Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference Call for HSBC Holdings Plc's Earnings Release for Q1 2018. For your information, this conference is being recorded. At this time, I will hand the call over to your host, Mr. John Flint, Group Chief Executive.
Thank you, and good morning from London. Good afternoon to everyone in Hong Kong, and welcome to our Q1 results call. I'll pass you over to Ian shortly, but let me begin by saying We've had a promising start to the year. Our global businesses have maintained their momentum, winning new business and continuing to benefit from interest rate rises and economic growth, particularly in Asia. We see plenty of opportunities to grow the business in the year ahead and we're investing to capture that growth.
We continue to manage the business to achieve full year positive jaws. And with that,
I'll hand over to Ian
to take the rest of the call before we go into
Thanks, John. Adjusted revenue of $13,900,000,000 was up 3% on last year's Q1. Retail Banking and Wealth Management and Commercial Banking had very good quarters with both benefiting from wider deposit spreads and increased balances. Global Banking and Markets adjusted revenue was stable as growth in Transaction Banking and Equities bounced the impact of reduced client activity in our fixed income businesses. Global Private Banking revenue was up on last year's Q1 due to increased client activity and the impact of wider spreads.
We continue to grow lending in the quarter, particularly in Commercial Banking in Hong Kong and the UK and in UK mortgages. Our adjusted costs were 8% higher than last year's Q1 as we invested to capture and support market share growth in our home markets and across our network and to improve our technology platforms and digitization programs. As a consequence, adjusted profit before tax of $6,000,000,000 was down by 3%. As John said, we're committed to achieving positive jaws for the full year. Our common equity Tier 1 ratio was unchanged from the year end at 14.5%.
And we have this morning announced that we intend to initiate a share buyback of up to $2,000,000,000 which we expect to commence shortly. In light of the growth opportunities that we currently see, we expect this to be the only share buyback that we announced in 2018. Looking quickly at some key metrics for the Q1, the reported return on average ordinary shareholders' equity was 7.5%, Reported return on average tangible equity was 8.4% and we had a tangible net asset value per ordinary share of $7.29 up $0.21 on last year's Q1. Slide 3 provides detail on the items that take us from reported to adjusted. The major significant items were legal provisions related to U.
S. Mortgage securitization. You'll find more details of these adjustments in the appendix and the remainder of the presentation focuses on adjusted numbers. Slide 4 breaks down adjusted profit before tax by global business and geography. Profits rose in 3 out of 4 global businesses and 3 out of 5 regions.
Asia profit before tax continued to grow strongly, driven by excellent performances from Retail Banking and Wealth Management and Commercial Banking. The fall in unit profit before tax was caused by a combination of reduced revenue in Global Banking and Markets and higher investment costs in Retail Banking and Wealth Management. Slide 5 shows the positive revenue trends in our global businesses. 1st quarter revenue from our 4 global businesses was $854,000,000 or 6% higher than last year's Q1. I'll go through each business in more detail over the next few slides.
Slide 6 looks at retail banking and wealth management revenue which grew by $456,000,000 or 9% compared with the same period last year. Higher balances and higher interest rates drove a $347,000,000 increase in deposit revenues, particularly in Hong Kong, the U. S. And Mexico. Income from investment distribution increased by $223,000,000 reflecting higher sales of retail securities and mutual funds, mainly in Hong Kong.
We continue to grow both loans and deposits quarter on quarter and year on year. Customer lending rose by 8% and customer counts increased by 4% compared with the same period last year. As Slide 7 shows, Commercial Banking revenue grew by 347 dollars or 10%. Global Liquidity and Cash Management had another outstanding quarter with a new business mandates and further growing balances. This and the impact of wider spreads in Hong Kong and Mainland China helped global liquidity and cash management grow revenue by 17%.
Credit and lending revenue grew by 4% due to balance sheet growth in the UK and Hong Kong. Commercial Banking grew lending by 3% since the year end and by 8% compared with the same period last year, mainly in Hong Kong and the UK. Global Banking Markets revenue was stable compared with last year's strong Q1. We saw positive momentum in the majority of business lines, including double digit percentage revenue growth in both Global Liquidity and Cash Management and Security Services. Global Banking revenue also grew by 6% driven by higher lending and higher recoveries on restructured facilities.
Within global markets, foreign exchange and equities performed well increased market volatility in the quarter. Rates and credit were impacted by lower client activity and a difficult trading environment particularly in Europe. The drop in net revenue in these business lines was also relative to a strong Q1 of 2017. Global Private Banking revenue grew by $45,000,000 or 10% compared with last year's Q1. We grew client assets in Global Private Banking for the 5th consecutive quarter.
Someone has left the conference.
And attracted positive inflows of $5,300,000,000 in our target markets. Corporate Centre revenue fell by $515,000,000 compared with the Q1 of 2017. This was mainly due to a $262,000,000 reduction in balance sheet management revenue, Reflecting repositioning in 2017 in anticipation of higher policy rates, lower investment yields and lower portfolio gains and $176,000,000 loss arising from swap mark to market movements on a bond reclassification. Slide 7 shows net interest margin. Net interest income of $7,500,000,000 was $369,000,000 Higher than last year's Q1 and broadly unchanged from the Q4.
Our net interest margin for the Q1 was 1.67%, 4 basis points higher than for 2017. The yield in total interest earning assets rose by 18 basis points, While the cost of interest bearing liabilities rose by 14 basis points, competition for good quality lending remains strong balanced by higher yields and surplus liquidity. There is more detailed information on net interest margin in the appendix. Slide 12 looks at expected credit losses and loan impairment charges. The credit environment remains stable in retail and wholesale sectors across The network adjusted expected credit losses of $170,000,000 related mainly to unsecured lending in retail banking and wealth management.
IFRS nine is obviously a new standard that the industry is adapting to and we expect some more we expect more volatility between quarters than we have seen in the past. Our expected credit losses in the Q1 were unusually low, so shouldn't be taken as an indicator for the rest of the year. Slide 13 looks at operating expenses, which were $624,000,000 or 8% higher than the same period Q1. You'll recall that we spent $3,000,000,000 in our cost to achieve program last year, which were included in our reported results as a significant item. Around $900,000,000 of these costs occurred in the 1st last quarter last year's Q1.
That program ended last December. We are continuing to invest to support growth, which is reflected in progress on revenues. In the Q1, this meant investing to capture and support market share growth in our markets and across our network and to improve our technology platforms and further advance our digitization programs. Investments in tech programs and digital programs focused on improving customer experience while also improving business efficiency. In Retail Banking and Wealth Management, we're investing to grow market share in the UK mortgages by expanding our intermediary channel to more than 30 brokers covering 75% of the market.
We're also investing in our cards businesses in Mainland China and in the United States. In Global Banking and Markets, we made a number of strategic hires in our securities joint venture in Mainland China and across our businesses in Global Markets. In Commercial Banking, we are hiring more relationship managers to win new business in Hong Kong and in the Mainland China and updating HSBC Net trade transaction tracker and our WeChat platform to improve the customer experience. While our CTA program has ended, We continue to see the benefit of additional savings, which totaled around $400,000,000 in the quarter. We expect full year operating expenses excluding the bank levy to be broadly in line with our 1Q annualized costs subject to achieving full year positive jaws.
Turning to capital, the Group's common equity Tier 1 ratio on 31st March was unchanged from year end at 14.5%. Our common equity Tier 1 capital increased by $3,500,000,000 in the quarter, which included $1,900,000,000 of favorable foreign currency translation differences and $1,200,000,000 related to the day 1 impact of IFRS 9. Slide 15 shows our group return metrics. The return on average ordinary shareholders' equity was 7.5% and the return on tangible shareholders' equity was 8.4%. Our return on tangible equity excluding significant items on the bank levy was 11.6%.
Our 4 main global businesses each achieved returns on tangible equity well above the group's cost of equity. I'll now hand back to John.
Ian, thank you. So in summary, we had a promising start to the year. Our strong capital and liquidity and robust balance sheet continue to support strong revenue growth from retail and corporate customers across our network. They've also enabled us to announce a further share buyback of up to $2,000,000,000 We're investing to grow revenue further and improve our digital capabilities, while maintaining our cost discipline. We continue to focus on improving the returns of the group and our commitment to positive jaws for the full year remains unchanged.
We will update you on our strategy either at or before our
half year results in August,
and we shall now take questions. The operator will explain the procedure and introduce The first question. Operator?
Thank you, Mr. Please ensure that the mute function on your telephone is switched off. We will now take our first question today from Manus Costello of Autonomous. Please go ahead.
Good morning, everybody. Thank you very much. I had A couple of questions about IFRS 9, please. Thank you for the disclosure you've given us here, both on your Fully loaded core Tier 1 ratio and all the detail on the stage of the assets that you've got. Not all your peers have been quite as forthcoming on all of that.
My questions are, if I look at your coverage ratios on your Stage 3 assets, they actually look like they've come down during the course of this quarter. So I wondered if you could comment on what was going on there, please, because it seems unusual to see such a low provision charge when coverage is coming down like that And what drove that? And secondly, more strategically, it's becoming very good and becoming very difficult for us to forecast provisions Under IFRS 9, it would seem. So does that impact your thinking about capital buffers for the next couple of years, please?
Mads, thanks for those questions. So I think as it relates to Stage 3, I think this is going to be an overall comment about How we learn our way through the adoption of IFRS 9. There is really nothing of particular note within the overall coverage ratios As it relates to Stage 3, but I think the one thing that I would point to is really one of the aspects of prudent underwriting within HSBC, which is the overall Value of collateral that we hold against those exposures being at fairly elevated levels. But I think The ratio
went out, didn't they?
Yes, beyond frankly just the adoption of IFRS 9 and working through what the models PLC. Again, this is a largely model driven approach to generating expected credit loss data. There is really nothing of particular note Coming through from an IFRS 9 perspective in the quarter. On your top of your point of forecasting, I think overall The topic of forecasting under an expected credit loss outlook is going to require a degree of sophistication, which perhaps goes beyond that The industry presently holds particularly when we start seeing particularly adverse developments in particular Sectors of the economy are areas in the network from a credit performance perspective. In terms of does it really influence what we think about capital, That I think will be informed by how our regulators respond in terms of their thinking about capital.
Now clearly one of the things that the prudential regulation authority is doing this year within the stress test Is a stress scenario very, very similar to that of last year, but obviously incorporating IFRS 9 With the intention to immunize IFRS 9 in the results of that. So I think that may give us Some indication at least as to how the prudential regulation authority is thinking about this. But as you know there is a piece of work of food With the Basel Committee not advancing at any particular pace at this point in time in terms of thinking not just about The transition to IFRS 9 at the point of transition and you obviously see the effect of those transition mechanisms on our numbers this quarter, but also From a quarter to quarter perspective as we see changes in the credit cycle how one manages that volatility. But look it's We sit with a very strong common equity Tier 1 position. When you look at how we respond to stress test as a whole, The business remains very resilient through what are in most instances pretty severe stresses that are set for us by the regulators.
But look this is an area which we're going to remain very focused on. But I wish I could, but I don't think we can give you much more than other than Diligence and attention to this and continuing to work with the regulators as we go through learning about how IFRS 9 impacts the numbers.
Thank you very
much. Thank you.
Our next question today comes from the line of Jason Napier from UBS. Please ask your question.
Good morning. If I may add 3 simple ones. The first is The cost guidance of sort of equal run rates for what remains plus levy looks like around 5% kind of consistent FX Growth and positive jaws, whether that's 1% or 2% maybe of some interest. But I'm just interested perhaps as a question for John, whether You see the cost inflation for this year is including an unusually high level of investment or whether that's the Sort of organic cost growth that one ought to expect from the business. Secondly, The margin, it's good to see it expanding in the Q1 and loan growth looks solid.
I just wonder whether you might give us a comment on The extent to which margins in Hong Kong might continue to expand, we're seeing reports of more aggression in the deposit market in particular. You could give us some color on that. And then thirdly, GB and M in the fixed space, I appreciate the base was fairly strong And then it's up quarter on quarter. I just wondered, is there anything to flag in Q1, which was sort of overtly Negative, if you like, which might have gotten better in the second quarter. Is there anything unusually weak that you think you might do better on as the year goes by?
Just thinking about whether the implication of positive jaws is that you effectively need flat revenues for the next three quarters, whether GB and M can contribute to that in a
Thanks, Jason. If I cover net interest margin and your question on fixed And John can follow-up on your question around cost and positive jaws. In terms of net interest margin, obviously, we're encouraged by the progress that we saw in the Q1. Interestingly, The characteristics that we saw in the Q1 are boldly informed by what we how we guided at the end of the year where we saw A continued improvement in terms of liability revenue generation or revenue generation of the liability base of the firm If you like in terms of how rates are impacting that side of the balance sheet. We continue to see a pretty competitive environment for asset pricing across the network.
There may be some early signals in Hong Kong that Some of that competition is beginning to ease a little bit and if that proves to be the case over the coming quarters that would certainly be very encouraging to see some expansion both from an asset and liability perspective. And then the third feature, which again I think will be very consistent with the guidance we provided the full year Is just some slightly higher costs coming through from issuances of regulatory instruments namely MREL or TLAC. So I think overall in terms of NIM the guidance that we provided the full year probably holds pretty good. I think It would be very encouraging if in fact we actually did see slightly less robust competition for asset pricing In the Asian market, it'd be great if we saw it everywhere actually, but if there are green shoots in Asia, we'll take that. From a Global Banking and Markets perspective, you'll recall we did have a very strong Q1 in 2017.
But looking at Gold Bank and Markets as a whole, it generated return on tangible equity in the Q1 11.9% And underpinning that notwithstanding some weakness in fixed income, we saw good progress in Foreign exchange where revenues advanced 13% over the same period last year equities we saw good progress global banking overall we saw good Progress with advances in debt capital markets and equity capital markets as well as good progress in global accretive cash management and security services. So You look at this business over the longer term, you see a diversified range of revenue streams very much focused on Supporting customers activity and fairly low volatility. I think what you see in fixed income is not unusual in terms of what you see in fixed income in HSBC When you have the sort of trading conditions that we experienced in February March, but overall, We're pretty happy with where Golar Bank and Markets came out for the Q1. John?
Ian, thanks. And this is Jason. Thanks for the question On costs, I mean just probably 2 broad comments to make. When we were operating in an environment of low or no revenue growth, We used the CTA program to generate the capacity to invest in
the business. So last year,
we spent $3,000,000,000 It was in the reported numbers and $900,000,000 in the Q1 and those numbers for this year will be 0 because that CTA program is gone. We're reasonably comfortable this year that we can generate the capacity to grow the business and to make the investments we need to improve Either from a cost or a revenue perspective of the business within a positive jaws constraint. Now that we've got a rising rate environment and rates are a Tailwind as opposed to a headwind, our outlook suggests that we can generate the So I think for the rest of this year just keep that construct in mind. Revenue outlook As long as that remains good, our capacity to sustain this cost of investment I think Remains really solid. Whether we think about changing our targets, that's something that's part of the strategy that we view that We'll come to later in the year.
But for now, positive jaws because the revenue outlook changed, I think is the right discipline for us.
Thanks very much.
Our next question today comes from the line of Raul Sinha from JPMorgan. Your line is open.
Hi, morning everybody. If I can follow-up on the costs and then just another one on the buyback. John, if I can just Perhaps draw a little bit further in terms of the costs and ask you how much of the sort of increase in costs is actually directly linked To revenue initiatives across the bank. And related to that, I was just wondering what your thoughts are on operating leverage and the need to deliver operating leverage at HSBC, because if I take a look at the shape of The growth in revenues against costs, that implies that even if you do deliver positive operating leverage of, let's say, 1% in terms of jaws, you would be exposed to a pickup in impairment, which would from these high low levels, which would Obviously offset a lot of the hard work that you're doing in terms of growing revenues. So I guess the question really is, Should we think about the investment as sort of linked to the fact that your impairment outlook is quite benign and that is allowing you to invest?
And as, let's say, the impairment outlook turns, you would actually look to reduce some of the cost investment You would actually look to reduce some of the cost investment that you're putting in.
Yes, Raul, thanks very much for that question. Look, as we look at jaws, first of all, expected credit losses and impairments just simply don't figure as part of that calculation. And our focus is in terms of making those investments as John said that help us grow revenue or improve the overall productivity and efficiency through the cost base of And the guidance absolutely is to generate a positive jaws for the full year 2018. In terms of where we look at that from a revenue opportunity perspective notwithstanding the tailwinds that we've seen from interest rates Policy adjustment, we're also seeing improving volumes coming through. You can see that in terms of balance sheet growth, which again Looking at it simply quarter from the Q4 to Q1 was good progress across our businesses, Typified really by strength coming through Hong Kong and Asia as well as from the United Kingdom just because those are the big numbers that come through.
But also that's been done in a highly consistent underwriting and risk appetite. So there are not adjustments being made to risk appetite that pushes Further up the risk curve either as it relates to mortgages or unsecured retail banking credits for example or within the wholesale sector. So this is really very much about looking at the revenue outlook, continuing to build on the investments that we've done over the last couple of years to improve the interaction with the customer, the efficiency and effectiveness and stability of the technology platforms, improving digitization capabilities And with a particular focus in that area in retail banking, wealth management, commercial banking, but also in some of the platforms within Global Banking and Markets. And to John's point, as the revenue environment supports that governed absolutely by a commitment to positive jaws for the full year 2018, We'll continue to make the investments necessary to support the growth in the firm for the long term.
Okay. And then just Secondly, on the buyback, I was just wondering if you could share any thoughts on sort of the magnitude and the decision making kind of what led you to think that Is it the take up of the script, which was obviously quite low this time around? Did that influence your thinking around the buyback size?
Not really, Raul. The thinking around this is, it goes back to what we've talked about how we deploy our capital Over the course of many quarters, our focus is on growing the business for the long term and supporting that organic growth Through the strength of the capital base and the capital generation quarter over quarter, we generated strong capital again in the Q1, we equally Supported organic growth over the Q1 and that informed by also a strong common equity Tier 1 ratio as we exit the quarter Informed the buyback, the scale of the buyback is informed about the scale of the opportunity to continue to grow the business organically. And as we've always said, our focus is on the organic growth of the business and deploying our capital to do so. And when the opportunity was either less attractive or unavailable to us that we would then consider buyback. What we are seeing in the outlook for us at the moment encouraged Our view that one we can support the growth through the capital base but we can also support some degree of buyback in 2018 and that's really what we're Signalling you today as we announced that GBP 2,000,000,000 buyback.
Okay. Thanks very much.
Thank you,
Our next question today comes from the line of Joseph Dickerson from Jefferies. Please go ahead.
Hi, good morning. Most of my questions around cost have been answered. But I The key question I have is really what to what degree is your cost base flexible? Because it seems to me like if you're going to deliver an ROE, certainly a reported ROTE that has 1 in front of it and it's double digits. You'll need to do better than 1% to 2% cost jaws in some year in the next 3 years.
So what degree of flexibility is there or is the opportunity on the revenue side? Because it seems at the moment that a lot of your investments actually aren't Discretionary because you have to do it to generate the balance sheet growth and the revenue growth. So if you could elaborate on That would be incredibly helpful. Thank you.
The way we look broadly at the cost base is we break it down into 2 2 or 3 high level components. 1 is we call 1 the bank, which is basically showing up switching on the lights and getting to work in the morning and the second is change the bank, which is about investing For the future, whether it's in product development, the overall capabilities of our colleagues that are working in the firm or the technology platforms that we're all facing on. And within that cost base this quarter compared to last quarter for example, our run the bank costs are actually marginally lower. So we continue to Focus on the cost discipline overall in terms of managing costs within 1 the bank and generating productivity within that cost base. Part Part of that productivity obviously comes from some of the investment we make in people and technology, but it also just comes from that basic discipline around managing the cost base.
Where we've seen the increase in costs coming through this quarter has been within the change the bank environment, which has been orientated around investments in Continue to grow the market presence that we've got in Paribas Delta and Mainland China with a particular focus in retail banking, wealth management and commercial banking. We continue to invest in the development of the Qinghai Securities Venture, our majority owned securities venture in Mainland China. We continue to invest in digital programs again largely focused in the Hong Kong PRD and the UK market to improve The interface and the efficiency of the relationship with the customer and significant investment around developing and further improving the interface with our commercial banking To HSBC Net, you absolutely could view those investments as discretionary, where we're in a revenue environment that was less supportive, The discipline that we would apply to really anything from an investment perspective that we view as discretionary Would be different and frankly that's really the commitment to positive jaws. If the revenue environment continues to support The level of investment that we see then we would continue to invest if the revenue environment were to suggest something different emerging in the future then we would adjust our cost discipline Accordingly.
Ian, sorry, with all due respect, don't you need to make those investments to keep up with a lot of the competitors in the mainland market?
Yes, to prioritization, this is not about opening up the jar and spreading peanut butter everywhere. This is very much about prioritization Of where we see the most attractive competitive opportunity for HSBC.
Yes. And Joseph, can I just add on the coming back to your question around flexibility and then How do we get towards the 10%? I think for us to get to a 10% ROE, we're going to have to grow the business. I think it's very difficult to get there just by shrinking the cost base. And if we were to do that, if you if you if you if you if you if you if you if you if you if you if we would do that, we're effectively back into a CTA environment where we're going to have to come to investors to say we need to invest again to take more of the cost base out.
The outlook we've got, what we can see in front of us in terms of the opportunities and certainly a slightly different rate environment, we've got the opportunity to get HSBC growing again. And it's worth remembering that the balance sheet is roughly the same size now that it was 10 years ago. The customer base is actually a lot smaller than it was 10 years ago For all the reasons that everybody understands, I do think we've got an opportunity now. We see an opportunity to try and get To try and get parts of the group certainly growing again. And the revenue environment as we see it gives us the capacity to invest in it.
But to come back to your original point, the flexibility of the cost base, there are limits to it. There are certainly limits to it, which is why we want to invest In the capacity to grow now so that we don't miss these opportunities.
Thank you. All sensible. Yes.
Great. Thanks, Ed.
Our next question today comes from the line of Magdalena Stoklosa from Morgan Stanley. Your line is open.
Thank you very much. I've got 2 questions. One is still on the NIM evolution and another one on the commercial banking. So Let me start with the Nimitz, broadly on deposits. And could you run Through your outlook of the deposit evolution kind of from here across the network, I suppose, in Asia in particular?
And what do you expect in terms of kind of growth in pricing, particularly for 2018? And I think that what would interest me also a lot is How do you perceive the balance of the impact of the higher rates versus the competitive pricing or competitive pricing pressures? And I suppose that would be both on deposits and on loans. And I'm very curious about your commentary on the Slide 7 of the presentation on the commercial banking. Because I think that for the first time in a long time, you're actually commenting on 2 things.
So wider spreads in the global kind of liquidity management, but also higher fees In global trade as well. For years, we talked about pricing pressures in broadly both of those businesses. Of course, volume growth, but still pricing pressures. And I was just wondering whether you see some of those trends turning. Thank you.
On trade, specifically, we've certainly seen stabilization In those trends in margin over the course of the last 2 or 3 quarters, I think it would be a slight overstatement to see that we see significant Expansion in margins in global trade volumes are improving and really overall pricing in global trade It is very much a function of the pricing of those volumes as opposed to the volumes themselves. But overall I think we would describe what we see in global trade and receivables financing In the round is stable. For structured products pricing tends to be more attractive and we are certainly shaping more of the business to be orientated towards structured products With respect to inventory financing for example in that particular area. But overall I think the outlook is certainly more positive Now than it has been both in terms of increasing volumes and slightly improving pricing across that space which is reflected in margin. From an interest margin perspective overall, I'm not sure there's a great deal more that we could add.
I mean one of the things That is very recent news is HSBC in Hong Kong was yesterday the 1st bank in probably the better part of the 8 years To increase the savings rate offered to our customers and we increased it by 10 basis points. That means the rate that you could get in savings In Hong Kong now it's gone from 0.0001 percent to 0.1%. It probably still isn't a massive Change, but I think it's a broad signaling of the fact that 1 in terms of doing exactly the right thing for customer in terms of sharing some of that Interest rate improvement in interest rate environment, then I think we need to lead the way in that regard, but also recognition that it is a competitive environment For deposits that we operate in not only in Hong Kong, but across a number of markets. But overall, we continue to sit with a very strong liquidity position in Hong Kong And across the Asian network and the wider network as a whole. I think in terms of asset pricing it remains a very competitive environment, but There are certainly early signals that perhaps things may be becoming a little bit more interesting for us in that regard In Asia, in terms of overall liquidity balances, I would not expect to see significant change over the Notwithstanding the fact that we continue to put more of that to work with our customers as has been evidenced both in the Q1 of last year and the second half of last year.
Thank you.
Thank you.
Our next question today comes from the line of Ronit Ghose of Citigroup. Please ask your question.
Great. Thank you. It's Ronald from Citi. I just have a few follow-up questions on the cost side, please. First of all, can you I mean, previous Ian, in previous earnings results, you've Given us some quantification of how big you think jaws can be, you're talking about positive jaws now.
Are you willing to give any quantification 1% to 1.5% or less or more for this year and for future years? That's my first My second question is, if I look at the cost evolution in normal years, And this has been alluded to in earlier questions. Normally you get a drift in the second quarter up to the 4th quarter in underlying costs. And I'm just wondering, You've run through in great detail what you're spending the extra money on in the deck and on this call. Is there any element of that that is particularly front loaded that you Call out now to give us comfort that the normal seasonality could be offset as we go through the year.
And the third question is more conceptual in cost and maybe one for John. I understand the discipline and the importance around jaws. Given the growth opportunities you've got in Asia and given particularly in retail in the PRD in Hong Kong, Both the combination of growth, but also competition and transformative competition, is it still relevant, do you think, For your Hong Kong, your PRD business, to talk about positive jaws or should you say we need positive jaws In the developed markets and in Asia we've got a couple of years where we just need to invest and go for growth.
In terms of quarterly trend, I think I revert to the response I gave earlier around how we view the cost base in terms of running the bank and Change the Bank Investing for Growth. And there is a very, very strong discipline around managing that run the bank costs to generate some cost productivity Year in, year out and then focusing on the change of the bank around prioritized investment against the opportunity for each investment to contribute towards improved returns Within the group. So the guidance that we're giving you today is that based on what we see and how we face investments, we would expect The cost profile for the firm over the remaining three quarters of the year to be broadly consistent with what we see in the Q1. We We're absolutely targeting a delivery of positive jaws. Ideally we would target that to be around the 1% mark, but positive jaws is Is what we're focused on and I think that again builds very much on John's comments here around taking the opportunity to invest on a prioritized basis against those areas where we see
the most Of course. Yes. And just to build on the spirit of your question, Laila, which I completely agree with. A question around Hong Kong and PRD, would a positive jaws constraint prevent us from taking advantage of the opportunities? Well, We're specifically trying not to allow it to be a constraint.
Polyde jewels are at the group level, the aggregate numbers. But within that, we are absolutely deploying resources into The PRD is absolutely negative jaws and has been since we started the investment. Hong Kong through periods and for certain initiatives and activities just the same. So your question Kind of comes back to the challenge of if you're going to pick a metric or you're going to pick a discipline that you're going to convey to The Street Positive jaws, a CR target, an absolute cost target. If you pick 1, there's always going to be some circumstances in which it doesn't quite fit Every circumstance for every environment.
The spirit of your question, I completely agree with. We won't we're going to try really hard not to stop ourselves from missing opportunities. But at the group level, given that we've got a favorable revenue environment and a favorable outlook, we're going to the discipline, I think, is really important for us to maintain Positive revenue growth and cost growth on a full year basis.
Great. Thanks for that. Can I just go back again to my first question? And I mean, I hear you, we don't want to get too tied down to Small places. But if we're going for around 1%, let's just say plus or minus, but around 1%, if I go back 6 months I think you were more confident about bigger jaws and obviously some of us on the sell side were even more optimistic and you've guided us down on that.
But I'm just wondering over the last 6 months, what do you think has particularly changed or 6 to 9 months in terms of why have the jaws Become smaller and smaller because the underlying revenues have been strong. So you're growing your group almost in line With some of the Asian bank revenue numbers I can see out of Singapore, for example, or even Hong Kong, so the underlying revenues are actually quite impressive. I'm just wondering where is this how How much of this incremental cost growth is just something that we're going to have to live with for the next 3 years? So a kind of 6%, 7%, maybe 7%, 8% underlying cross growth is a kind of new normal for you now.
No, not at all. I think we're going to I think it goes back to John's comments. We do not want to starve Opportunities for growth, not investing in those opportunities for growth, but we've also, John said, a very clear discipline around generating positive And that positive jaws for the firm progressively over time will continue to improve the overall cost efficiency of the firm and that is really The focus that we've got, to the extent that you observe any narrowing in the guidance around positive jaws, it's informed by exactly what John Just the opportunity to invest on a prioritized basis areas that represent attractive growth to Qualys at the moment, not just in terms of revenue, but in terms of what that means for the returns Overall against the equity that we deploy into these businesses.
Thank you.
Thank you. Thanks, Sona.
Our next question today comes from the line of Chris Manners from Barclays. Your line is open.
Good morning, everyone. It's Chris from Barclays here. Just sort of a couple of questions, If I may, both from the UK actually. So the first one was just about your mortgage volume growth. And you've sort of been growing about €2,000,000,000 a quarter over the last couple of quarters seems to slow down in Q1.
Could you maybe just give us a little bit of an update there on how you think about Pricing discipline in that market and about your growth rate. We've had some competitors You've been pretty aggressive on pricing and just wondering how sustainable that is. And second question was Just on deposit beta. So fair enough, it looks like we're not going to get a rate hike in the U. K.
In May, but the curve is still pricing something over the next sort of year or 2. Given how much liquidity you've got sort of trapped in your ring fenced bank, How much do you think you would be passing through to customers if we do get a rate hike? Is that going to be a source of NIM expansion for you? So If that comes through, what are you going to sort of move with the pack? Thanks.
I don't think we initially want Predict how we're going to respond to any changes that we see in the Bank of England rate over the coming quarters, Certainly not until you get much more proximate to that and what sort of market conditions exist in that environment. I think the competition in the UK both for Assets and deposits is pretty hot at the moment. I think you can see that in some of the pricing across the market on both sides of the balance sheet. Going to UK mortgages specifically, Chris, we have grown our market share in terms of looking at the stock of market share. Our share of market at the end of 2016 was 5.9%.
Our share of market at the end of 2017 was 6.1% And at the end of 1Q, it's 6.2%. We are growing into this market in a very measured way, I think. Our risk Appetite remains very consistent. The underwriting standards reflect absolutely the pricing That is in the marketplace. So where those very attractively priced products are out there, they tend to be very closely related to Fairly robust collateral requirements and booking fee requirements and affordability requirements of the customers That are able to access those offers.
It is a competitive market. I think the most significant feature in terms of HSBC Precision is how we've expanded Our access to the intermediaries, if you went back 3 years, we really were not in that space at all. At the end of last year, we had about 23 brokers that gave us access to about 65% of the intermediary market. And over the 1st few months of the year, we've added About another 7 in the intermediary space that probably now gives us a view to about 75% of the intermediary market. So we are seeing more of the market and more of the market that fits our underwriting appetite.
So we have not moved down Or up the risk curve if you like in terms of how we grow market share, but as you also observed from the data that I shared with you, we're growing into this space In a very measured fashion. And if
I could just add one thing, just a reminder, Chris. When it comes to Rates going back up and the kind of the competitive market and whether or not we choose to respond. One of the advantages we have in many of the balance sheet is because our AD ratio is so low, we've got pricing power effectively. We can choose, we can choose, I think we think it's the right thing to lag the market. The ring fenced bank When it's created, we'll have a very significant funding surplus.
That partly informs the mortgage strategy, but it also means that we have a bit of latitude, perhaps more than Some others, when it comes to how we respond to rates going up and deposit pricing.
Thanks, Chris.
Thank you. That's very clear.
Thank you.
Our next question today comes from the line of Alastair Ryan from Bank of America. Please ask your question.
Thank you. Good morning. Three short ones, please. First, given you've the sequencing you've described on the cost and the revenues, Can we assume that you've got better than average visibility on revenues into the back end of the year because of balance sheet growth, Net interest margin expansion and sort of annuity income streams being the driver. And second, on the buyback, When does that start and how quickly does it move?
So does it run right to the end of the year or to the full year results next year or just until it's done? And third, the Tier 2 buyback, it's quite earnings accretive given the very high coupons on that. Is there any more of those that you could do? I think people have tended to focus on the cost of the AT1 issuance, Which has been substantial. Clearly, this is quite a material move back in the right direction.
Thank you.
Yes.
Thanks, Alastair.
Let me do those in reverse order. So on the Tier 1 buyback, this is really just part of ongoing improving overall PLC. Around balance sheet optimization as you quite rightly point out, these convertibles were issued back in 2,008 I think it was with a pretty healthy coupon on it and notwithstanding the higher cost of Tier 1s alternative Tier 1s that we put out there. This buyback represents a fairly significant economy for HSBC over the course of the next few quarters. So really nothing more than just taking the opportunity to do a bit of sensible refinancing that lowers the overall cost of the capital structure of the firm in that regard.
We are continuously looking across both Tier 1s and Tier 2s, really the overall capital structure as well as debt Structure and where it makes sense from an economic net present value perspective considering So the capital impact of some of those capital instruments then we will from time to time contemplate liability management exercise, but for the moment This is it. In terms of the share buyback that we announced today, we'd expect to start it early next week as long as nothing Kind of interesting or particularly unusual happens between now Tuesday of next week and we would expect to run it until it is complete and the sooner we can complete it the better. Realistically based on the last three that we've done we would expect this to probably take us through to probably the end of August beginning of September Depending on trading volume. So that's broadly the timeline, but it's basically to get it done as soon as we can, but volume is traded And the criteria that we've set with the bank that's executing this for us based on experience would probably take us through August and perhaps into early September. Cost and revenue visibility, I think the fact that we've Got an investment in cost profile which is broadly consistent with the Q1.
I think hints at the fact that we feel that we've got a bit of tailwind not only from rates but also from balance sheet Growth and volumes that we see coming through, Retail Bank Wealth Management across a number of the well, certainly the home markets, but also Some of the network markets and equally what we see in terms of confidence within the wholesale space through Commercial Banking and Global Banking Markets and that has been Predominantly, not uniquely, but predominantly within Asia with a particular focus on the strength of the Hong Kong balance sheet And the surpluses that we have in U. S. Dollars, Hong Kong dollars and renminbi in particular on that balance sheet. I think the only comment I would temper that with is where we'd see an adverse swing in revenues then I think we would fairly quickly respond equally from a cost actions perspective, but really that would just be around The reprioritization of certain investments.
Our next question today comes from the line of David Lock from Deutsche Bank. Your line is open.
Good morning, everyone. I've got one on The corporate center, please. So I think appreciate that there's obviously a lot of volatility in here and there's a lot of moving items, but clearly that weighed on the The revenue line and actually the revenue line would have been significantly better than I was forecasting if we had adjusted for some of those items. I'm just conscious that the second quarter That was particularly strong last year, €650,000,000 I wonder if you could give any color on particular lines within the treasury and the corporate center that you could maybe help us try to understand what the run rate expectation is for here and particularly what you are using as a planning assumption when When you're thinking about your cost jaws and when you're thinking about the firm 2 or 3 years out? Thank you.
Yes. Thanks, David. There were 2 specific features within Corporate Center from a revenue perspective in the Q1. There was a significant item sitting within corporate center within the U. S.
From a cost perspective And that related to the provisions that we made for a civil suit that we're in settlement discussion with the Department of Justice on and civil suit that we're in settlement discussions or actually largely completed settlement discussions with a former customer of the U. S. Finance Company also related to residential mortgage backed securities. So going back to revenue line, from a balance sheet management perspective, so our corporate treasury managing the Look, really surpluses that we've got. In the second half of last year, our team did repositioning As a reflection of where we saw rates moving and as a consequence of that repositioning did some de risking in the book and as a consequence of that within balance sheet management we see Somewhat lower revenues in the Q1.
I think that is really the adjustment effect that we see, so we would expect to see a fairly stable view from balance management over the remainder of the year and guidance for balance sheet management would remain broadly consistent with that which we provided at the end of the year. So Sort of in the range of GBP2.3 billion to GBP2.5 billion overall for the year in balance sheet management. The other feature that we reference is We reclassified certain bonds that sit within the holding company capital structure in the 1st week of the year in response to the requirement to reclassify assets and liabilities In line with IFRS 9 guidance and on that reclassification had a mark to market on the swap in the bonds The bonds on the swap associated with those bonds in the 1st month of the year of US177 $1,000,000 which again is a one time feature. So I think that hopefully gives you a little bit more visibility in terms of what else was sitting within Corporate Center, Slightly, slightly higher costs on MREL in terms of issuance that we did in the Q1. And again, that issuance is in line with meeting regulatory requirements for 2019.
And we're largely there from a 2019 perspective, but again The guidance that we provided around higher MREL costs for 2018 remain absolutely consistent with that which we provided at the end of the year.
Okay. Thank you very much.
Thanks, Stephen.
We will take our last Question today from the line of Tom Rayner from Exane. Please go ahead.
Yes, good morning, champs. I'm making a habit of being last, last on Lloyd's as well. Someone said they saved the best for last.
You might just have to go up earlier in the morning, Tom. Who knows?
So I just wanted to You, Ian, what your guidance today means for sort of consensus for the full year because obviously We can annualize the cost number and get a figure of around €33,700,000,000 which I think as someone else pointed out is 5% Growth underlying. If I look at the FX adjusted revenue for last year, I get 53.2 percent. So If I assume 0 jaws, which is obviously the worst case outcome, that gets me pre provision profit of €22,000,000,000 which is bang in line with Current consensus, if my math is right, every 1% jaws you do on top of that adds 2%, 3% to that number. And Obviously, this is against an impairment number in Q1, which is €170,000,000 versus I think consensus for the full year is €2,600,000,000 So again, if you could comment on that and maybe talk about that Q1 impairment number as well because I know there is seasonality in Q1 and what have you, but It's such a low number. I just wonder if there's anything else you can add on that.
Thank you.
Yes. Thanks, Tom. Trying to break that down, I think going back to my Comments earlier around impairments in the Q1. I mean we obviously and this has got very little to do with IFRS 9 in terms of what we saw within the portfolios from a credit performance perspective, it was a low charge. It was certainly Lower possibly than we expected.
In terms of what influenced that was again To the extent that is any IFRS nine influences, it's possibly around how forward economic guidance as required by the standard is applied to overall provisioning for expected credit losses. But I think as we said a little bit earlier, we'd encourage you not to annualize the Q1 numbers. And I'm not sure whether we necessarily encourage you to change what you've got From a consensus perspective for expected credit losses at all for the year, I think it would be fair to say that we haven't. In terms of Sort of looking at the top line and the bottom line, by providing the guidance that we've today around what we see as being the quarterly run rate for costs And the fact that we've guided to positive jaws for you, I think that probably gives you a pretty good roadmap as to how you would read across to how we see revenues developing for the year At this point in time, Tom, I think that's probably the best I can do for you right now.
Okay. Thank you. I mean it's I'll leave the revenue and costing. Just on the impairment there, I mean, from 1.17 in Q1 to consensus 2.6, not changing that. There's a lot of things going on, isn't it, in the rest of the year?
Tom, I mean, when you look at what we've gone through for the last couple of years on this line, I shouldn't say we've given up predicting it because we haven't. What we talked about at the end of the year was we said look, if you took out The significant recoveries that we realized principally in the U. S. Business on the back of some improving around restructuring and performance of some of our oil and gas credits in North America. Last year's normalized cost of credit against average outstanding balances would have been about 25 basis points.
And when we think about what logically against our underwriting appetite and how we build the book, we would expect to see A credit cost of around sort of 25 to 30, 35 basis points and that's informed by looking at a long, long time series of how that's developed through a number of cycles. We are in a particularly stable I think we should all reasonably expect to see some turn in that across markets over some period of time. The devil that we're all trying to deal with is what is that period of time.
Sure. Okay, lovely. Thanks a lot.
Thanks, Tom. Tom, thank you very much. Ladies and gentlemen, thank you very much for joining us and That concludes today's call. Thank you. Thank you.
Thank you, ladies and gentlemen. That concludes the call for the HSBC Holdings Plc earnings release for Q1 2018. You may now disconnect.