Good afternoon from Hong Kong, good morning in London, welcome to our 2018 HSBC Annual Results Call. With me today is Ewen Stevenson, Group Chief Financial Officer. I'll start by putting the results in the context of our strategy and broader vision for the bank before Ewen takes a look at the numbers. I'll finish by talking a little bit more about 2019. In June, I outlined 8 strategic priorities to get the organization growing again and create value for shareholders. Those priorities focus on delivering growth from areas of strength, particularly from our Asia franchise. They commit us to redeploying capital to higher return businesses and the turnaround of our U.S. business. They also aim to fundamentally change some elements of the bank so we can compete in the long term and serve our customers better.
In particular, we are focused on improving our digital services and future capabilities. We are also committed to improving our ESG performance and creating stronger, healthier relationships with all of our stakeholders. This includes all 235,000 people who work for HSBC. Helping our people be at their best is the critical enabler of our business strategy, and absolutely fundamental to delivering our financial targets. If we can do all that, and I'm confident that we can, then the financial outcomes should be a return on tangible equity above 11% and a stable dividend. We made encouraging progress against 7 of our 8 strategic priorities in 2018. We've accelerated growth from Asia and our international network. We've established the U.K. ring-fenced bank, grown our U.K. customer base, and increased our U.K. market share.
We've also delivered more sustainable financing and continue to be a leading player in helping clients make the low-carbon transition. The U.S. turnaround is our most challenging strategic priority. There is still much further to go. We've improved capital efficiency, largely on the back of revenue growth. Our technology investment is improving customer service and making us more competitive. Again, there is more to do, the progress is positive. On the human side, we started a conversation throughout the bank about how we help every person who works for HSBC be the best version of themselves. Employee advocacy, our key measure here, is up on 2017. Again, lots to do, we've made real strides in a relatively short space of time. These achievements are reflected in our 2018 financial performance.
Reported profit before tax of $19.9 billion was $2.7 billion or 16% higher than 2017. Group return on tangible equity, our headline target, was 8.6%, up significantly on the 6.8% delivered in 2017. This is a good first step towards achieving our return on tangible equity target of over 11% by 2020. The area where we've fallen short is Jaws, strategic priority number 6. When I updated you at the third quarter, we were on track for full-year positive Jaws. What we didn't know then was that markets would weaken in the last 2 months of the year and hit us and many other banks hard on revenue. While costs were on plan at the end of the year, revenues weren't because of market movements in the fourth quarter. I don't take the Jaws miss lightly, and our commitment to the discipline of positive Jaws has not changed.
What has changed is the economic outlook, which has softened since our June strategy update and even since Q3. I'll go into the outlook in a bit more detail at the end of the presentation, but what we are seeing is that risk and uncertainty have increased and customers are more cautious. We remain alive and alert to these risks. Where necessary, we are proactively managing costs and investments in line with the softer outlook and will continue to do so. What we absolutely will not do, though, is take short-term decisions that harm the long-term interests of this organization. We will continue to invest sensibly and sustainably. Ewen will now talk you through the numbers.
Thanks, John. Good morning or afternoon all. Particular thanks to those of you in London having to be up early today. It's a pleasure to be presenting my first full set of full-year results at HSBC. Despite a softer fourth quarter, it's a good set of full-year numbers. John's just talked about the strategic progress we made last year, you can also see this reflected in our financial performance. Underpinning our business strategy is a clear set of financial objectives. We're targeting growth where we've sustainable competitive advantage. We're investing both to support that growth and to accelerate our digital transformation. We're also actively managing our capital base as we transition to higher returns, sustaining our dividend, keeping a healthy Core Tier 1 ratio , and funding our growth aspirations. A few numbers for you for full-year 2018.
Reported revenues were $53.8 billion, some $2.3 billion or 5% higher than 2017. Reported pre-tax profits were $19.9 billion, 16% higher than the previous year. On an adjusted basis, revenues were up 4% and pre-tax profits were up 3%. Our return on tangible equity was up 180 basis points to 8.6%, and earnings per share were up more than 30% to $0.63. Adjusted loan growth was 8%, while RWA growth was 2%. Our core equity Tier 1 ratio was 14% at year-end. We declared a final dividend of $0.21, representing a stable full-year dividend of $0.51. Slide four breaks down our full-year revenue performance in more detail. While total adjusted revenue growth was 4%, this masks much stronger underlying growth in the areas we've targeted.
Looking at our four global businesses in turn, Retail Banking and Wealth Management had a very good year, with particularly strong growth in Hong Kong and the U.K. In spite of adverse Q4 market impacts hitting revenue and insurance manufacturing, adjusted revenue for RBWM was up 8% on 2017, within this, Retail Banking was up 13%. Commercial Banking had a strong 2018 with adjusted revenues up 12%. We increased revenues in all business lines with a notable 22% growth in our Global Liquidity and Cash Management franchise. In Global Banking and Markets, we increased adjusted revenues by 1%. This was largely due to the strength of our transaction banking franchises, Global Liquidity and Cash Management, FX and security services, all achieved double-digit revenue increases.
This more than covered the impact of market volatility and lower customer risk appetite on our market-related franchise with revenues and rates, credit, and equities down materially. Overall market revenues were 7% lower than 2017. With Global Private Banking, we returned to growth. While adjusted revenues were up only 4%, we see strong potential for this business with material scope to improve both returns and profits in the coming years. Revenue fell in Corporate Centre. Several reasons for this, but primarily a combination of lower balance sheet management revenues, higher interest expense on MREL debt issuance as our MREL stack continues to build, valuation differences on long-term debt and associated swaps, and the impact of Argentinian hyperinflation.
In terms of split by geography, our two biggest markets, Hong Kong and the UK ring-fenced bank, both delivered strong adjusted revenue increases, with Hong Kong adjusted revenues up 14% and the UK ring-fenced bank up 7%. We're also pleased with the growth we achieved last year across Asia, including in the Pearl River Delta and the ASEAN region, and in the Americas in both Mexico and Canada. On the next slide, looking at our Q4 revenue performance in more detail, we were clearly impacted by volatile markets in November and December. Compared to a soft Q4 2017, adjusted revenue in our global markets franchise fell by around $200 million or 16% and were down by around $700 million or 38% on Q3 2018.
In wealth management, revenues were down by about $250 million, primarily adverse market impacts in our insurance business as a result of weak equity markets in Q4. Away from these market-sensitive revenue streams, Retail Banking and Wealth Management and Commercial Banking both had strong quarters. We grew adjusted revenue by 10% in Commercial Banking compared to Q4 2017, and revenue growth in Retail Banking and Wealth Management was 4%. Overall, group adjusted revenue was still up 5% on a soft Q4 2017, but down 8% on the third quarter. Markets have been more supportive so far this year. We've made a good start to 2019 with our group revenue performance in January ahead of plan. As John said earlier, we've got a clear strategy to accelerate growth in areas of strength.
Slide six shows the progress we've made, both in terms of our mix of revenues and the allocation of our capital. Asia now accounts for 49% of total revenue. That's up from 46% in 2017. This understates the Asia-centric growth we've achieved across other geographies. If you look at the adjusted revenue split by business, the contribution of Retail Banking and Wealth Management and Commercial Banking increased by three percentage points to 68%, in line with prioritizing capital towards the higher returns we're achieving from those businesses. In Global Banking and Markets, we're continuing to focus on allocating capital where we see the potential to sustain returns above the cost of capital. All of this together represents real improvement since our strategy day last June.
As you can see on slide seven, net interest income in Q4 was up 8% on the same period last year and up 8% for the full year. This was mainly due to a 7% increase in average interest earning assets with a more modest benefit from a three-basis point increase in our net interest margin. There are three things I wanted to call out on NIM. The first is the improving rate environment. This increased the yield on free funds, benefiting NIM by three basis points. The second is the change in how we've made our net interest spread. The improved rate environment meant we made less from the asset side and more from the liability side. The third is the excess funding from the formation of our U.K. ring-fenced bank, which reinforced our strategy of building mortgage share by targeting the broker channel.
Equally, we needed to build up liquidity in the non-ring-fenced bank, and this resulted in a largely one-off resetting to a lower non-ring-fenced bank NIM in 2018. Looking ahead to the rest of 2019, for those of you who know me, you know that I'm not a fan of guiding on NIM, given the various macro and competitive variables that we don't control as a management team, including volatile HIBOR movements. Given underlying loan growth, we do expect modest net interest income growth in 2019. Turning to operating expenses on Slide eight. They were up $1.8 billion or 6% for the full year. While Jaws was negative for the year, cost growth was on plan. In 2018, we made a very conscious decision to step up investment into both growth and our digital transformation, with total investment up $4.1 billion was up 10% on 2017.
We firmly believe this is the right thing to do, investing sensibly now for long-term value creation. As John mentioned earlier, we'll not make short-term decisions that jeopardize our long-term competitiveness. Equally, we do recognize the need to be flexible on cost growth and the need to be responsive to the outlook for revenue growth. As we look out at 2019, we can see that the revenue environment is less predictable. There's idiosyncratic risks to growth in the U.K., and to a lesser extent, Hong Kong and mainland China. The outlook for interest rate rises has become less certain. In Hong Kong, in particular, this translates more rapidly into net interest income than other markets. We've dialed down the speed of some investment growth for 2019, and we've tightened up on headcount plans until we've got more confidence that we'll see strong revenue growth coming through.
Turning to the next slide, we had a total ECL charge of $1.8 billion or some 18 basis points in 2018. This is not strictly comparable to 2017, given the introduction of IFRS 9 at the start of 2018. To understand ECL trends under IFRS 9, you'll know that you need to split the discussion into two parts. The first being the underlying asset quality and impairment trends, and the second, the impact of changing forward economic guidance. If you look at actual default data, there's very limited signs of deterioration at the moment, with only the U.K. showing some softness in certain corporate sectors. With forward economic guidance, the U.K. presents unique challenges at the moment. Given this increased U.K. forecasting uncertainty, we've taken what we consider to be an appropriately conservative additional adjustment of some $165 million in the quarter.
This is on top of the $245 million adjustment we made when adopting IFRS 9 on 1st of January last year. Looking forward, we expect credit performance to continue to normalize compared to the historic lows of the past few quarters. No change to how we previously guided the lower end of a 30 to 40 basis points normalized range. As a result, we're planning for ECL charges to be higher in 2019 and 2020. The total ECL charge will be sensitive to forward economic guidance, particularly in the U.K., but to a lesser extent in Hong Kong and mainland China. I'll finish with a few words on our quarter one position before I hand back to John. No change to our guidance in keeping our CET1 ratio above 14%.
Our CET1 ratio was 14% at the end of 2018, down 50 basis points from the previous year, including adverse FX movements of around 20 basis points. Just to remind you, the Q4 movement of 30 basis points include the impact of the U.K. bank levy and the final dividend of $0.21. With Basel III reform on the horizon in a few years' time, we'll continue to prioritize a strong quarter one position until we have more clarity on its impact. We know there'll be some RWA uplift from Basel III reforms, but given the continuing uncertainty around the final reforms and national discretions, we're not comfortable providing guidance at this point. Ahead of Basel III reform, we're managing competing demands on our CET1 and CET1 ratio.
Three core objectives for me: keeping the CET1 ratio healthy, sustaining our $0.51 dividend, including neutralizing any scrip take up over time, and being able to fund attractive growth in areas that we want to grow. Achieving higher returns underpins managing these competing demands. Our 2020 return on tangible equity target of over 11% equates to a return on core equity Tier 1 capital of over 13%, allowing for a sustainable mix of dividends and growth. We still see more opportunities on RWA management. Last year, I think, is a good example of us continuing to deliver on this. For Q1, we do expect some one-off uplifts, some $7 billion to $8 billion of higher RWAs on top of net business growth, primarily due to the implementation of IFRS 16. With that, I'll hand over to John to briefly sum up.
Ewen, thank you. We have taken the first steps in getting HSBC back to growth. We're doing what we set out to deliver, growing revenues from areas of strength, using capital more efficiently, and investing in the future of the business while empowering our people. This is reflected in a good set of numbers for 2018. As I said earlier, the outlook for 2019 has softened. Uncertainty and risk in the global economy is higher, relating mainly to the U.K. economy, global trade tensions, and the future path of interest rates. This is yet to translate into higher credit losses, but that could change if the global economy deteriorates further. We've made a good start to 2019, but we remain alert to the downside risks of the current economic environment, and we will be proactive in managing costs and investment to meet any risks to revenue growth.
We remain committed to the plan that we outlined last June. The strategy is working, and the long-term drivers of revenue growth remain strong. The fundamentals of growth in Asia are sound. We expect China to avoid a hard landing and continue growing. While barriers to trade are increasing in parts of the world, they're also falling rapidly in others, especially Asia. We're also at the heart of financing the low-carbon transition, one of the biggest drivers of global investment this century. At the same time, we have a business that is diversified, resilient, and well-placed to navigate the risks inherent in today's world. HSBC is in a good position. I'm encouraged by our progress and looking forward to the year ahead. We remain focused on growing returns, creating value for shareholders, and meeting our return on tangible equity target of greater than 11% by 2020.
We will now take questions. The operator will explain the procedure and introduce the first question. Operator?
Thank you, Mr. Flint. If you would like to ask a question today, please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off. If you find your question has been answered, you may remove yourself from the queue by pressing the hash key. Once again, to ask a question, please press star one. Please ensure that the mute function on your telephone is switched off. We will now take our first question from Magdalena Stoklosa from Morgan Stanley. Your line is now open.
Thank you very much.
Morning.
Good morning. I have two questions. One is about the revenues within the retail division, and that's page five I will be referring to. The second one is on NII. Let me start with the page five. Ewen, could you give us a sense, what it would take to reverse some of the negative delta that we have seen within the insurance manufacturing and wealth management? You have talked about the market impact, but I'm sure there's also a big transactional impact there as well. Could you give us a sense of the moving parts of those two revenue sources, particularly with the year-to-date market trends, and what you're seeing in Asia transactionally? That's one. Two, I will try to draw you on the NII discussion because, of course, there's a lot of moving parts as you've mentioned in your remarks.
Year-to-date, particularly, they all look more challenging. We've got the flatter curve, the absolute levels of HIBOR, the HIBOR-LIBOR spread, the mix shift, and of course, not even mentioning the good old asset spread competition across your key markets. You still mentioned that you think that your NII is going to grow slightly. How should we think about, particularly Hong Kong and U.K., in U.K. margins in that context of what's been happening year-to-date?
Okay.
Thank you.
Thank you. I think John's going to take your first question on insurance manufacturing.
Magdalena, hi. It's John. Thanks for the questions. Page five, the top bar, the insurance manufacturing market impacts. The one below that is the Wealth Management excluding market impacts.
Yes.
To the extent that there was any lower customer activity, you can read that into the $51 million number. The big number on top, the $205, is the effect of the PVIF accounting for insurance. We value of in-force business, all of the contracts. In substance, when risk assets fall in value, we take losses through the P&L, and when risk assets rise in value, we take profits through the P&L. The vast majority of that
Negative adjustment in the fourth quarter, the $205 million, was driven by weakness in the equity markets, predominantly in Hong Kong. We do actually disclose that sensitivity somewhere, I can't remember which page, but we can point you to that later. Given what's happened to equity markets since the start of the year, I think it's reasonable to read across that a lot of that will have been reversed through the course of this year already. It still remains subject to any future movements in markets. It really is market-driven and not primarily customer-driven. Ewen, on the NIM.
Okay.
On NIM, I didn't mean to convey that I was overwhelmingly negative on it. I just said I wasn't going to forecast it. The NIM in Q4 was 163 basis points. As we look out in 2019, and you'll obviously be able to run your own numbers on this, we're continuing to see some benefit come through from rate rises in 2018. We continue to see a mix shift going on because we're growing lending faster than deposits, which is obviously beneficial to NIM. In some markets, that's clearly the case, like the U.K., where we continue to have an excess funding position in our ring-fenced bank.
I talked about earlier the fact that we've done the liquidity repositioning in the non-ring-fenced bank that we had to do in the second half, because effectively, ring fencing created a funding surplus inside the ring fence and a liquidity deficit outside the ring fence that we had to address. We're obviously continuing to build up our MREL stack. That will have some impact on margins, and I'm not going to predict what will happen on asset and liability spreads. There's a bunch of pluses, there's some neutral factors, there's some negative factors in that. I think the main underlying driver of net interest income growth in 2019 will be no different to what we saw in 2018, i.e., it will be driven by underlying volume growth that we see.
We continue to be reasonably positive about the volume growth that we're going to be able to put on in various markets.
Okay, perfect. Thank you very much.
Thanks, Magdalena.
Our next question today comes from Chris Manners from Barclays Research. Your line is now open.
Hi, Chris.
Hi, Ewen. How are you doing?
Very well. Thank you.
Well, thanks very much for your first set of results at HSBC. Just two questions, if I may. The first one is on, sorry to bring it back, is the net interest margin again. Maybe if you could talk a little bit about the U.K. dynamics. You obviously have a lot of surplus liquidity in your ring-fence bank, but then when we look at some of the offers that you have out there, like the 1.6% one-year fixed rate bond, it does look like you are paying up in certain segments. Just maybe try and understand a little bit more about the U.K. net interest margin and how you expect that to develop. The second question was on the revenue outlook. When we look at where consensus is, it is about $57.5 billion of revenue for 2019.
If we look at your revenue you have just printed for the year, the $54 billion, we re-profile it for current FX, that would probably get you down to about $52.5 billion. That looks to me that you probably need about 10% revenue growth to get to where consensus is. Do you think that is achievable? It is just trying to work out what parts of the business might be able to grow at that pace and what parts might struggle. Thank you.
Okay. Well, on U.K., look, I would not overread into the fact that we have a short-term deposit offer out on the U.K. market at the moment. The overall funding spreads in the U.K. continue to be. We have one of the lowest funding costs in the U.K. We continue to enjoy a significant funding surplus. I think we are sensitive to the fact when we look at future deposit pressures in the U.K., the fact that the Term Funding Scheme has got over $120 billion of funding out on the market. We obviously did not take any of that. That is, as you know, about three to four years of funding growth in the U.K. Understanding price elasticity is stuff that we will do every so often.
That offer out in the market, I think at the moment, in totality, has less than a one basis point impact on our net interest margin in the U.K. On the revenue outlook, a couple of things. Firstly, if you look on slide four, on full-year adjusted revenue performance, you will see any number of those line items, the red bars, those volatile items that we would expect some or much of that to turn around in 2019, depending on how much of that you want to take. I think that provides about 2%-3% of underlying revenue growth support into 2019. As I said, we continue to be reasonably positive on loan growth in 2019. I think you can run your own analysis on what you think will happen to NIM. I do not think that gets us close to double-digit revenue growth in 2019.
Consensus, if you're saying it's at $57 billion, feels a bit high in that respect if that's implying 10% revenue growth.
Okay. That makes a lot of sense. Basically, to get to the lower baseline to get to that 10% revenue growth, what I was doing is just taking your Q4 adjusted FX revenues, the ones that you reprofiled for the rest of the year, which got me to about $52.5 billion rather than the $54 billion reported. That's how I got to that number.
Yeah. I think equally, you probably need to adjust consensus somewhat for FX as well, because I don't think consensus has been adjusted for the same FX. Which maybe you take $1 billion off consensus for that as well.
Cool. Okay. That makes a lot of sense. Thanks, Ewen.
Thanks, Chris.
Our next question today comes from Alastair Ryan from Bank of America. Your line is open.
Hi, Alastair.
Afternoon. Welcome. One on Hong Kong and one Global Banking and Markets, please. On Hong Kong, there's quite a material slowdown in both loans and current and savings accounts in the market, in Hong Kong. You had good momentum in the fourth quarter, but does that catch you up into Q1? It looks cyclical rather than permanent, but it is quite material. Things are sort of going backwards rather than forwards at present. Is that your experience as well? Global Banking and Markets. Was there anything wrong you'd call out in the fourth quarter? I mean, rates and credit were very poor. Those are naturally volatile items, but they're sort of particularly weak this quarter. Was there anything you'd call out or that's just the market in the round you're happy with sort of the income mix at GBM? Thank you.
Alastair, hi. It's John. I'll start and Ewen will chip in. Hong Kong balance sheet. We saw, obviously, very strong year in Hong Kong last year. Revenues up 14%. Really good balance sheet growth. We saw that moderate towards the end of the year. Just checking in with the team early part of yesterday for the first part of the year, it's fine, actually. I think your question kind of suggested that there was going to be a drop-off into the beginning of this year from where we were last. I'm not aware that that's what we've seen. I do think we should expect to see, irrespective of that, a lower rate of asset growth this year than we enjoyed last year.
I think the other thing to note whenever we think about Hong Kong is just the state of the HIBOR-LIBOR basis, which is very wide at the moment. It's at its kind of widest point for quite a while now. There's nothing in the market, other than the fact we're close to the top of the CET1 band, other than that, nothing that suggests that that's going to narrow short term. That's the Hong Kong one. With respect to GBNM, I think worth remembering, we had a really strong third quarter. The fourth quarter was weak by kind of any measure, but relative to the third quarter, it looked extraordinarily weak, because we had a great quarter in Q3. Much of that was driven by FX. I'm not sure we've got any calls wrong.
I don't think there are any big market positions in the fourth quarter that we got wrong. Our results in the fourth quarter kind of stacked up with the other Europeans. We're quite a long way behind the Americans, driven mostly by equities, where our equities franchise is small relative to the Americans, and the Americans outperformed. I think it was just one of those quarters. I don't think there was anything particular. No. I think the other thing, as you know, Alastair, is that the mix of our GBNM business is different to others, given that we have more transactional related business in there. If you look at the underlying trends on some of the transactional businesses last year, they continue to be very positive. FX, security services, Global Liquidity and Cash Management all had double-digit growth rates.
While the overall markets franchise for the full year was down 7%, I think, in terms of revenues, the Global Banking and Markets in totality was up $1. Samir and team did that while managing our RWAs down by 4%, too. Yeah, they did well.
That's clear. Thanks very much.
Thank you.
Next question today comes from Tom Rayner from Numis. Please ask your question.
Hi, Tom.
Thank you. Hi, good morning, Ewen. Good morning, John.
Hi.
Or afternoon, wherever you are. Couple, please. Just to stick on the NIM, one final NIM question, maybe. I think if I back out Q3, can you hear me?
Yes.
Yeah, sorry. I think the Q3 NIM was 169, so that's fallen to 163 in Q4. I think there was also a basis point in there for the hyperinflation, so it would've been 162. It's quite a big drop in the quarter. Could you just help us understand how that splits down between the liquidity issue in the U.K. and maybe some of the competitive issues in Hong Kong? Then I've got a second question on the ECL, please. I can give you that now or wait.
Yeah, there were a few things going on Q4 NIM. There was liquidity buildup going on in the non-ring-fenced bank partly in anticipation of Brexit. If anything, we're over-liquefied in the non-ring-fenced bank at the moment, and we'll continue to be so. There was a bit of NIM pressure on the deposit side in Hong Kong, and there were slightly lower balances in Global Banking and Markets and in some of the Global Liquidity and Cash Management overdraft products. The biggest swing, I think, were the first two things I talked about. In terms of where to from here, I wouldn't view that drop as something we view that we would anticipate seeing in Q1.
Okay. All right. Thanks. The second one, when you talk of normalizing charge, the low end of the 30-40 basis points range, which I think is fairly in line with what consensus expects over the next 2-3 years. When you talk about the ECL charges going through, are you thinking about any additional build-up in the coverage on stage 1 and stage 2 as things normalize? Maybe something might push the charge higher in the near term.
You all may not have had the chance yet, we've provided some additional disclosure on pages 98 and 99 of the annual report.
I expect Jonathan's probably looking at that right now.
You will see in there what our economic scenarios are for the U.K. We've also taken an economic scenario on trade disruption. When we guide to higher ECL charges in the next couple of years, I think we're just being prudent. If you back out the additional U.K. overlay we took, 18 points for the full year was about 16 basis points, ex that. There's a long way to go from there to get to the low end of the 30-40 basis point range. Those overlays, when we look at the U.K. overlays, we've got $400 million in total, which certainly to date is higher than U.K. peers. Even though we've got a smaller book, and if you look in last year's stress test results, actually a less stressed book than others.
We feel that we're being appropriately conservative there, and we can even imagine scenarios in the U.K. where we get to softer versions of Brexit would cause us to revisit that overlay and write some of it back during the year. Yes, they'll normalize, but how quickly they normalize, I don't know. The only places we talked about earlier that we're seeing any softness at the moment in credit is the U.K., and most of that's not to do with Brexit.
Lovely. Thanks a lot. That's helpful.
Thanks. Tom.
Next question comes from Ronit Ghose from Citi. Your line is open.
Morning.
Great, thanks. Hi, thanks. It's three quick questions, please. Just if I can go back to NIM. The standalone exit run rate's 162 basis points in the fourth quarter. Assuming the rates don't change from here, are there any positives that I should be thinking about for the year ahead? I know you don't want to guide explicitly, Ewen, but are there any positives? I can think of lots of negatives that I need to add to the 162 exit run rate, but what are the positives I should be thinking of, is question number 1. Question number 2 is on buybacks. I think you said that you're hoping to neutralize the scrip dividend. Can you just clarify what your plans are on the buyback? That'd be great. Thirdly, stepping back to John, you called out January, it started well.
How much of this is simply reversal of marks in the tough end of the year, November, December, going positive in GBM in Q1? Is there anything else you want to call out about January going well? Thank you.
Do you want to do buybacks, John?
Sure.
Come back to the other two.
Why don't I do the buybacks and then talk about the January, December thing, and then we'll come back to you, Ewen, for the NIM again, since you're so good at this now, you.
I know Ewen loves NIM.
Yeah. Buybacks. I think what we're saying is our policy towards buybacks has not changed. What we intend to do is neutralize the scrip take-up, and over time, use buybacks to keep the share count broadly stable. At this point, I don't want to get drawn into a conversation about the timing of the next buyback, the policy remains the same, the attitude's the same. We want to keep the share count broadly stable over the medium term. That's buybacks. With respect to what we've seen in January, there is clearly some element of revenue slipping out of December into January. Outside of that, I would say January's been a solid month. I think we're seeing lower levels of credit demand in some parts of the group than at the same time last year. We note that.
I think for the retail investors in Asia that are a big part of our revenue base, their core investing activity is holding up well, their equity broking activity is low, for example. There are definitely some signs that customers' confidence is in some way impacted by the trade tensions and the uncertain outlook. The balance sheet's holding up well. No issues, as Ewen has already indicated from a credit perspective. Yes, there's definitely some slip of revenues out of December into January, in both the retail business, and I think to some extent also in global markets as well.
On sort of positive things on NIM that I thought too, we still are getting some benefit from rate rises that happened in 2018. I think we still do anticipate some further rate rises in 2019, albeit at a slower rate than what we may have anticipated one or two quarters ago. We are getting benefit in terms of mix shift going on in several markets. We are growing lending faster than deposits. We have got, as you can see from our liquidity metrics in most markets, still pretty liquid in most markets, and therefore, can continue to sustain that for a while. The other thing I would say is, I would not do two negatives on top of each other, i.e., if you are going to see margin pressure, it is probably because asset quality trends are benign, and therefore, take the two together.
If you are going to take a harsh view on margin pressure, then I think you do need to slow down the normalization of ECL charges as part of that, because the two go hand in hand with each other.
Sure. Thanks for that. I guess I am thinking, I am circling back to your earlier comment about moderate or modest NII growth, because I have got a $162 exit run rate, given you started the year in Q1 at $167 or so, and then you had rate rises during the year. If there, let us just assume there are not rate rises from here, then I am looking at year and you have quite a big delta on NIMs. I am struggling to get even moderate NII growth. I guess it goes out to what we define as moderate at that point. I guess it circles back to what Chris was saying before about consensus looks quite punchy right now in NII.
Again, I would sort of go back to the fact that we grew average interest earning assets last year by 7%. NIM expanded by three basis points, and we grew net interest income accordingly. The growth and underlying volume growth will be a key support for net interest income growth in 2019. We are positioned in a bunch of markets that are growing. Last year, we grew top-line revenues, just as a reminder, in Hong Kong at 14%, in mainland China at 14%, Retail Banking at 13%, Commercial Banking at 12%. There is very few other banks in the U.K. that are achieving that.
Right. Obviously, you had a strong tailwind going into last year, and you started the year strong into the volumes and NIMs, but given where we are today, I guess you're looking at more low single-digit NII growth based on your comments. You're going to need pretty strong non-NII growth to get to kind of previous guidance of mid-single-digit revenue growth.
Those are your comments, not mine.
Indeed. Can I have a quick supplementary just going back to costs? I know we don't want to get too hung up on Jaws, particularly on a short-term basis, based on my comments that I just made of low single-digit NII growth, it's going to be a challenge to get to mid-single-digit revenue growth. Can you just elaborate a bit more what you're doing on sort of levers you can pull on costs, John, any of them?
Yeah, sure. I think worth remembering that we start this year in a fundamentally different position with respect to Jaws than when we started last year. We transitioned from 2017 into 2018, moving away from a CTA budget of $3 billion to 0. We spent pretty much all of 2018 chasing the Jaws discipline. The plan was to get to land positive Jaws in December, for the reasons we just stepped through, we missed it. The way that we planned this year, we're not going to be chasing Jaws. I would expect to see quite a different start to the year from a Jaws perspective. We are noting that the revenue outlook is a little more difficult than it was at this point last year.
As Ewen indicated in his remarks, we are phasing some of the planned investments that we contemplated probably three to six months ago. We're not changing how we plan to invest or what we prioritize, but we'll phase it, and we'll defer some of the spend. That's what we're doing now, effectively. We'll still be investing more this year, probably, than we invested last year, but the rate of growth will moderate in line with what we see as the revenue outlook.
Great. Thanks, John.
Thank you.
Next question comes from Joseph Dickerson from Jefferies. Your line is now open.
Hi, Joseph.
Hi, good morning, guys. Just a hi. A couple of quick things, if I may. Just on the comment around the U.K. softness. How broad-based is that? One of your competitors who reported last week, very close to your heart, Ewen, who lends to one out of every two corporates in the U.K., did not indicate that there was a broad-based deterioration outside of a few single names here and there. How broad-based is the U.K., and what are the mechanics between the $165 million, effectively, Brexit top-up? Why not $100 or $500? What drives the calculation there on number one? Number two, I think you alluded to it, but could you just clarify.
It looks to me like there was just under $400 million in Q4 quarter-on-quarter being in low-quality revenues, notably in GBM, around principal investments and credit and funding valuation adjustments. Since you've been already discussing the start to the year, could you just discuss what drove the Q4 result there and how we might think about that as having started the year? Thanks.
Yeah. Look, on softnes s, I would sort of echo the comments from the bank that's close to mine, reported last week. We don't see it as a broad-based deterioration at the moment. It is quite concentrated on a few sectors, high street retailers, restaurant chains and the like, some of the government contractors. Very specific at the moment, not broad-based. The $165 million charge is, as you'll know, under IFRS 9, with forward economic guidance, we need to construct a set of forward economic forecasts, which we do in our annual report. We then need to probability weight them. What we've done this quarter, because of Brexit, and because of the It's hard to call a central economic scenario at the moment in the U.K. We've broadened out the probabilities across a range of scenarios.
Obviously, the skew is to the downside, and that creates the need for that additional overlay. You can put different probabilities in. No doubt as the year progresses, we will get to different probabilities depending on the future of the Brexit negotiations. There were negative funding and credit valuation adjustments in Q4. There were some swings in principal investments. Users assume that they are not repeated so far in 2019.
Thanks. I guess I'd also ask, John, you mentioned the fundamentals of Asian growth are sound. I think along those lines, what gives you conviction? What really drives that comment?
There's nothing fundamentally that's changed other than, I guess, the injection of trade tensions between China and the U.S., which are not to be diminished in any way. They're significant. They are causing customers to pause. Otherwise, the demographic trends that underpin Asia's growth, the emerging middle class, the very high savings rates, et cetera, all of those drivers remain intact. We've got a strategically privileged position for that, particularly in Hong Kong and Greater China. It remains sound. I think we're looking at slightly lower rates of growth this year in Asia than we saw last year. Otherwise, we're talking about another year of growth.
Great. Thanks.
Next question comes from Christopher Cant from Autonomous Research. Your line is now open.
Hi, Chris.
Good morning. Thank you for taking my questions. I just had two quick ones, please. I appreciate you don't want to guide on NIM, obviously, you've made reference to the HIBOR-LIBOR gap. I was wondering if you could just give us a sense of how you think about the sensitivity to changes in that gap, if we do see that move over the course of the year. Just sort of a rough rule of thumb would be really helpful. You also talked in your opening remarks about flexing cost growth given the softer revenue outlook. Just looking at your consensus, I think consensus is looking for about 4% cost growth into 2019. Do you think you could do better than that potentially, given that you just did about 6% cost growth year-over-year into 2018?
4% already does seem to give you some credit for slower cost growth. I'm just wondering how you're thinking about the cost numbers, since that's obviously an area of focus for you. Thank you.
Chris, hi. It's John. I'll do the first one on HIBOR-LIBOR. The HIBOR-LIBOR basis is kind of around about 100 basis points in the one month at the moment. That's as wide as it's been. We either need to see intervention, i.e., the exchange rate move to the top of the band and Hong Kong dollars drain through the system that way. That's either going to happen either through FX demand or through IPO activity in the Hong Kong market, which will often create liquidity squeezes. I think we need to see resolution of the U.S.-China trade tensions before we see Hong Kong's China IPO pipeline open back up again. Those are things to watch for. We do show NII sensitivity in our appendices.
If the Hong Kong dollar's 100 basis point uplift, closing that basis for the full year would benefit us to the tune of $700 million-$800 million. It's that kind of order of magnitude. It is material. At the moment, I don't think that basis will widen from here. I don't think it will deteriorate, get any worse than 100. That wouldn't be my view. If it were to close on a full year basis, it's kind of a $700 million-$800 million number, as indicated in the tables somewhere in our annual report.
On cost growth, Chris, it's a sort of rare luxury for me, being at HSBC and being able to talk about cost growth. Something that I wasn't used to in my previous role. Can we manage cost below 4% growth? Yes. I think the trade-off that we're constantly debating internally is, we can continue to pace the growth of investment growth and headcount growth consistent with what we see going on in terms of underlying volume and revenue growth. To the extent we've already started so far this year with a much more prudent view on pace of investment growth and pace in headcount in areas that we want to grow into are consistent with a more uncertain revenue outlook. As that revenue outlook firms up one way or the other, I think will dictate the pace of cost growth.
Okay. Thank you.
Next question comes from Ed Firth from KBW. Your line is now open.
Morning.
Yeah. Morning, everybody. Just a very quick question, actually. Back on revenue. I suppose there's been a lot of mixed messages about revenue growth in terms of one-offs and in terms of underlying drivers, et cetera. Could I just ask you a slightly simpler question, which is, if we look into 2019, are you expecting revenue growth to be better or worse than 2018?
Okay. I'm not sure that's a simple question, as I said, if you look at slide four in our pack and the red bars, I think you could easily convince yourself that there's underlying 2%-3% revenue growth just from the reversal of one-offs or volatile items in 2018. On top of that, underlying volume growth, we spent a long time on this call talking about our confidence in volume growth. I've spent a long time telling you I'm not going to guide on NIM. You take all that together, yeah, we think you get decent levels of income revenue growth in 2019. I think the other thing we are
That's like
I think the other thing we are signaling is there's two idiosyncratic events out there that we don't control. One is the outcome-
Yeah
of Brexit negotiations, and the other is the outcome of U.S.-China trade discussions. The deltas around those are not insignificant, particularly around the first one. We are injecting an element of caution into anyone's ability to forecast at the moment.
Okay. Yeah, I know. I guess those are uncertainties. It sounds to me then, if I'm looking at slide four as the sort of where we end up focusing as the basis for our outlook, that you would expect revenue growth in 2019 to be better than 2018. You've got the one-off negative reds are almost If you took out the reds, you'd almost double your revenue growth.
Just be careful because those reds, you wouldn't plan for them to be reds in the same way again. Equally, they could be. For example, the insurance manufacturing market impacts. If there is a scenario in which risk assets deteriorate, equity markets correct again through the year, it will be red again. Year to date, clearly it's been positive because markets are up. I completely understand what you're trying to read from this. Just don't be too mechanical about it.
No. What I'm saying is the reds, I guess we can accept are unforecastable or unforecastable by me anyway.
Exactly.
We're left with the blues, and my impression from what you're saying is that you expect the blues orders of magnitude to be not dissimilar this year versus last, which sounds quite optimistic to me given the broader environment.
Was that a question or a statement?
Yes, that was a question.
Well, look, you would expect us to be optimistic. I do think you have got some capacity to forecast the blues. We're not going to forecast it for you.
Okay. Thanks so much.
Thank you.
Your next question comes from David Lock from Deutsche Bank. Your line is now open.
Hi, David. Hi, David.
Afternoon. I've got a couple, please. Then a clarification. The first one, just on the loan growth expectations. Apologies if I've missed it on the call, but you previously pointed to mid-single digit growth. You're talking about some headwinds to that on this call. Just wondering if you could clarify whether that's still the medium-term target to have mid-single digit loan growth within the organization. Secondly, on the January comment. I'm conscious that the first quarter last year was particularly strong in wealth management. I wonder if you could give any further color on the kind of revenue trends you're seeing, and which areas have been particularly strong in January, as it would help frame how we're thinking about cost Jaws in the first quarter of the year. The final kind of clarification, really, just on the scrip.
There was a lower scrip take-up in 2018. Would it be prudent, therefore, for us in the market to think about a lower buyback as a result from that? Are you really thinking about buybacks as sort of conforming to the average scrip take-up, which has been, I think, around 25% over the last few years? Thank you.
Yeah, on the last one, we think of our commitment as being neutralization. If it is a 15% scrip take-up, we would think of lower numbers, obviously. On loan growth, Q4 was just over 5% annualized, which gets you into your sort of mid-range. I think, depending on economic scenarios, we can get more bullish in that, but depending on others, we'll see. As we keep referring to our two biggest markets, Hong Kong and the U.K. The U.K. in particular, is facing some quite broad economic scenarios at the moment, so difficult to predict. On January, John, and wealth management?
On the wealth management thing, I think probably just three things to think about. One, the markets have been favorable so far. The red bars, there'll be some reversal of that. In terms of underlying customer activity, I think I indicated earlier, the core savings activity, mutual fund investing, insurance policy investing, that's holding up really well. Where we've seen customers a little bit less active is in things like foreign exchange and equities, which are the smaller pieces of the revenue pie for us. There's definitely lower customer activity, indicating, I think, lower customer confidence or an inability to decide what the trend in equity markets is. We've definitely seen that to date. Six weeks in, though, it looks okay at this point. Still looks reasonably solid.
Okay. Thank you.
Thanks, David.
Thank you, David.
We will take our last question today from Martin Leitgeb from Goldman Sachs. Your line is now open.
Hi, Martin.
Yes, good morning. Good morning, Ewen and John. Two questions from my side. The first one on growth and just the mix of growth going forward. In light of the weakening global growth outlook, I was just wondering if your expectation of the growth mix, both in terms of geographic mix, where the growth comes from. Also previously you mentioned Hong Kong, Asia, the U.K., or in terms of products and the split between loan growth and maybe wealth management. Anything that's changed in terms of the expectations, how the contribution of that growth stacks up? The second question related to that, in terms of U.K. ring-fenced bank, obviously, we saw a nice acceleration of loan growth, I think in particular in the second half 2018.
I was just wondering, has that reached now a kind of a steady state level in terms of your growth ambitions from here? Could that be one of the levers potentially to compensate potentially some weaker growth elsewhere, assuming obviously macro uncertainty clears or reduces over time? Thank you.
Yeah. Look, on the U.K., if we choose to grow in the U.K., we continue to think we've got the capacity to take share, both in Retail and in Commercial. Over the last few years, as you all know, we were not a significant player a few years back in the broker mortgage channel, which is about two-thirds of all mortgage origination. We've rebuilt access to the brokers. Last year, we grew mortgages in the U.K. by about 10%. We shifted stock share from 6.1 up to 6.6%. We've got a low double-digit share of current accounts. We can continue to take decent share in mortgages if we choose to take it. Similarly, in Commercial, we do think that we've got an advantage position in relation to customers who want to trade internationally.
Under whatever Brexit scenario you come up with, we do think that we've got a set of core competencies that will advantage us relative to others. On geographic mix, product mix globally, I don't think we're trying to signal any significant change in terms of how we're thinking about the business, where we think growth will come from. Just to repeat that we've clearly got areas that we are competitively advantaged, U.K., Hong Kong, Asia, international trade, and the like. You saw that in the growth that we achieved in 2018. No reason to think that we're going to continue to be advantaged in those areas, and we'll be able to continue to take share.
Yeah. Very good.
Thank you very much.
Thanks, Martin, for the question. Thank you all for dialing in. That's the last question I think we've got on the list today, and I think we're out of time as well. To all of you who've dialed in to be with us, thank you very much for your time, and any further questions, let us know. The team will do their best to help you with any answers.
Thanks a lot, everyone.
Thank you.
Thank you, ladies and gentlemen. That concludes the call for HSBC Holdings plc annual results 2018. You may now disconnect.