Good afternoon, ladies and gentlemen, and thanks for standing by. Welcome to today's HSBC Q4 Fixed Income Results Conference Call. At this time, all participants are in a listen only mode. There will be some opening remarks I must advise you this conference is being recorded today on Monday, 22nd February, 2019.
I will
now hand the conference over to your speaker Officer, Ewen Stevenson. Please go ahead.
Thanks, Charlotte, and thanks to everyone for dialing in today. As you will know, it's my 1st fixed income call with you in my new role at HSBC. I'm joined today by a couple of colleagues, Dean McKinnon, Good Treasurer And Greg Hayes, Head of Fixed Income Investor Relations. So I'm sure you both know well. There's a fixed income specific is available on our website.
I don't plan to speak to specific slides in the introductory comments. Chief. Well, Pete, comment's brief. As you know, you'll have had the chance to listen to the equity call we had last Tuesday. I plan to run through a few high level points, then I'm going to hand over to Ian McKinnon for a bit more detail before opening up for Q and A.
On our full year results and despite a weaker 4th quarter, we consider the full year progress continues to reinforce our credit story. We grew revenues by 5 percent to $53,800,000,000 We grew pretax profit by 16% to $19,900,000,000 Earned the share by 31 percent to $0.63 and our return on tangible equity by 1.8% to 8.6%. We achieved good top line revenue growth where we wanted to grow. To give you a few numbers on that, we grew revenues in Hong Kong at Mainline by 14% each, Wholesale Banking by 13%, Commercial Banking by 12% And international customers by 7% and the U. K.
Wind plant came by 7%. This top line growth enabled us to afford higher investment spend. We're investing substantially at the moment into both growth and our digital transformation. Investment spend was up 2% last year to $4,100,000,000 Our overall cost rate was 5.6%, was in line with planned spend for the year, but with an unplanned 8% drop in revenues in Q4, Largely due to adverse markets in November and particularly December, we saw a mix of jaws of 1.2% for the full year. We achieved loan growth of 8% while only growing RWAs by 2%, which helped underpin our core Tier 1 ratio 14% at year end.
Credit conditions remained benign in most places. Annual ECL charge was only 18 basis points, well below our through the cycle guidance of 30 to 40 basis points. The only market we see any softness currently is the UK. And with more conservative forward economic guidance underpinning our IFRS nine modeling, This was an additional overlay of some $165,000,000 for the DJI in Q4. That's In addition to the $245,000,000 opening adjustment we took at the start of last year.
On dividend, we declared a final dividend of $0.51 maintaining our annual dividend table of $0.51 And with that, I'll pass over to Ian.
Well, as Ian said, we ended last year with a very strong balance sheet. CET1 ratio was 14%. We still have entirely a very strong
We have high
cost liquid assets of about just under $600,000,000,000 LCRs running in the 850s. During 2019, we achieved a number of milestones. We successfully completed our intensive exercise in the U. K. Result of that was that We managed to obtain stable rating with HSBC Holdings and the noninterest banks' The ratings remain unchanged after the separation.
Last year, we issued DKK 19,000,000,000 of FOCO senior debt, NREL, £6,000,000,000 of 81, which was most of it, which was used to replace previously issued 81. So we are now looking out to next year, and we expect to be issuing somewhere in the mid teens for MREL To meet ongoing MRR requirements, particularly in the U. K. And in Asia, We also expect to issue a small low number for CET1 to These are our Asia business and our noninterest bank in the U. K.
So I
think that's the deadline issuance plan. We continue with the plan that the issuance should be done At the Whalpool level and downstream, although I would point out that we expect to from several subsidiaries, notably France, Canada, Hong Kong and Mexico And HSBC U. K, which is currently deposit funded, and we would like to access
Your first question comes from the line of Lee Street from Citigroup. Please go ahead.
Hello. 3, please. So firstly, just in terms of OpCo sub debt, do you see or represent an investment to resolution if you've got OpCo sub Number 2, can you just remind us what type of buffer you're intending to run for additional Tier 1 and Tier 2 relative to your minimum requirements? And just finally, just what time frame would you expect to update the market and your plans for any further share buybacks? That would be much of your questions.
Yes.
Maybe I'll take the 3rd question and then Ian or Greg, I'm going to take 2. On time frame for buybacks, we said Last week, going back to our policy, our policy is to script neutralize over the medium term through bottlenecks. We said last week that given the uncertainty around Brexit, we wanted to pause for the buybacks for the moment until we had So I'd like to clarity around the outcome for Brexit and the direction of travel. So I'm not going to get drawn on So the dates as to when we feel we've got that clarity. And obviously, all of this is subject to regulatory approval in due course.
I can
deal with questions. It's Ian here. In regards to the buffer on Tier 1 and Tier 2. It's fair to say that we haven't got complete visibility of the some of the past requirements That will apply to the group. So you can't just look at 16% or 18% RWAs at Top of the house and then work your way up from that.
We have to wait for further guidance from the There is regulators that we deal with in establishing the some of the parts. And so with regard to the so that's number 1. And then number 2, I would say that What's actually going to be happening, we will have Tier 2 maturing over the next 5 years. So we expect the Tier 2 to decline back back to normal levels. And we would wait for the maturity rather than buying them out at the moment as we have some economic answer for us.
So hopefully, that deals with that. And then, Greg, maybe you can deal with the question 1.
Yes, sure. So on OpCo sub debt I think this is going to be a piece of work that we'll be doing over the course of the next 12 to 18 months as part of our Resolution planning in the report that we'll have to publish to the market next summer. Obviously, working on going there and we're in discussions about England. I think the definition of what is an impediment to resolution has not been formally defined as yet. We work with the bank on all my conducting and forming our own gains.
Our next
Thank you for doing this call. Greatly appreciated A couple of quick questions again about issuance. You outlined your plans for this year, and there was a bullet point In the presentation, that seemed to intimate that you would like to get PEMREL issuance To approximate maturities, we don't have a lot of maturities in 2020. So Should we look for a big decline there and then a ramp back up in Emerald? Or should it be kind of steady Across the next couple of years is my first question.
Secondly, What would be some of the swing factors that would change that? You mentioned that you had some good balance sheet growth, but not a lot of RWA growth. Is China growth more RWA intensive or not? Or is there anything else there that would be a swing factor? And my third question is on AT1s.
This year, you're saying low single digits. Last year, you did a fair amount of issuance. I'm just wondering how much more you can kind of force into the stack there after a very active year last And where do you see issuance 2020 2021 and can the market get a little relief?
Okay. Well, maybe I'll have a go at the second question and then hand over to Stephen Greg on the question first. Yes. I don't think there's any particular nuances. We've committed to the market, but we're trying to Grow RWA is at about 1% to 2% per annum.
That obviously represents Difference between gross RWA growth and net, with gross being the underlying growth in the portfolios that you referred to, Net being after various mitigation actions and including continuing to one out certain legacy LWA pools, Model approvals, etcetera. Yes, the only thing I'd observe is while growth is 1st January, we had IFRS 16 checking back on balance sheet, lease and real estate I've had about a $5,000,000,000 increase in RWAs. We've obviously got Basel III to a full month horizon over the next few years. Yes, I would say Basel III is probably a much better influence there of future RWA trajectory than whether we grow It's Greg here. If I can get your Question 1 and question 3 together on issuance.
Sure. I think on the MREL side of things, I think what we've tried to And I think both are actually on the MREL on nature. And we tried to be a little bit more helpful in terms of giving a more longer term view on assurance. So yes, With 81, we said we want to be low single digit OEMs this year. We've also said that broadly, we're comfortable with where this stat is.
I think it's I'd underline the word broadly given with our balance sheet side that it is, roughly speaking, 10 basis points of capital is about €1,000,000,000 So the swing can be So that's material for you guys. We don't feel our material. And yes, broadly, we're comfortable with how it is. On the The MREL side of things from Senior HoldCo, you said, look, it's going to be fairly to mid in terms of billings on an ongoing basis. And then on Slide 16 of the existing computation, we give the maturity schedule of the HoldCo Senior side of things.
So as we stand today, we've got about $62,000,000,000 of HoldCo Senior that's MREL eligible and about another 1,000,000,000 of stuff that was issued pre VRRD, so talking about €68,000,000,000 €69,000,000,000 of total debt. This year, we have no maturities. Next year, we have about 5. And then from then on, we're talking about being broadly flat in terms of insurance profile on a net So that's kind of how we're thinking about things. We don't think that's a hugely material asset in the market from where we are today.
Yes.
If you look across
the 5 years, We're looking at
a net increase over the entire period of somewhere between €15,000,000,000 and €20,000,000,000 and that's across the entire 5 years. There is also a lot of issuance and replacement of maturities, and that would include replacement of what we currently view as senior What we currently view as Tier 2. Okay. Yes, we think we've broken the back of the umbrella issuance program.
So this year, next year seem to be the last 2 years that you'll be issuing more emerald And we'll have gap between issuance and maturities. So we'll definitely administer as we get to 2021, 2022. But this year and next year with the 5.1, assuming that you'll still be looking at kind of a mid teens number, It'll still be €10,000,000,000 or so, just for shorthand.
Yes. That's broadly right, Robbie. The other thing I'd say is while we are flagging the OpCoats we'll be issuing funding in the next few years, We do still have a significant amount of OpCo maturities coming through. So I think it's fair to say the OpCo will be issuing less than the maturities. HSBC name, it won't be quite that much either.
Okay. That's very helpful. Thanks, and thanks for doing the call.
Our next question comes from the line of Will Goldman from Soros. Please go ahead.
Hi, Will. Hi, guys.
Thanks for taking the call, Nathan, Greg. I also appreciate you being in U. S. Hours. On Slide 21, About Tier 2, you talked about the final implementation of CRO2 and future plans, and it may impact your plans.
What are your current Reads from what has been said on non U. K. Law language that In some of your long dated Tier 2, that's my first question. 2nd is on your LCR, your ratio you're running at Hi, 150s. Is that related to uncertainty around Brexit?
And then I guess the third on the back of that, in terms of planning, if Brexit is extended for a long period of time, how will that impact How you run your LCR ratio going forward? So I guess those are my first
questions. Sure.
So, hi, Will. It's Greg here. On the CRR2 side of things, we're starting to kick off work now with our lawyers on looking at the entire stack. Obviously, that's dusting off some of the work we did last May as well. But in terms of an initial view, I don't think it's going to be hugely helpful for you because What we reviewed our lawyers and our final view will be the binding one.
So if you don't mind, we'll leave that until we've got something more specific to say. Well, yes, I think, to say, we're looking at the stock and they may welcome some bonds that don't make the grade. The 6 year grandfathering period is helpful for us. So it gives us time to think about what we want to do in the future. And also, we still have good and healthy stack.
So we should be in a good place.
On the 150 I think it should be that the reflection of what we're seeing in particularly area of Asia In Hong Kong, where we have a significant level of liquidity, plus the fact that we had to build liquidity out when we were Putting together the ring fence non ring fence bank and the uncertainty with Brexit where the government asked us to Bank of England asked us to Make sure that we hold sufficient liquidity to deal with the uncertainty. It's fair to say that we're going through a methodology review, And we will probably see the group LCR metric fall back 10%, maybe 10%, 15 basis points 10% or 15%. It doesn't mean that we've lost liquidity. It's just a different methodology. We remain capitally liquid, just Trying to monitor and balance the liquidity versus
the cost of that liquidity.
Yes. I'm
Yes. I'm going to walk inside of anything, but everyone will have their own views on this. There's obviously Yes. Why set of possible economic outcomes coming from political decisions over the next few weeks months? All we've tried to do, our IFRS 9 forward economic guidance is to take what we consider to be relatively cautious We confirm we've now got an aggregate total of just over $400,000,000 of 1st 9 overlays in relation to the U.
K. That number inevitably will either be too much or too little on the Brexit scenario results. We're trying to help our customers out In whatever way we can, our own employees who are impacted potentially by any of the expected outcomes. We have a big operation and have had for a long time in France. So the sort of operational aspects of Brexit that impacts us I'm not as competitive as I would be had we not had assets in France.
Yes. We've got plenty of capital funding and liquidity. If you look in our annual report and accounts, you'll see pretty detailed modeling set out there about what the scenarios that we have modeled, probably under 4 day dollar guidance. We would normally have a 10% upside case, an 80% base case, a 10% downside case. What we've done and what we said was because of the uncertainty that exists, we've got a 10% upside case, 50% base and 3 downside scenarios totaling 40%.
Obviously, Yes. The way that IFRS9 works is it's very cyclical. So what we're seeing is the impact of price of causality not coming through
And I guess just one follow-up talking about issuance specifically. You Clearly issued and prefunded in 2018, dollars 19,000,000,000 HoldCo and $60,000,000,000 of AT1. Why the change in languaging, Not specifically sort of targeting how much you're going to get to issue. You've given context, but I guess On the senior holdco HSBC has been clear over the years the size and scale. And is this more leaving yourself The optionality with Brexit uncertainty and then on AT1 specifically, do you have a stated buffer that you'd like Ron, I think Barclays mentioned on their fixed income call that they would like to stay with a buffer.
Do you guys will you give a stated Q1 buffer where you would like to run going forward as you approach your Jan twenty call?
I think the numbers we're looking at, and you mentioned this, certainly, before Before I turn to RWA is that we expect to be issuing somewhere up the order of 12 to 15 this year and are expected To be around 13, 13.5 of that order for Envrel. And on the 81, we just get to issue 2 this year because we can see specific needs for that in some of the parks. We haven't actually been targeting a threshold about The above the regulatory requirements, it's simply been a function of what's an issue and what we can manage. And if I can remind you that last year, we issued €6,000,000,000 but we actually did retire in excess of €4,000,000,000
We have a question from the line of James Hyde from CCIM. Please go ahead.
Not major, but while I have been online. 1 of the Global Investment Banking peers has called out the Base effect anti erosion tax with VAT as a factor that's going to weigh Earnings. Is that I mean, is this potential for that to change your issuance structure Ron, are you just going to keep doing HoldCo? Or is there a potential U. S.
HoldCo issuance because of that? Or is it just Actually, no, that's fine. Well, the second question is Brexit, again, but it's about The extent to which you guys are taking market share in mortgages, I'm aware that these are Lower LTV, but does the Brexit development in any way mute your appetite for us because you have
Our mortgages in the U. K, the average LTV of New London is about 65%. We're Pretty comfortable with the risk profile. If we are seeing any softness in
the U. K. At the
moment, it's in very selective sectors in commercial. The other thing I would say about the fact that the market share gains that we're taking in mortgages in the U. K. At the moment, we had a very limited presence In the broker channel, until recently, and we've built that up essentially in the last few years. Natural current account market share in the low double digits.
We're currently at about a 6.6% share of mortgages. So we think our natural market share in mortgages is materially higher than where it It's today. But the reality is that we have actually been operating in 80% of the market, which is our own Own origination and until recently had not been an active participant in 70% of the market, which is originated through brokers. So yes, we're taking market share. But I think in part, that is because of the historical underrepresentation and the biggest channel for origination.
Yes. And hi, Jim. It's Greg. On the we're confident now that we've just been issuing out of holdings. And if it's unlikely, we need to issue out the U.
S. Specifically. Yes.
And I
could just follow-up on a forward as you could also Yes, refer it back to the Bank of England stress test last year, where they do publish, I guess, an independent view on The stress portfolio of mortgage growth across the U. K. Bank. You'll see in there that the stress categories of this top book Still out very, very well, relative to the others.
Great. Thank you very much. That's really helpful.
Thank you.
Thanks a lot, Charlotte. Look, thanks all for joining the call. And if you do have any follow-up questions, please follow-up with Greg and the IR team, and we'll be happy to answer them on your behalf. But