Good morning, ladies and gentlemen. Welcome to the Investor and Analyst Conference Call for HSBC Holdings plc's Interim Results 2018. For your information, this conference is being recorded today. At this time, I would like to hand the call over to your host today, Mr. John Flint, Group Chief Executive. Please go ahead.
Thank you. Good morning from London. Good afternoon to everybody in Hong Kong, welcome to our 2018 interim results call. I am here today with Iain Mackay, and I will pass over to him shortly. Let me start, though, by recapping our strategy and covering the main points of our results. In June, we set out eight 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 turn around 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 the constraints 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, adjusted PBT was down by 2% due to increased investment in the business. For the second quarter, reported profit before tax was up 13% and adjusted profits were broadly in line with last year's second quarter. This performance was in line with our expectations. Our global business delivered an increase in adjusted revenue of 7% on the second quarter. This was offset by the corporate center, which was down against a strong second quarter for 2017. In line with the guidance we issued in May, our second-quarter adjusted costs rose by 7% and were stable compared with the first quarter.
We grew lending by above 3% compared with the first quarter and 5% from the start of the year. Our common equity Tier 1 ratio remains strong at 14.2%. This includes the impact of foreign currency movements and the full amount of the $2 billion share buyback that we announced in May. Iain will talk you through the numbers.
Thanks, John. Looking first at some key metrics for the first half. The return on average ordinary shareholders' equity was 8.7%. The return on average tangible equity was 9.7% with a lower tangible net asset value per ordinary share of $7, driven by foreign exchange movements, and we had negative jaws of 5.6% due to increased investments in the business. We remain committed to achieving positive jaws for the full year. Slide four provides detail on the items that take us from reported to adjusted. You'll note that there are no costs to achieve this year. The other main difference in the first half was the legal settlements and provisions. In July, we reached an agreement in principle with the U.S. Department of Justice to resolve its three-year investigation into HSBC's historical origination and securitization of residential mortgage-backed securities.
This amount was substantially covered by the provision we made in the first quarter, as covered on pages one or two of the interim report. You'll find more details in the appendix. The remainder of the presentation focuses on adjusted numbers. Slide five breaks down adjusted profit for the year for the first half by global business and geography. Profits in our four global businesses rose by a total of $851 million. By contrast, corporate center PBT fell by $1.1 billion due to lower revenue. In Asia, excellent performances from Retail Banking and Wealth Management and Commercial Banking contributed to a strong PBT performance. Europe bore much of the impact of the fall in the corporate center and was also affected by a drop in revenue in global markets.
The drop in corporate center revenue comprised $241 million of valuation differences on long-term debt and associated swaps, which were broadly reversed, apart from liquidity. A $242 million fall in Balance Sheet Management revenue, a $169 million movement in losses on disposal of legacy assets, and a $114 million additional interest expense primarily due to MREL issuance. Slide six looks at profit before tax for the second quarter, which was broadly stable compared with the same period last year. PBT was up in all four global businesses and up significantly in Asia, North America, and Latin America. The drivers of the increase in Asia were broadly the same as for the half-year. In North America, revenue increases and expected credit loss releases related to oil and gas sector contributed to a large increase in profits.
In Latin America, the increase in PBT was driven by good all-around performance from our global businesses in Mexico. Corporate center was again the main driver of the fall in Europe, due largely to a $632 million fall in revenue. The drivers of this movement were again based on having a half year. Slide seven shows revenue trends by global businesses. Second-quarter revenue from the four global businesses was $865 million, or 7% higher than the same period last year. I'll go through each business in more detail over the next two slides. Slide eight looks at Retail Banking and Wealth Management revenue, which grew by $326 million, or 6%, compared with last year's second quarter. We also made market share gains, particularly in the U.K. mortgage market. Higher balances and higher interest rates drove a $472 million increase in deposit revenues, particularly in Hong Kong and the U.K.
Income from investment distribution increased by $57 million, reflecting higher sales of retail securities and mutual funds, mainly in Hong Kong. Lending revenue fell $83 million due to asset margin compression from competition in the mortgage market. We continued to grow lending quarter-on-quarter and year-on-year. Customer lending rose by 8%, and customer accounts increased by 3% compared with the same period last year. Slide nine shows Commercial Banking revenue grew by $466 million or 14%. Growth in Commercial Banking was increasingly well-based with good performances from credit and lending and Global Trade and Receivables Finance. In addition to another excellent quarter from Global Liquidity and Cash Management. Global Liquidity and Cash Management revenue grew by 22% on the back of increased balances and the impact of wider spreads in Asia.
Credit and lending revenue grew by 6% due to balance sheet growth in the U.K. and Hong Kong. Global Trade and Receivables Finance revenue rose by 4% as we grew balances in Hong Kong and the United Kingdom. Commercial Banking grew earnings by 3% in the second quarter and by 8% compared with last year's second quarter, mainly in Asia and the U.K. Global Banking and Markets revenue grew by $65 million or 2% compared with last year's second quarter. After credits, funding, and valuation adjustments, revenue was broadly stable. We saw continued positive momentum in key product areas, including double-digit percentage revenue growth in Global Liquidity and Cash Management, securities services, and foreign exchange. Global banking revenue was broadly stable as the impact of growth in lending balances and market share in debt capital markets was offset by lower corporate issuances and tighter margins.
Global markets revenue was down by 13% against a strong second quarter of 2017, due mainly to lower client activity and rates in credit. Adjusted RWA is down by $11 billion in Global Banking and Markets in the second quarter. Global Private Banking revenue grew by 2% compared with last year's second quarter, supported by positive NNA inflows. The corporate center was a major factor in our second quarter performance. As noted earlier, a significant portion of the reduction in revenue was from valuation differences in long-term debt and associated swaps, on which we expect ongoing volatility from quarter-to-quarter. These differences were broadly reverse if held to maturity . We continue to manage down our legacy credit positions. In the first half, we realized a loss on one specific transaction that was capital accretive. With respect to Balance Sheet Management, full-year revenue guidance remains broadly unchanged from $2.3 billion-$2.5 billion.
Interest expenses are expected to stay at broadly the current level for the rest of the year. We remain focused on improving capital efficiency in the corporate center. Net Interest Income largely reflected higher deposit margins in the second quarter, rising 4% to $7.6 billion. As we work through the quarterly Net Interest Income and Net Interest Margin trends, there have been a few possible minor adjustments to Q1 Net Interest Margin number, which if made, would confirm continued quarter progression. Net Interest Margin in Asia rose by 15 basis points from the full year to 2.3%-3% due to higher deposit margins. By contrast, group Net Interest Margin fell by 17 basis points to 1.18% due to asset margin compression and the higher cost of funding and liquidity in the non-ring-fenced bank.
The higher funding and liquidity balances and the impact on net interest margin reflected management's implementation of ring-fencing as of 1st of July this year. Group net interest margin for the first half was 1.66%, 3 basis points higher than for 2017. Competition for good quality lending remains strong, balanced by higher yields on surplus liquidity. We anticipate further progress on net interest margin and net interest income as we continue to grow the business and as monetary policy normalizes. In the first half alone, we grew lending by 5%. There's more detailed information on net interest margin in the appendix. Slide 14 looks at expected credit losses and loan impairment charges. The second quarter benefited from a release in the oil and gas sector in North America. The credit environment remains stable, and expected credit losses remain unusually low.
Bear in mind that expected credit losses are very sensitive to any changes in forward economic forecasts and IFRS 9. Slide 15 shows our operating expenses for the quarter. These were $554 million or 7% higher than the same period last year and broadly stable compared with this year's first quarter. Unlike in the last few years, there is no CTA program in the strategic plan. We have to create the capacity to invest more through a combination of cost discipline and revenue growth. To that end, $300 million of cost savings helped absorb the additional cost of inflation, regulatory programs, and compliance in the second quarter. We invested an additional $400 million in growth, digital, and productivity in Q2.
In Retail Banking and Wealth Management, we are investing in our cards business in the U.S. and the U.K. and in marketing, frontline sales, and technology in the U.S., United Kingdom, and Canada, wherever. In Global Banking and Markets, we made further strategic hires in Global Banking and in Global Liquidity and Cash Management, and continued to invest in our securities joint venture in Mainland China. In Commercial Banking, we are hiring more relationship managers to our new business in Hong Kong and Mainland China, and updating our core systems in Global Liquidity and Cash Management, trade finance, and business banking in Hong Kong and the U.K. We continue to invest in the business subject to growth in revenue and expect full-year costs, excluding the bank levy, to be as previously guided. Turning to capital. The group's common equity Tier 1 ratio on 30th June was 14.2%.
Our common equity Tier 1 capital reduced by $6.8 billion in the quarter. Capital generation of $1.9 billion was more than offset by foreign currency movements related to the strong U.S. dollar, and also the recent share buyback, the full impact of which was deducted from capital. Risk-weighted assets grew by 1% on an adjusted basis in the first half, compared with loan growth of 5%. Slide 17 looks at our group return metrics. Return on tangible shareholders' equity was 9.7%, or 11.5% excluding significant items in the bank levy. Our reported revenue as a percentage of RWAs rose by around 20 basis points to 6.3% compared with last year's first half. We continued to benefit from low expected credit losses in the second quarter. Our four main global businesses each achieved Return on Tangible Equity above the group's cost of equity.
We are investing to grow the businesses and to improve the group's return on tangible equity to above 11% by 2020. I'll now hand back to John.
Iain, thank you. Our global businesses have now delivered eight successive quarters of year-on-year revenue growth and carry momentum into the second half of the 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, we are investing to grow revenue further and strengthen our competitive position. We remain cautiously optimistic about economic conditions for the remainder of 2018. We shall now take questions. The operator will explain the procedure and introduce the first question. Operator?
Thank you very much, Mr. Flint. If you would like to ask a question today, please press star then one on your telephone keypad. Please ensure that your mute function on your telephone is switched off. If your question has been answered, you may remove yourself from the queue by pressing the hash key. Once again, to ask your question today, please press star then one on your telephone. Please ensure that your mute function is switched off. The first question we have today comes from the line of Ronit Ghose from Citi. Please go ahead.
Hi. Good morning. It's Ronit from Citi. Just a couple of questions. First of all, a quick question on margin. You've given us some comments around the Europe decline first half versus last year, 17 basis points down. Iain, I wonder if you could give us some more color on the quarter-on-quarter NIM trend, and specifically, any color around how much this is driven by the NRFB formation. That seems to be the big delta when I look at what happened to NII and NIM in the quarter. That would be really helpful. My second question is about jaws, and this is for either of you. In the second quarter, obviously got underlying about six percentage point negative jaws costs. I think underlying comes to about GBP 16.4 billion for the first half. Are you looking at implicitly or explicitly flat costs half-on-half extra levy?
I'm just trying to work out how we get to positive jaws for the year because it's looking quite challenging. Thank you.
Thanks, Ronit. Quarter-on-quarter from a net interest margin perspective, broadly stable. The features that are driving that remain pretty much consistent with what we've talked about in the past. Specifically in the U.K. and formation of the non-ring-fenced bank, or actually the formation of the ring-fenced bank and the definition of non-ring-fenced banks. If you reflect on HBEU, we've maintained a strong funding and liquidity position within that legal entity consistently. As we created the ring-fenced bank, the strength of the customer deposits sitting within the retail bank and the commercial bank principally become part of the ring-fenced bank and are no longer available in terms of funding and liquidity resources to the non-ring-fenced bank.
As we approached, or the industry approached ring-fencing, the PRA set out some specific requirements with respect to LCR and Net Stable Funding Ratio. To ensure that we achieved those positions by 1st of July with a margin of safety, we strengthened the funding and liquidity position within the non-ring-fenced bank over the first half of the year and most notably within the second quarter of this year, leading up to the 1st of July. We had LCR and NSFR ratios, some of them excess, in fact well in excess of requirements from a regulatory perspective. As we move through the remainder of this year, we'll optimize that balance sheet and hit the right position.
We wanted to make sure that we had a strongly funded position over the transition period into the non-ring-fenced bank and before. Clarity just for memory's sake, the non-ring-fenced bank essentially contains Global Banking and Markets and then other activities which are not permitted to be within the ring-fenced bank. Raising that extra funding and ensuring a strong liquidity position had a adverse impact on net interest margin in the second quarter of the year. Overall, net interest margin continues to progress half year and half year. We saw it at 163 for the second half of 2017, 166 for the first half of 2018. The key drivers of that are the continued normalization of monetary policy, notably in the U.S. dollar and related currencies, and that translating through the deposit surplus and, again, most notably within Asia, but more broadly.
What we are beginning to see is some stability in asset pricing, certainly in the Asian market, although as we call it today, it continues to be fairly competitive in mortgage pricing, both within the Hong Kong and the U.K. markets. John, I don't know if on jaws you want to take that question.
Sure, Iain, thank you. Yeah, on the jaws thing, I guess first thing to say is our results at this stage in the year are in line with our expectations. We are where we thought we would be. The money that we've spent is in line with our plan. I think we've guided that we expect cost ex the bank levy to be reasonably stable half on half. That does mathematically get you to a stronger revenue growth number for the second half of the year. The way that I think you should think about that is as follows. We've had good balance sheet growth in the first half of the year, and we've enjoyed continued progression with net interest margin, albeit modest progression. As monetary policy continues to normalize, I think that will continue.
We should enjoy momentum on a net interest income line heading into the second half of the year. It's also the case that there were some aspects of the corporate center performance in the first half that we might reasonably expect not to repeat themselves in the second half. Our business plans do see us get to positive jaws by the end of the year. We remain reasonably confident about the revenue outlook that will get us there.
Thanks a lot, John. Iain, can I just jump back to your answer to the margin question. Can you quantify or help me understand exactly how much structural change or NRFB formation contributed to it as a headwind to the margin Q and Q? Or maybe another way to think about it is when you're looking ahead into the second half, is this like the steady state now for the U.K. European business? Or do we get anything back? Any kind of color around that would be great.
Well, we will certainly see higher funding and liquidity costs in the non-ring-fenced bank going compared to history. What we would expect as we go through the second half of the year is that we will fine-tune our funding and liquidity requirements within the non-ring-fenced bank going forward. In terms of the impact to net interest income in the first half of the year, as we built that funding and liquidity position, it was somewhere in the region of $100 million was the impact in nominal terms on that. We did come into the creation on 1st of July with a strong funding liquidity position, somewhat in excess of the regulatory guidance. We'll normalize that out and get to a steady state.
I think when we look at this at the end of the year, we'll hopefully, well, I would certainly anticipate that you'll have a much clearer view of how that's likely to run from an overall funding liquidity perspective going forward.
Great. Thanks for that.
Thank you.
Thanks, Ronit.
Thank you very much. Our next question today comes from the line of Chris Manners from Barclays. Please go ahead.
Good morning, guys. Just a couple of questions, if I may. The first one was on the impairment charge. Looks very low in the quarter, obviously, you flagged a write back there. Could you maybe just help us a little bit with the outlook? Are there any parts of the loan book that you're worried about at all? Maybe you could give us a think about to get to your 11% plus RoTE, what sort of cost of risk numbers you're thinking about in there. The second question was maybe to come back onto the European NII point. Obviously, we've had the U.K. rate hike now. How much of a benefit do you think that might be to your net interest income in the U.K. business? And how are you thinking about passing some of that rate hike back to savers? Thanks.
Yeah. On that last point around the impact of 25 basis points on the bank rate at the end of last week, over the remainder of the year, we would expect to see that an uptick of some $40 million positive impact, obviously, to net interest income. In terms of talking about impairments longer term, Chris, at the investor update in the month of June, we talked about our greater than 11% return on tangible equity target reflecting what we believe to be normalized credit costs in the range of 30, 40 basis points. To be clear, that target on return on tangible equity is informed by a higher expected credit loss on impairment charges than we are presently experiencing. In terms of any specific portfolios that are of cause for concern right now, that's not the case.
We are seeing very stable credit costs at a low level as we count today. Areas where I think we've previously commented that we're keeping a pretty close look, not because there are emerging issues, but because the operating conditions would suggest that there may be emerging issues. For example, the U.K. high streets and retail more broadly is one of the areas where our credit teams are keeping a very close watch on things. Other than the United Kingdom, further afield in Europe, Asia, Middle East, or Americas, certainly the credit outlook at the moment is fairly stable.
Thank you. Could I just follow up on that $40 million of extra NII that you're expecting. What sort of pass-through rate would that mean on your savings accounts?
The deposit beta, certainly in markets where there's fairly significant competition for deposits, is beginning to move up. In the U.K. ring-fenced bank, we have a very healthy funding surplus. As a consequence of that, our deposit betas will be informed by the overall strength of the funding position in the United Kingdom. I think that's probably the extent of what we would say at this point, Chris.
I think Chris, it's John. Just one thing to add, of course, now that we've actually ring-fenced, the management of the ring-fenced bank are the ones who are taking the decisions on pass-throughs and savings pricing. It's a great time to get the question. We are in a slightly different world now.
You would debate that with them, surely?
Of course. We would indeed. Of course.
Thanks.
Thanks, Chris.
Thank you very much. The next question today comes from the line of Joseph Dickerson from Jefferies. Please go ahead.
Hi, good morning, guys. I think just going back a bit to the first question. Could you discuss the, I suppose your outlook for cost growth in the second half of the year? I know you've said that you would seek to generate positive jaws subject to revenue growth being there. I guess, what type of cost growth would you expect in the second half of the year? Because it seems to me that I know costs picked up in the second half of last year, but it seems to me you'd have to have flat cost growth at some point in the second half if consensus revenue expectations are correct. Just on the revenue point.
Given that the corporate center in Q2 2017 was quite a large result, can we expect over the remainder of the year perhaps that the revenue growth starts to converge towards that 7% growth you've seen in global businesses? Thanks.
Yeah. Joe, on cost growth, you may recall that in the second half of last year, we started to phase in some investments that we were particularly focused on trying to get ahead of in terms of exactly the areas we're investing in for growth of the business now. That informed some of the higher costs in the second half of last year. As John mentioned a little bit earlier, we would expect costs in the second half of this year to be broadly consistent. Ex the bank levy, I should say, broadly consistent with what we've seen in the first half. Again, that would be consistent with what we talked about back in May for the first quarter results. The cost discipline within the firm is enormously important in terms of informing achieving positive jaws by the end of the year.
We do have good revenue momentum and balance sheet build coming through the first half and taking it into the second half of the year. In terms of the corporate center, one of the key features of the corporate center in the second quarter of last year was valuation differences coming through the holding company debt and hedging derivatives on that position. That was actually a reflection of a movement of almost exactly the opposite direction in the fourth quarter of the previous year. What we do see is some volatility within the overall funding position. As we hold those bonds generally to maturity, we'd expect that to come back to zero. It is very much around a valuation difference as opposed to a fundamental economic driver or cash driver within the business. From a Balance Sheet Management perspective, the guidance remains very much consistent.
When we think about what's in the corporate center, we've got our Balance Sheet Management, corporate treasury decisions sitting there. We've got our investments in associates, principally BoCom and Saudi British Bank. That's certainly what makes up the lion's share of risk-weighted assets and capital sitting within the corporate center. Revenue generators, Balance Sheet Management. We've got interest expense and holding company debt and MREL, again, we've guided to that being broadly consistent second half over first half. We continue to run down legacy in a capital accretive fashion, notwithstanding some losses in card and disposals in the first half of this year. We're down to a very small number of RWAs now. We're down to about $6 billion of RWAs around legacy credit now in corporate center.
Yes, we would expect corporate center to be more neutral in the second half of the year, allowing for some possible volatility in those valuation differences in holding company debt and derivatives.
Okay, thanks Iain. That's helpful.
Thanks, Joe.
Thank you.
Thank you very much. Once again, ladies and gentlemen, to ask a question today, please press star then one on your telephone keypad. The next question today comes from the line of Raul Sinha from JP Morgan. Please go ahead.
Hi. Thanks for taking my questions. I was wondering if I can have two please. Maybe one just to follow up Iain, on the liquidity point. If I look at the liquidity coverage ratio at the group level I think you disclosed that Q1, it was 157.5%, and Q2 has actually not moved much. It's 158%. Is that right? I guess that probably implies you built up liquidity towards the end of the first quarter. Is that the reason why you've seen some pressure on the margin? Should we expect that to go lower in the second half of the year? That's the first one.
Yes, from a liquidity coverage ratio perspective, I think overall broad consistency, we have seen a deployment of more of our funding surplus into building the balance sheet. I think that's probably most of it, most notably within the Asian market and within Hong Kong. We've seen very strong competition for particularly US dollar deposits within the Hong Kong marketplace, and that certainly is beginning to influence deposit pricing in that marketplace. But broadly, the dynamics around net interest margin generation remain very consistent in Asia, with the deposit base beginning to continue to show progress in terms of how it contributes to net interest income and net interest margin. As I mentioned earlier, some stability begins up here from a pricing perspective for assets in that regard.
The key feature in terms of LCR, and it's virtually negligible at group level, but from an LCR and NSFR level, the areas in which we purposefully made movements in the first half, and most notably the second quarter, was to ensure that we had the non-ring-fenced bank, or as known as HBEU, in the right position for the non-ring-fenced bank, or rather the ring-fenced bank creation in the 1st of January, 1st of July rather, which is derivative of the non-ring-fenced bank.
Is that why the rate sensitivity also seems to have come down a little bit in the U.S. dollar block, especially?
Yeah. Some of the features there again is we are seeing higher competition for U.S. dollar deposits, and that is certainly informing pricing in a number of markets. What we also see, and I mentioned this earlier, is absolutely more of that surplus being deployed into assets with our customers. The other feature that we're seeing is with the increasing interest rate environment, we're beginning to see a switch, some of us switch away from demand deposits into time deposits. Again, that obviously influences overall net interest income and net interest margin. As we would absolutely expect as this rate cycle continues to develop, with customer behavior is beginning to change, informed by higher rates, informing where they place their money, in terms of positioning within our balance sheet and these factors coming together are informing progression in net interest margin.
We would expect to continue to see that progress as John mentioned. Hopefully that provides some clarity around the dynamics that are informing this. Okay.
Thanks so much. Could I have one on capital, or should I come back?
Absolutely. Go ahead, Raul.
On the capital, I can see there's a 20 basis point negative impact from the FX translation move. I'm guessing that's basically sterling. I was wondering if you were planning to do something to hedge yourself as we head towards a possible cliff edge around Brexit. Can you actually hedge your capital volatility for the Q1 ratio?
Indeed, we can. From a structural perspective, one of very few set of currencies that we do hedge structurally is U.K. sterling. We do have a number of hedges in position there. We continue to revisit that on a regular basis based on how the balance sheet is positioned. It is partial. In terms of hedging out the position fully, we just continue to reflect on that. We've got a partial hedge in place at this point in time.
Okay. Thank you very much.
Thank you.
Thank you very much. The next question today comes from the line of Manus Costello from Autonomous. Please go ahead.
Good morning. I had a couple of questions, please. The first one was on RWAs, where again, they've grown by much less than the group assets over the first half. In particular in GB&M, your RWAs are down 4%, but the assets are up 10%, I think because of some model changes. My question is, are there any model changes to come over the next few quarters? Are you concerned at all about how aggressive that risk density in GB&M is becoming? My second question is on BoCom. I just wanted to ask whether or not you thought the BoCom capital issuance in the second half of this year, expected in the second half of this year, will have any impact on your value in use, because that gap between carrying value and VIU is pretty tight again.
On RWA, within the second quarter, we had $8 billion of approvals by the PRA models, which contributed to some of the reduction in RWAs within Global Banking and Markets. Coming out of 2017, we had a total of some $20 billion of opportunity for reductions in RWAs from model improvements pending approval by the PRA. We received $8 billion of that in the first half, specifically the second quarter of this year. Therefore, by definition, we've got some $12 billion still pending approval. In terms of the opportunity to improve RWA through models specifically, we've made a lot of progress in this over the course of the last 3 years. The opportunity for model improvements, although not negligible, is a much less significant component of overall improvement to capital efficiency within the Global Banking and Markets business.
What you will clearly have witnessed over the course of the last couple of years, the business has made significant progress improving capital efficiency. A lot's informed by the nature of managing the overall exposure to customers on a customer-by-customer basis, improving returns. Again, you see the overall return on capital equity for the Global Banking and Markets business continues to progress. We see that at, I think about 12.4% in the first half or the second quarter of 2018. The business continues to be very sharply focused on capital efficiency. In terms of how much of that will come from model improvements going forward, it will be of lesser influence overall.
I think that if you think about the risks to RWA intensity within the Global Banking and Markets business, it almost certainly is informed, 1, by credit development as the cycle continues to work its way through. As you can see, we continue to have very low expected credit losses, and the outlook remains fairly stable for the time being. The other area is regulatory change. Fundamental Review of the Trading Book as a component of Basel IV. Again, that would seem to be still some time into the future, notwithstanding the fact that we keep a pretty close eye on that. Manus, from a BoCom perspective, the impact of their fundraise, which is a convertible bond. The extent to which that would have any effect on the overall capital position or the shareholding of HSBC would only be in conversion of that bond into equity.
The extent to which that would dilute HSBC would be minimal, and to the extent it diluted, then our equity accounting will simply account for a lower percentage of ownership in BoCom as we presently do, which is at 19.03%. Then if you like, the mathematics of our equity share flows through, obviously market valuation, value in use, carrying value in the balance sheet. The aspect of that per se, and only upon conversion, I think is unlikely to be a significant feature of the accounting for BoCom. The valuation in terms of valuation use over carrying value expanded very slightly in the second quarter.
As we've talked about in the past, this is something that is valued and revalued on a quarterly basis based on input from the markets, input from our colleagues at BoCom, and subject to a pretty good scrubbing from both our internal teams and our auditors.
Manus, it's John. Can I just pick up just on one thing? I don't recognize the word aggression in the way that we do our capital planning and our capital management. I certainly think for GB&M, we've been very focused on just becoming more efficient. We've been embedding Return on Tangible Equity methodologies across the group. GB&M two or three years ago was quite challenged from a returns perspective, as you well remember. I think the business has been very disciplined about extracting capital from low returning portfolios and low returning segments. I think efficiency is the right word. I don't recognize aggression. I think from a regulatory perspective, the regulators are very diligent around everything we do here. I think efficiency is the right way to think about this.
Okay. Thank you.
Thanks.
Thank you very much.
Thank you very much. The next question today comes from the line of Guy Stebbings from Exane. Please go ahead.
Morning. Just wanted to circle back on impairments, a couple of questions. The 30 to 40 basis points, including the RoTE guidance. I'm interested to get your view on when you expect this to increase. Appreciate that's very difficult, but any color would be helpful. I seem to remember you suggesting earlier in the year you're prepared to take a little more risk and grow a little more in unsecured in some markets, so how that might fit in. Secondly, just on your comments on U.K. impairments, just to be clear, are you seeing anything here that you weren't expecting? Given your book is really quite primed, does that worry you about the broader market at all? Thanks.
The U.K. answer is the easiest one. No, we're not seeing anything at this point. I think everybody would expect us, given the degree of uncertainty that faces U.K. economy at the moment is informed by the Brexit discussion, is it just merits appropriate diligence across the portfolios. In terms of overall performance, it remains very stable. I think everybody's well aware of those sectors which may be most exposed. At this point in time, there's really nothing emerging of concern. In terms of when we'll see higher credit costs, I hate to say this, but your guess is as good as mine.
From a prudence perspective, in terms of forward planning and recognizing the goal of achieving and delivering a return on capital equity of greater than 11%, the plan that we built, it was the basis of the update to the market the June quarter and the month of June, was informed by a higher expected credit loss coming through over the cycle, that is informed by something in the range of 30, 40 basis points. When that might emerge, I'm afraid I can't help you.
Okay. Fair enough. Thanks.
Thank you, Guy. Okay. I think we're now heading towards our last question for the moment.
Thank you very much. The final question today comes from the line of David Lock from Deutsche Bank. Please go ahead.
Morning. I've got two, please. First one is on trade wars. Just wondered if you'd seen any change in behavior from your Asia corporate client base heading into the second half of this year, and if there perhaps been any pull forward of any activity or loan growth before the tariff implementation, which perhaps could lead to lower loan growth in the third quarter. The second question is whether the BSM guidance of $2.3 billion-$2.5 billion, does that still stand? I saw that BSM was a bit stronger in the second quarter. Thank you.
Thanks, David. On trade wars, I think it's fair to say that we haven't yet seen any meaningful impact on our customer base, either in terms of activity or in terms of risk profile. Too early, I think, to know whether there will be an impact. As we think about the trade wars, I think from my perspective, I'm more concerned about the trade rhetoric damaging investor confidence, investor sentiment, and sending markets lower. I think that could have more of an impact on things like our wealth business. From a trade perspective to date, there's been no impact and no customer impact. With respect to balance sheet management, no change in the guidance. 2Q was a good quarter. No change in the guidance that we previously offered for the full year.
Thank you. Just coming back on the first question there. You haven't seen a spike in activity around people perhaps positioning themselves just out of conservatism going into the second half of the year. There hasn't been any activity like that in the second quarter?
No, not that I'm aware of.
Thank you.
Sorry, we do have one more question, if that's okay. [inaudible].
Thank you. The next question comes from the line of Claire Kane from Credit Suisse. Please go ahead.
Good morning. Just a quick follow-up please on the cost. Just to clarify, you're still expecting cost extra levy to be stable half on half. That would imply about GBP 33.3 billion for the full year, including the levy, which is down a bit from the guidance at Q1, GBP 33.7 billion. Just to clarify that. Then just with that, given the number of these volatile revenue items included in your adjusted Jaws definition, how comfortable are you that you may miss these targets given the number of volatile items that are somewhat out of your control? Do you think you've got enough in there if you continue at this runway on those volatile items? Thanks.
Yeah, Claire, thank you. Let me respond to the second part of the question first. It's a good question. Based on the plans we've got now, we are confident that we'll get to full-year Jaws. There are a couple of items in there that are non-economic. For example, the valuation stuff. If we get to November and we have some big valuation swings, am I going to start to pull cost levers that would damage the franchise of the group over the remaining two months of the year? No, I wouldn't do that. I will always preserve the health of the organization over and above some accounting noise. For the rest of the real costs, the real costs that are economic to shareholders, it is our intention to hit the full year positive Jaws targets. The valuation stuff, as you say, is impossible to predict.
Given that it's non-economic to shareholders, I don't want to be making management decisions based on something where actually it's not that significant.
Just the first part of your question reflected or related to the numbers, Iain, do you want to comment on the
Yeah, absolutely. I mean, the currency movements take the fourth number down a little bit, but broadly speaking, Claire, the mathematics that we set out are in the right ballpark, right? The guidance around operating expenses for the remainder of the year remain consistent with what we said back in May and reiterate today. We would expect the second half of the year ex the bank levy to be broadly in line with the work of the first half of the year.
Great. Thank you. That's very clear.
Great. Thanks, Claire.
Thank you.
Okay. Well, that concludes today's call, everybody. Thank you very much for being up so early to be with us today. Those of you yet to celebrate the summer, have a wonderful summer. Thank you.
Thank you, ladies and gentlemen. That concludes the call for HSBC Holdings plc interim results 2018. You may now disconnect.