Your information, this conference is being recorded. At this time, I will hand the call over to your host today, Mr. John Flynt, Group Chief Executive. Please go ahead.
Good morning from London. Good afternoon to everyone in Hong Kong, and welcome to our Q3 results call. Ian 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 3rd quarter results demonstrate our ability to do that And to deliver on the promise to get HSBC back to growth. Our 3 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 Ian to talk through our numbers.
Thanks, John. Reported profit before tax of $5,900,000,000 was 28% in last year's Q3 and adjusted profit before tax was $6,200,000,000 an increase of 16%. For the year to date, reported and adjusted profit before tax were up by 12% and 4% respectively in the 1st 9 months of last year. Group adjusted revenue was $1,100,000,000 or 9% higher than last year's Q3 Due to the strong performance of our 3 main global businesses, 3rd quarter adjusted costs rose by 2%, reflecting our continued investment in growth and technology. We drew lending by a further 2% compared with the 2nd 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 Inflationary Economy and 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 Q2. Earnings per share was $0.56 For the 9 months, We had a negative jaws of 1.6% and we remain on track to achieve positive adjusted jaws for the full year. Slide 4 shows the items that take us from reported to adjusted. The principal difference with last year's Q3 is the absence of cost to achieve from our reported numbers.
Last year's Q3 also included $104,000,000 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 5 breaks down adjusted profit before tax for the year to date by global business and geography. Profit Before tax increased in our 4 global businesses by a total of $1,900,000,000 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 6 looks at profit before tax for the 3rd quarter, which was up significantly in the same period last year. Profit Before tax grew in all four global businesses and 3 out of 5 regions, particularly Asia and Europe. The increase in Asia came largely from growth Banking revenue in Global Banking and 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 UK 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 for 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 7 shows the revenue trends in our global businesses. Revenue from our 4 global businesses was 1.6 1,000,000,000 or 12% higher in the Q3 versus the same period last year. And I'll go through each business in more detail over the next few slides. Slide 8 covers Retail Banking Wealth Management revenue, which grew by $711,000,000 14% compared to last year's Q3.
Our balances and interest rates generated a $758,000,000 increase in deposit savings and Turn to current revenue, notably in Hong Kong. On the Wealth Management side, dollars 116,000,000 increase in insurance manufacturing revenue Came mainly from higher new business premiums and actuarial assumption changes. Lending revenue fell by $181,000,000 Due to continued asset margin compression from competition in local mortgage markets, particularly in Hong Kong, Customer lending rose by 8% compared with Q3 of last year, mainly in the back of continued strong mortgage growth in the UK and Hong Kong. Customer deposits increased by 3%. As Slide 9 shows, commercial banking revenue grew by 479,000,000 dollars are 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 grew rose by 3% as we grew balances and market share in Asia and Europe. And lending grew by 8% compared with the same period last year and 2% compared with the 2nd quarter. In Global Banking and Markets, revenue grew by $374,000,000 or 10% compared with last year's Q3, 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 This more than covered with 29% fall in revenue from rates. Security Services generated double digit Percentage revenue growth, while revenue in Global Trade and Receivables Finance also increased. Global Credit and Cash Management revenue was 23% Adjusted risk weighted assets fell by further $5,000,000,000 in the 3rd quarter. This included $6,000,000,000 from Recycling 1 profitable client exposure, offset by business growth of $4,000,000,000 Additionally, there was a $2,000,000,000 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 and 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 Q3. Corporate Center revenue fell by $439,000,000 compared with last year's Q3. $304,000,000 of this was due to hyperinflation in Argentina. This cost was booked in the Q3, 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 Fall of $139,000,000 versus the prior year. We expect ongoing volatility from quarter to quarter and these differences would broadly reverse if the instruments are held to Legacy credit revenue increased by $45,000,000 and included a gain on the sale of legacy assets in the 3rd quarter. Our balance sheet management full year revenue guidance remains unchanged at $2,300,000,000 to $2,500,000,000 Net interest income largely reflected higher deposit margins in the 3rd quarter, rising 3% to $7,700,000,000 versus the 2nd quarter. Group net interest margin for the year to date was 1.67%, 4 basis points higher than for 2017.
In the Q3, we benefited from interest rate rises in Hong Kong, the UK and the U. S. Hyperinflation in Argentina reduced the year to date group net Interest margin by 1 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 dollars related to Retail Bank and Wealth Management in Mexico and the UK 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 You'll recall that in the adoption of IFRS 9 on 1st January this year, we included a $245,000,000 overlay In the Q1 relating to UK economic uncertainty. Indeed, it's worth bearing in mind that expected credit losses remain sensitive to any changes in forward economic The credit environment remains stable and expected credit losses remain low. Slide 15 shows our operating expenses in the 3rd quarter. These were $155,000,000 or 2% Higher than the same period last year and $161,000,000 lower than this year's Q2.
We continue to create the room to invest through a combination Cost discipline and revenue growth. We delivered $370,000,000 of cost savings in the 3rd quarter, which more than covered the additional costs of inflation. The impact of Argentina hyperinflation brought costs down by $139,000,000 As you can see from the detail on the slide, we invest another $338,000,000 in growth, digital and productivity and regulatory programs in the 3rd 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 the 30th September was 14.3%.
Profit for the period of $3,900,000,000 more than covered $2,100,000,000 of dividends, net of scrip, Resulting in capital generation of $1,800,000,000 in the quarter. In addition, there were adverse foreign currency movements of $1,000,000,000 Risk weighted assets grew by $2,600,000,000 on an adjusted basis in the 3rd quarter. Loan growth was 2%. Slide 17 looks at our group return metrics. The return on tangible shareholders' equity was 10.1%.
Our 3 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 based assets rose by around 30 basis points to 6.3% Compared with the 1st 9 months of last year. I'll now hand back to John.
Thank you, Ian. As you can see, we are starting to unlock the revenue Ken Schall 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 the 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 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 and A shortly, but first, I'd like to I'd like to say a quick word about Ian. As most of you know, Ian 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. 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 and thank you for taking my questions. And congratulations on what I think are, as you say, very strong numbers. 2, if I may. The first was Just looking at the composition of loan growth, sort of 9 of the 15,000,000,000 in loan growth was in the UK, whereas The Asian book is effectively flat, and it's obviously the area where I imagine the equity market expects kind of longer term growth. So I wonder whether you wouldn't mind Sort of beyond the comments you've made around returns in Hong Kong being perhaps more tough, talk about sort of the prospect So 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.
And then secondly, just focusing on the UK 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 I know it's right where you were kind of at the end of last year. So I just wonder in In terms of getting to an industry normal level of about 2 thirds or more, kind of 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
would be great. Thank you. David, thanks very much. It's Ian here. So looking at growth in lending balances on a year to date basis, that's about 6.3%.
And Asia balances on a year to date basis are up about 7.5%. Now Truthfully, most of that, a considerable part of that was developed in the first half of the year, the first two quarters. So very strong growth Coming through our Asian businesses, notably within Hong Kong. The Q3 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.
So nothing particularly concerning in that regard. And 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 From a UK mortgage perspective, we continue to grow into that business very much in line with an expectation that we would grow into what we expect via natural Market share, but as you'll observe, although the gross balances are developing at quite a nice rate, we're still sitting at around about Point 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 and 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, barely present in more just a little bit more than a year ago and 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, so 85% coverage, I think you've indicated that that's almost as high as you're Sort of intending to go just cost benefit wise, just what is it that keeps you from being at around 2 thirds The intermediary lending in the channel, do you think you have to cut prices further?
No, I think we're still working on the development of the platform in actual The platform was really introduced in November of last year, and we 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. So it's just a question of continuing to develop that channel and 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. So you're right, 70% of the UK mortgage market is So broker intermediated. 40% of our flow came to that channel.
We're roundabout the kind of 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% for market norms. In the short- to medium term, I don't think we'll get much above 50%. So 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. Appreciate
it. Thank you. Our next question comes from the line of Raul Sinha of JPMorgan. Please ask your question.
Hi, can you hear me? Yes. Can you hear me, yes?
Yes.
Hi, good morning. So if I can have 2, please. Just the first one is 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 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 it was really good. And I think you noted that FX revenues were very strong offsetting the weakness in rates, up 39%. I think credit was 30% plus as well. I was just wondering if we should be think what we should be thinking about in terms of sustainability That particularly the FX performance and is there anything you'd call out there in terms of strength?
Thanks, Raul. 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 in tariffs, in terms of actual credit experience, we're really not seeing any impact coming At this point in time, at all, whether across retail or wholesale exposures, whether in Asia and perhaps more understandably in the United States, A very stable credit environment, the extent of which we saw credit costs coming through in wholesale, specifically commercial banking In Asia, it was very much business as usual. There was nothing untoward in that regard, nothing singled out by an individual sector or marketplace. So 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 know, we're part of the modeling with respect to expected credit losses The forward economic guidance, which we revised on a regular basis, but our view coming through the Q3 was that forward economic guidance Did not capture all of the possible impact and expected credit losses of trade and tariff restrictions.
And as a consequence, we provided an overlay of $71,000,000 So if you like, a management adjustment to adjust for the fact that we did I believe that the economic outlook fully captured all the forward looking elements of that. So that's really what you've seen coming through credit costs In the Q3, specifically as it related to Asia, John, any reflections on the revenue
Sure. Yes, there's nothing really in the numbers yet that is evidence of stress arising from the Trade spat. So as Iain said, nothing really on the retail side, but nothing on the revenue side that we can point to. Clearly, customers are a little bit more aware, stoke anxious of the issues. So it's top of the conversations.
But today, we haven't seen anything that's in the numbers. We're going to be publishing on Thursday a Client survey, 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've surveyed still have a positive outlook with respect to their own businesses and trade. And within Asia, the number is even higher than that. So I think an obvious area of concern, but too early for it to be in our numbers.
Sure. Thanks very much.
On GB and M, Raul, I mean, the picture remains very Well, the performance in the Q3 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 percent, we saw very good performances in foreign exchange. Credit performed well in the 3rd quarter. And the one area which looked possibly in comparison with our particularly our U. S. Peer group was the equities business, and I think that's largely Formed by the Shape For Equities business where it's much more focused within the Asian business notably and confident with the exposure to merger market Equities where we certainly saw some pressure on compression on margins In the equities business, but also just I think as you as we've all observed, a slightly harder quarter in terms of emerging Market equities in the Q3, but across the pre's pretty strong in Global Banking as well as Global Credit to 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 Q4 as it relates to Global Banking and Markets, our revenue forecast Pick up on what we believe would be some seasonality and clearly the extent to which we've seen some volatility in the equity markets over the 1st few weeks of Tober, I would probably inform that that will reflect to some degree In terms of that Q4 seasonality.
Okay. But so you wouldn't call anything out in the FX line particularly?
No, not at all.
Okay.
Our next question comes from the line of Chris Manners. Please ask your question.
Good morning, John. Good morning, Ian.
Good morning.
So yes, two questions, if I may. The first one was On the sort of net interest margin and how things going in sort of 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 450,000,000 So I thought maybe you could sort of talk about the mortgage trends and why that revenue line is quite so soft. And then on the flip side, deposits, very good.
RBS were kind enough to tell us they did a 40% pass through in the UK from the rate hike that we Tad, maybe you could let us know how much you at HSBC had passed through to savers on the UK book? And then 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? And 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.
You want to take mortgages, John?
Do the Capital One first. Okay.
So, Chris, exactly so in terms of the impact coming through CET1 Pillar 2A and that's the product of Work by the team is 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 few 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 few years of through improving data quality, improving Dialogue and understanding with the PRA in helping them understand the discipline around Managing some of those risks and 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. And 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.
So great progress made. I'm afraid it's not really up to myself or John or the business to comment Whether it's a permanent reduction, but it certainly would be our intention to continue to manage capital very, very diligently in a disciplined manner to hopefully realize that outcome. Yes.
And then 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 2 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 UK, Difficult to kind of 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. So I think it's very difficult to well, I don't have the information to give you an equivalent number to the RBS one.
Yes. Okay. No, that's helpful. That's helpful. Thank you.
Thank you. Our next question today comes from the line of Ed Firth. Your line is open.
Good morning, everybody. Could you just 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 Yes, that is a slightly smoother picture going forward or is that trajectory something that we should now be factoring in over the next, I don't know, 6 to 12 months?
Yes. Hi, it's John. Look, I think this story around savings is the story that really Has underpinned the revenue progression of the group for the last few quarters and is likely to underpin the revenue progression for the next few because We have these structural surpluses, and they've been deployed reasonably short term into the financial market. And as monetary policy normalizes, The value of those surpluses reflates. It's really nothing more or less complicated than that.
So if we believe that the Fed will continue to hike And 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. And those of you with a much longer So, history of HSBC will recognize how much margin how quickly our margins compressed when rates came off post crisis.
So, this is just the reverse of So that there is if rates continue to go up from the Fed and LIBOR normalizes, there is possibly more to come. Okay.
It's just that if I read the newspapers, there seem to be signs of prime rate, some pressure on prime in Hong Kong and perhaps savings rates are going to have to We'd be tricking 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 And we did at the earliest stage in the cycle. I think that's absolutely fair. So yes, that's real.
Okay. Thanks so much.
Thank you. Our next question comes from the line of Joseph Stifersen of Jefferies. Your line is open.
Hi, good morning guys. Just a quick one. If I look at the your costs, which were $7,700,000,000 in Q3, 3, operating, yes, there was slight 100 plus 1,000,000 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 $600,000,000 $700,000,000 ramp up In Q4, which strikes me as somewhat odd, given where you are now and kind of the walk that you provided In the presentation, so any commentary on that would be helpful. Also in terms of your expected credit loss, you called out The U.
K. Unsecured, but I know that the delinquencies are getting better there. So is this similar to the overlay that you did to trade? In other Some caution around the UK that's a management discretion. Any help on those two items would be grateful.
Thank you.
So Joe, thanks very much for the question. You'll recall I'm sure the Q1 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 accounting in Argentina, which is 130 $9,000,000 that is precisely what we're delivering. Now the commitment around delivering Faucette It's 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. But if you reflect on Page 15, the cost profile that you're seeing, I think we would guide you to something reasonably stable into 2,000 sorry, into Q4, obviously recognizing that The bank levy to the tune of some $1,000,000,000 coming through in the 4th quarter as we ever do.
As it relates Ian, was that basically flat on Q3 ex bank levy, assuming no major changes in currency?
Exactly. Yes. Okay, got it. On credit costs, Now 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 UK, 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 lending book.
In terms of reflection on the UK, We when we implemented IFRS 9 on the 1st January this year, included within that implementation was our reflection Forward economic guidance at the time did not capture the full effect of the possible impact of the UK on the UK economy of leaving Europe, and we incorporated an overlay at that time of US245 million dollars That Has remained consistent throughout the course of the year. There's been no adjustment upwards or downwards. And as we refresh forward economic guidance going into the Q4 of the year, We may see some movements either upwards or downwards in that degree. But really there are no other factors coming through credit costs other than those that we've identified. It's a very, very stable picture.
I think one of the things that we saw was continued recoveries coming through the Global Banking and Markets Business notwithstanding the fact that they're slightly lower than in previous quarters, but I think we're beginning to see some normalization in these credit costs at levels we would expect. Understood. Thank you. Thanks.
Thank you. Our next question comes from the line of Fayed Kunwar of Redburn. Your line is open.
Good morning. Morning. Thanks for taking the questions. Just 2. The first one is on the interest earning balance sheet you guys have provided in the quarter, which is very helpful.
There's quite a big jump in the lending yield. I think it jumps kind of 10, 11 basis points in the quarter, just looking The 9 month versus the first half. Is that because the kind of effect of excess liquidity and HIBOR moving up Inside that line or is there something else going on? Because I guess I didn't chime with a lot of the commentary around pressure on asset margins, particularly on the mortgage side of the business. That's question 1.
And then the second question was on your risk weighted assets. Obviously, you've had quite a decent sized currency benefit in the quarter. And if I Exclude that, then your risk weight basically grew in line with your lending and your leverage. Now overall, I think your target was for revenue Growth in excess of risk weighted asset growth. Should we think about kind of risk weights now broadly growing in line with the balance sheet?
Over the last few years, you've had very good capital efficiency or is that is the effect of GBM optimization still to come through on that point? And I guess a wider point here is on your core Tier 1 ratio to your Pillar 2A reduction. You were talking about high 14%, I think Steen being the kind of core Tier 1 requirement you want to go into going into Basel IV. Is that still the case? Or should we still be thinking about capital Bill, what 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, Brad. No change to guidance or 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. So if you recall, in June, John talked about sort of Mid single, low to mid single digit growth on the balance sheet and 1% to 2% growth in risk weighted assets. So continued focus on driving capital efficiency Within the business and you'll have seen in these 3rd quarter numbers continued progress in that regard and notably within the Global Banking and Markets business. So I think the easiest response to a number of your questions there if I had would be no change to 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 U. S. Dollars, Hong Kong dollar related thereto and also to some extent within sterling, That's very much as we would expect. In terms of both assets and liabilities, as we She has the opportunity to invest surplus capital surplus liquidity rather at slightly higher rates. We're continuing to get Good yield coming through that surplus liquidity position.
But I think your observation is as we see higher interest We are seeing what we'd expect is 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 UK or Hong Kong Or other jurisdictions impacted by interest rates, but certainly from a yield perspective, we are seeing improved yields in markets affected by higher interest rates.
Just a follow-up on one good question. So 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, but we indicated that 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 Stebbins of Exane BNP Paribas. Your line is open.
Good morning. Just want to circle back on capital and then a question on UK mortgages. On capital on Pillar 28, I appreciate no change to guidance, but the gap now, if you like, between your buffer and your capital stack It's quite sizable. So I appreciate the dynamics are particularly complex for HSBC given the structure with local availability differences, double leverage considerations, Not to mention Basel finalization, but how should we think about a move in Pillar 2A? I mean, does the makeup of your Requirement limit the actual impact of any change in Florida 2A actually has on the business?
The movements in Florida 2A, Particularly of the variety that we've experienced in 2018 are helpful. And as 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. As we work through the reforms to Basel III, one of the things that I think the Bank of England has Being 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, then there is an expectation that there will be some offset coming through Pillar 2. Now 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. So I don't think at this point does not have a particularly telling impact on Our capital guidance is, as I just highlighted.
Okay, thanks. And then just on UK mortgages, obviously, it's been an area of considerable growth in recent Again, in Q3, given the market is very competitive, how far away are we from a point where you would reconsider the The amount of capital liquidity you're deploying into UK mortgage market or do some of the kind of favorable dynamics on the deposit side kind of offset that and you're happy to continue Can you just go at the current level?
Yes. Guy, it's John. Yes, we're still happy to grow into the UK mortgage Okay. And 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, so there's still very much, if you like, underweight. And there are still plenty of good risk for us to take in the UK. 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 reforms. So 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. But 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 Ghos of Citigroup. Please ask your question.
Great, thanks. It's Roni from Citi. I have 3 sets of questions, please, if I may. The first one is, can I circle back to your strong GBM performance? I obviously hope you've said so far on the call, but is there any more color you can give us on your FICC performance in A particular, is there any color on either say, client activity, whether it's FIs versus corporate positioning went well?
Only reason I'm following up is that, it's pretty broad based. It's FX quarter on quarter FX rates and credit. And If I look at the trading line in your P and 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 other next two questions?
The second question is on RBWM and I'm looking at Page 21 of your deck in the appendix. And by the way, this is in the last couple of years, your disclosures have been really helpful. So Page 21, we split it out and I can see the strong performance in savings which you've talked about partly offset by the loans pressure. But Can you comment a little bit more on the life insurance line, the manufacturing? I was kind of taken by surprise, the $100,000,000 quarter on quarter improvement in life insurance manufacturing.
Tring, 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. And then Other line in LBM is up also quite substantially. So that's my second question. And the third question is, How do I think about Argentina and the hyperinflation accounting? Because I hope you said about year to date the negative impact That you booked, but looking at FX movements, it looks like a lot of the FX movement in the pace have happened during the Q3.
Is it fair to say that much of that impact is Q3? Or is it actually should I be thinking about it spread across the year and Kind of quarterized that negative you booked. Thanks for taking the questions.
How about we do those in reverse So it is The requirements of IAS 29 and 21, the 2 go together. There's not a great there's no judgment There's a set of criteria that we are to apply and we have applied those on a year to date inception to date basis. So we're required to disclose current purchasing power by reference to the index and we've disclosed in the earnings release index that we've applied. And that So the net impact of $140,000,000 on PBT is The inception to date impact, there may be we're required to do this every quarter. In actual fact, the standard is quite rigorous in that regard.
So there may be an adjustment in the 4th quarter, But we would expect that to be in the low 10s or even less in terms of any impact on PBT in the 4th quarter. Now when you've applied the purchasing index to the Argentinian data, you're then required to translate that into U. S. Dollars for group reporting purposes at the end of the reporting date, so the 30th September date Was applied and that clearly amplifies based on current movements the impact that that then has on PBT. So to be clear, we're not restating prior periods.
There's a total catch up of $140,000,000 on PBT from hyperinflation accounting. There may be a small adjustment Of that in the Q4, obviously, we'll keep you posted in that regard and that's about it really.
So I have a crack at the life insurance one.
So
yes, life insurance. So the way that we account, we're familiar with PIVUS accounting. So any changes to market or economic assumptions, changes in the value of equity markets or bond prices, They transmit through the P and L on a monthly basis. So any market stress you will see in the P and 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.
So 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 $88,000,000 in the 3rd quarter. So it's that. It's this annual non economic assumption adjustment That we do every year.
Yes. In that other line also, Ronen, there was a negative adjustment In a prior period, which impacted the other line within Retail Bank Wealth Management, and it's a little bit of a Conglomeration of odds and sods as it relates to Retail Bank Wealth Management Business. So there's nothing particularly telling in the other line as it relates to Retail Bank 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 does not is not particularly dependent on the strength of any particular business in any particular quarter and 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.
So within fixed income, currencies and You've seen a very strong performance in the Q3 from foreign exchange, credit came along quite nicely, rates again we saw has been quite weak and that's That's been a continuing phenomenon over the course of the last few quarters. I think the one point that would perhaps stand out and compared to the American peer group is Equity 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 and the prime business and overall flow in the Q3 was probably more difficult in emerging markets And was the case in the United States, for example. Again, we saw a pretty stable picture within Global Banking, Global Liquidity Cash Management Moving ahead strongly at 23%, trade receivables financing, again another strong quarter. So this is a broad based business, Which is very much focused, a preponderance of focus on corporates as opposed to financial institutions. And 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.
And Ian, just a follow-up on that comment. So Has there been a notable pickup in corporate activity in FICC, like hedging or other in the 3rd quarter? Is that what's helped you? I'm just not But you're in contrast with some of the big global banks that reported. Some reported good FICC results, but this looked particularly good to most amateur eye.
Yes, I think that's true. But I think the other areas 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. So our business and our results for business tend to be a reflection That's how corporate is positioned, as they see trading conditions develop in front of them. So that would be True, both in the case of foreign exchange as well as within the Global Banking business.
Okay, great. Thanks for that, Ian, and thank
Our next The first question comes from the line of Manas 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.
And my second question is on your pension. You call out the fact that the recent judgment against Lloyd's 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.
Thanks, Manus. In terms of euro dollar liquidity, I think it'd be fair to say that there has been building over the last quarter or 2 some pressure just in terms of euro dollar Almost certainly informed by the fact that a number of central banks are beginning to ease off, reverse quantitative easing. And as a consequence of that, you can certainly see slightly higher funding costs coming through in the euro dollar space. But again, nothing particularly of note in the Q3, but just an observation that liquidity in that space is Hi, but 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. But just as an observation around Euro dollar liquidity, that is tightening and you see it in some of the prices.
And so
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 period?
Very, very marginal increase. Very marginal increase. Got it. Thank you. Okay.
And in terms of the judgment handed down by the high court in respect to Lloyds Banking Group on Friday, As 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 GBP6.2 billion, the effect of that judgment will be that we I will sit down with our actuarial team and go through and work through the impact of that judgment On the plan, but it will result in us recording a charge to the P and L in recognition of prior period service. This is a cost of service from our employees in prior periods.
We'll evaluate that. It will not be 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
I think I'll follow-up with IR now afterwards.
You can follow-up all day like. They've been told they can't tell you anything
Thank you, until our team has finished the work. All right. Thanks very much. Okay, Manas, thank you.
I think, operator, it looks like we've got one more question, and then I will sum up, 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.
Good morning, everyone. Thank you for taking the questions. First one is just on model changes. I think, Ian, you've previously called out €12,000,000,000 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 to 90 basis points In the Q3, I just wondered if that's a real kind of increase you're seeing in the margin now or if that's just an averaging effect in the balances that I can see on the slide. And then 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 to give us a steer on how we think those lines should have evolved at the time. I think you've previously talked about EUR 200,000,000 of And well increase coming through this year versus last year. If you could give us any idea of how we should expect the Q4 2019 to evolve, that would Great. Thank
you. In terms of any further issuance in the Q4, 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 Of course of this year and as recently in Q3, if the market is equally welcoming of HSBC paper, we may well Go ahead and try and prefund 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 Q3, it would probably be in the range of 2,000,000,000 to 3,000,000,000 In the MREL space and across a range of currencies other than the U.
S. Dollar. So I think you'd probably get a sense as to how that would Flow through into the Q4 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. So just ensuring that we've got a strong refinancing, a buffer there to support any refinancing A disruption.
So really nothing really else on that front. When you talk about the global trade and receivables financing, 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. So Broadly what you're seeing across the global trade and receivable financing 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 still We started the year with about $20,000,000,000 of opportunity for model approvals From the regulator, in the first half of the year, we got 8 of that through. We've got about 12 still to come. Whether that is going to come through in the Q4, I would hasten to say probably unlikely. Our model approvals require approval from the European, the EBA or the ECB as well.
And in that regard, we've along with probably other banks in the UK 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. But 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. A portfolio which is principally operating risk risk weighted assets, which we'd expect to see roll off progressively over the course of the next year or so. But 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, and this is why our positive jaws discipline is something to which we remain committed. I was expecting lots of questions on jaws this morning, and we didn't get many.
So it suggests that you're comforted by the progress we've made in Q3. As I said, 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 The help 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.
But 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