Good afternoon, ladies and gentlemen, and thanks for standing by. Welcome to today's HSBC Q4 fixed income results call. At this time, all participants are in a listen-only mode. There will be some opening remarks, a question and answer session. At which time, if you wish to ask a question, you will need to press star and one on your telephone, and wait for your name to be announced. I must advise you this conference is being recorded today on Monday the 25th of February 2019. Now let's hand the conference over to your speaker today, Ewen Stevenson. Go ahead.
Thanks, Charlotte, and thanks everyone for dialing in today. As you will know, it's my first fixed income call with you in my new role of HSBC. I am joined today by a couple of colleagues, Iain MacKinnon, Group Treasurer, and Greg Case, Head of Fixed Income Investor Relations, who I am sure you both know well. There is a fixed income consistent slide pack available on our website. I do not plan to speak to specific slides in the introductory comments. We will keep comments brief. As you know, you will have had the chance to listen to the equity call we had last Tuesday. I plan to run through a few high-level points, I am going to hand over to Iain MacKinnon for a bit more detail before opening up for Q&A. On our full-year results, despite a weaker fourth quarter, we consider the full-year progress continues to reinforce our credit story.
We grew revenues by 5% to $53.8 billion. We grew pre-tax profits by 16% to $19.9 billion, earnings per share by 31% 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 and mainland China by 14% each, retail banking by 13%, commercial banking by 12%, and international customers by 7% in the U.K. wholesale by 7%. This top-line growth enabled us to afford higher investment spend. We are investing substantially at the moment into both growth and our digital transformation. Investment spend was up 10% last year to $4.1 billion. Overall cost growth was 5.6%, which was in line with planned spend for the year.
With an unplanned 8% drop in revenues in Q4, largely due to adverse markets in November and particularly December, we saw a negative jaws of 1.2% for the full year. We achieved loan growth of 8%, while only growing RWAs by 2%, which helped underpin our CT1 ratio 14% at year-end. Credit conditions remain benign in most places. Our 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 U.K., with more conservative forward economic guidance underpinning our IFRS 9 modeling, this is an additional overlay of some $165 million for the U.K. in Q4. That is in addition to the $245 million opening adjustment we took at the start of last year.
On dividends, we declared a final dividend of $0.31, maintaining our annual dividend stable at $0.51. With that, I'll pass over to Iain.
As Ewen said, we ended last year with a very strong balance sheet. CT1 ratio was 14%, and we still have in total a very strong pool of high-quality liquid assets of just under $600 billion, $567 billion. LCR is running in the 150s. During 2019, we achieved a number of milestones. We successfully completed our ring-fencing exercise in the U.K. A result of that was that we managed to obtain stable weighting with HSBC Holdings, and the non-ring-fenced banks ratings remained unchanged after the separation. Last year, we issued $19 billion of wholesale senior debt, MREL, and $6 billion of AT1, most of it which was used to replace previously issued AT1. We are now looking out to next year, and we expect to be issuing somewhere in mid-teen for MREL, to meet ongoing MREL requirements, particularly in the U.K. and in Asia.
We also expect to issue a small, low number for AT1 to meet HBAP and HBEU requirements. These are our Asia business and our non-ring-fenced bank in the U.K. I think that's the outline issuance plan. We continue with the plan that the issuance should be done at the wholesale level and down-stream. Although I would point out that we expect to issue senior from certain of our subsidiaries, notably France, Canada, Hong Kong, and Mexico.
HSBC UK, which is currently deposit funded, and we would like to access commercial markets as well. With that, I'll turn you all over to questions and answers, if I may.
As a reminder, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queues. This will only take a few moments. If you wish to cancel your request, please press star and two. Once again, please press star and one if you wish to ask a question. Your first question comes to the line of Lee Street from Citigroup. Please go ahead.
Hello, Street please.
Yeah.
Firstly, two concerns of opco sub debt. Do you believe it represents an impediment to resolution if you've got opco sub debt written under U.K. law outstanding beyond 2021? Just linking back to that. Probably your paper in a sense, that's number one. 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? Just finally, just what timeframe would you expect to update the market on your plans for any further share buybacks? That'd be my two questions. Thank you.
Yeah. Maybe I'll take the first question and then Iain or Greg can cover number 2. The timeframe for buybacks, we said last week, going back to our policy, our policy is to script neutralize over the medium term through buybacks. We said last week that given the uncertainty around Brexit, we wanted to pause buybacks for the moment until we had greater clarity around the outcome for Brexit and the direction of travel. I'm not going to get drawn on to specific dates as to when we feel we've got that clarity. Obviously all of this is subject to regulatory approval in due course. I can deal with question two, Iain here. With regards to the buffer on Tier 1 and Tier 2, it's fair to say that we haven't got complete visibility of some of the parts requirements that will apply to the group.
You can't just look at 16 or 18% RWAs at the top of the house and then work your way up from that. We have to wait for further guidance from the various regulators that we deal with in establishing some of the parts answer. That's number 1. Number 2, I would say that what's actually going to be happening, we will have Tier 2 maturing over the next five years. We expect Tier 2 to decline back to normal levels. We would wait for the maturity rather than buying them out at the moment, as being the better economic answer for us. Hopefully that appeals to that. Then, Greg, maybe you can deal with question one.
Yeah, sure. On opco sub debt, with regards to whether or not they're an impediment, 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 and the report that we'll have to publish to the market next summer. Obviously, work is ongoing there and we're in discussions with the Bank of 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 formalizing that and forming our own view.
Okay. That's all. Thank you very much for your comments.
Thank you.
Thank you. Our next question comes to the line of Robert Smalley from UBS. Please go ahead.
Hi. Good morning. Thank you for doing this call. Greatly appreciated that you've done these and are doing them on a quarterly basis. A couple of quick questions again about issuance. You outlined your plans for this year. There was a bullet point in the presentation that seemed to intimate that you would like to get MREL issuance to approximate maturities. We don't have a lot of maturities in 2020. Should we look for a big decline there and then a ramp back up in MREL, 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?
Is there anything else there that would be a swing factor? My third question is on AT1 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 year. Where do you see issuance 2020, 2021? Can the market get a little relief? Thanks.
Okay. Well maybe I'll have a go at the second question and then hand over to Iain and Greg on the first and third. Yeah, I don't think there's any particular nuances. We've committed to the market that we're trying to grow RWAs at about 1%-2% per annum. That obviously represents the 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, including continuing to wind down certain legacy RWA pools, model approvals, et cetera. The only thing I'd observe is while gross is RWA growth is reasonably linear as the loan portfolio growth, net is very much dependent quarter on quarter, depending on what mitigation actions are taken in any given quarter. Of bigger influence, first of January, we had IFRS 16 kicking back on balance sheet leased own real estate.
That had about a $5 billion increase in RWAs. We've obviously got Basel III reform on the horizon over the next few years. I would say Basel III is probably the much bigger influencer of future RWA trajectory than whether we grow loans, see loan growth in China, which is another market at this point.
Hey, Rob, it's Greg here. If I can bucket your question one and question three together on issuance.
Sure.
I think on the MREL side of things, I think what we've tried to do, and I think both actually on the MREL, on the AT1, we tried to be a little bit more helpful in terms of giving a more longer-term view on issuance. Yes, with AT1, we said we want to be in low single-digit billions this year. We've also said that broadly we're comfortable with where this stack is. I think I'd underline the word broadly, given with our balance sheet the size that it is, roughly speaking, 10 basis points of capital is about $1 billion. The swing could be It doesn't material for you guys. We don't feel as material. Yeah, broadly we're comfortable where it is.
On the MREL side of things from senior holdco, we've said, look, it's going to be early to mid-teens in terms of billions on an ongoing basis. On slide 16 of the Q&A presentation, we give the maturity schedule of the holdco senior side of things. As we stand today, we've got about $62 billion of holdco senior that's MREL eligible and about another $6 billion of stuff that was issued pre-BRRD. Talking about $68 billion-$69 billion of total debt. This year we have no maturities. Next year we have about five. From then on, talking about being broadly flat in terms of issuance profile on a net basis. That's how we're thinking about things. We don't think that's a hugely material ask of the market from where we are today.
If you look across the 5 years, we are looking at a net increase over the entire period of somewhere between $15 billion and $20 billion, and that is across the entire 5 years. There is obviously a lot of issuance and replacement of maturities, and that would include replacement of what we currently view as senior and what we currently view as Tier 2.
Okay.
We think we have broken the back of the MREL issuance program.
This year, next year seems to be the last two years that you will be issuing more MREL than that gap between issuance and maturities will definitely diminish as we get to 2021, 2022. This year and next year with the 5.1, assuming that you will still be looking at a mid-teens number, it will still be $10 billion or so, just for shorthand.
That is broadly right, Robbie. The only thing I would say is, while we are flagging that the OpCos will be issuing for funding in the next few years, we do still have a significant amount of OpCo maturities coming through. I think it is fair to say the OpCos will be issuing less than the maturities. When you just see net, it will not be quite that much either.
Okay. That's very helpful. Thanks. Thanks for doing the call.
No problem. Thanks.
Thank you. Once again, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. Our next question comes from the line of Will Boardman from Soros. Please go ahead.
Hi, Will.
Hi, guys. Thanks for taking the call. This is Greg. I also appreciate you doing it in U.S. hours. On slide 21, about Tier 2, you talk about the final implementation of CRR2 in the future past. It may impact your plans. What are your current reads from what has been said on non-U.K. law language that exists in some of your long-dated Tier 2? That's my first question. Second is on your LCR, your ratio, you're running it in the high 150s. Is that related to uncertainty around Brexit? 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? I guess those are my first questions.
Sure. Do you want to cover off one, and Iain can cover the-
I can do the liquidity piece.
Sure. Hey, 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. In terms of an initial view, I don't think it's going to be hugely helpful for you. Because what we review with our lawyers and our final view will be the binding one. If you don't mind, we'll leave that until we've got something more specific to say. Yes, I think it's fair to say we're looking at the stack and there may well be some bonds that don't make the grade.
The six-year grandfathering period is helpful for us. It gives us time to think about what we want to do in the future. Also, we still have a pretty chunky stack, so we still feel in a good place.
On the 150% LCR ratio, I think you should view that as the reflection of what we're seeing in particularly Asia, in Hong Kong, where we have a significant level of liquidity, plus the fact that we had a bit of liquidity out when we were putting together the ring-fenced, non-ring-fenced bank, and the uncertainty with Brexit, where the Bank of England asked us to make sure that we held sufficient liquidity to deal with the uncertainty. It's safe 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 happily liquid, and we're just trying to monitor and balance the liquidity versus the cost of that liquidity. Ewen, do you want to talk about Brexit generally?
Yeah. I don't know why I can say anything that everyone will have their own views on this. There's obviously a wide set of possible economic outcomes coming from political decisions over the next few weeks and months. All we've tried to do with our IFRS 9 forward economic guidance is to take what we consider to be a relatively cautious stance. Just to reconfirm, we've now got an aggregate total of just over $400 million of IFRS 9 overlays in relation to the U.K. That number inevitably will either be too much or too little, depending on the Brexit scenario that results. We're trying to help our customers out in whatever way we can. Our own employees who are impacted potentially by depending on what the Brexit outcome is.
We have a big operation and have had for a long time in France, so the sort of operational aspects of Brexit as it impacts us are not as complicated as they would be had we not had that presence in France. We've got plenty of capital funding and liquidity. If you look in our annual report and accounts, you'll see a pretty detailed modeling spread out there about what the scenarios that we had modeled. Broadly under forward economic 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 three downside scenarios that are totaling 40. Obviously, the way that IFRS 9 works is it's very cyclical.
What you're seeing is the impact of procyclicality now coming through our ECL charges.
Great, thanks. I guess just one follow-up, talking about issuance specifically. You clearly issued and pre-funded in 2018, $19 billion in holdco and $6 billion of AT1. Why the change in languaging, not specifically targeting how much you're going to issue? You've given context, but I guess on the senior holdco, HSBC has been clear over the years the size and scale. Is this more leaving yourself the optionality with Brexit uncertainty? Then on AT1 specifically, do you have a stated buffer that you'd like to run? I think Barclays mentioned on their fixed income call that they would like to stay with a buffer. Will you give a stated AT1 buffer where you would like to run going forward as you approach your January 20 call?
If I try and deal with the MREL on the AT1. I think the numbers we're looking at, and you mentioned the uncertainty before in terms of RWAs, but we expect to be issuing somewhere of the order of 12-15 this year, I would expect it to be around 13.5 of that order for MREL. On the AT1, we expect to issue two this year because we can see specific need for that in the sum of the parts. We haven't actually been targeting a threshold above our regulatory requirements. It's simply been a function of what's been issued and what we can manage. If I can remind you that last year we issued $6 billion, but we actually did retire in excess of $4 billion. It is actually a net two by the time we're finished.
Great. Thanks for taking my calls.
Thanks.
Once again, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced.
Do you have any more questions?
We have a question from the line of James Hyde from PGIM. Please go ahead.
Hi, James? You're on mute, James.
Yes. Sorry. I am on mute. Sorry. Thanks for taking this call. It's very helpful. First question, I've only got two questions, and they're not major, but while I have you online. One of the global investment banking peers has called out the Base Erosion and Anti-abuse Tax, or BEAT, as a factor that's going to weigh on earnings. Is this potential for that to change your issuing structure gone? Are you just going to keep doing holdco? Is there a potential for U.S. holdco issuance because of that, or is it just your earnings there are just not important enough? I'm just wondering that. Actually, no, that's fine. 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. Does the Brexit developments in any way mute your appetite for that? You have had a clear impact on the competitive dynamics of the market. Thanks.
Just on the second one first. On mortgages in the U.K., the average LTV of new lending 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 substantially in the last few years. We've got natural current account market share in the low double digits. We're currently at about a 6.6% share of mortgages. We think our natural market share in mortgages is materially higher than where it is today.
The reality is that we have basically been operating in 80% of the market, which is our own origination, and until recently had not been an active participant in 70% of the market, which is originated through brokers. Yes, we're taking market share, but I think in part that is because of historical underrepresentation in the biggest channel for origination.
Hi, James. Greg. On the AT1, we're confident now that we'll just be issuing out of holdings, and it's unlikely we'd need to issue out of the U.S. specifically.
Maybe just a final point on mortgages. You could also refer back to the Bank of England stress tests last year, where they do publish, I guess, an independent view on the stress portfolio of mortgage books across the U.K. banks. You'll see in there that the stress characteristics of our book stood up very well relative to peers.
Great. Thank you very much. That's very helpful.
There are no further questions at this time. I will now hand back to you then.
Yeah. Thanks a lot, Charlotte. Look, thanks all for joining the call. If you do have any follow-up questions, please follow up with Greg and the IR team. We'll be happy to answer them on your behalf. Thanks all for making yourself available today.
Thanks. Bye.
That does conclude our conference for today. Thank you for participating. You may disconnect.