Good afternoon, ladies
and gentlemen, and thank you for standing by. Welcome to today's Fixed Income HSBC Q2 Results Conference Call. At this time, all participants are in a listen only mode. There will be
a presentation followed by a question and answer session.
I must advise you that this conference is being recorded today. I'd now like to hand the conference over to your speaker, Mr. Ian MacKay. Please go ahead.
Good afternoon from London. Evening to those in Hong Kong, and good morning to everyone in North America. Welcome to our 2018 interim results call for the fixed income community. With me today are a number of colleagues from our Treasury and IR team, including Ian McKinnon, our Group Treasurer. I expect most of you already had the chance to listen to this morning's call where we run through the results in detail.
I'll run over the key points briefly, then open up the call to questions and answers. In June, we set out 8 strategic priorities that will enable us to grow our profits on a consistent basis and create value for shareholders. In particular, we aim to deliver a return on tangible equity of more than 11% by the end of 2020. To do this, we intend to deliver growth from areas of strength to turnaround low performing businesses, to invest in revenue growth and the future of the business and to simplify the organization and invest in future skills. Central to this is our ability to use the revenue capacity of the group to invest in growth and competitiveness within a constraint of full year positive jaws.
For the first half of the year, reported profit before tax was up 5% compared with the same period last year, and adjusted profit Before tax was down by 2% due to increased investment in the business. For the 2nd quarter, reported profit before tax was up 13% And adjusted profits were broadly in line with last year's Q2. This performance was in line with our expectations. Our global businesses delivered an increase in adjusted revenue of 7% in the 2nd quarter. This was offset by the Corporate center, which was down against a strong Q2 of 2017.
In line with the guidance we issued in May, our 2nd quarter adjusted Costs rose by 7% and were stable compared with the Q1. We grew lending by a further 3% compared with the Q1 and 5% from the start of the year. Our common equity Tier 1 ratio remained strong at 14.2%. This includes the impact of foreign currency movements and the full amount of the $2,000,000,000 share buyback that we announced in May. Liquidity and funding remains strong with $540,000,000,000 of high quality liquid assets on hand.
Our liquidity coverage ratio stands at 158%, Our loans and advances are equal to just 72% of our $1,400,000,000,000 deposit base. We're well on track to meet our endpoint MREL requirements ahead of time. This year to date, we've issued over $10,000,000,000 of MREL eligible senior debts, Bringing the total outstanding to $53,000,000,000 reiterate this year's $12,000,000,000 to $17,000,000,000 issuance plan for MREL eligible Senior debt likely landing at the top end of this range. Additionally, we may look to refund part for 2019 issuance Alongside MREL, we've issued over $4,000,000,000 of $81,000,000 in the first half. Our year to date issuance brings us near to $5,000,000,000 to $7,000,000,000 issuance target for 2018.
We continue to expect our AT1 issuance to land around the middle of this range, albeit subject to market conditions. With our $2,000,000,000 equity buyback ongoing, we've been precluded from issuing AT1 since the early May. As of Friday's close, the program was 89 Looking out to next year and beyond, we anticipate our 81 insurance levels will fall towards In Tier 2, we have no plans to issue this year given our healthy excess in this area. Our operating subsidiaries will continue to issue a small amount of preferred senior and secured debt to fund growth. To conclude, HSBC is a strong credit story.
Our global businesses have now delivered 8 successive quarters on year on year revenue growth and current momentum into the second half of this year. On this basis, we remain confident of achieving positive jaws for the full year. Our main focus is on delivering a return on tangible equity greater than 11% by 2020. We're a well funded business With strong capital generation and a diversified balance sheet, and we're investing to grow revenue further and strengthen our competitive position. We remain cautiously optimistic about economic conditions for the remainder of 2018.
We will now take questions And the operator will explain the procedure and introduce the first question.
Thank you. And your first question today comes from the line of Robert Smalley from UBS. Please go ahead. Your line is open.
Hi. Good morning from New York. Thanks for doing this call in U. S. Hours.
Greatly appreciated. Greatly appreciate the deck as well. 3 real areas of interest, if I could. First, on the net interest margin, I know you were asked this earlier on the call. I really wasn't sure about the answer though.
Could you Talk about your European NIM and why it's at the level it's at and what do you think the kind of go forward level is Given ring fencing the bank, liquidity needs, etcetera, that's the first one. The second is in terms of issuance, could you talk about currency distribution? I know in the past you've wanted to Reflect the asset your asset composition. And third, I want to ask you about U. S.
Acquisitions.
Okay. Thanks, Robert. Thank you. Net interest margin, For the group overall, the themes are consistent with previous quarters. We continue to see progress in net interest income informed by Policy movement within interest rates development, particularly within U.
S. Dollars and currencies directly linked to the U. S. Dollar. That most notably informs progress in terms of net interest margin in Asia Pacific, where we have a very strong funding surplus and the propensity to invest that and deploy that funding surplus to generate net In addition to which we are beginning to see in Asia a stabilization of some of the asset pricing pressures we've experienced over Recent past quarters.
So the performance in Asia in this regard remains The key theme in terms of net interest income and net interest margin development for the group. In the first half of twenty eighteen and specifically the second quarter, We focused on ensuring that we met certain regulatory ratios that were developed for HSBC in approaching ring fencing and specifically liquidity coverage ratio and net stable funding ratio for the non ring fenced So the derivative of the ring fenced bank. So just to clarify, our UK bank, which was HSBC Bank Plc, To meet requirements of the Banking Reform Act of 2013, which required to ring fence Ring fenced certain activities. Those activities to be ring fenced, broadly speaking, were Retail Bank Wealth Management, A substantial portion of the Commercial Banking business and the Private Banking business. That which sits outside the ring fenced bank is broadly speaking global banking and markets Certain other activities which are prohibited by law from being included inside the ring fenced bank.
The ring fenced Bank started trading on the 1st July of this year under the name of HSBC Bank UK Plc. The non ring fenced bank is HBU or HSBC Bank Plc as it is known and has been known in the market for quite some time. The funding of the combined HSBC Bank PLC pre ring fencing was made up of a broad diversification of customer deposits within retail bank, commercial bank, global bank and markets, Wholesale funding. And on ring fencing, the vast majority, as you could reasonably imagine, of deposits within the Retail Bank Wealth Management Commercial Banking and Private Banking business went to the ring fenced bank. The liquidity and funding value from a regulated perspective, the deposits and funding that remained within the non ring fenced banks, HSBC Bank PLC fell slightly short of where the regulatory requirements were set for that organization to be effective July 1, 2018.
And in the first half And specifically, within the Q2, we took actions to raise appropriate funding from diversified sources, including deposits, CDs and wholesale other forms of wholesale funding to ensure that we met and exceeded the LCR ratio requirement and the NSFR ratio requirement at 1st July. We've done that and we will spend the second half of twenty eighteen and beyond Fine tuning the balance sheet as the activities within the non ring fenced bank continue. Raising that funding and liquidity requirement increased Our cost of funds, specifically within that legal entity during the Q1, and that was the most significant headwind in terms of informing What otherwise would have been a fairly steady progress in terms of net interest margin for the group as a whole. So that's a little bit of amplification around what specifically we disclosed on Page 13 within the equity investor deck that we published that we published this morning. In terms I'll go to your last question next, because it's a fairly easy one.
U. S. Acquisitions, It is unlikely that there would be any significant U. S. Acquisitions in the foreseeable future.
We certainly won't discount the opportunity To consider digestible bolt on acquisitions, possibly focused within the wealth management Space more generally, but there is nothing specific at this point that we could refer to, and therefore, it is Very much a focus on building the business in the U. S. Organically. We've clearly made the team in the U. S.
Clearly made a lot of progress in terms of Meeting the regulatory requirements of various regulators in the United States and in terms of growing revenues, managing costs and improving capital efficiency, The business has made very significant progress over the last couple of years. There is clearly more to do until the U. S. Achieves a level of return against Equity invested in that business, which would be appropriate and acceptable to HSBC as a whole, but significant progress It continues to be realized, but significant acquisitions at this point in time are not a significant part of
Sorry about that. So in the press, in the past, Synchrony Financial had been mentioned As a possible target, basically, that's So what you're saying is that's a little too big and a little bit over the horizon, if at all, at this point?
Yes. There was never To that whatsoever, we're still somewhat mystified as where that media coverage came from, but that was never on the cards. Me too. So thanks. No pun intended.
With respect to issuance, sorry, refreshing the question on issuance?
Just in terms of currency Yes. Right.
Yes, sorry. So look, Our intentions remain consistent. Our intentions for the future remain consistent with our actions in the past in terms of broadly trying to match The currency of issuance to market with the composition of the balance sheet and the funding required on the balance sheet. So we will we have Further diversified, and we'll continue to focus on diversifying issuance to align to the composition of the asset side of our balance sheet. So Although we continue to issue substantially the majority of our paper in dollars, that is informed by the fact that We have a very significant U.
S. Dollar business in various locations around the world. And even where instruments are issued out of the holding company In dollars, that tends to be downstream to our operating subsidiaries, which have U. S. Dollar exposure, which require funding.
And if I could just follow-up. So there's no need to kind of Compensate and lean in one direction or another in order to reflect this. This is kind of a go forward policy. So there's no need, say, to do more dollars than you had in the past or more euros than you had in the past to balance out the portfolio? No.
And you had mentioned being at the top end of the range for issuance and potentially pulling forward some, But your redemptions next year are a lot less. So if that's the case, then would we expect a lot less issuance in 2019?
I think, 1, our issuances going forward will be informed, 1, by the regulator requirements, most notably with respect to MREL in the round and clearly that's an area where guidance from various regulators around the world continues to develop And also informed by the level of refinancing, so redemptions that will be coming through the pipeline. So broadly speaking, our guidance with respect to the overall level of issuance of MREL will remain remains broadly consistent with what we've guided you in the past. And I think the factors that would inform any change to that guidance will be informed by how regulation in the round, but specifically with respect to MREL TLAC requirement shapes up over the coming, I want to say months because I suspect it will be quarters or even years.
That's great. Thank you. And thank you for all the fixed income disclosure. It's greatly appreciated.
You're very welcome. Thank you, Robert. Next question.
Thank you. Your next question today comes from the line of Lee Street from Citigroup. Please go ahead. Your line is open.
Hello. Good afternoon all. Three questions from me, please. Just firstly, on the Bank of England paper on MREL in June, Just any what your thoughts on how it impacts your operating company's subordinated debt and whether you take it as a confirmation that for any of the OpCo stuff that you've got outstanding, Under UK law, but that does not represent an impediment to resolution. Secondly, in the slide deck, you noted you're currently evaluating the And a proposal on MREL.
Just any thoughts you could give on what the potential impact on the group might be? And finally, just a simple one, any more color you can give us on the potential funding needs for HSBC Bank PLC, please?
So HSBC Bank Plc, the I think we entered into July 1 with both an NSFR and an LCR I'm somewhat above where the requirement we believe will be in the long term. So there's a bit of fine tuning and balance sheet optimization to be done In the second half of the year and beyond, I would not expect funding requirements to go above those That were disclosed at the 1st July. So I would be inclined to be guided by that or even slightly more, A slightly lower level of overall funding and liquidity because we did very purposefully go into the formation of the bank With what we thought was a fairly prudent conservative position with respect to that. In terms of the Bank of England paper on internal MREL, helpful, right, moving in the right direction in terms of providing guidance, but I think there are still aspects of that guidance which are to be grounded out upon which There is an active dialogue in from the industry with the Bank of England and the Prudential Regulation Authority. So Helpful.
I'm not in fact, I won't say I'm not sure it changes. At this point in time, we do not believe it necessarily changes our overall view, Our overall view with respect to how recovering resolution or specific resolution would work and Specifically, the eligibility of any of the debt instruments that we have, capital or debt instruments that we've got in place at this point in time. So More work to be done and I think exactly the same would be said of HKMA consultation in that regard. What is encouraging The guidance is now in front of us. There is an opportunity to consult and engage with our principal regulators around that guidance.
And there is clearly a very strong focus on the part of those regulators to gain industry feedback from the industry and then fine tune And the guidance as we go forward. So I think that the overarching comment that the team would make back here is that it hasn't changed in any Significant way our interpretation or attitude towards funding requirements in the context of recovery resolution at this point in time. So I think that so what is clearly at a European level is both CRR2 and What we call CRD V is in fact such a thing ever becomes real. But clearly, where we stand today is that we've got eligibility For instruments informed by CRR and CRD IV, to the extent that any of the requirements change between Mark 1 and Mark 2 of CRR and CRD 4 and CRD 5, then That would clearly inform any changes that we may need to make in terms of the overall eligibility of Capital and debt instruments that sit within the structure today. But I think, again, that's developing space, which we are engaged in.
Today, our focus is on optimizing the eligibility of our capital instruments within the guidance offered by CRR and CRD4.
Okay. That is it. That's great. Thank you for your comments.
Thank you.
Thank
call. Your next question today comes from the line of Corinne Cunningham from Autonomous. Please go ahead. Your line is open.
Thank you. Good afternoon, everyone. My questions have been mainly asked, but I've got a couple of Follow-up to Lee's really. The first one in terms of when do you think you might get clarity on the role of some of your Legacy bonds in Resolution Planning and Requirements. Is it something you already have?
Or you mentioned that The dialogue is being ground out and any guidance as to when you think that might be clarified would be helpful. The other one is perhaps more of a little bit of head scratching really about multiple versus single point of entry for the group. So you've gone down a multiple point of entry route. But so far, all of the NREL has been issued from the group, and it sounds like that's your intention to carry on doing it that way. Have you chosen to go down the marketable point of entry route because it actually lowers your overall requirements?
So if you were a single point of entry, you would have to have higher requirements overall. Is that basically the driving feature for volume multiple rather than single point of entry? Thank you.
Yes, it's a great question. So on your first Guidance? No, we don't have it. So there is we've got policy papers out there from a number of our regulators. We're engaged In conversation with them, but there is no final guidance.
And as to when we may expect to receive it, I'm afraid My crystal ball gazing capabilities don't extend that far, but I suspect it's sometime in the future. As Varus Malco's inventory goes, so I suppose I could embark on a Regulatory rant at this point, but I'll spare you all of that. Look, our corporate structure, Where we operate as a holding company with a number of key operating subsidiaries, which are funded and capitalized to be resilient In periods of stress, without the need to resort to assistance from the holding company has been Our capital management and funding practices and risk management framework for many, many years. The group naturally that structure It lends itself to multi point vent free resolution and our principal resolution hubs as recognized by the PRA And our principal regulator, so the HKMA, the Federal Reserve in the United States, is Underneath the HSBC Holdings Plc, we have a European resolution hub, which up until recently, the principal The principal subsidiary within that was HSBC Bank Plc. Our Asian Resolution Hub, the principal holding company and operating company within which was The Hong Kong Shanghai Banking Corporation.
And then thirdly, our U. S. Resolution hub, The principal operating entity of which is the HSBC Bank, but the holding company of which is HSBC North American Holdings. And the purpose of issuing our resolution instruments out of the holding company is that Those instruments are issued at the Holdco 1 because we have a strong track record with all of the process and capabilities in place To issue a diverse range of instruments from that holding company and then downstream them to the principal operating, the main resolution hubs In the form in a form that is identical to that which we issued to the marketplace, so there's literally a back to back transaction Where anything that's issued from the holding company, the significant majority of it is downstream to those resolution entities. On exempt of resolution, what would then conceivably occur, so this is the principle behind multiple inventory, Is that those bail inable instruments would be bailed in by the local supervisor, the local regulator, And the local entities would be recapitalized, the operating entities would be recapitalized upon the bail in Of those instruments holding at the local held at the local holding company level.
And in so doing, the losses would be upstreamed to the ultimate holding company, HSBC holding the PLC. And in so doing, what we would do is we would retain the integrity Of the corporate structure of the group, thereby enabling local regulators, whether in Hong Kong, United States or Europe, for example, The time and capacity to go ahead and execute an orderly resolution of operating subsidiaries and activities within HSBC. So that is the point behind multiple point of entry. In terms of does it give us Any particular advantage or saving in the context of MREL, for example, As much as we would like to think it does and should, it doesn't. So I think at least there's no evidence So the guidance at the moment around what our requirement will be is the higher of the sum of the parts required, I.
E. The guidance provided by local regulators responsible for the resolution within that community. And was it 18% at the end stage and I think 16% between now and 20, 18% of RWAs Or 6.75 percent of leverage exposures. So our we at the moment are aiming for that 18% of RWAs and when guidance from our local regulators responsible for resolution in those jurisdictions Provide us with settled regulation as to their requirements, it will determine whether that 18% of RWAs at a group consolidated level Or the sum of the parts is the binding constraint or the target, if you like, from an MREL standpoint. But again, that goes back to your first point, Karim, which is at what point we get guidance around Exactly what is required of us from a resolution perspective and consequently MREL requirements.
So It is overall a little bit of a moving the feast, but the at the risk of well, not getting worse than mine, But the regulators, certainly our UK regulator and our principal regulator, the potential regulation authority, Look at that approach to resolution as being robust, workable, But we clearly need more guidance in terms of where regulation ends before we can buckle that down.
Okay. Thanks very much.
Thank you.
Thank you. And your next question comes from the line of James Hyde from PGIM. Please go ahead. Your line is open.
Hi. I've got three questions, please. First of all, I just wanted to get a better understanding of the profile of the group Going into Brexit in terms of earnings, you've sort of taken away some disclosure on UK, but you helpfully included This HoldCo impact. Would it be fair, am I right in thinking that annually UK Without HoldCo, it's about EUR 4,000,000,000 pretax. It seems a bit high to me, but I just want to check out over EUR 21,000,000,000, EUR 22,000,000,000 Underlying is Ian.
That would be the first question. Secondly, on again, impact maybe impact on UK No impact on European earnings. What is your feeling about being able to keep the European subsidiaries and branches Under what is still an HBEU HSBC Bank TLC, does it have to go straight to the holdco with a New intermediate European Mainland Europe, Eurozone HoldCo. And what would be the impact of that? Should it be necessary?
And thirdly, just want to know if there's any sort of more sense On the impact of BEAT of the base erosion and tax avoidance and whether It does necessitate that some U. S. Holdco issuance for optimal tax management.
That's it.
Okay. Thank you. So James, I think I'll take those in reverse order. On VAT, all the work that we've done up to this point would suggest that we will not be subject to VAT. And therefore, we We'll keep a very close eye on that because final regulation around the implementation of the tax reform bill in the U.
S. In December last year It's not yet available, but all of the work that we've done and advice we've taken would strongly indicate that we will not be subject to BEAT in the U. S. On the HBU, well, let's not HBU, HSBC Bank Plc. Let's talk about the structure going into Brexit.
So part we have always approached Brexit With the view that we ought to prepare for the worst case scenario, so euphemistically a hard Brexit And hope for a better outcome. So the contingency planning and in effect implementation that we are affecting is informed by what we would believe would be a hard Brexit. In that vein, We are perhaps fortunate, you might say, to have a significant operating bank with a universal banking model In France, that was the product of our CCF acquisition a number of years ago. That bank Today carries on Retail Bank, Wealth Management, Commercial Banking, Gold Banking Markets and Private Banking activities, and has a broad Product and service capability, very similar, obviously, to a smaller scale, but very similar to that of HSBC Bank PLC. Some of the actions that we have done to effect Operating capability to meet our customer requirements upon Brexit, whatever form that may be, is to ensure that the product and service capability of The French bank exactly mirrors that of the UK bank.
So we have been working on and are largely Complete in terms of ensuring that product and service capability is in place in terms of systems, processes, risk management and functional support. We have not at this point started moving any significant numbers of employees into that trench legal entity by virtue of the fact We continue to support most of our customers that are banking across the European market substantially to the UK bank. What we have also done is applied to the ECB and to the PRA seeking approval and such approval has been obtained To take the branches of HSBC Bank Plc that operated across Europe, we were operating in some 20 countries across Europe, 2 branch structure supporting corporate banking activity, and those branches have been part of HSBC Bank PLC. Those branches are now being repointed to become branches of HSBC France. And so HSBC France will be The principal operating subsidiary of the group supporting our customer activity across the continent.
We have 2 other subsidiaries in Continental Europe. 1 is Schuenkhausenbarkhausen in Germany, where we own 80% and the other is Malta, where we own just under 100% of that bank. And all three of those entities are subject to SSM regime. So post Brexit or as we approach In whatever form it takes, our French entity will have the capability to support our customers in whatever activity they undertake across the European Union. The activities outside France, Germany and Malta will be conducted through branches Of the French bank HSBC France SA and the UK bank, the UK activities will be made up of the ring fenced bank And the non ring fenced bank, they will continue to cater to international customers, but obviously not those that are required to be supported by a European Julie Formed and Regulated Institution.
In terms of the holding structure there, Today, HSBC France is owned by HSBC Bank Plc. The holding structure will be changed such that The 2 UK entities will become held by an intermediate holding company in the UK, and our European entities Will be, we believe, subject to an intermediate holding company, which the regulation of which still has to be formed. And when that European holding company is formed, the French, German and Maltese subsidiaries will be subsidiaries to that holding company. And that holding company will then either become a sister entity to the UK holding company All will be held within that UK holding company, but we await guidance and the final form of regulation before Any decision in that particular holding structure is taken. Your last point around UK earnings, The UK bank on a PBT basis Through the first half of this year, well, if you think about a normalized run rate for earnings of the UK bank, it tends to be between $2,500,000,000 3,000,000,000 dollars per annum on a profit before tax basis as adjusted.
In terms of the first half of this year, there were some significant reductions And revenue went through the corporate center within the UK and also we had somewhat lower revenues within the global markets business orientated out of the UK, which informed a lower than usual adjusted profit before tax in the UK. But in the UK, broadly speaking, the run rate of adjusted earnings tends So it's somewhere between $2,500,000,000 to $3,000,000,000 And that's in capture that encapsulates both the ring fenced and the non ring fenced bank.
Is that ex the HoldCo or with HoldCo?
That's ex the HoldCo.
Okay. Yes. So I might think that I'll get it wrong there. Okay. Thank you.
Thank you very much.
Thank you.
Thank you.
And there are no further questions coming through at this time, so I'll hand back for closing comments.
Very good. Well, thank you very much for joining us today. As ever, your time is greatly appreciated. And I know that if you have any follow-up questions later time, you'll follow-up with our Investor Relations team. Thank you for joining.
That does conclude our conference for today.
Thank you for participating. You may all disconnect.