For information, this conference is being recorded. At this time, I will hand the call over to your host today, Mr. John Flint, Group Chief Executive. Please go ahead.
Good morning from London. Good afternoon to everyone in Hong Kong, and welcome to our third quarter results call. Iain Mackay will take you through the numbers shortly, and then we will field questions together. Let me start, though, by recapping our strategy and reflecting on our performance. In June, we outlined our plan to get HSBC growing again and to create value for shareholders. To do that, we are delivering growth from areas of strength, turning around low-performing businesses, investing in revenue growth and the future of the business, and simplifying the organization and investing in future skills. Central to this is our ability to use the revenue capacity of the group to invest in the business while maintaining good discipline around costs. Our third quarter results demonstrate our ability to do that and to deliver on the promise to get HSBC back to growth.
Our three main global businesses had very strong quarters. All three are increasing returns, winning new business, and investing in future capabilities. We see the potential for further growth, and we're continuing to invest to capture those opportunities. I'll now hand over to Iain to talk through our numbers.
Thanks, John. Reported profit before tax of $5.9 billion was up 28% in last year's third quarter. Adjusted profit before tax was $6.2 billion, an increase of 16%. For the year to date, reported and adjusted profit before tax were up by 12% and 4% respectively in the first nine months of last year. Group-adjusted revenue was $1.1 billion, or 9% higher than last year's third quarter, due to the strong performance of our three main global businesses. Third quarter adjusted costs rose by 2%, reflecting our continued investment in growth and technology. We grew lending by a further 2% compared with the second quarter and 6% from the start of the year. Our common equity Tier 1 ratio remains strong at 14.3%. The numbers also take into account the classification of Argentina as a hyperinflationary economy. I'll cover that in more detail later.
A quick look at some key metrics for the year to date. The return on average ordinary shareholders' equity was 9%. The return on average tangible equity was 10.1%. We had a lower tangible net asset value per ordinary share of $7.01, driven by foreign exchange movements. This was up $0.01 from the second quarter. Earnings per share was $0.56. For the nine months, we had a negative jaws of 1.6%, and we remain on track to achieve positive adjusted jaws for the full year. Slide four shows the items that take us from reported to adjusted. The principal difference with last year's third quarter is the absence of cost to achieve from our reported numbers. Last year's third quarter also included $104 million of releases in relation to legal settlements and provisions. More detail can be found in the appendix. The remainder of the presentation focuses on adjusted numbers.
Slide five breaks down adjusted profit before tax for the year to date by global business and geography. Profit before tax increased in our four global businesses by a total of $1.9 billion on the back of strong revenue performance. The corporate center profit before tax fell mainly due to lower central treasury revenue and the impact of hyperinflation in Argentina. Slide six looks at profit before tax for the third quarter, which was up significantly in the same period last year. Profit before tax grew in all four global businesses and three out of five regions, particularly Asia and Europe. The increase in Asia came largely from growth in transaction banking revenue and Global Banking & Markets and Commercial Banking, and from increased revenue from current accounts, savings, and deposits in Retail Banking and Wealth Management.
The rise in profit before tax in Europe was due primarily to good performances in the U.K., from Retail Banking and Wealth Management and Commercial Banking. In North America, higher revenue in both the U.S. and Canada contributed to an increase in profit before tax. Hyperinflation in Argentina was the main cause of lower profit before tax in Latin America. This was tempered by the strong performance of our Mexico business, which continued to deliver double-digit balance sheet and profit growth. Our business remains well-balanced, as the breakdown by global business demonstrates. Slide seven shows the revenue trends in our global businesses. Revenue from our four global businesses was $1.6 billion, or 12% higher in the third quarter versus the same period last year. I'll go through each business in more detail over the next few slides.
Slide eight covers Retail Banking and Wealth Management revenue, which grew by $711 million or 14% compared to last year's third quarter. Higher balances and interest rates generated a $758 million increase in deposit savings and current account revenue, notably in Hong Kong. On the wealth management side, $116 million increase in insurance manufacturing revenue came mainly from higher new business premiums and actuarial assumption changes. Lending revenue fell by $181 million due to continued asset margin compression from competition in local mortgage markets, particularly in Hong Kong. Customer lending rose by 8% compared with the third quarter of last year, mainly on the back of continued strong mortgage growth in the U.K. and Hong Kong. Customer deposits increased by 3%. As Slide nine shows, Commercial Banking revenue grew by $479 million, or 15%, with growth across all our product lines.
Global Liquidity and Cash Management revenue grew by 24% on the back of higher balances and wider margins, notably in Asia. Credit and lending revenue increased by 5%, thanks to balance sheet growth in all regions. Global Trade and Receivables Finance revenue rose by 3% as we grew balances and market share in Asia and Europe. Lending grew by 8% compared with the same period last year, and 2% compared with the second quarter. In Global Banking & Markets, revenue grew by $374 million, or 10%, compared with last year's third quarter, thanks largely to our strength in transaction banking. Revenue in Fixed Income, Currencies and Commodities grew 10% on the back of a 39% increase in foreign exchange revenue. This more than covered a 29% fall in revenue from rates. Securities services generated double-digit percentage revenue growth, while revenue in Global Trade and Receivables Finance also increased.
Global Liquidity and Cash Management revenue was 23% higher due to increased balances and higher interest rates. Adjusted risk-weighted assets fell by a further $5 billion in the third quarter. This included $6 billion from recycling unprofitable client exposures, offset by business growth of $4 billion. Additionally, there was a $2 billion reduction in market risk due to lower volatility and changes in mix of exposures. Return on average tangible equity was 12.5% for the year-to-date. Our differentiated Global Banking & Markets business model continues to deliver for our clients and create value for our shareholders. Global Private Banking was broadly stable versus last year's third quarter. Corporate center revenue fell by $439 million compared with last year's third quarter. $304 million of this was due to hyperinflation in Argentina. This cost was booked in the third quarter, but it reflects the year-to-date impact.
You can find more detail in the appendix. Valuation differences on long-term debt and associated swaps resulted in the fall of $139 million versus the prior year. We expect ongoing volatility from quarter to quarter, and these differences would broadly reverse if the instruments are held to maturity. Legacy credit revenue increased by $45 million and included a gain on the sale of legacy assets in the third quarter. Our balance sheet management full-year revenue guidance remains unchanged at $2.3 billion-$2.5 billion. Net interest income largely reflected higher deposit margins in the third quarter, rising 3% to $7.7 billion versus the second quarter. Group net interest margin for the year-to-date was 1.67%, four basis points higher than for 2017. In the third quarter, we benefited from interest rate rises in Hong Kong, the U.K., and the U.S.
Hyperinflation in Argentina reduced the year-to-date net interest margin by one basis point. You can find more detail on net interest margin in the appendix. Slide 14 looks at expected credit losses and loan impairment charges. Expected credit losses of $507 million related to Retail Banking and Wealth Management in Mexico and the U.K., and Commercial Banking in Asia, Turkey, and the Middle East and North Africa. Our expected credit losses in Asia reflected increased charges across a small number of customers and also included an overlay relating to the possible impact of higher tariffs and trade restrictions. You'll recall that in the adoption of IFRS 9 on 1st January this year, we included a $245 million overlay in the first quarter relating to U.K. economic uncertainty. Indeed, it's worth bearing in mind that expected credit losses remain sensitive to any changes in forward economic forecasts under IFRS 9.
The credit environment remains stable and expected credit losses remain low. Slide 15 shows our operating expenses in the third quarter. These were $155 million, or 2% higher than the same period last year, and $161 million lower than this year's second quarter. We continue to create the room to invest through a combination of cost discipline and revenue growth. We delivered $317 million of cost savings in the third quarter, which more than covered the additional cost of inflation. The impact of Argentina hyperinflation brought costs down by $139 million. As you can see from the detail on the slide, we invest another $338 million in growth, digital and productivity, and regulatory programs in the third quarter. We're on track to deliver full-year positive jaws based on current operating trends, and this is a discipline to which we remain committed.
Turning to capital, the group's common equity Tier 1 ratio on 30th September was 14.3%. Profit for the period of $3.9 billion more than covered $2.1 billion of dividends net of scrip, resulting in capital generation of $1.8 billion in the quarter. In addition, there were adverse foreign currency movements of $1 billion. Risk-weighted assets grew by $2.6 billion on an adjusted basis in the third quarter. Loan growth was 2%. Slide 17 looks at our group return metrics. The return on tangible shareholders' equity was 10.1%. Our three main global businesses each achieved returns on tangible equity above the group's target of 11%, offset by the factors mentioned earlier in Corporate Center. Our reported revenue as a percentage of risk-weighted assets rose by around 30 basis points to 6.3% compared with the first nine months of last year. I'll now hand back to John.
Thank you, Iain. As you can see, we are starting to unlock the revenue potential of HSBC. We're doing what we said we would, increasing revenue from areas of strength, improving returns, and investing in the business while keeping a tight hold on our costs. We remain cautiously optimistic on global growth. Geopolitical concerns have softened customer confidence slightly since the half year, and they're clearly creating some volatility in capital markets. However, we're not yet seeing that impact core revenue streams in a meaningful way. Our balance sheet is growing and provides us with a strong, secure revenue base. On top of that, our most significant external revenue driver in recent quarters has been the normalization of interest rates. This is reflected in a very good set of numbers. We'll move to Q&A shortly, but first, I'd like to say a quick word about Iain.
As most of you know, Iain leaves HSBC in December after 11 years, having done 32 sets of results as our Group Finance Director. In that time, Iain has been a terrific colleague and an integral part of the work we've done here. He goes with the gratitude of the group and our very best wishes for the future. 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 and 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 and one. Please ensure that the mute function on your telephone is switched off. We will now take our first question. Your first question comes from the line of Jason Napier of UBS. Your line is open.
Good morning. Thank you for taking my questions. Congratulations on what I think are, as you say, very strong numbers. Two, if I may. The first was just looking at the composition of loan growth, nine of the $15 billion in loan growth was in the U.K., whereas the Asian book is effectively flat. It's obviously the area where I imagine the equity market expects longer-term growth. I wonder whether you wouldn't mind, beyond the comments you've made around returns in Hong Kong being perhaps more tough, talk about the prospects for better loan growth going forward, and whether that's the current results or a function of risk reward or pricing or what have you. Secondly, just focusing on the U.K. as a driver of loan growth in the period.
I believe the intermediary channel was about 40% of gross lending in the quarter, and that's probably about double, if my notes are right, of where you were at the end of last year. I just wonder, in terms of getting to an industry normal level of about two-thirds or more, what's missing? What's the outlook? Is it just time and training, or is it perhaps price? If you could talk a little bit about composition of that business, that'd be great. Thank you.
David, thanks very much. It's Iain here. Looking at growth in lending balances on a year-to-date basis, that's about 6.3%. Asia balances on a year-to-date basis are up about 7.5%. Truthfully, most of that, a considerable part of that was developed in the first half of the year, the first two quarters, saw very strong growth coming through our Asian businesses, notably within Hong Kong. The third quarter certainly has been a little bit slower, about 1% growth. That broadly is in line with seasonality that we would expect to see, and that we've often experienced in the past. Nothing particularly concerning in that regard. As we said, strong loan growth, very much in line with the guidance and what we were expecting in terms of coming through the Asian business over the course of 2018 on a year-to-date basis.
I think overall, from a U.K. mortgage perspective, we continue to grow into that business, very much in line with an expectation that we would grow into what we expect to be a natural market share. As you'll observe, although the gross balances are developing at quite a nice rate, we're still sitting at around about 6.3, 6.4 market share of stock in that particular area. Maintain a very conservative risk appetite in terms of how we develop that market. Probably one of the key contributors to continued growth in that space is the expansion of our intermediate channel, which is an area that we were barely present in just a little bit more than a year ago. That has grown very nicely over the course of this year, where we now have about 85% coverage for that channel.
Just to follow up on that last point. 85% coverage, I think you've indicated that that's almost as high as you're intending to go, just cost-benefit wise. Just what is it that keeps you from being at around two-thirds of intermediary lending in the channel? Do you think you have to cut prices further?
No. We're still working on the development of the platform, in actual fact. The platform was really introduced in November of last year. We've still got quite a lot of work to do in terms of process improvement within that channel, in terms of reducing cycle times and making the platform really work for the intermediaries. It's just a question of continuing to develop that channel and work through it. I don't think there's any particular impediment to.
Growth in that particular area.
Jason, it's John. Just to add, I don't think it's our target to get to kind of market norms of penetration. You're right, 70% of the U.K. mortgage market is broker intermediated. 40% of our flow came through that channel. We're round about the levels of penetration of the channels that we want to be at, but I don't think we're setting ourselves to get to 70% or market norms. In the short to medium term, I don't think we'll get up much above 50%. It's not a target that we want to get to market norms, but it's good to see that we've made the progress that we have with that channel.
Thank you.
Thanks, Jason.
Thank you. Our next question comes from the line of Rahul Sinha of JPMorgan. Please ask your question.
Hi, can you hear me? Yeah, can you hear me, yeah?
We can, yeah.
Hi. Morning. If I can have two, please. Just the first one is on the impact of trade tariffs on your business as you've seen this quarter, and how we should expect it to evolve going forward from here. If I look at the revenue line and impairment line, I was wondering if you might be able to comment where specifically have you seen any negative impact, in the revenue line, if anything, and clearly in the impairment line, I think you've talked about an Asia overlay. Could you give us some sense of what assumption changes you've made there, that have driven the sort of higher impairment and what sensitivity we should think about going forward?
Your second question?
The second one was on GBM and its performance in the quarter I thought was really good. I think you noted that FX revenues were very strong offsetting the weakness in rates, up 39%. I think credit was up 30% plus as well. I was just wondering what we should be thinking about in terms of sustainability of that, particularly the FX performance, and is there anything you'd call out there in terms of strength?
Okay. Thanks, Rahul. I'll talk to the expected credit losses, and I'm sure John will give you more insight on what's happening on revenues as it relates to trade and tariffs. In terms of actual credit experience, we're really not seeing any impact coming through at this point in time at all, whether across retail or wholesale exposures. Whether in Asia and perhaps more understandably in the U.S. A very stable credit environment. The extent of which we saw credit costs coming through in wholesale, specifically Commercial Banking in Asia, was very much business as usual. There was nothing untoward in that regard. Nothing singled out by an individual sector or marketplace. Absolutely nothing unusual when compared to previous quarters in that regard.
What we have done as part of the ongoing implementation of IFRS 9 is, as you're aware, part of the modeling with respect to expected credit losses is the forward economic guidance, which we revise on a regular basis. Our view coming through the third quarter was that forward economic guidance did not capture all of the possible impact and expected credit losses of trade and tariff restrictions. As a consequence, we provided an overlay of $71 million. If you like, a management adjustment to adjust for the fact that we did not believe that the economic outlook fully captured all the forward-looking elements of that. That's really what you've seen coming through credit costs in the third quarter, specifically as it related to Asia. John, any reflections on the revenue picture?
Yeah. There's nothing really in the numbers yet that is evidence of stress arising from the trade spat. Yeah, as Iain said, nothing really on the wholesale side, but nothing on the revenue side that we can point to. Clearly, customers are a little bit more aware/anxious of the issues. It's top of the conversations. To date, we haven't seen anything that's in the numbers. We're going to be publishing on Thursday a client survey, a customer survey we've done that speaks to the outlook for trade and the outlook for business optimism. 75% of the 8,000 corporates that we surveyed still have a positive outlook with respect to their own businesses and trade. Within Asia, the number's even higher than that. I think not an obvious area of concern, but too early for it to be in our numbers.
Sure. Thanks very much.
On GB&M, Rahul, the performance in the third quarter, as indeed the case through the 9 months of 2018, has been a good performance from Global Banking & Markets. Continued focus on driving capital efficiency. That combined with the revenue and profit performance has got a return on tangible equity for the year to date of 12.5%. We saw very good performances in foreign exchange. Credit performed well in the third quarter. The one area which looked possibly in comparison with our, particularly our U.S. peer group, was the equities business.
I think that's largely informed by the shape for equities business, where it's much more focused within the Asian business notably, and consequently the exposure to emerging market equities, where we certainly saw some compression on margins in the equities business, but also just, I think as we've all observed, a slightly harder quarter in terms of emerging market equities in the third quarter. Across the piece, pretty strong in Global Banking as well as Global Liquidity and Cash Management, and global trade. If you reflect back on the majority of previous years, we've always seen a little bit of seasonality coming through the fourth quarter as it relates to Global Banking & Markets. Our revenue forecasts pick up on what we believe would be some seasonality.
Clearly the extent to which we've seen some volatility in the equity markets over the first few weeks of October would probably inform that will reflect to some degree, in terms of that fourth quarter seasonality.
You wouldn't call anything out in the FX line , particularly?
Would not call.
Okay. Thanks so much.
Thank you.
Thank you. Our next question comes from the line of Chris Manners. Please ask your question.
Good morning, John. Good morning, Iain.
Morning.
Yeah, two questions, if I may. The first one was on the net interest margin and how things are going in mortgages versus deposits. When I look at page 21 of your slide deck, the mortgage revenue looks like it's down about 15% quarter-on-quarter and down about 30% versus where we were in Q1 2017 at about $450 million. I thought maybe you could sort of talk about the mortgage trends and why that revenue line's quite so soft. On the flip side, deposits very good. RBS were kind enough to tell us they did a 40% pass-through in the U.K. from the rate hike that we just had. Maybe you could let us know how much you at HSBC had passed through to savers on the U.K. book. The second question was just on capital.
Obviously, nice to see the Pillar 2A requirement come down there. Do you think that's a permanent step down lower? Maybe you could help us think through about is that more volatility in that line or is that something that you've done to reassure the PRA about your capital, and we should just take 40 basis points off our steady state ratio? Thank you.
Do you want to take mortgages, John?
Do the capital one first.
Pillar 2A, Chris, exactly so in terms of the impact coming through CET1 Pillar 2A, that's the product of work by the team. Now, as you know, the PRA are happy for us to communicate the change in Pillar 2A, but not the composition of the change in Pillar 2A. I think what it is certainly very accurate to say is that the teams have worked very diligently over the course of the last two years to continue to provide a greater understanding as to how the group manages risks that are not necessarily captured in Pillar 1. I think we've been successful over the course of the last two years through improving data quality, improving dialogue and understanding with the PRA in helping them understand the discipline around managing some of those risks. That has resulted in the reduction that you see.
As you know, we're subject to an annual SREP review, which focuses on an individual capital requirements, as well as stress testing. As to whether or not that reduction proves to be permanent, I think will continue to be dependent on the group's ability to demonstrate the discipline with which we manage these risks, continuing to improve the quality of our data, continuing to improve transparency through our regulatory reporting, the stress testing and SREP processes. Great progress made. I'm afraid it's not really up to myself or John or the business to comment as to whether it's a permanent reduction, but it certainly would be our intention to continue to manage capital very diligently in a disciplined manner to hopefully realize that outcome.
Yeah. On the NIM questions around deposits and mortgages, there's not a great deal to say. Obviously, at this stage in the rate cycle, this is what you would normally expect to see happen to margins. Our two big mortgage books are here and in Hong Kong, and both markets are very competitive. Clearly, we have a structural advantage in both markets and that our cost of funds is different to the markets. Both markets are competitive and margins have been under pressure for some time, and that's what we're seeing in the numbers. With respect to the question around the pass-through rates in the U.K., it's difficult to give a broad answer or a complete answer. On the retail side, we passed through the last rate hike. We passed through a little more than half, I think, to retail customers.
On the wholesale side, I don't have the number. It's very difficult to I don't have the information to give you an equivalent number to the RBS one. Yeah.
Okay. No, that's helpful. Thank you.
Thank you. Our next question today comes from the line of Ed Firth. Your line is open.
Yeah. Morning, everybody. Could you come back again on this question of the savings numbers in that slide 21, because there's obviously been a very strong performance there. I'm just trying to get a sense as to how much of this is what I would call a sustainable uplift and how much of it is a sense of the rates have just gone up and therefore this quarter you've probably done particularly well because there may have been a delay of a month or weeks and that we should see a set of slightly smoother picture going forward? Is that trajectory something that we should now be factoring in over the next, I don't know, 6 to 12 months?
Yeah. Ed Firth, it's John Flint.
This story around savings is the story that really has underpinned the revenue progression of the group for the last few quarters, is likely to underpin the revenue progression for the next few, because we have these structural surpluses, they've been deployed reasonably short-term into the financial markets. As monetary policy normalizes, the value of those surpluses reflates. It's really nothing more or less complicated than that. If we believe that the Fed will continue to hike, in particular, if we believe that HIBOR, LIBOR will normalize, i.e., HIBOR will continue to track back towards LIBOR, as I think over time it will, then there is further upside in that line. It's nothing more or less complicated than we have surpluses, which are now worth more now that policy rates go up.
Those of you with a much longer term history of HSBC will recognize how quickly our margins compressed when rates came off.
post-crisis. This is just the reverse of that. If rates continue to go up from the Fed and as LIBOR normalizes, there is possibly more to come.
Okay. It's just, if I read the newspapers, there seem to be signs of some pressure on prime in Hong Kong and perhaps savings rates are going to have to be trickling up a little bit there if there's a bit more competition around. Is that fair, or actually, are you finding it pretty easy to hold your pricing where it is?
No, that is fair. That is absolutely fair. I think the likelihood that we will pass more of future rate hikes on to customers than we did at the earliest stage in the cycle, I think that's absolutely fair. Yes, that's real.
Okay. Thanks so much.
Thank you. Our next question comes from the line of Joseph Dickerson of Jefferies. Your line is open.
Hi. Good morning, guys. Just a quick one. If I look at your costs, which were $7.7 billion in Q3 operating. Yes, there was a slight $100 million-plus impact from Argentina. Could you just discuss your investment strategy over the coming quarters? Because I think consensus expectations for Q4 have a fairly big $600 million-$700 million ramp up in Q4, which strikes me as somewhat odd given where you are now and the walk that you provided in the presentation. Any commentary on that would be helpful. Also, in terms of your expected credit losses, you called out the U.K. unsecured, but I note that the delinquencies are getting better there. Is this similar to the overlay that you did to trade? In other words, some caution around the U.K. that's a management discretion? Any help on those two items, I'd be grateful. Thank you.
Joe, thanks very much for the question. You'll recall, I'm sure, at the first quarter, we provided guidance that we would expect to see the cost profile for the remainder of the year impacted for constant currency to be broadly stable. With the exception of the point that you quite rightly identified in terms of the downward push from hyperinflation and cleansing in Argentina, which was $139 million. That is precisely what we're delivering. The commitment around delivering cost jaws is really that discipline around trying to keep the cost and investment profile in line with our propensity to generate revenue growth, which, again, we fully expect to accomplish for 2018 and beyond. If you reflect on page 15, the cost profile that you're seeing, I think we would guide you to something reasonably stable into fourth quarter.
Obviously recognizing that we'll have the bank levy to the tune of some $1 billion coming through in the fourth quarter as we ever do. As it relates-
Iain, was that basically flat on Q3 ex bank levy, assuming no major changes in currency?
Exactly, yeah.
Okay. Got it.
Exactly. On credit costs. Broadly, as you can see from our numbers, pretty stable. The increase that we're seeing coming through some unsecured is very much in line with what we're seeing of the growth in the unsecured business. Growing from a small base, whether it's in the U.K., Mexico, Hong Kong, or the United States. We're seeing slightly higher delinquencies in dollar terms, not necessarily in rate terms, on the back of growing a non-secured, unsecured lending book. In terms of reflection on the U.K., when we implemented IFRS 9 on the 1st of January this year, included within that implementation was our reflection that forward economic guidance at the time did not capture the full effect of the possible impact on the U.K. economy of leaving Europe. We incorporated an overlay at that time of $245 million.
That has remained consistent throughout the course of the year. There has been no adjustment upwards or downwards. As we refresh forward economic guidance going into the fourth quarter of the year, we may see some movements either upwards or downwards in that degree. Really, there are no other factors coming through credit costs other than those that we have identified. It is a very stable picture. I think one of the things that we saw was continued recoveries coming through the Global Banking & Markets business, notwithstanding the fact that they are slightly lower than in previous quarters. I think we are beginning to see some normalization in these credit costs at levels we would expect.
Understood. Thank you.
Thanks.
Thank you. Thank you. Our next question comes from the line of Fahed Kunwar of Redburn. Your line is open.
Morning. Thanks for taking the questions. There is just two. The first one is on the interesting balance sheet you guys have provided in the quarter, which is very helpful. There is quite a big jump in the lending yield. I think it jumps 10, 11 basis points in the quarter, just looking at the nine-month versus the first half. Is that because the kind of effect of excess liquidity and HIBOR moving up is inside that line, or is there something else going on? I guess it does not chime with a lot of the commentary around pressure on asset margins, particularly on the mortgage side of the business. That is question one. The second question was on your risk-weighted assets. Obviously, you have had quite a decent sized currency benefit in the quarter.
If I exclude that, your risk weight basically grew in line with your lending and your leverage. Overall, I think your target was for revenue growth in excess of risk-weighted asset growth. Should we think about risk weights now broadly growing in line with the balance sheet? Because over the last few years, you've had very good capital efficiency. Or is the effect GBM optimization still to come through on that point? I guess a wider point here is on your quarter 1 ratio to your Pillar 2A reduction. You were talking about high 14, I think 15 being the kind of core Tier 1 requirement you want to go into going into Basel IV. Is that still the case?
Should we still be thinking about capital build, or is the Pillar 2A offset mean you're comfortable around the kind of level of core Tier 1 you are at right now? Thanks.
Thanks, Fahed. No change to guidance on actually any of the points that you raised, whether it's with respect to common equity Tier 1, whether it's with respect to the rate of growth in the balance sheet versus the rate of growth in risk-weighted assets. If you recall, in June, John talked about mid-single, low to mid-single digit growth on the balance sheet and 1%-2% growth in risk-weighted assets. A continued focus on driving capital efficiency within the business, and you'll have seen in these third quarter numbers, continued progress in that regard, notably within the Global Banking & Markets business. I think the easiest response to a number of your questions there, Fahed, would be no change to the guidance that was provided with the update to strategy in June.
In terms of overall yields, yes, we've certainly seen improvement in yields both on the asset side and the liability side, as we've seen interest rates move up, both in US dollars, HKD related there too, and also to some extent within GBP. That's very much as we would expect. In terms of both assets and liabilities, as we see the opportunity to invest surplus liquidity at slightly higher rates, we're continuing to get good yield coming through that surplus liquidity position. I think your observation is, as we see higher interest rates, we are seeing what we'd expect as both higher yields coming through in assets and in liabilities.
I think John's comment earlier around depositor betas is obviously, as we work through this rate increase cycle, a slightly higher proportion of those rate increases are being shared with our customer base, whether in the U.K. or Hong Kong or other jurisdictions impacted by interest rates. Certainly, from a yield perspective, we are seeing improved yields in markets affected by higher interest rates.
Just to follow up on one good question. We should expect the core Tier 1 ratio to build going forward?
We said we would maintain common equity Tier 1 above 14%, recognizing some of the matters that we still have to work through in terms of building understanding and clarity around what Basel III revisions and reform may mean. We indicated a number above 14%, and that's what we're sticking with.
Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Guy Stebbings of Exane BNP Paribas. Your line is open.
Good morning. I just wanted to circle back on capital and then a question on U.K. mortgages. On capital and Pillar 2A, I appreciate no change to guidance, but the gap now, if you like, between your buffer, and your capital stack is quite sizable. I appreciate the dynamics are particularly complex for HSBC, given the structure with local regulatory differences, double leverage considerations, not to mention Basel finalization. How should we think about a move in Pillar 2A? I mean, does the makeup of your requirement limit the actual impact that any change in Pillar 2A actually has on the business?
Well, movements in Pillar 2A, particularly of the variety that we've experienced in 2018, are helpful. As you know, I think the regulation is quite clear. Pillar 2A requirements or Pillar 2 is there to capture risks that our supervisors believe are not captured in Pillar 1. We work through reforms to Basel III, one of the things that I think the Bank of England has been quite clear and helpful on is that as they see those changes filter through Pillar 1, so changes whether to the standardized approach or the internal ratings-based approach, for example, there is an expectation that there will be some offset coming through Pillar 2.
It's obviously too early in the day to see how exactly that filters through, but what we've accomplished this year is simply to realize through building improved understanding of how we manage risk in this area, some economies from a Pillar 2A perspective. It would be nice to continue to build on that. It clearly is an advantage in terms of building confidence around our capital management capabilities, both internally and clearly with the PRA as well, and we'll build on that. I don't think At this point, does not have a particularly telling impact on our capital guidances, as I just highlighted.
Okay, thanks. Just on U.K. mortgages, obviously it's been an area of considerable growth in recent quarters and again in Q3. Given the market is very competitive, how far away are we from a point where you would sort of reconsider the amount of capital and liquidity you're deploying into U.K. mortgage market? Do some of the kind of favorable dynamics on the deposit side kind of offset that and you're happy to continue to grow at the current level?
Yeah, guys, it's John. Yeah, we're still happy to grow into the U.K. mortgage market. I mean, we've been absent from a big part of it for such a long time. We're really just stepping back into it. Our market share in mortgages are still less than half of our natural market share on the liability side of the balance sheet. We're still very much, if you like, underweight. There are still plenty of good risk for us to take in the U.K. Post the structural reform, we do have capital and funding to deploy back into domestic economy. It's one of the byproducts of the structural reform. We're happy to continue to do this. We're not changing our risk appetite, and we'll stay disciplined, but there's still very good business for us to write.
Whether we grow as quickly as we did in Q3, I don't know. We should continue to take back some of the market share that we gave up in prior periods.
Okay, thanks.
Thank you. Our next question comes from the line of Ronit Ghose of Citigroup. Please ask your question.
Great. Thanks. It's Ronit from Citi. I have three sets of questions, please, if I may. The first one is, can I circle back to your strong GBM performance? I've obviously hoped you've said so far on the call, but is there any more color you can give us on your FICC performance in particular? Is there any color on either, say, client activity, whether it's FIs versus corporates, positioning went well? Only reason I'm following up is that it's pretty broad based. It's quarter-on-quarter FX rates and credit. If I look at the trading line in your P&L, this looks like it's the best quarter since something like early 2016. You seem to have capitalized on some of the EM volatility. Any color on that would be great. Should I go on to my next two questions?
Yeah.
Fire away.
The second question is on RBWM. I'm looking at page 21 of your deck in the appendix. By the way, in the last couple of years, your disclosures become really helpful, so thank you for this. Page 21, we split it out, and I can see the strong performance in savings, which we've talked about, partly offset by the loans pressure. Can you comment a little bit more on the life insurance line, the manufacturing? I was kind of taken by surprise, the GBP 100 million quarter-on-quarter improvement in life insurance manufacturing. I just thought given the soggy markets, particularly in Hong Kong, where much of this must be booked, I would have thought that would have gone down rather than up quarter-on-quarter. The other line in RBWM is up also quite substantially. That's my second question.
The third question is: how do I think about Argentina and the hyperinflation accounting? I hope you said about year-to-date, the negative impact that you booked. Looking at FX movements, it looks like a lot of the FX movement in the piece that happened during the third quarter. Is it fair to say that much of that impact is third quarter, or is it actually, should I be thinking about it spread across the year in a kind of quarterized that negative you booked? Thanks for taking the questions.
How about we do those in reverse order?
Okay. You start with Argentina.
It is the requirements of IAS 29 and IAS 21, the two go together. There's no judgment involved. There's a set of criteria that we are to apply. We have applied those on a year-to-date, inception-to-date basis. We're required to disclose current purchasing power by reference to the index. We've disclosed in the earnings release the index that we've applied. The net impact of $140 million on PBT is the inception-to-date impact. We're required to do this every quarter. In actual fact, the standard is quite rigorous in that regard. There may be an adjustment in the fourth quarter, but we would expect that to be in the low tens or even less in terms of any impact on PBT in the fourth quarter.
When you've applied the purchasing index to the Argentinian data, you're then required to translate that into US dollars for group reporting purposes at the end of the reporting date. The 30th of September date was applied, that clearly amplifies, based on current movements, the impact that that then has on PBT. To be clear, we're not restating prior periods. There's a total catch up of $140 million on PBT from hyperinflation accounting. There may be a small adjustment of that in the fourth quarter. Obviously, we'll keep you posted in that regard, that's about it, really.
I have a crack at the life insurance one.
Fire away.
Yeah, life insurance. The way that we account for that, you'll be familiar with PBIP accounting. Any changes to market or economic assumptions, changes in the value of equity markets or bond prices, et cetera, they transmit through the P&L on a monthly basis. Any market stress you will see in the P&L on a monthly basis. However, there is an annual exercise, which we conduct in September, where we update what we call the non-economic assumptions. It's any changes to models, any changes to things like longevity, plus some other parameters that I can't remember. We do that on an annual basis in September. I think last year it was a negative. This year we've indicated that it was a positive. It was a positive adjustment of 88 bucks, $88 million in the third quarter. It's that.
It's this annual, non-economic assumption adjustment that we do every year.
In that other line also, Ronit, there was a negative adjustment in a prior period which impacted the other line within Retail Banking and Wealth Management. It's a little bit of a conglomeration of odds and sods as it relates to Retail Banking and Wealth Management business. There's nothing particularly telling in the other line as it relates to Retail Banking and Wealth Management. Going back to Global Banking & Markets for a little bit more color. We've always tried to make this point, that this is a well-diversified business, which is not particularly dependent on the strength of any particular business in any particular quarter. Hopefully you can see again from the disclosures on page 10 within the investor deck, as well as those within the earnings release, that this is a well-diversified business.
Within the Fixed Income, Currencies and Commodities space, you've seen a very strong performance in the third quarter from foreign exchange. Credit came along quite nicely. Rates, again, we saw has been quite weak, and that's been a continuing phenomenon over the course of the last few quarters. I think the one point that would perhaps stand out when compared to the American peer group is the equities seemed a little bit weak, and that almost certainly goes to the composition of our equities business with stronger concentration within the emerging markets in Asia in particular, where equities performance, both in terms of margins in the prime business and overall flow in the third quarter, was probably more difficult in emerging markets than was the case in the United States, for example.
We saw a pretty stable picture within global banking, Global Liquidity and Cash Management moving ahead strongly at 23%. Trade receivables financing, again, another strong quarter. This is a broad-based business, which is very much focused, a preponderance of focus on corporates as opposed to financial institutions. Again, that's an observation that we've made in the past that the business is very much focused on a corporate customer base with a much higher proportion of corporates as opposed to financial institutions when compared to some of our peer group.
Iain, just to follow up on that comment. Has there been a notable pickup in corporate activity in FICC, like hedging or other in the third quarter? Is that what's helped you? Which I'll put you in contrast with some of the big global banks that reported. Some reported good FICC results, but this looked particularly good to my amateur eye.
Yeah, I think that's true. I think the other area is within FX, there was fairly sensible positioning done ahead of time within the emerging markets, recognizing some of the pressures that were coming through in that particular area. Our business and our results for business tend to be a reflection of how corporates position, as they see trading conditions develop in front of them. That would be true both in the case of foreign exchange as well as within the global banking business.
Okay, great. Thanks for that, Iain, thank you for all your help and good luck in the new role.
Thanks very much, Ronan.
Thank you. Our next question comes from the line of Manus Costello of Autonomous. Your line is open.
Thanks. Good morning, everyone. Just two quick ones from me. You previously called out that you thought that U.S. dollar deposits outside the U.S. were seeing upwards pricing pressure. I just wondered how that developed during the quarter and whether you're a bit more relaxed about the outlook now as rates continue to go up or go up even further in the U.S. My second question is on your pension. You call out the fact that the recent judgment against Lloyds means that you're going to have to likely take a charge as well. Can you give us any indication of how material that might be, please? Thank you.
Okay, thanks, Manus. In terms of eurodollar liquidity, I think it'd be fair to say that there has been building over the last quarter or two some pressure just in terms of eurodollar liquidity and almost certainly informed by the fact that a number of central banks are beginning to ease off reverse quantitative easing. As a consequence of that, you can certainly see slightly higher funding costs coming through in the eurodollar space. Again, nothing particularly of note in the third quarter, just an observation that liquidity in that space is tight. Again, when you look at the strength of our corporate surpluses in our main operating centers around the group, this is something that we, overall, the improving interest rate environment for us is a very positive tailwind.
Just as an observation around eurodollar liquidity, that is tightening and you see it in some of the prices.
Do you think that beta for you would be about the same as it was at the half year, or is it increased versus the half year?
Very marginal increase. Very marginal increase.
Got it. Thank you.
In terms of the judgment handed down by the High Court in respect of Lloyds Banking Group on Friday. You know, that will affect a great many defined benefit plans across the United Kingdom. Our largest defined benefit plan in the world is the UK Defined Benefit Plan. It is very well funded. We carry a surplus on that plan of some GBP 6.2 billion. The effect of that judgment will be that we will sit down with our actuarial team and go through and work through the impact of that judgment on the plan. It will result in us recording a charge to the P&L in recognition of prior period service. This is a cost of service from our employees in prior periods. We'll evaluate that. Well, I shouldn't say it won't be, because we're working through the evaluation of it.
In the realm of significant versus material, we would expect it to be significant, but not material, if that makes any sense to you at all, Manus.
I think I'll follow up with IR on that afterwards.
You can follow up all you like. They've been told they can't tell you anything until our team has finished the work.
All right. Thank you very much.
Okay. Manus, thank you. I think, Operator, it looks like we've got one more question, and then I will sum up, if that's okay. We'll take the last question.
Thank you. Our last question today comes from the line of David Lock. Your line is open.
Morning, everyone. Thank you for taking the questions. First one is just on model changes. I think, Iain, you've previously called out $12 billion of opportunities in the second half. I just wondered if you could give us an update of where we are and the likely timing of those. The second one is on Global Trade and Receivables Finance. If I could compare the funded assets, which are in the slides, with the revenue trends. It looks to me like the margin has actually jumped from about 80-90 basis points in the third quarter. I just wondered if that's a real kind of increase you're seeing in the margin there, or if that's just an averaging effect in the balances that I can see on the slide. The final one is another question on slide 21.
I think you've restated the way you split holdings interest expense and other. I just wanted you to give us a steer on how we think those lines should evolve over time. I think you've previously talked about $0.2 billion of MREL increase coming through this year versus last year. If you could give us any idea of how we should expect the fourth quarter and 2019 to evolve, that would be great. Thank you.
In terms of any further issuance in the fourth quarter, I think it's going to depend on the market. We've largely, both at an AT1 and an MREL level, completed what we set out to do for 2018. We've had pretty favorable funding markets for HSBC product over the course of this year and as recently in the third quarter. If the market is equally welcoming of HSBC paper, we may well go ahead and try and pre-fund some of what we believe we would need to do, or we know we would need to do in 2019, provided the conditions are favorable to us. If we were to do any more in the third quarter, it would probably be in the range of $2 billion-$3 billion in the MREL space and across a range of currencies other than the US dollar.
I think you'd probably get a sense as to how that would flow through into the fourth quarter and beyond. Really what we did within that classification was really just to split out, to give you more of a headquarter cost view in terms of what is retained at the parent company in terms of our holding company capital buffer, in terms of funding and refinancing requirements for that debt. Because you know the principal issuer of instruments is the holding company. Just ensuring that we've got a strong refinancing, a buffer there to support any refinancing disruption. Really, nothing really else on that front. When you talk about the Global Trade and Receivables Finance, we've certainly grown the revenue in that regard. When you talk about margins, we've seen a little bit of expansion in margins.
And when I say a little, I mean a little in the European context, and a little bit of tightening in margins in the Asian context. Broadly, what you're seeing across the Global Trade and Receivables Finance as a whole is a bit of an averaging effect with a little bit of expansion in Europe offset by a little bit of compression within the Asian environment. You talk to model changes. We do. We started the year with about $20 billion of opportunity for model approvals from the regulator. In the first half of the year, we got eight of that through. We've got about 12 still to come. Whether that is going to come through in the fourth quarter, I would hasten to say probably unlikely. Our model approvals require approval from the European EBA or the ECB as well.
In that regard, we've, along with probably other banks in the U.K., fallen slightly victim to the Brexit process such that notwithstanding the best efforts of the PRA, there are a few models which have not yet been approved and probably will slip into next year. We continue to manage down risk-weighted assets in legacy credit, and what we've got is a very small one-off in the U.S. portfolio, which is principally operating risk-weighted assets, which we'd expect to see roll off progressively over the course of the next year or so. The discipline around overall RWA management, no change in that regard. There's a strong focus in continuing to improve the overall efficiency of the capital deployed within the businesses, the corporate center, and the group overall.
Thank you very much.
Thank you. Okay. Very good. Thank you all very much for joining us this morning. Just as a quick recap, a really solid set of numbers for Q3. Management's primary focus is on improving the return on tangible equity of the group and getting us back above 11% by 2020. In order to do this, we plan to grow revenues quicker than costs, this is why our positive jaws discipline is something to which we remain committed. I was expecting lots of questions on jaws this morning, we didn't get many, it suggests that you're comforted by the progress we've made in Q3. As I say, we remain in line with our plan to get back to positive jaws. As I indicated at the half year, I won't make any silly decisions that damage the long-term health of the franchise just to get there.
Positive jaws is the means to the end. The end is a much improved return on our equity. Again, Q3, I think should give you comfort that we're making good progress against the strategy that we outlined over the summer. Thank you for being with us. Operator, this ends today's call. Thank you.
Thank you, ladies and gentlemen. That concludes the call for the HSBC Holdings PLC earnings release for 3Q 2018. You may now disconnect.