Good afternoon from Hong Kong. Good morning in London, and welcome to our 2018 HSBC Annual Results Call. With me today is Ewan Stephenson, Group Chief Financial Officer. I'll start by putting the results in the context of our strategy and broader vision for the bank before Ewan takes a look at the numbers. And 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.
But 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 HSBC. Helping our people be at their best is the critical enabler of our business strategy and absolutely fundamental to delivering 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 UK 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. We made progress last year, but there is still much further to go. With 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, but the progress is positive. And 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, but 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 $19,900,000,000 was $2,700,000,000 or 16% higher than 2017. Group return on tangible equity, our headline target, was 8.6%, up significantly on the 6 0.8% 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 Q3, 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 Q4. 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 a 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.
Ewan 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 1st full set of full year results at HSBC. And despite a softer 4th quarter, it's a good set of full year numbers.
John's just talked about the strategic progress we made last year, and 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. And we're also actively managing our capital base as we transition to higher Turns, sustaining our dividend, keeping a healthy core Tier one ratio and funding our growth aspirations.
A few numbers for you for full year 2018. Reported revenues were $53,800,000,000 Some $2,300,000,000 or 5 percent higher than 2017, reported pretax profits were $19,900,000,000 16% higher than the previous year. On an adjusted basis, revenues were up 4%, and pretax 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 4 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 4 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.
And in spite of adverse Q4 market impacts hitting revenue in insurance manufacturing, adjusted revenue for RBWM was up 8% on 2017. And 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 Center. 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 2 biggest markets, Hong Kong and the U. K. Room Fence Bank, Both delivered strong adjusted revenue increases with Hong Kong adjusted revenues up 14% and the U.
K. 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 December. Compared to a soft Q4 2017, Adjusted revenue in our global markets franchise fell by around $200,000,000 or 16% and were down by around $700,000,000 or 38% on Q3 2018.
In Wealth Management, revenues were down by about $250,000,000 primarily adverse market impacts in our insurance business as a result of weak equity markets in Q4. But 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 3rd 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 6 This shows the progress we've made both in terms of our mix of revenues and the allocation of our capital. Asia now accounts 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 3 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. And all of this together represents real improvement since our strategy day last June. As you can see on Slide 7, 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 There are 3 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 3 basis points. The second is the change in how we've made our net interest spread. The improved rate environment made 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.
Room fenced bank, which reinforced our strategy of building mortgage 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 highball movements. But given underlying loan growth, we do expect modest net interest income growth in 2019. Turning to operating expenses on Slide 8. They were up $1,800,000,000 or 6 percent 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 $4,100,000,000 of $4,100,000,000 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. But equally, we do recognize belong 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 risk 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. So 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 $1,800,000,000 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 2 parts: the first being the underlying asset quality and impairment 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 $165,000,000 in the quarter. This is on top of the $245,000,000 adjustment we made when IFRS 9 on 1st 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 the 30 to 40 basis point normalized range.
And as
a result, we're planning for ECL charges to be higher in 2019 2020. However, 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 99 China. I'll finish with a few words on our core Tier 1 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 30 basis points include the impact of the U. K. Bank levy and the final dividend of 0 point 21 With Basel III reform on the horizon in a few years' time, we'll continue to prioritize a strong Core Tier 1 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 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 $7,000,000,000 to $8,000,000,000 of higher RWAs on top of net business growth, primarily due to the implementation of IFRS 16. And with that, I'll hand over to John to briefly sum up.
Ewan, thank you. So 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 UK 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 investments 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 Call. China to avoid a hard landing and continue growing. And 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. So 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. We will now take our first question from Magdalena Stoklosa from Morgan Stanley. Your line is now open.
Thank you very much. Good morning. I will I have two questions. One is about the Revenues within the Retail division, and that's Page 5 I will be referring to. And the second one is a little bit is on NII.
So let me start with the Page 5. Ewen, could you give us a sense what it would take To reverse some of the kind of the negative delta that we have seen within the Insurance Manufacturing and Wealth Management. Of course, you have talked about The market impact, but of course, I'm sure there's also a big transactional impact there as well. So could you give us a sense of how of the moving parts of those two revenue sources, particularly with the year to date market trends And what you're seeing kind of in Asia transactionally? So that's 1.
And 2, I will try to draw you on the NII discussion because we are of course, there's a lot of moving parts as you've mentioned in your remarks. But of course, year to date particularly, they all look more challenging. So we've got the flatter curve, the Levels of HIBOR, the HIBORLIBOR spread, the mix shift and of course, not even mentioning the good old kind of asset Asset spread competition across your key markets. But you still kind of mentioned that you think that your NII is going to grow slightly. But how should we think about, particularly Hong Kong and U.
K. In U. K. Margins in that context of what's been happening kind of year to date. Thank you.
Thank you. So I think John is going to take your first question on insurance manufacturing.
Yes. Magdalena, it's John. Thanks for the questions. So Page 5, the top bar, the insurance manufacturing market impacts. And then the one below that is the Wealth Management excluding market impacts.
So to the extent that there was any lower customer activity, You can read that into the $51,000,000 number. The big number on top, the 205, is the effect of the PBF accounting for insurance. So we present value enforce all of the contracts. And in substance, When risk assets fall in value, we take losses through the P and L. And when risk assets rise in value, we take profits through the P and L.
The vast majority of that negative adjustment in the 4th quarter, the $205,000,000 was driven by weakness in the equity markets, predominantly in Hong Kong. Now and we do in Hong Kong. Now, and 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 kind of read across that a lot of that will have been reversed through the course of this year already. But it still remains subject to any future movements in markets.
So it really is market driven and not primarily customer driven. Ewan, on the NIM. Okay.
Yes. 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. And 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, Yes. 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 liquidity 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, yes, what will happen when asset and liability spreads. But yes, there's a bunch of pluses. There's some neutral Factors, there's some negative factors in that. But 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. And we continue to be reasonably positive about the volume growth that we're going to be able to put on in various markets.
Our next question today comes from Chris Manis from Barclays Research. Your line is now open.
Hi, Chris.
Hi, Ewan. How are you doing?
Very well.
So just sort of 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 fenced bank. But then when we look at some of the offers that you have out there, like the 1.6% 1 year fixed rate bond. It does look like you're sort of paying up in certain segments. So 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 sort of revenue outlook, when we look at where consensus is, it's about €57,500,000,000 of revenue for 2019. If we look at your revenue you've just printed for the year, €54,000,000,000 We re profile it for current FX. That would probably get you down to about 52.5%. That looks to me that you probably need about 10% revenue growth to get to where consensus is.
Do you think that's achievable? And Just trying to work out what parts of the business might be able to grow at that pace and what parts might struggle.
Okay. Well, on U. K, look, I wouldn't read over read into The fact that we have a short term deposit offer out on the U. K. Market at the moment.
The overall Spreads in the U. K. 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 $120,000,000,000 of funding out on the market, We obviously didn't take any of that. That's, as you know, about 3 to 4 years of funding growth in the U.
K. So understanding price elasticity is stuff that we'll do every so often. Yes, that offer out in the market, I think, at the moment In totality, it has less than a 1 basis point impact on our net interest margin in the U. On the revenue outlook, a couple of things. Firstly, I mean, if you look on Slide 4 on Full year adjusted revenue performance.
You'll 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 I think that provides about 2% to 3% of underlying revenue growth support into 'nineteen. As I said, we continue to be reasonably positive on loan growth in 20 'nineteen, I think you can run your own analysis on what you think will happen to NIM. I don't think that gets us to Close to double digit revenue growth in 'nineteen. But so consensus that If you're saying it's at $57,000,000,000 feels a bit higher in that respect, if that's implying 10% revenue growth.
Okay. That makes a lot of sense. What basically, to get to the sort of lower baseline to get that 10% revenue growth, what I was doing is just taking Your sort of Q4 adjusted FX revenues, the ones that you re profile for the rest of the year, got me to about 52.5 rather than the 54 reported. That's how I got to that number.
Yes. But 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 $1,000,000,000 off consensus for that as well.
Cool. Okay. That makes a lot of sense. Thanks, Ewan.
Thanks, Chris.
Our next question today comes from Alastair Ryan from Bank of America. Your line is open.
Hi, Alastair. Afternoon, afternoon. Welcome. One on Hong Kong and one Global Banking 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 Q4, but does that catch you up into Q1? It looks cyclical rather than Permanent, but it is quite material. So things are sort of going backwards rather than forwards at present. Is that your experience as well? And then Global Banking and Markets, was there anything wrong you'd called out in the 4th quarter?
I mean, rates and credit were very poor And those are naturally volatile items, but they're sort of particularly weak this quarter. Was there anything you'd call out or that was That's just the market in the round you're happy with sort of the income mix at GB and M. Thank you.
Alastair, hi, it's John. I'll start and Eun will chip in. Hong Kong balance sheet, so we saw, I mean, obviously, very, very strong year in Hong Kong last JEA 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 1st part of the year, it's fine actually.
So I think your question kind of suggests There was going to be a drop off into the beginning of this year from where we were last year. And I'm not aware that That's what we've seen. But 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. I said it's kind of widest point for quite a while now.
And there's nothing in the market other than the fact we're close to the top of the TT band And that suggests other than that, nothing that suggests that that's going to narrow in the short term. And that's the Hong Kong one. With respect to GD and M, I think worth remembering we had a really strong Q3 and the Q4 was weak by kind of any measure. But relative to the Q3, it looks extraordinarily weak because we had a great quarter In Q3, much of that was driven by FX. I'm not sure we got any calls wrong.
I don't think there are any big market positions in the 4th quarter that we got long. Our results in the 4th 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 was small relative to the Americans and the Americans outperformed. So I think it was just one of those quarters. I don't think there was anything particular No, no,
I think the other thing, as you know, Alastair, is that Yes. The mix of our PB and M business is different to others, given that we have more transactional related business in there. And If you look at the underlying trends in 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 rate. So while the overall markets franchise for the full year was down 7%, I think, in terms of revenues, The Global Banking Markets in totality was up 1%, and Sameer and team did that while managing RWAs down by 4%, too.
So, yes, they did well.
Next question today comes from Tom Rayner from Numis. Please ask your question.
Hi, Tom.
Thank you. Hi, good morning, Ewan. Good morning, John or afternoon, wherever you are. A 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.
Yes, sorry. I think the Q3 NIM was 1 69. So that's fallen to 163 in Q4. I think there was also a basis point in there for The hyperinflation, so it would have been 162,000,000. 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 UK and maybe some of the competitive issues in Hong Kong. And then I
things going on, on Q4 NIM. The it was liquidity buildup going on in the non ring fenced bank, Partly in anticipation of Brexit. So if anything, yes, we're Over liquefied in the Nonwood Banks Bank at the moment and will 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. But 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 as That we would anticipate seeing in Q1.
Okay. All right. The second one, when you talk of normalizing charge, the sort of low end of the 30 to 40 basis points range, which I think it's fairly in line with what consensus expects over the next 2 to 3 years. Have you when you talk about the ECL charges going through, are you Thinking about any additional buildup in the coverage on Stage 1 and Stage 2 as things normalize, there may be something The charge higher
in the near term? You all may not have had the charge yet, but we've provided some additional disclosure on Pages 9899 of the annual report.
Expect to be much on
the unit for 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. Yes.
As we look at when we guide to higher The 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 to 40 basis point range.
Yes, those overlays, when we look at the U. K. Overlays, We've got $400,000,000 in total, which certainly to date is higher than U. K. Peers.
So 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, so 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. So 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.
Okay. All right. Lovely. Thanks a lot. That's helpful.
Thanks, Tom.
Next Question comes from Ronit Ghose from Citi. Your line is open.
Good morning.
Great. Thanks. Hi, thanks. It's 3 quick questions, please. Just if I can go back to NIM.
So The standalone exit run rate is 162 basis points in the 4th quarter. And if assuming the rates don't change from here, are there any positives that I should be thinking I know you don't want to guide explicitly, Ewan, but are there any positive 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? This is question number 1. Question number 2 is on buybacks.
I think You said that you'd like you're hoping to neutralize the scrip dividend, but can I just can you just clarify what your plans are on the buyback? That'd be great. And thirdly, stepping back to you called out 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 And GBM in Q1 or is there anything else you want to call out about January going well? Thank you.
Do you want to do buybacks, John? Sure. I want to
do the buybacks and then talk about the January, December thing and then we'll come back to Ewen for The NIM again since you're so good at this now.
I know you have lost NIM, so.
Yes. Buybacks, so 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, but the policy remains the same, the attitude is the same. We want to keep the share count broadly stable over the medium term.
So that's buybacks. With respect to what we've seen in January. I mean, clearly, there is clearly some element of revenue slipping out December into January. Outside of that, I would say January has been a solid month. We're seeing Lower levels of credit demand in some parts of the group than at the same time last year, so we note that.
I think for the retail investors In Asia, they are a big part of our revenue base. Their core investing activity is holding up well, but their equity broking activity is low, for example. So There are definitely some signs that customers' confidence is in some way impacted by the trade tensions and the uncertain outlook. But the balance sheet is holding up well. No issues as Ewan has already indicated from a credit perspective.
And 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.
Yes. On sort of positive things on NIM that I'd point to, we still are getting some benefit from rate rises that happened in 'eighteen. I think we still do anticipate some further rate rises in 'nineteen, albeit at a slower rate than what we may have anticipated 1 or 2 quarters ago. We are getting benefit in terms of mix shift going on in several markets. We're growing lending faster than deposits.
We've got, as you can see from our liquidity metrics in most markets, still pretty liquid in most markets and can continue to sustain that for a while. The other thing I would say is they're not I wouldn't do 2 negatives on top of each other, I. E, if you're going to see margin pressure, it's probably because asset quality trends are benign. And therefore, take the 2 together, but if you're 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 2 go hand in hand with each other.
Sure. Thanks for that. I'm just I'm thinking I'm circling back to your earlier comment about Moderate or modest NII growth, because I've got a 162 exit run rate given you started the year in Q1 at 1 67% or so. And then you had rate rises during the year. So if there let's just assume there aren't rate rises from here, then I'm looking at Year on year, quite a big delta on NIMs.
I'm struggling to get even moderate NII growth. I guess it goes out to what we define as moderate at that point. It's yes, I guess it circles back to what Chris was saying before about consensus looks quite punchy right now in NII.
Well, again, I'd sort of go back to the fact that we grew average interest earning assets last year by 7%. NIM expanded by 3 basis points, and we grew net interest income accordingly. The Growth in underlying volume growth will be a key support for net interest income growth in 2019. And 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's very few other banks in the U. K. That are achieving that.
Right, right. No, I mean, obviously, you had 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 like low single digit NII growth based on your comments. So 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. Indeed. Is that can I have a quick supplementary just going back to costs because I know we don't want to get too hung Upon jaws, particularly on a short term basis, but based on my comments that I just made of low single NII growth and it's going to be a challenge to get to mid single digit revenue growth? And what kind of can you just elaborate a bit more what you're doing on sort of levers if you can pull on costs, John and Ewan?
Yes, sure. So I think worth remembering that we start this year in a fundamentally different position to with respect to jaws than when we started last year. So we transitioned from 2017 into 2018 moving away from a CTA budget of $3,000,000,000 to 0. So we spent pretty much all of 'eighteen chasing the jaws discipline. And the plan was to get land positive jaws in December and 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. Now We are noting that the revenue outlook is a little more difficult than it was at this point last year. So as Ewan indicated in his remarks, we are phasing some of the planned investments that we contemplated probably 3 to 6 months ago. We're not changing how we plan to invest or we prioritize, but we'll phase it and we'll defer some of the spend.
So 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, good morning guys. Just a couple of quick things, if I may. Just on the comment around the UK softness, How broad based is that? And one of your competitors who reported last week, very close to your heart, Ewan, who lends 1 out of every 2 corporates in the UK did not indicate that there was a broad based deterioration outside of a few single names here and there. So how broad Based as the UK and then what are the mechanics between the $165,000,000 effectively Brexit top ups, I mean, with top up and why not 100 or 500, and what drives that, the calculation there on, number 1?
And then number 2, I think you alluded to it, but could you Clarify, I mean, it looks to me like there was just under $400,000,000 in Q4 quarter on quarter Swing in low quality revenues notably in GBM, around principal investments and credit and funding valuation So 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?
Yes. Look, on Softmost, I would sort of Echo the comments from my the bank that's close to my 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. So very, very specific at the moment, not broad based.
The $165,000,000 charge is, I mean, as you'll know, under IFRS 9, with forward economic guidance, we need to construct a set of forward economic Forecast, 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 Yes. It's hard to call a central economic scenario at the moment in the U. K. So we've broadened out the probabilities across a range of scenarios.
Obviously, the SKU is to the downside, and that creates the need for that additional overlay. You can put different probabilities in them. No doubt, as the year progresses, we will get to different probabilities depending on the future of the Brexit negotiations. Yes, there were negative funding and credit valuation adjustments in Q4. And those and there were some swings in principal investments.
So you should assume that they are not repeated so far in 2019.
John, you mentioned the fundamentals of Asian growth are sound, but I think along those lines. What gives you conviction? What really drives that comment?
Well, 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 and they are causing customers to pause. But otherwise, the demographic trends that underpin Asia's growth, the emerging middle class, the very high savings rates, etcetera. All of those drivers remain intact, and we've got a strategically privileged position for that, particularly in Hong Kong and Greater China. So yes, we're not it remains sound.
I think we're looking at slightly lower Rates of growth this year in Asia than we saw last year, but otherwise, we're talking about another year of growth.
Great. Thanks.
Next question comes from Chris Can't from Autonomous Research.
I just had 2 I appreciate you don't want to guide on NIM, but obviously you've made reference to the LIBOR, LIBOR GAAP. 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. And you also talked in your opening remarks about flexing cost growth given the softer revenue 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 Just wondering how you're thinking about the cost numbers since that's obviously an area of focus for you. Thank you.
Yes, Chris, it's John. So I'll do the first one on HIBOR LIBOR. So yes, the HIBOR LIBOR basis is kind of roundabout about 100 basis points in the 1 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.
So those are things to watch tour. We do show NII sensitivity in our appendices. And for Hong Kong dollars, 100 basis point uplift. So closing that basis On a full for the full year, would benefit us to the tune of $700,000,000 to $800,000,000 It's that kind of order of magnitude. So it is material.
And at the moment, I don't think that basis will widen from here. I don't think it will deteriorate, get any worse than $100,000,000 That wouldn't be my view. But if it were to close On a full year basis, it's kind of a $700,000,000 to $800,000,000 number as indicated in the tables somewhere and our annual report.
Yes. On the 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 Wasn't used to in my previous role. So can we manage costs 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 consistent with And headcount growth consistent with what we see going on in terms of underlying volume and revenue growth.
And to the extent we've already started so far this year with a much more prudent view on pace of investment growth and pace and headcount in areas that we want to grow into Consistent with a more uncertain revenue outlook, as that revenue outlook firms up one way or the other, I think we'll dictate the pace of cost growth.
Next question comes from Ed Firth from KBW. Your line is now open.
Good morning. Good morning, everybody. Just a very quick question, actually, back on revenue.
I said I've got slightly There's been a
lot of mixed messages about revenue growth in terms of one offs and in terms of underlying drivers, etcetera. So can I just ask you a slightly simpler question, which is, If we look at 2019, are you expecting revenue growth to be better or worse than 2018?
Okay. So I'm not sure that's a simple question. But as I said, I mean, if you look at Slide 4 in our pack on and the red bars. I think you could easily convince yourself that there's Underlying 2% to 3% revenue growth just from the reversal of 1 offs or volatile items in 'eighteen. Then on top of that, yes, underlying volume growth, and we spent a long time on this call talking about our confidence in volume growth.
And then I've spent a long time telling you I'm not going to guide on NIM. So yes, You take all that together, yes, we think you get decent levels of income revenue growth in 2019. But I think the other thing we are signaling is there's 2 idiosyncratic events out there that we don't control. One is the outcome 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. So We are injecting an element of caution into anyone's ability to forecast at the moment.
Okay. Yes. No, I mean, I guess, that's all I understand. But it sounds to me then, if I'm looking at Slide 4, it's 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 because you've got a I mean, the one offs negative rents are almost if you took out the rents, you'd almost double your revenue growth.
Yes, just be careful because those reds, you wouldn't plan for them to Red's in the same way again, but equally they could be. So 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. So It's I mean, I completely understand what you're trying to read from this. I just don't be too mechanical about it.
No. I said what I'm saying is the reds, I guess, we can accept are unforecastable or unforecastable by me anyway. So 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 but as 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. But I do think you have got some capacity to forecast the Blues, So we're not going to forecast it for you.
Your next question comes from David Lock from Deutsche Bank. Your line is now open. Hi, David.
Afternoon. Good afternoon. I've got a couple, please, and then a clarification. And the first one, just on the loan growth expectations. Apologies if I've missed it on the call, but you previously pointed So mid single digit growth, but you're talking about some headwinds to that on this call.
Just wondered if you could clarify whether you're still still the medium term target to have mid single digit loan growth within the organization. And then secondly, on the January comment, I'm conscious So the Q1 last year was particularly strong in Wealth Management. So I wonder if you could give any further color on the kind of revenue trends you're seeing in which areas Have been particularly strong in January as it would help kind of frame how we're thinking about cost jaws in the Q1 of the year. And then 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 on us in the market to sort of think about a lower buyback The results from that? Or 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.
Yes. On the last one, we think of Our commitment has been neutralization. So 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, Yes, we'll see. But as we keep referring to, our 2 biggest markets, Hong Kong and the U. K, and the U. K, in particular, It is facing some quite broad economic scenarios at the moment, so difficult to predict. On January, John, on Wealth Management?
Yes. So on the Wealth Management thing, I think probably just three things to think about. 1, the market Markets have been favorable so far. So 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 High for us, but there's definitely lower customer activity indicating, I think, lower customer confidence or inability to decide what the trend in equity markets is. So we've definitely seen that to date. Yes, 6 weeks in, though, it looks okay at this point. It still looks reasonably solid.
Okay. Thank you.
Thanks, David.
Thank you, David.
We will take our last question today from Martin Leggate from Goldman Sachs. Your line is now open.
Hi, Man.
Yes. Good morning. Good morning. Good morning, Ewan and John. Two questions from my side.
And The first one on growth and just the mix of growth going forward. And in light of the weakening global growth outlook, I was just wondering Is your expectation of the growing 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 here, the split between loan growth and maybe wealth Management, has there anything has changed in terms of your expectations, how the contribution of that growth stacks up?
And 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 the decline in the second half twenty eighteen. And I was just wondering, has that reached now kind of a is state level in terms of your growth ambitions from here or could that be one of the levels potentially to compensate potentially some weaker growth Elsewhere, assuming obviously macro uncertainty clears or reduces over time? Thank you.
Yes. Look, on the U. K, yes, if we choose to grow in the U. Okay. 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 broken Woolworths channel, which is about twothree 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 6%. Yes, we've got a low double digit share of current accounts. We can continue to take decent share in mortgages if we choose And similarly, in commercial, we do think that we've got an advantage position in relation to Customers who want to trade internationally. So 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. Yes.
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, we've clearly got areas that we are competitively advantaged, Yes. 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. Very good.
Thank you
very much.
Thanks, Martin, for the question. And 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. So to all of you who 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 with any answers.
Thanks a lot, Ebrahim. Thank you.
Thank you, ladies and gentlemen. That concludes the call for HSBC Holdings Plc Annual Results 2018. You may now disconnect.