Earnings Call: Q4 2016

Feb 21, 2017

This presentation and subsequent discussion may contain certain forward-looking statements with respect to the financial condition, results of operations, capital position, and business of the group. These forward-looking statements represent the group's expectations or beliefs concerning future events and involve known and unknown risks and uncertainty that could cause actual results, performance, or events to differ materially from those expressed or implied in such statements. Additional detailed information concerning important factors that could cause actual results to differ materially is available in our annual report and accounts. Past performance cannot be relied on as a guide to future performance. This presentation contains non-GAAP financial information. Reconciliation of the difference between the non-GAAP financial measurements with the most directly comparable measurements under GAAP is provided in the annual report and accounts available at www.hsbc.com. The analyst and investor conference call for HSBC Holdings plc's annual results 2016 will begin in 10 minutes. Following the presentation, there will be the opportunity to address questions to HSBC's executive directors. To ask a question today, please press star one. This presentation and subsequent discussion may contain certain forward-looking statements with respect to the financial condition, results of operations, capital position, and business of the group. These forward-looking statements represent the group's expectations or beliefs concerning future events and involve known and unknown risks and uncertainty that can cause actual results, performance, or events to differ materially from those expressed or implied in such statements. Additional detailed information concerning important factors that could cause actual results to differ materially is available in our annual report and accounts. Past performance cannot be relied on as a guide to future performance. This presentation contains non-GAAP financial information. Reconciliation of the difference between the non-GAAP financial measurements with the most directly comparable measures under GAAP is provided in the annual report and accounts available at www.hsbc.com. The analyst and investor conference call for HSBC Holdings plc's annual results 2016 will begin in five minutes. Following the presentation, there will be the opportunity to address questions to HSBC's executive directors. To ask a question today, please press star one. This presentation and subsequent discussion may contain certain forward-looking statements with respect to the financial condition, results of operations, capital position, and business of the group. These forward-looking statements represent the group's expectations or beliefs concerning future events and involve known and uncertain risks and uncertainty that could cause actual results, performance, or events to differ materially from those expressed or implied in such statements. Additional detailed information concerning important factors that could cause actual results to differ materially is available in our annual report and accounts. Past performance cannot be relied on as a guide to future performance. This presentation contains non-GAAP financial information. Reconciliation of the difference between the non-GAAP financial measurements with the most directly comparable risk measures under GAAP is provided in the annual report and accounts available at www.hsbc.com. The analyst and investor conference call for HSBC Holdings PLC's annual results 2016 will begin in two minutes. Good morning, ladies and gentlemen, and welcome to the investor and analyst conference call for HSBC Holdings PLC's annual results 2016. For your information, this conference is being recorded. At this time, I will hand the call over to your host, Mr. Douglas Flint, the group chairman. Thank you very much. Good morning from London, good afternoon in Hong Kong, and welcome to the 2016 HSBC annual results call. With me today are Stuart Gulliver, group executive, and Iain Mackay, the group finance director. Before we start, I'd like to say a word on behalf of the board. HSBC's performance in 2016 was very satisfactory against the backdrop of far-reaching geopolitical and economic developments. Operating performance in the second half of the year was much stronger than expected, as businesses and financial markets responded more optimistically than predicted. The board was happy with the traction from management actions to reshape the group and address the challenges of the continuing low interest rate environment. These actions are bearing fruit through market share gains, greater cost efficiency, and improved performance. Much of the heavy investments in reshaping the group to improve products so that they embrace technological change and reinforce global standards of business conduct has been made. We enter 2017 with the restructuring of the group essentially completed and with a strong capital position and a conservative balance sheet. We delivered on our commitment to maintaining the annual dividend in respect of the year at $0.51, as we indicated at the interim stage, and this was delivered through the declaration today of a fourth interim dividend of $0.21. In addition to this, the board has determined to return to shareholders up to a further $1 billion via a share buyback. Let me hand over now to Stuart to talk through the key points before Ian takes a more detailed look at our performance. Stuart? Thanks, Douglas. Turning to slide 2. We made good progress in 2016. The implementation of our strategic actions is actually well advanced, and our global universal business model performed well in challenging conditions. The drop in reported profit before tax reflected a number of significant items. The non-cash items included a $3.2 billion write-off of goodwill in Global Private Banking in Europe and fair value losses on our own debt of $1.8 billion. The cash items included $3.1 billion in investment in our cost reduction programs, $680 million related to legal settlements and provisions, and $559 million related to U.K. customer redress. The reported number also includes a $1.7 billion accounting loss on the sale of our Brazil business. Our adjusted profits were broadly unchanged year on year, following solid performances by our global businesses. These enabled us to capture market share in strategic product areas and build a platform for future growth. We delivered positive adjusted jaws in 2016. Global Banking and Markets recovered from a sector-wide slow start to the year to generate higher adjusted revenue than 2015. Commercial Banking performed well, particularly in the U.K. and Hong Kong, growing revenue in spite of a slowdown in global trade. Retail Banking and Wealth Management performance was mixed. Overall revenue was down compared to 2015, due largely to the impact of reduced client activity in Hong Kong on our wealth management businesses. However, strong mortgage growth and higher current accounts and savings balances helped to increase revenue in retail banking. We have written off all the remaining goodwill in the European Private Banking business. This goodwill relates principally to the original purchase of Safra Republic Holdings in 1999. The restructuring of Global Private Banking is now largely complete. Although Global Private Banking is now much smaller than it was three years ago, it is deliberately positioned for sustainable growth with a focus on serving the personal wealth management needs of the leadership and elements of the group's corporate clients. This was reflected in 2016 through solid revenue growth from group-referred relationships. We also continue to make strong progress in our strategic actions to improve returns and gain maximum value from our international network. Meanwhile, our targeted reduction of risk-weighted assets is now 97% complete, and we expect to exceed our reduction target at the end of 2017. Our cost reduction programs continue to bring down our adjusted operating expenses. The traction that these programs have gained in the last 18 months has enabled us to increase the amount of costs that we are able to remove from the business. We now expect to deliver annualized cost savings of around $6 billion by the end of 2017, about $1 billion above our original target, and will invest an equivalent amount of around $6 billion over the same timeframe to achieve this. Improved lending and deposit balances, interest rate rises, and better collaboration between businesses helped generate significantly higher profits in our Mexico business year on year and significant market share gains, particularly in consumer lending. We also continue to build our business in Asia Pacific, launching our first exclusively HSBC-branded credit card in mainland China, growing assets under management and insurance new business premiums, and seeing the first signs of growth in our loan book in the Pearl River Delta. We also extended our leadership of the offshore renminbi bond market and achieved our best ranking for China outbound mergers and acquisitions since 2003. We also completed the $2.5 billion share buyback in December that we commenced at the half year. We are today announcing a second buyback of up to $1 billion to retire more of the capital that previously supported the Brazil business. Having received the appropriate regulatory clearances, we aim to complete this new buyback in the first half of 2017. This will bring the total value of shares we have purchased since last August to $3.5 billion. Our strong common equity Tier 1 ratio of 13.6% reinforces our ability to invest in the business, support the dividend, and consider future share buybacks and manage the continuing uncertain regulatory environment. Ian will talk you through the numbers. Thanks, Stuart. As you may already know, we have resegmented our results with the global businesses now representing our primary reporting segments, and have replaced the business line known as Other with Corporate Centre to better reflect the way we manage our business. Corporate Centre comprises central treasury, including Balance Sheet Management, our legacy businesses, interests in associates and joint ventures, central stewardship costs that support the business, and the UK bank levy. There are more details in the Corporate Centre in the appendix. Our published resegmentation document also provides detailed analysis and reconciliation of this reporting change. Looking quickly at some key metrics for 2016, the reported return on average ordinary shareholders equity was 0.8%. The reported return on average tangible equity was 2.6%. On an adjusted basis, we had posted jaws of 1.2% and made a tangible net asset value per ordinary share of $6.92. The movement in jaws was due to a 3.7% reduction in adjusted operating expenses, which exceeded a 2.5% fall on adjusted revenue in 2016. Our adjusted measure includes the impact of the bank levy. Tangible net asset value fell by $0.45 in the fourth quarter, driven largely by foreign currency exchange differences and movements in available-for-sale investment through other comprehensive income. There is more detail on this movement in the appendix. Slide four shows the impact of significant items and currency translation in the fourth quarter on our reported profits and on our return on equity. The largest significant items in Q4 were non-cash items, namely the $2.4 billion write-off of the remaining goodwill in the European Global Private Banking business and $1.6 billion arising from changes in credit spreads in our own debt designated at fair value. We also included a $1.1 billion from investment to achieve our cost savings. Adjusted profit before tax for the fourth quarter was up 39% year on year. Adjusted profits for the full year were broadly stable. Our return on equity was 0.8%, and our return on tangible equity was 2.6% for 2016, both adversely impacted by significant items. Excluding these items and the bank levy, our return on equity was 7.7% and the return on tangible equity was 8.5%. Slide five provides more detail on the items that take us from reported to adjusted for both the fourth quarter and the full year. You will find more details of these adjustments in the appendix, and the remainder of the presentation focuses on adjusted numbers. Slide six looks at fourth quarter profit before tax. Adjusted profit before tax was $738 million higher in the fourth quarter of 2015, driven by significantly lower loan impairment charges and continued robust cost management. The decrease in revenue is due predominantly to adverse valuation differences on long-term debt and associated swaps caused by sharp interest rate rises in the fourth quarter. The negative impact of these valuation differences was $742 million compared to a negative impact of $126 million in the same period last year. The full-year negative impact of this difference was $278 million. We do not forecast this for revenue purposes, as we have hedged these bonds over their duration, and the short-term valuation differences are not meaningful. There are more details on this in the appendix. Against this are strong performances in Global Banking and Markets and Commercial Banking. Slide seven looks at revenue. Fourth quarter revenue from our global businesses was $605 million higher than last year's fourth quarter. I will go through each business in more detail in the next few slides. The $944 million reduction in revenue in Corporate Centre between the third and fourth quarters was mainly caused by the valuation difference in long-term debt and associated swaps that I have already described. Reported revenue numbers include a $396 million impact associated with foreign currency translation differences versus the third quarter. On an annual basis, our global businesses revenue was broadly unchanged. Slide 8 looks at Retail Banking and Wealth Management revenue. Revenue increased by $25 million compared to last year's fourth quarter. Increased customer lending and higher deposits throughout 2016 helped grow fourth quarter retail banking revenue by $66 million. Wealth Management revenue also grew by $40 million, driven by investment distribution in Asia. Lending growth accelerated in the fourth quarter, particularly in mortgages in Hong Kong and the U.K. For the full year, adjusted revenue was down 2% as 1% growth in Retail Banking revenue was more than offset by a fall in Wealth Management. This was principally caused by the impact of our investment business of reduced client activity in Hong Kong, particularly in the first half of the year. As slide 9 shows, Commercial Banking revenue was broadly stable compared to last year's fourth quarter. We continued to see strong balance sheet growth in the fourth quarter, with $6 billion of additional lending and a further $11 billion of deposits. This contributed to a 5% revenue increase in Global Liquidity and Cash Management compared to last year's fourth quarter. TLAC costs and the impact of market movements in Asia on insurance revenue caused revenue and other to fall by 16%. For the full year, Commercial Banking revenue rose by $134 million or 1%. This included growth in Global Liquidity and Cash Management of $181 million, driven by increased balances and wider spreads in Hong Kong. Credits and lending also increased by $83 million, reflecting continued loan growth in the U.K. These were partly offset by low revenue in Global Trade and Receivables Finance. Global Banking and Markets had a strong fourth quarter, increasing revenue by 23% year-on-year. Foreign exchange, rates, banking, and Global Liquidity and Cash Management all grew revenue, capitalizing on increased client flows and market movements. For the full year, Global Banking and Markets revenue rose by $353 million or 2% compared to 2015. This included a net negative impact of $297 million related to adverse movements in credit and funding valuation adjustments. Excluding these movements, revenue rose by $650 million or 5%, mainly in rates and credit as we gain market share in Europe. Revenue also increased in Global Liquidity and Cash Management as we grew average balances and benefited from wider spreads. This was a good performance from Global Banking and Markets in 2016. Since 2014, adjusted risk-weighted assets in Global Banking and Markets have fallen by 14%, and adjusted revenue has risen by 10%. This demonstrates the effectiveness of both our RWA reduction program and our targeted investment in the business. Slide 11 looks at Global Private Banking, which saw a fall in revenue of $43 million or 10% compared to last year's fourth quarter. This largely reflected the continued repositioning of the business and reduced market activity. During 2016, we disposed of Private Banking businesses in Bermuda and Brazil and a client portfolio in Europe. These disposals are reflected in the fall in client assets during the period. The repositioning of Global Private Banking is now substantially complete. For the full year, adjusted revenue fell by $208 million or 11%. We attracted more than $5 billion of net new money from collaborations by Global Business customers in 2016. Corporate Centre revenue fell by $944 million compared to the fourth quarter of 2015. This was principally due to a net $616 million reduction from adverse valuation differences on long-term debt and associated swaps, and a loss of revenue from the run-off of our US CML portfolio. Balance Sheet Management revenue rose by $133 million, or 21%, against last year's fourth quarter. Balance Sheet Management for the full year was up by $175 million, or 7%. We reduced the remaining US run-off portfolio by 49%, which contributed $8 billion of the $22 billion RWA reduction in the fourth quarter. We expect to complete the disposal of the CML assets during 2017. Full year net interest margin of 1.17% was 15 basis points lower than 2015. Eight of those basis points came from the disposal of our operations in Brazil and currency translation differences, particularly in the U.K. and Mexico. The remainder came largely from lower yields in customer lending, including revenue lost from the run-off of our US CML portfolio, and an increase in the cost of debt, including around $400 million of TLAC interest costs. Slide 14 looks at operating expenses. Our operating expenses, excluding the UK bank levy, increased by 5% from the third to the fourth quarter, reflecting a small number of specific items. These included a write-off of around $150 million relating to software that we no longer use and a spending increase related to marketing programs launched in the fourth quarter. Our cost performance in 2016 was excellent, with a $1.2 billion or 4% drop in adjusted operating expenses. We removed $2.2 billion of costs from the business in 2016, bringing the total annualized run rate savings since we started our cost saving programs to around $3.7 billion. Our UK bank levy charge was $499 million lower than 2015, including a positive adjustment of $128 million relating to the previous year. These reductions were partially offset by the impact of inflation and further investment in regulatory programs and compliance. Our total expenditure on regulatory programs and compliance was $3 billion, which was around $4 million, or 14% higher than in 2015. We expect an increase of more than 10% in regulatory and compliance costs in 2017. Slide 15 walks you from 2014 operating expenses to our revised 2017 exit run rate target. While we invest in more regulatory and compliance programs, we're also continuing to invest in growth and improvement in the business. Excuse me. We will more than pay for this investment through additional cost savings, which will require additional one-off investment to remove these costs from the business. We've already invested around 90% of the amount that we originally said we needed by the end of 2017 to achieve our target cost savings and improve the operating capabilities and productivity of the group. We now expect to invest a total of around $6 billion by the end of 2017 to achieve total run rate cost savings around. Sorry. Excuse me. To achieve total run rate cost savings of around $6 billion, around $1 billion above the top end of our investor day target range. Slide 16 looks at loan impairment charges. Fourth quarter LICs were down $83 million on the third quarter of 2016, and down $825 million compared to fourth quarter of 2015. Fourth quarter LICs for 2016 had no outstanding features, and the credit outlook remains benign. That is in no small part due to the strength of our risk management and portfolio repositioning since 2011. In 2016 as a whole, loan impairment charges were $48 million higher than 2015, due to a small number of individually assessed LICs in Global Banking and Markets relating to oil and gas and mining sectors in the U.S. in the first half of the year. There were also higher charges in Retail Banking and Wealth Management, particularly in Mexico, as we grew our market share of retail and consumer banking products. These increases were mostly offset by a large reduction in Commercial Banking charges. Slide 17 breaks down adjusted profit for 2016 by global business and geography. The overall story is unchanged since the third quarter. Adjusted profit before tax was down by $228 million or 1% due to lower revenue and marginally higher loan impairment charges. But this was largely offset by good progress in costs. The effectiveness of our cost reduction programs means that we achieved positive jaws of 1.2% in 2016, in spite of a tough revenue environment. We generated a further $38 billion of risk-weighted asset reductions in the fourth quarter, bringing total reductions for the year to $143 billion. $17 billion of the fourth quarter total came from Global Banking and Markets and legacy credits. $8 billion came from our US CML run-off portfolios, $5 billion from Commercial Banking, and $8 billion from other, mainly in Balance Sheet Management. The total reduction since the start of 2015 now stands at $267 billion, around 44% of which came from Global Banking and Markets and legacy credits. This takes us more than 97% of the way towards our target, which we expect to exceed through continued focus on efficient capital deployment. Turning to capital, the group's common equity Tier 1 ratio was 13.6% on the 31st December, compared with 13.9% at the end of the third quarter. Common equity Tier 1 capital reduced by $9 billion in the fourth quarter, due mainly to foreign exchange movements, dividends, and reported loss for the period. The impact of this reduction in our common equity Tier 1 ratio was mitigated by the reduction in risk-weighted assets. Today's buyback announcement reduces common equity Tier 1 ratio to 13.5%. Slide 20 looks to the year ahead. Our financial targets maintain our focus on improving returns, delivering cost productivity consistently, and providing sustainable returns to shareholders. Our medium-term revenue prospects remain good, supported by loan growth and strong deposit growth in 2016, and steeper yield curves and rising interest rates in the U.S. and Hong Kong. Our restructured business is increasingly well-positioned to capture further opportunities, and our global businesses look to have carried momentum from the fourth quarter into the start of 2017. We have traction in our cost management and productivity improvement programs, with persistent focus on improving returns, supported by a continued commitment to capital efficiency. Uncertainty in the geopolitical and regulatory environments remain considerations. There are also a number of near-term revenue headwinds that are worth bearing in mind. Restating 2016 reported revenues based on average January 2017 foreign exchange rates will reduce them by $2 billion. Clearly, cost benefited from such FX movements. We expect around $500 million of additional TLAC interest costs in 2017, and a potential $300 million revenue impact from lower U.K. interest rates. It is also worth remembering that while the run-off of our U.S. CML legacy portfolio has clearly been used, we will lose the revenue associated with the assets that we sell, as well as the associated impairment losses. I will now hand back to Stuart. Thanks, Ian. Slide 21 shows our progress in implementing the actions we outlined at our investor update in June 2015. We are now 18 months into a 2-and-a-half-year program, and the large majority of actions remain on track. We are going to beat our original targets to reduce both risk-weighted assets and costs, as Ian has already said. Mexico also continues to recover strongly. Adjusted PBT more than tripled in 2016, and revenue grew 18% year-on-year. We grew lending by 14%, increasing our market share of personal loans, payroll loans, and mortgages, and raising our advances to deposit ratio. We also grew Global Trade and Receivables Finance and Global Liquidity and Cash Management revenues in Mexico by 11% and 19% respectively. The low interest rate environment, however, continued to keep the U.S. business off track, although adjusted revenues in Global Banking and Markets and Retail Banking and Wealth Management both grew in 2016. The network benefits of the U.S. business have also increased, as we grew revenue from the international subsidiaries of our U.S. clients by 11% compared with 2015. The establishment of the U.K. ring-fenced bank remains on track. Both the Chair and CEO positions of HSBC UK have now been filled following the announcements of Clara Furse as Chair and Ian Stuart as the Chief Executive. The migration of roles from London to Birmingham is around 35% complete, with the remainder on track to be in place by the time the bank launches in 2018. Our international network continued to drive revenue growth in our transaction banking product lines. Global Liquidity and Cash Management revenue increased by 6% year-on-year, and Global Trade and Receivables Finance captured further market share in strategic markets, including Hong Kong and Singapore. In 2016, we were named Best Bank for Corporates by Euromoney and Best Supply Chain Finance Bank at the Trade Finance Awards. We continue to invest for growth in Asia. We launched a new digital banking platform for SMEs in Guangdong, a growing business around the China-led Belt and Road Initiative, and we were named Asia's Best Investment Bank and Asia's Best Bank for Financing by Euromoney. Assets under management in Asia increased by 11%, and we grew revenue from the international subsidiaries of our ASEAN region Commercial Banking clients. We continue to be the leading bank for international renminbi products and services, and we are better protected from financial crime because of our investment in our Global Standards program. Our monitor has raised certain concerns, but we have continued to progress, and our commitment remains unwavering. By the end of this year, we are on track to have our AML and sanctions policy framework in place and to have introduced major compliance IT systems across the group. Beyond 2017, we will continue to work to fine-tune those systems and ensure that our improvements are fully integrated into our day-to-day risk management practices. To conclude, I would like to leave you with four points. First, our strategy is working. Our global businesses are performing well in challenging operating conditions. Our international network, our main differentiator, is delivering more than 45% of client revenue. We are capturing market share in strategic areas. We have an unrivaled business in Asia with strong returns and good momentum. We have delivered a positive adjusted jaws in 2016, and we expect to do this again in 2017. Second, we are doing what we said we would do. We are going to exceed both our original risk-weighted asset and cost reduction targets. We sold our Brazil business, which allowed us to complete the first share buyback in our history and to announce today a second buyback of $1 billion. Our Mexico business is being turned around quickly and effectively. Our investment in Asia is delivering more revenue for the group in strategic areas. Third, more than ever, there is a big advantage in being a diversified global bank. The complexity of the current environment and the potential difficulty in connecting customers with strong growth opportunities naturally benefits a bank with our network and heritage. The world is evolving into big regional trading blocks with less global trade, but vastly increased regional trade. The areas where barriers are falling fastest are the regions where HSBC is strongest. A longstanding and growing strength in infrastructure and project finance in Asia and Europe also positions us perfectly to capitalize on opportunities arising from the China-led Belt and Road Initiative and the rising prominence of green finance. Finally, we remain a well-funded business with strong capital generation, a diversified balance sheet, and an excellent record of delivering value for shareholders. Last year, we delivered a total shareholder return of 36% in Hong Kong dollars while building a common equity Tier 1 ratio of 13.6%. We have maintained the dividend in 2016, and we are confident doing so for the foreseeable future. We are now happy to take questions. The operator will explain the procedure and introduce the first question. Operator? Mr. Gulliver, if you would like to ask a question today, please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off. If you find your question has been answered, you may remove yourself from the queue by pressing the hash key. Once again, to ask a question, please press star one. Please ensure that the mute function on your telephone is switched off. We will now take our- Can we have the first, please? We will now take our first question from Ronit Ghose from Citigroup. Please go ahead. Great. Thank you. Stuart, Ian, thanks for the presentation. Can I just pick up on a couple of points relating to revenues? Q4 seemed to be a bit of a disappointment vis-à-vis market expectation. Maybe just bad at forecasting, but you're highlighting lots of 2017 challenges while talking up the medium term. If we can just dig into this, please. On specifically the growth outlook, you say you're very well-positioned. You're well-positioned for growth. In Asia, loan growth's running at about 4% right now in Asia for you. Do you expect that run rate to accelerate from 4%? In your statements, you've mentioned some of the leading indicators, macro indicators are picking up, trade's picking up. Yet it's pretty uncertain in terms of outlook. So I'm just wondering if that 4% revenue, so loan growth, 4% loan growth can be stronger in your Asian footprint this year. Linked to that on the revenues, the margins. Is most of the margin, so the underlying margin weakness that you've seen in Q4, down to loan spreads coming down? How much more pressure do you expect on the spread, this in the U.K. and the U.S., particularly in the U.K.? Finally, on the one-offs, there's a USD 1 billion swing in treasury that Ian's obviously called out. I'm just curious as to why you're not putting that into the one-offs, because you say that you expect this to net to zero over time. How should we try to think about that treasury revenue number? Thank you. There's a lot in there. I think Stuart can provide some context around this. We clearly got very strong loan growth coming through our Global Banking and Markets and encouragement coming through Retail Banking as well in the fourth quarter of last year, with some momentum coming into 2017. But I think the growth rates that you referred to, Ron, around 4%-5% are probably in line with what we are presently seeing and what we would expect to see through 2017 in that particular area. Moving on to margins, there were a couple of factors coming through in the fourth quarter. You will notice, and we commented here, that again, you got accelerated reductions in our US CML run-off portfolio in the fourth quarter. Notwithstanding that that historically has been a loss-making portfolio, it is a very strong NIM portfolio. As we continue to sell and run off those assets, that feeds through to NIM. The other factor that we saw in the fourth quarter was the impact really of the MREL or TLAC, depending on what you want to call it, coming through in the fourth quarter, having issued last year over $31 billion worth of instruments into the marketplace to meet those regulatory requirements. Another factor that was an influence in the fourth quarter was the impact of the bank rate reduction earlier in the year. That was certainly reflected in the fourth quarter. I think those are probably two of the main features that come through in that regard. FX again. Yeah. Quite big FX. Impacts coming from the weakness in the Mexican peso, the Chinese renminbi, the Egyptian pound, and of course, the U.K. pound. Yeah. Which also, as you translate them into U.S. dollars, has a sort of negative impact. Loans and advances actually grew quite strongly in the fourth quarter, which as I say, is why we can see some revenue growth, but not about that 4% or 5% handle. The specific thing that caused a lot of the miss against analyst estimates in the revenue line is specifically around debt issued, and Ian should just talk about that a little bit as to, as you said, to why it's not in significant items. Yeah. If you look at the total year impact, we have a number of long-dated bonds outstanding, part of the overall funding structure for the group. And those are matched by interest rate swaps. So those are fixed rate instruments hedged swapped into floating because the majority of our book is floating rate, and they are matched economically across the duration. What we clearly saw is some of the longer dated bonds, as what we saw in the fourth quarter is, we saw a little bit of winding in the valuation curve so that the bond is valued off a wide bar curve and the swap by convention is valued off the overnight index swap rate. There was a little bit of divergence that came through in that regard, which impacted more in the fourth quarter than it had been over the course of the year. If you looked at the total year, the impact was less. It was about $200 million, $270 million for the full year impact. We haven't historically seen a great deal of volatility coming through this. We don't really do anything particular from a forecasting perspective for the reasons that I described, is that if we hold these bonds and the economic hedge swap against them through to maturity, the impact should broadly migrate towards zero. This has really been a relatively insignificant feature within the P&L and within the revenue line over recent quarters. It was really part of that yield, the curve movement that we saw in the second half of the year that largely influenced it. Whether we reclassify this going forward, I think will largely depend on the volatility that we see coming through this. We'll provide insight to it when we do see it coming through every quarter. Great. Thanks for that. Can I just have a quick supplementary on the RBWM revenues? You called that out as well. You mentioned there is a weakness in wealth. Is that client activity or is that sort of the traditional life insurance type returns, like an investment return weakness in the fourth quarter? Is it client volumes were slowing in the fourth quarter? No. It is actually the first half, and actually it was because we had an incredibly strong first half of 2015. Hong Kong-Shanghai Stock Connect. Then remember, the first quarter of 2016 was a really slow start and quite difficult for everything related to capital markets generally. That created weakness in the first quarter, first half in wealth management, particularly in Hong Kong, and the second half never made it back up. It looked like, maybe I misread it, but it looked like Q3 was really strong and Q4 was a bit weaker, a couple of hundred million weaker quarter-on-quarter in Hong Kong wealth or in Asia wealth. No, I think what we saw coming through was fairly good numbers from a retail banking perspective rather than the wealth piece. So in Hong Kong, there is big growth in deposits. So it is not really just margin on deposits in the retail banking space. Yeah, and I think what we also see seasonally within the Asian business, within Hong Kong in particular, is a little bit of repositioning around the end of the year. From an investment distribution perspective, the revenue was down slightly in the fourth quarter versus the third, but nothing of particular note. Okay. No major concerns. Okay, thank you. Helpful. Thank you. Okay. Thanks, Anatt. Our next question today comes from Alastair Ryan from Bank of America. Please go ahead. Good afternoon. Thank you. Briefly from me, the net interest margin, just to come back to that, is 175 basis points in the first half, 173 basis points for the full year. How should we think about the exit run rate and how quickly the December dollar rate hike starts to outweigh the earlier in 2016 rate cuts in places like the U.K.? Second, just on your comments on the CML, you are quite clear you hope to be out of that in 2017. Did I understand correctly that the entities will be gone as well then? Because clearly in the past they have been a big consumer of stress test capital for you. Thirdly, just on your comment on slide 20, an encouraging start to the year. Can I encourage you to quantify encouraging? Okay. So Alastair, on NIMs, going back to taking the fourth quarter discrete, the NIM in the fourth quarter was 160 basis points. Now, if you take out the annualized effect of reserve on a year-to-date basis through the third quarter, you take out the annualized effect of reserve, that is 10 basis points. You then have about a 5 or 6 basis point move between the third quarter and the fourth quarter. That is contributed to by a little bit of asset compression coming through U.K. mortgages. So what we clearly saw last year was a pretty competitive environment for U.K. mortgages. We competed in that market more broadly with strengthening our presence in the broker channels we have talked about over the course of the year. So we saw a little bit of spread compression coming through there. At the end of the year and the beginning of this year, you probably noticed there was coverage about the fact that some of the better priced products in that space had been withdrawn just as we responded to some of the pressures in that area. Other factors coming through I have already mentioned. One of the CML portfolio and TLAC costs. But the discrete fourth quarter was 160 basis points, Alastair. In terms of CCAR and CML, we will have substantially all of the assets. By that I mean we expect to be well under $1 billion of remaining unpaid principal balances, probably around $300 million to $400 million of unpaid principal balances outstanding by the time we get to the half year. Now, when you reflect on that from a CCAR and a DFAST stress testing perspective in the U.S., it is the asset portfolio that has caused the stress. It is not the existence of the legal entity. So what we would expect to have accomplished by the half year is substantially all the assets to be gone. The process of winding down the legal entities has in actual fact already commenced. That is a state-by-state regulated business in the U.S., and as we come out of a state and have no further loans outstanding, we start rationalizing those legal entities. Clearly for a number of years now have been rationalizing the infrastructure supporting that business. But the cause of stress coming through CCAR and DFAST was the asset portfolio. So as that goes, the opportunity to be stressed in that regard will go with it. In terms of encouraging, I think on chart 20, as you say, we have laid out some of the short-term pressures that we see. Clearly foreign exchange had an adverse impact on revenues last year. Those rates been particularly moving in an encouraging direction in an early part of the year. We will continue with just over 31 billion of MREL instruments out in the market last year. Consistent with previous guidance, we've got somewhere between 60-80 to do, so 2017 should be a reasonably big year in that regard once again. There will be some costs associated with that. Lower U.K. interest rate, that's just really the full year impact of what we saw happen on the bank rate earlier in 2016. Then there's the CML. We do see those as largely being short-term influences. What we have seen, and we talked about it earlier, is the growth coming through the Asian business. Notwithstanding some of the geopolitical uncertainty in the U.K., that business performed well in Commercial Banking, Global Banking and Markets over the course of 2016 as well, and hopefully carrying some momentum into 2017. I think in the round, reasonably optimistic, but we do have some short-term revenue headwinds to deal with. Just to add a bit. The rate rise in December probably adds about $300 million to the NII 2017 and about $500 million-$600 million in subsequent years. We've assumed two rate rises this year, but in the second half of the year. If we get a rate rise in March, that will be obviously an earlier benefit for us. January was a strong month. GBM had a strong January, but obviously it's the type of business that you can't really extrapolate. It had a strong January, and so did RBWM as the impact of higher rates came through the deposit base, which is essentially the number I've just mentioned. Thank you very much. Thanks, Andrew. Thanks, Andrew. Next question today comes from Chirantan Barua from Bernstein. Please go ahead. Morning, guys. Three quick ones. One, Ian, you mentioned about the CML portfolio and the wind down. We've always been interested in the excess capital there. You've announced a $1 billion buyback right now from your Brazilian proceeds. How should we think about now that excess capital? When do you hear from the Fed next, and when will you communicate with the Street regards what you do with capital repatriation for the U.S.? That's number one. Second, the reg and compliance cost just keeps going up and up. It's a significant item, and I know that you've brought in the new cost plan. It'd be great to understand how do you see the $3 billion-$3.5 billion going forward over the next three, four years? What is sticky and what is not? The third quick technical question, your rate sensitivity on rest of Asia has gone up sharply from the first half. Is there a liquidity book that you have moved to China, Singapore, somewhere? I just want to understand what is driving that uptick in sensitivity. Thank you. From a CML perspective or more broadly U.S. capital, we had within our CCAR submission for 2016 a dividend proposal from the U.S. holding company to the parent in early 2017. So actually at the beginning of the second quarter in 2017. That capital plan raised no objection from the Federal Reserve, so we would expect that dividend to proceed in the early second quarter of this year. When that does proceed, we will let you know, obviously, what the number is. Broadly speaking, we have described having in excess of $8 billion of surplus capital in the U.S., and that has been informed by the portfolio repositioning over the course of the last few years. The disposition of the credit card business back in 2012/13, the run-off of the CML portfolio, the overall reshaping of the business. I think we have also guided that the expectation in terms of being able to move the surplus capital out of the U.S., whilst we will clearly continue to invest appropriately in the growth of our U.S. business, is something that is likely to take three to five years. Certainly one of the things that informs that, in fact, the key thing that informs it, is us continuing to be successful in our CCAR submissions. Our next one will be on the 1st of April this year. Ensuring that we continue to improve our overall capacity to plan, forecast, and manage the capital position within our U.S. business. I think we have certainly been very confident in terms of being able to get the capital position in the U.S. to an appropriate standing with respect to the risks and the business that we run in the U.S. and thereby repatriating capital to the parent company. We will keep you posted. On regulatory programs and compliance. As you noted, the total expenditure was about $3 billion in 2016, which is about $400 million higher than 2015. Of this, the spend on global standards was about $1.6 billion in 2016 within that $3 billion number. The expenditure on global standards peaks in 2017. We expect the implementation of systems and IT platforms to obviously therefore enable us to scale without incremental costs going up with that scaling. However, this is part of our BAU. I would not expect us to see a material reduction either in that $3 billion number. As I say, 2017 should be the peak number. Then I would expect us to see that repeat in future years. Thanks, Steve. I think, going back just momentarily to your capital question, Stuart, how do we deal with that? The capital that comes back to the parent company in the form of dividends, capital transactions like the Brazilian disposal, any dividends that we would receive from the U.S. legal entity or anywhere goes into the general capital pool at the parent company. The deployment of that is focused on investing to grow the business, supporting the dividends to shareholders. As we've said, from time to time as appropriate, we'll consider buybacks. I wouldn't necessarily link any of the capital actions specifically to buybacks or anything else. It becomes part of the general pool, which Stuart and the management team along with the board then make decisions around how that is attributed to the various priorities. If you look at the Asia Pacific rate sensitivity. Yeah. Pretty big growth in deposits in China. Remember, China sits in that Asia Pacific number. Big rate move down in China on that deposit base, so much more rate sensitive. There's no thought being moved. No. Thank you. Thanks very much. Thanks. Next question today comes from the line of Raul Sinha from JP Morgan. Please go ahead. Morning, gentlemen. If I can have two, please. The first one on the rate sensitivity again. I think you've been very clear on the short end of the curve and the sensitivity to that, but you also mentioned the steepening of the U.S. and the Hong Kong yield curves. I was wondering if you could maybe talk a little bit about the sensitivity to the mid or the long end of the curve, and how you might be positioned or changing your positioning around that, especially in Q4. Again, not much really. When you think about where the U.S. dollar rate really benefited in the second half of last year, it was at the long end. It was really 10 years and beyond. When you look at the asset composition of our Balance Sheet, we don't have a particularly large component of the Balance Sheet. In fact, a relatively small proportion of the Balance Sheet is longer dated, with the majority really sitting below five years. So though clearly steepening of the curve helps us, it's going to take longer to work its way through the asset base, and real result in terms of uptick. So what helps us are policy rate increases and movements in the shorter end of the curve. it's a help, but it doesn't have the same impact as things at the shorter end. The way to think about Balance Sheet Management is it's three years and under. Okay. That's helpful. If the kind of one month, three years is steep, there's a lot of money riding down that curve. But think about it three years and under. So what the 10-year or 30-year does is not that relevant. Sure. Okay. I think broadly speaking, if you think about it in those terms, we have talked about this before. A rising rate environment, you are generally going to see that improvement coming through the businesses, Retail Banking and Wealth Management, Commercial Banking, Global Banking and Markets, with a possible downside to that within Balance Sheet Management. By the same token, you have seen highly consistent earnings coming through Balance Sheet Management over the course of the last four or five years, where it has consistently fallen within the $2.5 billion-$3 billion, this year being at the $3 billion end of that range. Okay. Just the second one. We have not talked about asset quality on the call, but obviously this was a very good quarter. I think you had some write-backs in Q4 as well. But clearly some of your peers have had different experiences more recently. Obviously you have got quite a low risk profile in the balance sheet. I was just wondering if you could talk a little bit about what is the real underlying run rate you see in terms of provisions, and what your thoughts are in terms of the outlook. Can it get better from this or is it as good as it gets? Look, I think one of the things, certainly as a couple of the Asian banks came out with the results last week, we had a quick call with our colleagues in Hong Kong over the weekend just to get any really up-to-date feedback about what they saw coming through. The story has been remarkably consistent in terms of asset quality across Retail Banking, Commercial Banking, Global Banking and Markets. The year was clearly impacted by higher provisions in the metals and mining and oil and gas sector, principally in our North American businesses. That being said, we saw some credits coming through in the Commercial Banking business in those sectors as the year progressed. But credit quality, whether you look at it from a China perspective, Hong Kong, the wider Asian, the U.K., the European, remains very, very stable. There are no really adverse indicators at this point coming through the book. Questions have been put to us earlier this morning by Reuters, Bloomberg, for example, have we seen any impact from Brexit? At this point in the game, no, we absolutely haven't. I think overall credit quality remains stable. We did get some credits coming through in the fourth quarter, which gives us probably a slightly artificial view. But again, we're at a fairly benign point in the cycle. I am, as you know, notoriously disinclined to forecast LICs from a basis points as a percentage of outstanding loans. Again, if you sort of take account of where you saw oil and gas, metals and mining exposures being dealt with by us in the course of late 2015 and 2016, and normalize for that, you get some sense as to where the run rate might be. Sure. Any thoughts on IFRS 9 and how that might change, in terms of should we start to think about that from 2018 in terms of your provisions? Well, the industry's certainly thinking about it big time. I think more probably in terms of the context of how it affects capital and volatility within the capital ratio. Thinking about this over the duration of a loan, it shouldn't change. If we maintain consistent underwriting and discipline in terms of how we manage the book, it should not change the lifetime loss experience. However, the timing of the cost that gets recognized from a stage 1, stage 2, stage 3 perspective in IFRS 9 clearly could, almost certainly will, introduce some volatility. If you were to see significant cyclical downturns, again, I'll refer back to the stuff we saw in oil and gas at the end of 2015. That would move quite a lot of the book into stage 2, and you'd see some significant upward volatility, upward movement in loan impairment charges. From a lifetime credit cost perspective, it shouldn't change unless we allow that short-term volatility to filter through to how we actually underwrite and manage the exposure. I think that's something we've got to focus on. If you step back from the standard itself, I think the area where our regulators are beginning, but only just beginning to think about, is how that leads to potential short-term volatility in capital ratios and how they deal with that. The industry is full steam ahead in implementing this standard. It goes in the 1st of January next year. You will see volatility. In theory, what you'll see is credit losses recognized much, much earlier in the cycle. Whether that necessarily is a good thing remains to be seen, but lifetime impact should remain reasonably consistent. Okay. Just quickly, when do you think we might get some guidance in terms of the impact of the upfront impact of IFRS 9? Second half. Okay. Thank you. Next question today comes from Claire Kane from Credit Suisse. Please go ahead. Hi, good morning. A couple of follow-up questions on the revenue outlook, please. Firstly, on the NIM, I think you said 160 basis points for Q4. Did you say that the like-for-like sequential impact was -5 basis points, so Q3 was 165? Also, could you explain if there was any hedging impact in there or was that 5 basis points broadly related to just the U.K.? My second point is on the MREL or TLAC guidance. You've said it would go up to USD 0.9 billion for 2017. Can you confirm that that is our long-term run rate, or should we expect there to be an additional impact going into 2018 and beyond if you need to be MREL compliant by 2021? Finally, my third question, just really to wrap it up. Clearly some of the headwinds you flagged in terms of FX broadly relate to the first half of 2016. If we consider the second half adjusted revenue run rate of around just under USD 49 billion, consensus is looking for around 6% uplift year-on-year versus that run rate. Given your commentary around volumes, do you think that's reasonable in the context of the NIM pressures? Thank you. Hey, Claire. To be clear, you're right, it was a 5 basis points impact. It was influenced by the factors I mentioned earlier in the call. The compression of U.K. mortgages was one of the contributors. That was about 2 or 3 basis points. TLAC and CML were also the other contributors. There was no real notable impact from hedging coming through in the fourth quarter. It was informed by assets on the balance sheet and movement within that. From an MREL perspective, the long-term guidance that we've provided is consistent, USD 60 billion-USD 80 billion, based on firming up guidance coming from our regulators as to exactly how much is required, where it is required to be positioned, the characteristics of it. Clearly, there is a first threshold, which is compliance by 2019, and that really is what we focused on. Within that timeframe, somewhere between $60 billion-$80 billion of issuance to be accomplished, $31 billion accomplished in 2016. Broadly speaking, assuming there's good reception for this in the marketplace, we'd expect to do much the same in 2017. To the extent that any further issuance is required, we'd complete that in 2018 to reach the first threshold of compliance in 2019. Clearly, as you point out, the final compliance timeline around the full implementation of MREL is 2022. I think based on guidance we are today, the 900 is broadly consistent subject to whether or not there is more that needs to be done in 2018. I think we really need greater clarity and guidance around quantification and characterization and treatment of MREL from our regulators, not only in Europe, but further afield, because it's not called MREL outside Europe, it's called TLAC, but it is a global phenomenon that needs to be implemented. I wouldn't change the long-term guidance in that regard at this point. In terms of overall revenue outlook for 2017, I'm not really super keen on filling out the old spreadsheet for you there. We've given you some pretty good guidance around what we think the FX impact is. There are other short-term pressures that we've highlighted, but we've also talked to the kind of growth that we see coming through the business. What we've seen certainly in the fourth quarter and first few weeks of 2017 has been encouraging in that regard. Okay, thank you. Could I maybe just have one follow-up then? In terms of the NII trajectory versus the Q4 run rate, do you think volumes would more than mitigate the NIM pressure that you've guided to relative to the Q4 base? We will certainly be focused on the management of the assets that we underwrite. Our teams in BSM do a great job of managing the overall liquidity portfolio and interest rate risk in the group for us. Our focus will be on trying to mitigate NIM pressures and continue to grow volumes to offset that, but also to grow volumes in a way that accrete returns for the business. That's a discipline which Samir and his colleagues, Noel and his colleagues, John and his colleagues are very focused on is putting business on the books that bring us to improved returns against risk-weighted assets and returns on equity in the business. I think when you look at the return on risk-weighted assets and the improvements that Global Banking and Markets have realized, Commercial Banking have realized, that is encouraging. That is a discipline that is going to remain in place. Great. Thank you. Thanks, Claire. Next question today comes from Tom Rayner from Exane. Please go ahead. Yes, morning, chaps. Just a couple of questions, please. First, I want to just go back to the share buyback announcement, because you're fairly clear that this is a first half buyback, and it's very much linked still to the capital release from Brazil. So my question is, once we get to, say, the interim stage this year, the CCAR is behind you, and assuming there's no problems with any of that, is it fair to assume that then it's like a clean page for the rest of the year? We shouldn't take this $1 billion necessarily as a proxy for what you're planning to do for the year as a whole. That's my first question. Then I've got another question on the revenue headwinds in a second. Yes. So what you should assume is that, as we have evidenced last year, we're starting to obviously manage our capital in a much more active way than we've been able to do previously. Because at 13.6, 13.5 after this buyback, we are in a good position. And what we'll be doing is looking at what our capital position is. First of all, trying to actually not have this as surplus capital, but actually use it within the business by obviously putting on risk-weighted assets at accretive returns. If we can't put them on at accretive returns, and assuming that we're nicely covered on the dividend, it's possible, subject to regulatory approval, we might look at doing further buybacks. But the first priority's got to be to see if we can actually make this work within the business, and that would be the huge focus of all of the teams. The focus of the teams is not essentially to see if we can buy back. The focus of the teams is to see if we can get accretive RWA deployed within the business. So yeah, I think the way you characterized it, that you get to the interim as a blank sheet of paper is the way to think about it. But I don't want you to raise expectations and start modeling perpetual buybacks. We won't be doing that. If we actually do see reasonable growth coming around, if we see higher interest rates, as I said earlier, Balance Sheet Management, the whole series of books make a lot of money in the kind of naught to three year area. We get to keep our CET1. We'll actually be using that capital up in the business. Okay. Very clear. Thanks. Just on the revenue headwind, just a little bit more color. You mentioned TLAC. I think, Ian, you've said the sort of $900 million for now is the guidance. I'm assuming that is the $900 million is a net figure. That's not a sort of cost of the new TLAC, which will be offset by some uneligible debt maturing. Is that right? I'm thinking of that. That is the negative carry we've talked about, Tom. Clearly, the focus within the business is to find ways of deploying that higher cost debt in a way that we can mitigate that negative carry to the extent possible. So again, that's a focus in which Balance Sheet Management is zeroed in, and clearly will bring their expertise to bear from clearly Stuart's experience as well as Samir and the teams in terms of how we mitigate that. But that is the negative carry that we're projecting, Tom. Sure. Just on the FX, you flagged up the $2 billion headwind if rates stay at the January level. Yeah. How does that drop down to sort of pre-tax or even net income in terms of a headwind? Will it be the same sort of percentage impact all the way down the income statement? Yeah. Tom, we would certainly expect to see some kind of corresponding benefit coming through the operating expenses, which mitigates some of that headwind that we see coming through revenues from FX. I think if you sort of think in broad terms, perhaps about 30% that we see having an adverse impact on the P&L because we get some benefit coming through loan impairment charges and operating expenses. Yeah. Okay, thanks. And sorry, just one very final one from me. You specifically mentioned sort of the mortgage pressure in the U.K. I am just trying to get a sense of whether you view this as a market phenomenon, or is it a real push for market share by you guys? You are happy to maybe trade off that volume margin, or do you think it is the market itself is becoming more competitive? Well, certainly this area where Francesca and Antonio in the U.K. can give us much more insight and detail around what is happening on a day-to-day basis. But it clearly was a competitive marketplace in 2016. 2015, the team in the U.K. engaged much more actively with selected brokers to give ourselves line of sight to a larger share of the U.K. market. And from a volumes and stock perspective, we grew market share in 2016. But it is clearly competitive from a pricing perspective. I think we had one of the best priced products in the marketplace in 2016 for a significant period of time. And as I say, the latter part of the year or very early this year, we took that particular offering off the marketplace. It goes back to Stuart's comment. We are absolutely focused on growing our market share in products that we know we can make good returns on. But by the same token, there is a very strong focus On return generation within the business and continuing to improve those returns, both in terms of returning risk-weighted assets and the wider capital creation around return on equity. So discipline around that capital deployment is a heightened and increasing level within the firm. Okay. Thanks, Ian. Okay, thanks a lot. Thanks, Tom. Our next question today comes from the line of Martin Leitgeb from Goldman Sachs. Please go ahead. Yes, good morning from my side. I've just got 3 questions, and the first one is a follow-up on earlier comments on the rate sensitivity. I was just wondering if you could give us a steer in terms of currency denomination of your deposit base and what percentage of your global deposits are denominated in either U.S. dollar or Hong Kong dollar. Obviously, we get some idea of that coming from the booking location of the deposits, which would imply slightly shy of 50% on those currencies. But I was just wondering if you could give us a steer if that is the right number or if the number could be meaningfully higher in terms of U.S. dollar, Hong Kong dollar deposit exposure. The second question is to follow up on your just previous comment or answer on Tom Rayner's question on the U.K. mortgage space. I get a bit of sense looking at pricing relative to market that it feels like something held you back a little bit during the year in terms of mortgage growth in the U.K., and it seems also that the growth has accelerated in the second half. I was just wondering if this has to do further with your rollout of intermediary networks and if we should assume that going forward from here, growth in net mortgage lending in the U.K. would further accelerate. The final question also on the U.K., but on the current account side. It seems from what we read in the press that the current account offering at this point in time is very competitive in the U.K. I was just wondering if you could share a bit of detail on the strategy there, because looking at the latest account, it seems like that there's quite a substantial deposit overhang in the U.K. I was just trying to get a sense what the aim here is in terms of broadening the current account offering. Thank you. I think if I take the last one first. You have seen, again, the deposit, the AD ratio, asset deposit ratio, sitting just below 68%. We saw significant customer deposit growth across each of our global businesses within 2016. Most notably, that was within Hong Kong, the wider Asia, and the U.K. We've got current accounts and an overall savings proposition out there in the marketplace. Customers either like it because of how it's priced, or they like it because of the strength of the HSBC balance sheet and the overall security. I think if you were to split it out from a corporate perspective, it's probably the latter. From a retail customer perspective, I think it's probably more difficult to point to any particular differentiation in that regard. If you think about overall deposit concentration, the greatest, the most significant deposit surplus that we carry is in Hong Kong. It is the most significant by a long stretch. It is then followed by strong deposit and AD ratios within the U.K. Then latterly, if you work down the list, you come to the U.S. as being third in terms of overall concentration of deposits that are either U.S. dollar directly or U.S. dollar-linked. But Hong Kong is the big beast in that equation. I think in terms of mortgage growth in the U.K., there clearly was a focus in 2015 and 2016 in terms of expanding our ability to access more of the market. In terms of being able to see more of the market in terms of accessing mortgage leads. But in terms of overall growth, it's actually been a fairly steady picture in terms of 2016 versus 2017. But we've grown at a reasonably steady pace from the first quarter of 2016 through the second, third, and fourth quarters. If you think about this, at the beginning of the year, we had slightly less than $93 billion outstanding in U.K. mortgage balances. At the end of the year, we had about $96 billion. That's on a constant currency basis. So overall, we grew the book, but I wouldn't have called it a headlong charge for growth, but there's a very strong balance between underwriting discipline and doing the right thing in terms of appropriate product for the customers in terms of the direction of the U.K. business. Thank you. On the deposit denomination, is this roughly a 50% steer? What is reflective of the U.S. dollar, Hong Kong dollar exposure? We'll come back to that. Like I said, the Hong Kong dollar deposits in terms of something linked to the U.S. dollar is the most significant surplus that we've got sitting around the world. I don't have the breakdown of the deposit base globally for the group by currency, but we can come back to you on that one. Thank you very much. Next question today comes from Jason Napier from UBS. Please go ahead. Good morning, good afternoon. Two on costs, please, and then one on capital. The enlarged gross cost program and the breakdown of the waterfall there, I just wanted to ask again for a little bit more color on the inflation and reg costs up well over $1 billion now versus the original plan, and some sense as to what has changed there. I appreciate the comments on taking it as OpEx. I am just interested in the way that things have turned out. Likewise, the very substantial increase in transformational savings that you are aiming for, strips by division, where that is coming from, given the size of the numbers. Secondly, a much easier one, the Corporate Centre cost, ex levy, look reassuringly stable at about $250 million a quarter. I just wondered if an underlying $1 billion a year run rate for Corporate Centre, ex levy, was about right. Then I have a last question on capital. Can you give me the question on capital? Certainly. I am afraid I am really just asking you to rehearse what I think you already said at Q3 around the change in treatment of BoCom. If I think about some of the comments today, the buyback announced today takes you to 13.5 of CT1. The $8 billion of capital that you have mentioned, you have said is potentially excess in the U.S. is another 100 basis points, and BoCom is worth a little over 100 in Q3. I am just trying to understand, again, whether the sense from yourselves is that the change in treatment at the PRA level is in the near term or even the medium term distributable. That would imply a new running deck for capital requirements of 11.5%, which I think many investors might regard as too good to be true. I am sorry, can you go into your rationale for 11.5? You are suggesting that an appropriate ratio for the group would be 11.5% common equity Tier 1? Well, I am just trying to check the math. I think in a response to an earlier question, you said that you had suggested that excess capital in the U.S. was $8 billion. Right. So that is 100 basis points. The benefit in Q3 from the PRA exchange to the BoCom treatment was 104 basis points. So where you are now, net of those two things is 11.5. I was just- No wanting to get your sense as well. Yeah. One way to think about it, we've set out a common equity Tier 1 ratio target of 12%-13%. Right. I think for probably the last 12 to 18 months, we've been pretty clear that probably at the top end of that range is the appropriate place for us to be, certainly until some of the regulatory uncertainty that still persists is resolved in an appropriate manner. Clearly, a little bit disappointing that we didn't get to our final guidance on Basel III divisions or Basel IV in January. We'll hopefully get something on that later this year. But no, our common equity Tier 1, sitting at 13.5% after this buyback, is 50 basis points above the top end of the range that we would target. Therefore, it kind of comes back to Stuart's comments. When we have capital resources at the group, which are in excess of our common equity Tier 1 ratio, there's a number of factors we'll consider. One, the investment opportunity at improved return levels within the group, the overall coverage for the group, and then consider the opportunity for buyback. The other factors that clearly flow into that is where we are with respect to overall stability in the regulatory environment as it relates to capital resources, and more broadly, dealing with uncertainty from a geopolitical perspective and how that could impact the overall revenue and profit generation within the group. It is a multifaceted problem that the industry faces, and I think we've got a pretty sensible and sound framework around dealing with that. But do not assume that moving significantly below 13% is something that we would countenance in the short, medium, or long term. Thank you. That's very clear. From a cost perspective, going to the overall compliance. The overall regulation compliance costs go well beyond the global standards. The global standards is a significant component of that, and as Stuart pointed out, we continue to invest on delivering our commitments against the U.S. deferred prosecution agreement, the agreement with the Financial Conduct Authority in the U.K. And that is a level of investment that we would expect. And certainly, Colin Bell, who leads that overall focus for us, is firmly of the view that investment in that area will peak in 2017, and that's consistent with previous guidance that we've provided in that regard. Other programs that fall into that are stress testing. We do multiple stress tests around the world for regulators. I think we did over 60 stress tests last year informed by regulatory guidance. We have our own internal stress testing program that's been running for many years that really informs questions that Marc Moses, our Chief Risk Officer, Stuart, the board have, that we stress test against. It also covers implementation of the Ring-fenced Bank in the United Kingdom. It covers the implementation of IFRS 9. It covers CCAR in the United States. So there's a broad base of programs that are dealt with in the regulatory and compliance space. Implementation of the senior manager regime in the U.K. is another that falls into this area. The area of expanded investment is primarily within the global standards program as it relates to anti-money laundering and sanctions control and overall financial crime risk management. And we would expect that investment to peak in 2017. And as Stuart said, we would expect that to be compliant with the run rate. I think our view is that we will deliver productivity over time, but we will deliver that productivity over the broader suite of our regulatory and compliance programs, as opposed to specifically within the global standards program. In terms of what's really delivering the cost saves, it's across each of the global businesses focused both on front office and back office processes. There's a very significant contribution to this from our technology and operations teams in terms of the efficiency with which our service centers around the world operate. Loading and optimization of the workforce within those in terms of getting better efficiency, in terms of responding to customer requirements, collection activities, for example. From a technology perspective, the overhaul that Andy Maguire and Daryl West have led across the organization is leading to some significant savings. One of the consequences that you saw from that was the impairment that we took in the fourth quarter against some of the software that we no longer deploy within the business. But it is really across every aspect of the business, within the supporting functions, across risk, across finance. We have seen significant savings realized as we improve processes. Really what we have seen, which has informed the increase of the targets, is not necessarily a proliferation of programs that we have got delivering those efficiencies, but getting greater yield from the programs that we have already launched. Clearly, there are more programs being launched, but the main contributor is greater yield from programs that we have already had up and running. Frankly, getting better at this as time goes on. I think the other point to make here is this is not about getting to the end of 2017, dropping the tools, taking a big breath, slugging down a glass of champagne, congratulating ourselves, but it is about carrying that productivity into 2018 and beyond. Thank you. The last one was Corporate Centre X levy about $1 billion a year. That feels like a sort of stable-ish number, does it, if we come to go through the new divisions? It is not a bad number for 2017, but just as the rest of the business is focused on delivering cost savings and better processes, our Corporate Centre is focused on the same thing. So it is not a bad number, but we will be focused on trying to work that a little bit southwards as well. Thank you. We have time for one last question. We will take our last question today from Stephen Andrews from Deutsche Bank. Please go ahead. Hi. Thank you, guys. Yeah, it just comes back to that last question on slide seven on the Corporate Centre and that billion dollars for the year ex levy. Can you just make a comment on the bank levy? It came in a little bit lower than expectation. You said there was a write-back. What you would expect that to be this year? Because I think it's about 300 million better than people's expectations. Yeah. The rate dropped. You will recall from the budget in 2015, I think, the rate will drop each year from now to 2021, when the basis of assessment will go from the consolidated balance sheet of the group to the U.K. balance sheet of the group. It is in 2021 when we will realize a significant reduction in the UK bank levy, assuming that that budget undertaking and legislation remains in place. What you should expect between now and 2020 is somewhere in the range of $1 billion to $1.1 billion each year for the UK bank levy. Net of the UK bank levy, we should just really be running that Corporate Centre forward as zero. Because it looks like a lot of the TLAC costs, the roll-off costs now of the US CML all is in that Corporate Centre with the new breakdown. Is that correct? Sorry. Any contribution at all from the Corporate Centre which has been positive in the past? I am sorry. When you say positive, what do you mean? Well, if I go to slide seven, and look at the sort of underlying run rates you're giving on the businesses, you've got the global businesses and the Corporate Centre. The Corporate Centre, as you rightly pointed out in your comments, there's a minus $621 million in the last quarter, which was the debt issue. Yeah. If I'm right, what you were saying just now, with the previous question, was that we're looking about $1 billion, that running at $1 billion for the full year ex the levy. Because obviously there's a lot more drags on that going forward, as you've pointed out. Yeah. If you're saying $1 billion for the full year, we take off the $1.1 billion essentially for the full year, we should be pretty much forecasting that as zero for the full year for each quarter. I know you don't give forecasts, but is that how we should think about it? From an ex levy perspective? Yeah, no, including levy full year, roughly zero. But remember what is going through the Corporate Centre here. You have got the associates, you have got BoCom, you have got Saudi British Bank, you have got headquarter operating expenses, you have got the net of our global service centers, revenue and expenses coming through that. You have got a proportion of the TLAC costs coming through that, some of which clearly is pushed down to the operating entities as we reposition that. So there are still fairly those very active flows coming through the Corporate Centre. Ex levy, I think the best analysis is the ex levy is from an operating expense perspective, subject to comments I made, is probably $1 billion. Ex levy. Okay. So including levy. Okay. Okay. Yeah. Thanks. Okay. Thanks, everyone. Thank you very much, gentlemen. Thank you. Thank you, ladies and gentlemen. That concludes the call for the HSBC Holdings plc annual results 2016. You may now disconnect.