HSBC Holdings plc (LON:HSBA)

Earnings Call: Q4 2013

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Feb 24, 2014

Good morning, ladies and gentlemen, and welcome to the Investors and Analyst Conference Call for HSBC Holdings plc's 2013 annual results. For your information, this conference is being recorded. At this time, I will hand the call over to your host, Mr. Douglas Flint, Group Chairman. Please go ahead. Good morning from London. Good evening to everyone in Hong Kong, and welcome to our 2013 HSBC annual results conference call. As has been said, I'm Douglas Flint, the Group Chairman. With me are Stuart Gulliver, the Group Chief Executive, and Iain Mackay, the Group Finance Director. Before we start, I'd like to say a word on behalf of the board. We consider HSBC to have delivered a sound financial performance in 2013, with good momentum in areas of targeted investment. The Group's capital position strengthened further during 2013. The core Tier 1 ratio improved to 13.6%, compared with 12.3% at the start of the year. Our estimated CRD4 endpoint basis, common equity Tier 1 ratio also improved to 10.9%. The first implementation phase of the strategy that Stuart set out in May 2011 has now come to an end. The results that we have announced today flow in large part from the repositioning of the Group and from enhanced risk controls given effect over the last three years. This progress, together with the strong capital position, has allowed the board to increase the dividends per ordinary share in respect to the year by 9%. Stuart will now talk you through the highlights for the year. Iain will take a detailed look at financial performance. Finally, Stuart will cover the next phase of the strategy. Stuart? Thanks, Douglas. I'll start by pulling out the key points. As Douglas said, our performance in 2013 was influenced by the strategic measures that we have taken since the start of 2011. Reported profit before tax was $22.6 billion in 2013, up 9% on 2012. Underlying profit before tax was $21.6 billion, an increase of 41%, and the reported return on average ordinary shareholders' equity was 9.2%, up from 8.4% in 2012. As Douglas indicated, we remain one of the best-capitalized banks in the world, with a core Tier 1 ratio of 13.6% and an estimated CRD4 endpoint basis common equity Tier 1 ratio of 10.9%. We therefore remain well-placed to meet expected future capital requirements, notwithstanding a continually evolving regulatory environment. The advances to deposits ratio remains robust at 72.9%, and we also continue to demonstrate our ability to generate capital, which allows us to increase dividends for the year by 9% to $0.49 per share, in line with our progressive dividend policy. This cements our status as one of the highest dividend payers in the FTSE. We will talk later about the strategic highlights of the last three years, as well as priorities for the three years ahead. Turning now to slide 4. This slide lays out the financial highlights, as I have just discussed. The additional point to note here is the cost efficiency ratio, which improved to 59.6%. As we explained in May at our investor update, we have modified the cost efficiency target for the next three years to mid-50s to more appropriately reflect the composition of the Group's profit. Earnings per share also increased from $0.74 in 2012 to $0.84 in 2013. Turning to regional and business contribution. Underlying profits were higher than 2012 in five out of the six regions. In Hong Kong, underlying profit before tax was $8.1 billion in 2013, up 13% on last year. This was driven primarily by RBWM and GBM. Higher revenue partly reflected average balance sheet growth, increased net fees from unit trusts and debt issuance, and increased collaboration between Commercial Banking and GBM. In the rest of Asia Pacific, profit was $6.7 billion, up 20% on 2012, though it was broadly unchanged, excluding the net impact of the Ping An disposal. In accordance with our strategy, we took action to strengthen our position in most of our priority markets and also to reduce fragmentation across the region. In Latin America, profit was $0.7 billion, down 62%, driven primarily by a rise in loan impairment charges. Whilst our performance in Latin America was affected by slower economic growth and inflationary pressures, we made significant progress in repositioning our portfolios with a focus on our priority markets of Brazil, Mexico, and Argentina. In Europe, profit was up $2 billion due to significantly lower customer redress provisions, higher revenue in Commercial Banking, a resilient performance in GBM, and higher mortgage lending in the U.K. North America returned to profit at $1.6 billion, due mainly to a decline in loan impairment charges in the U.S. and lower costs due to the non-recurrence of provisions for fines and penalties recorded in 2012. The reduction in loan impairment charges was primarily in the run-off portfolio, partly reflecting improvements in the housing market. Next, I will run through the results as broken down by the four global businesses. In Commercial Banking, we achieved profit of $7.9 billion, up 5% on 2012. Revenue growth was driven mainly by Europe and Hong Kong, partly offset by Latin America and North America. We also recorded loan growth of more than $13 billion, driven primarily by term and trade-related lending, and to a lesser extent, commercial real estate and other property-related lending. Trade-related revenue was affected by spread compression, although this began to stabilize in the latter part of the year. In GBM, profit was $9 billion, up 15% on 2012, driven by higher revenue and significantly lower loan impairment charges and other credit risk provisions. The increase in revenues was in part underpinned by resilient performance in the majority of our customer-facing businesses, particularly in credit, equities, and capital financing. We believe this result demonstrates again the strength of our differentiated business model with its broad international focus, emphasis on customer connectivity, product capability, and our balance sheet strength. In RBWM, profit was up $2.4 billion as we made further progress in running off the consumer mortgage and lending portfolio in North America, with an improvement in loan impairment charges, more than offsetting the decline in revenue. Our retail bank and wealth management business, excluding the U.S. runoff portfolio, what we call our principal retail banking and wealth management business, benefited from lower U.K. customer redress charges and further sustainable cost savings together with revenue growth, mainly in Hong Kong and Europe. This excludes the loss on sale of the HSBC Bank secured lending portfolio. In the U.K., we lent £3.8 billion or $6 billion U.S. to help more than 30,000 first-time buyers purchase their own home in 2013. We also provided greater convenience for our retail customers by rolling out our new mobile applications across 25 key markets, with 2.5 million downloads over the course of the year. Finally, we remain committed to global private banking and to repositioning the business. This repositioning, together with legacy issues, resulted in a reduction in profit of $0.7 billion in 2013. Our teams remain focused on the collaboration between global private banking and commercial banking, which is where we expect the majority of our new clients to come from. Before I hand over to Iain, I'd like to make a few key points. First, on revenue, by growing our organic business since the start of 2011, we have already replaced approximately a third of the reduction in total revenue from the 63 disposals or closures that we have initiated. Second, we've introduced new incentive plans to retail banking and wealth management globally, which remove the formulaic link between product sales and variable pay. We therefore expect future revenues to be of a higher quality with lower risk of customer redress. Third, on a constant currency basis and excluding U.K. customer redress and restructuring costs, operating expenses were broadly flat in 2013 compared to 2010. This demonstrates the impact of our sustainable cost savings and disposals in broadly offsetting cost increases over the period. These included inflationary pressures, the U.K. bank levy, and investment in risk and compliance, as well as other business initiatives. This is a clear demonstration that we're absolutely able to manage the firm on a global basis to drive revenue growth and manage costs. I'll now hand over to Iain to talk through the financial performance in more detail. Thanks, Stuart. This slide shows the reported results. Let me highlight a few key points. Reported revenues were down compared to 2012. This was driven principally by lower net gains from disposals and reclassifications, mainly as 2012 included gains from the disposal of the U.S. cards and retail services business of $3.1 billion and the disposal of our investment in Ping An of $3 billion. Operating expenses were down $4.4 billion, mainly reflecting the non-recurrence of the provision for U.S. Anti-Money Laundering, Bank Secrecy Act, and Office of Foreign Assets Control investigations, lower charges relating to U.K. customer redress programs, and lower restructuring and related costs. Loan impairment charges improved significantly, particularly in the U.S., where we continued to run off our consumer mortgage and lending portfolio. As you'd expect, the contribution from associates fell as a result of the sale of our shareholding in Ping An last year and the reclassification of Industrial Bank as a financial investment. Turning to slide seven. Let's look briefly at the discrete fourth quarter, where reported profit before tax decreased by 11% compared to the fourth quarter of 2012. Excluding movements in the fair value of own debt and the impact of any gains or losses on disposals, as well as the operating results, revenue increased. This was driven by Global Banking and Markets and Commercial Banking, although partially offset by lower revenue in Retail Banking and Wealth Management and Global Private Banking. Loan impairment charges improved significantly, particularly in Commercial Banking in Europe and in the U.S. runoff portfolio. Whilst operating costs were lower as a result of the non-recurrence of fines and penalties, lower customer redress, and decreased restructuring and related costs, these were partly offset by the increased U.K. bank levy. More detail now on the underlying numbers, as it is on this basis that we measure performance. As a reminder, our underlying numbers eliminate changes in the fair value of our long-term debt due to own credit spread, remove any gains or losses on disposals, as well as the operating results of those businesses in both 2012 and 2013, and eliminate foreign currency translation differences. They do not exclude anything else. Underlying revenue was up $1.7 billion or 3% compared with 2012. Loan impairment charges were down $1.9 billion or 25%, and operating expenses were down $2.6 billion or 6%. This performance, higher revenues, lower loan impairment charges, and lower costs meant that underlying profit before tax was $21.6 billion, up $6.3 billion or 41% compared with 2012. Turning to slide nine for a look at revenues. Underlying revenue was $63.3 billion, up $1.7 billion on 2012. We've brought out some of the selected items which influenced revenue, many of which we've discussed earlier in the year. These include a net favorable movement in non-qualifying hedges of $807 million, a net gain recognized on completion of the sale of our remaining investment in Ping An of $553 million, which offset the adverse fair value movement in 2012, and a number of other smaller items which we've previously covered. Taking each of the global businesses in turn from left to right in this slide. In global banking and markets, revenue was $915 million in 2012, which in part reflected a resilient performance across the majority of our customer-facing businesses and reflects the strength of the business model. Revenue increased notably in credit, equities, and capital financing. As expected, balance sheet management revenue decreased as proceeds from the sale and maturity of investments were reinvested at prevailing rates, which were lower, together with reduced gains on the disposal of available-for-sale debt securities. Additionally, in 2012, revenue included a reported net charge of $385 million as a result of a change in estimation methodology in respect of credit valuation adjustment of $903 million, and a debit valuation adjustment of $518 million to reflect evolving market practices. In commercial banking, revenue was $312 million higher than 2012. This was driven in part by average balance sheet growth, partly offset by spread compression, together with higher lending fees and improved collaboration with other global businesses. In our principal RBWM business, which you will recall excludes the U.S. run-off portfolio, revenue was marginally higher by around $100 million. This increase reflected improved mortgage spreads and mortgage balance growth, notably in our home markets of Hong Kong and the U.K. There was also higher fee income in Hong Kong, mainly from unit trusts and broking income. These were partly offset by reductions in revenue in the rest of Asia Pacific and Latin America, in part reflecting adverse movements in the present value in force assets and insurance operations compared with 2012. In the U.S. run-off portfolio, revenue was lower by $1.1 billion, reflecting lower average balances, losses on the sale of U.S. legacy non-real estate and real estate loan portfolios of $271 million and $153 million, respectively, and losses on the early termination of classical hedges of $199 million. In private banking, revenue was down $368 million. This partly reflected lower net interest income as higher yielding provisions matured and limited opportunities for investment due to lower prevailing yields, coupled with narrower asset spreads and lower average deposit balances. In addition, revenue fell as a result of lower client assets and ongoing repositioning of the business. However, we attracted positive net new money of $4.6 billion from our clients in Asia in 2013. Turning to operating expenses. We continued to exercise strict cost discipline and achieved $1.5 billion of sustainable cost savings during the year. This takes the annualized total to $4.9 billion since the start of 2011, as we continued to release funds to invest in growth in line with our strategy. Overall underlying costs were down $2.6 billion or 6%. This mainly reflected the non-recurrence of provisions for fines and penalties recorded in 2012, lower charges relating to U.K. customer redress programs, and lower restructuring and related costs. Excluding these items, costs were $808 million higher than in 2012, reflecting a number of items. An increase in the U.K. bank levy charge of $444 million, a provision in respect of regulatory investigation in global private banking, an increase in litigation-related costs primarily in respect of Madoff litigation in global banking and markets, and a customer remediation provision relating to our former U.S. cards business. We also increased spending on targeted organic growth and infrastructure and continued to invest in regulatory requirements, particularly through our global standards program. Other costs rose due to higher operational expenses, partly driven by general inflationary pressures of around $900 million. Costs benefited from our sustainable savings and an accounting gain arising from a change in the basis of delivering ill-health benefits to certain employees in the U.K. bank of $430 million. We achieved positive jaws of 9% for the year. Turning now to credit quality. Underlying loan impairment charges were down $1.9 billion or 25% compared with 2012. We saw declines in the majority of our regions, particularly in North America, where loan impairment charges fell by $1.9 billion. This partly reflected improvements in the U.S. housing market, reduced lending balances from the continued portfolio run-off and loan sales, and lower levels of new impaired loans and delinquency in the U.S. CML portfolio. These factors were partly offset by an increase in Latin America. In Mexico, we saw specific impairments in commercial banking relating to home builders due to a change in public housing policy and higher collective impairments in retail banking and wealth management. In Brazil, loan impairment charges increased due to changes to the impairment model and assumption revisions for restructured loan account portfolios in retail banking and wealth management and business banking and CMB, as well as specific impairments in commercial banking. However, following policy changes made in previous periods, the credit quality in the remainder of the book in Brazil has improved. Turning now to the drivers of returns on slide 12. The strengthening of our return on equity from 8.4% to 9.2% was due primarily to favorable impact from lower adverse movements on the fair value of our own debt, a reduction in notable cost items, primarily from provisions for fines and penalties and customer redress, and the net gain recognized in the sale of investment in Ping An, which offset the adverse fair value movement in 2012. However, these were partly offset by lower net gains on disposals and the exclusion of their operating results. Our current return on risk-weighted assets stands at 2% on both a reported and underlying basis. Excluding the run-off portfolios, it is 2.2%, including 20 basis points of notable items. We have provided a breakdown of the group underlying return on risk-weighted assets by global business and split out the legacy portfolios for global banking markets and retail banking wealth management. Looking forward, our return on equity will mainly be influenced by our success in executing components of our strategy and our ability to navigate ongoing regulatory uncertainty. There is also a technical accounting matter relating to BoCom. BoCom is accounted for under the IFRS equity accounting method. This means that when the investment carrying amount of BoCom in our books is more than the calculated accounting value in use, any further recognition of the share of its profits will be reversed. While this is likely to affect our earnings at some point in 2014, it has no impact on our cash flow, no impact on our progressive dividend policy or regulatory capital, and no impact on our long-term strategy towards BoCom. Turning to slide 13. The after-tax distribution of profits in 2013 is similar to that of 2012. We've retained 53% and increased our distribution to shareholders to 35%. This is reflected in the 9% increase in the dividends for 2013. 12% was allocated to variable compensation. As you can see, we have increased the fourth interim dividend to $0.19 per share in line with our progressive dividend policy, and we currently plan to deliver the first three interim dividends of $0.10 per share in 2014. Turning now to capital. The group's core Tier 1 ratio was 13.6% on December 31, 2013, compared with 12.3% in the prior year. This reflects strong net capital generation of $10.1 billion in addition to the $7 billion that we paid in dividends net of scrip during the year. One of the key contributors was the continuing management of our run-off portfolios, which released $40.8 billion of risk-weighted assets in 2013. From the beginning of 2011 to the end of 2013, we have reduced risk-weighted assets by approximately $90 billion as a result of disposals and closures, with potentially $5 yet to come. Our estimated CRD4 endpoint basis, Common Equity Tier 1 ratio was 10.9% at the end of 2013. This figure includes five dividend payments in respect of 2013, with the fourth-quarter interim dividend now deducted from capital. This is a one-time adjustment in line with CRD4 requirements. We are well-positioned with respect to the implementation of CRD4. Uncertainty remains around the amount of capital that banks will be required to hold, as key technical standards and consultation from regulatory authorities remain pending. We await clarification from the PRA on the quantification and interaction of CRD4 capital buffers and Pillar 2, and also a number of EBA technical standards on CRD4 implementation, which will be delivered in 2014. In addition, the PRA has given notice that it will implement loss-given default floors across select portfolios during the first quarter. This will increase our risk-weighted assets in the first quarter of 2014, with an estimated reduction in our Common Equity Tier 1 ratio of 25 to 35 basis points. HSBC remains one of the best-capitalized banks in the world, providing capacity for both organic growth and dividend return to shareholders. I will now hand back to Stuart. Thanks, Iain. 2013 marked the final year of the first implementation period of the strategy that I outlined back in May of 2011. You will recall that our strategy aims to capitalize on two major trends, the continuing growth of international trade and capital flows and wealth creation, particularly in Asia, the Middle East, and Latin America. Over the last three years, we have put this strategy into action, pursuing more effective capital deployment, greater organization efficiency, and better returns. It is worth restating that we have already replaced approximately a third of the reduction in total revenue that came about from disposals. As I explained earlier, we have a firm grip on costs and have demonstrated our ability to grow the business. The group today is leaner than in 2011, with strong potential for growth. 2014 marks the beginning of the next phase of the implementation of our strategy, and there are three priorities for the next phase, as we announced at the investor update last May. It is important to stress that these three priorities are absolutely equal, and we will pursue each of them with equal intensity. First, we aim to grow the business and dividends. We are going to continue to invest in organic growth opportunities that are aligned to our strategy, consistent with our risk appetite, and which add value to the group. In particular, we will increase collaboration between our businesses, further improve connectivity between regions, and build on our core strengths. In doing so, we are going to aim to capitalize on our global footprint, particularly in our leading business areas such as trade finance, payments and cash management, and foreign exchange. We will also continue to invest in high-growth markets, such as the Pearl River Delta and ASEAN, and improve our position in highly connected developed markets such as Germany and the U.S. Our capital strategy aims to increase dividends progressively, and if we are unable to deploy remaining capital ourselves in such a way that it provides incremental value for our shareholders, we may seek to neutralize the effect of the scrip dividend through share buybacks subject to regulatory approvals. We shall, of course, continue to wind down and reduce the impact of the portfolio of legacy businesses. Second, we will continue to implement our global standards program, which we believe will increase the quality of the group's earnings. Global standards concerns all of our activity and will drive consistently high standards throughout HSBC. We have made substantial investments in risk and compliance capabilities across all businesses and regions to strengthen our response to the ongoing threat of financial crime, and we will continue to do so. This is the right thing to do in line with our values, and we believe that it will also become a source of competitive advantage. Third, we aim to deliver a further $2 billion-$3 billion of sustainable savings by streamlining our processes and procedures without in any way compromising our commitment to compliance and global standards. We will achieve this by taking advantage of the considerable scope within the business to globalize and simplify many of our operations and practices. Finally, a quick word on outlook. We remain of the view that China will grow its GDP by about 7.4% this year, the U.K. by 2.6%, U.S.A. by 2.5%, and Western Europe by 1.2%. Although there has been a sharp sell-off in some emerging markets, both when tapering was first talked of last June and more recently in January this year, we see this as a reflection of specific circumstances rather than a generalized retreat. The countries most affected have two common themes, namely large current account deficits and the uncertain outcomes arising from elections within this year. By contrast, other emerging markets, such as Mexico, have been upgraded by the rating agencies in exactly the same period. Overall, we remain optimistic about the longer-term prospects of the emerging markets, and especially the opportunities for HSBC, which will arise from the anticipated material expansion in South-South trade and capital flows. In the short term, we stress the importance of differentiating within and between individual countries within the generic category of emerging markets. Nevertheless, we anticipate greater volatility in 2014 and choppy markets as adjustments are made to changing economic circumstances and sentiment. We are now going to take your questions, and the operator will be happy to explain the procedure and introduce the first question. Operator. Thank you, 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. If you have joined us after watching the webcast of the annual results presentation, for optimum clarity during the Q&A, please ensure that you mute the webcast on your computer. Once again, to ask a question, please press star one. Please ensure that the mute function on your telephone is switched off. Okay, can we have the first one, please? We will take our first question today from Chirag Barua from Sanford Bernstein. Please go ahead. Thank you. I have three quick questions. The first one is on the PRA floors. It almost sounds like counter cyclical capital already kicking in. It will be great if you could give us some idea on which flows, regions, businesses that these flows will impact. The second one, Stuart, is on Hong Kong outlook. You have given your guidance on greater volatility and how some emerging markets impacted, others are not. Not too many transactions happening in Hong Kong at the moment in the property space. It would be great to get 2014 outlook. The last one is on BSM as well. Sorry. If you have any updated guidance on BSM and how you are going to deploy the huge amount of cash which is on your balance sheet. Sure. Let me take BSM. We will do them in reverse order. BSM, I think guidance is $2.5 billion for 2014. I mean, curves again have flattened out. You had a little bit of steepness, and then they flattened back again. We are going to clearly keep the book short. We are not sure at what point short-term rates start to back up. We do not want to be caught with assets that actually we are then having to fund at higher running rates. So $2.5 billion is guidance for 2014. We are still at this inflection point. We saw effectively a sell-off in the long end, so the curve steepening from the long end. We have not seen any movement at the short end, but that clearly is something we have got to navigate quite carefully. Hong Kong, I think the property market in Hong Kong will remain soft during 2014. The government restrictions were there to take the heat out of the property market. They have not really changed. Volumes, as you say, remain reasonably low in the property market, and I do not see that particularly changing during the course of 2014. So I think it will be a soft property market. But remember, LTVs on the book in Hong Kong overall are sub 40%. Therefore, I am not concerned from a credit quality point of view and a bad debt point of view. Actually, the volume of activity in terms of mortgages has dropped a little bit, but we have not seen a significant impact in terms of the P&L of the retail banking wealth management business. Actually, from an equity capital markets point of view, there is actually quite a significant M&A pipeline and corporate finance pipeline, actually, in Hong Kong for this year. So I think that actually we may ironically see an offset from any softness in the mortgage part of retail banking in Hong Kong coming through in terms of the corporate finance IPO type of pipeline, which actually will support the wealth part of retail banking wealth management. So Hong Kong outlook, yeah, property market is soft, but overall, I still think that we will be able to see growth in PBT in our operation in Hong Kong. I will hand over to Iain on the PRA floors. Okay. As you will recall, we certainly saw a couple of PRA floors introduced in 2013, probably the most notable of which was on sovereigns outside the European Economic Area. What we refer to with respect to the first quarter is largely with respect to corporate portfolios and mostly within the developed economies of U.K., Europe, and the U.S., which again, the PRA has indicated their intent to implement a loss-given default floor of 45%. That is driven particularly by the concern around the level of data that the PRA would like to see in terms of how we support and develop the internal ratings-based models. Clearly, from our standpoint, in mitigating some of this impact, we continue to drive down on the granularity of that data, but this, again, is principally focused on corporate portfolios in the developed markets. Thank you. Thanks very much. Next, please. We will take our next question from Chintan Joshi from Nomura. Please go ahead. Hi. Good morning. You've already discussed a little bit in your opening remarks, but my first question is on asset quality. What kind of impact are you seeing from the January FX volatility we've seen, and if you could specify areas of concern for you. And I've got two more. Okay. We haven't Some issues arising out of the FX volatility that's taken place in Brazil, India, Indonesia, or Argentina. Hello? Yeah. Sorry. No, you broke off towards the end. So there has been no impact on the credit quality of our loan book from FX volatility so far this year in Brazil, India, Indonesia, or Argentina. What are your expectations going forward? Our expectations are that, depending on how that volatility continues throughout the year, we may see some impact in terms of bad debts, most likely actually through CMB and SMEs, but it really depends on what happens in the balance of the year. We have been very conservative in terms of our exposure to global banking markets clients, and therefore have made absolutely sure that they clearly have borrowed. If they've borrowed foreign currency, they have foreign currency revenues. What you may find is that actually as GDP slows, some of the smaller customers are impacted by the GDP slowing, not directly by the FX, but by the second-order impact. That tends to be what happens when you have these kind of sharp currency moves, unless they're corrected reasonably quickly. We have no line of sight to that at the moment to be adjusting any kind of loan impairment charges. Thanks. My second question is on trade finance. You do report it in a couple of different areas. Holistically, how do you see trade finance margins having developed in Q4? Also, if you could give us some indication of what current level of profitability is in that business in terms of ROE. Okay. Our volume of lending in trade finance increased by about 20% over 2012, driven mainly by Hong Kong, rest of Asia Pacific. The margins in 2013 were quite a bit lower. But actually we've started to see that decline in margin bottom out. This is a subtle point I'm going to make. The rate of margin compression has slowed into the third and fourth quarter. It hasn't stopped and gone back in the other direction, but the rate at which margins were being squeezed has slowed down. And this remains actually a very profitable business for us, with a substantial ROE. I don't know, Iain, if we have a RWA number on it. We disclose that separately. We don't disclose it separately, but it's a great business. And really, if you think about what we've done is, the revenue is broadly unchanged versus 2012. Because we pumped volumes up by 20%, which offset the margin decline. I think, broadly, if you think about returns on this one, Chintan, the targeted returns on return and risk-weighted assets for the commercial bank ranges from 2.2 up to 2.5. Given the capital intensity of this business, the returns within the global trade receivables financing business is quite strong in that range. Thanks. My final is, there are a lot of notable items, but even outside the notable items, there is a lot of non-recurring impact to revenues and cost. I just wanted to ask you, how do you see current underlying adjusted, if you may, revenue growth, cost growth, year-on-year? Also what your expectations are for the coming year. Thank you. That is a new question from you, Chintan. Thank you. Well, interestingly enough, I would actually say there are many, many fewer notable items in these numbers than has been the case in 2012 or 2011. Largely as we have moved through the latter stages of the reshaping of the business under the strategy. We have provided the key elements that sit within the underlying numbers. Again, the underlying numbers are only excluding three issues, fair value on debt, the currency effect, and the impact of acquisitions and dispositions. Those are the reconciling items. Broadly within that, we are slowly, I hope, working towards the end of what we see from a PPI perspective. Stuart made some remarks around how we have repositioned some of the incentives within the RBWM business to improve the quality of earnings in that respect going forward. I think from a litigation standpoint, there is very detailed disclosure in this in note 43 to financials, as well as in the provisions notes in note 31. Again, I think litigation and the risk of litigation is an ongoing feature of any banking business at this point. We have never really broken that out as notable items in the past, but we give you some fairly detailed disclosures as to that, which we have incurred this year. If you look at the revenue line, we have taken some losses as we have run down the CML portfolio in the U.S., and I gave you some details of that in the revenue walk. Really from a cost perspective, it is about litigation and it is about customer redress, where, again, we have given you some of the detail of that in the financials. But going beyond that, I would say we have got a set of numbers here that are beginning to migrate to something that looks more like the normal. And if you look under it, revenue growth is about 3%. As I say, bear in mind, we have sold 63 businesses that most analysts seem to have not focused on. We sold an awful lot of revenue. When you actually look at the revenue numbers and say, "Well, there is no revenue growth here," people are not really taking out of the fact that we actually sold substantial amounts of revenue as we sold businesses that were not strategically logical. Portfolios of assets that failed the six filters and obviously have released RWA through that, which we have been able to redeploy in growing revenues, which are logical within our GBM, RBWM, CMB private banking businesses, which actually logically should actually have a higher valuation. Would you venture some expectations we should set for the next year? Thanks. If you think about the guidance that Stuart provides here on the outlook around GDP development, and we have talked about this on numerous occasions in the past, it tends to be a reasonable indicator of our opportunity for growth within those markets. Fair enough. Thank you. Thank you. Next one, please. We will take our next question from Alastair Ryan from Bank of America. Please go ahead. Bank of America. Stuart. Thank you. Good morning. Morning. Yes. Three for me. First, back to our old favorite, regulation, and its never-ending development. Since last May, you've probably $50 billion or $60 billion more of RWA with these new floors that are coming in than you'd reasonably expected to have, and you're running a higher reported common equity Tier 1 than your goal, significantly in excess of 10% versus a goal of in excess of 10%, and likely to be building further as you run off legacy portfolios and retain profits. Can you work us back to whether the 12%-15% target that you reiterated last May is still a reasonable one? Just because the rules keep changing at quite a rapid pace. Second thing, the restatement of repos makes the margin very difficult to read period over period. From your commentary, it sounds like the margin has stabilized in the group net interest margin. Can you just walk us through that, please? And third, on BoCom, I've found it on page 510, which is probably the new record even for HSBC. Brilliant. But are you basically telling us that unless the share price goes up, you'll have to reverse out the profits that you'll accrue this year? It's just a non-intuitive accounting piece. Thank you. Okay. Let me kick off on the regulatory capital point, and then we'll walk through the repos and BoCom. You're right in what you're setting out as a sort of question, and actually, it's not one that we can easily answer, because until we have specific clarity, and this comes from the PRA, about what our end state Tier 1 capital ratio is, we have no choice but to continue to build our capital up, and there's kind of several points under that. One, we clearly are building capital up. If you look at it, $10.1 billion added to our Tier 1 capital ratio, $9.2 billion paid in dividends. So clearly we don't have a problem building up to a higher number. But then you get to the second point, which is, well, can you get the 12%-15% ROE if the E is now substantially higher than your assumption? The obvious answer to that will be, no, we won't be able to, depending on what actually that eventual E is. What I think I'm confident of saying, Alastair, is that no matter what the E is, we'll generate a return above our cost of equity. But whether the 15% becomes impossible to do and it becomes 12% or something similar, we just don't know. Because absolutely, there are two things going on here. RWA density, for want of a better expression, keeps changing. Floors keep being introduced, and there are some more floors coming in the first quarter on corporate books, which Iain can talk about. And we actually don't know what the end number is. Until we get specificity around all of that, and we know what the E is, then only at that point can we revisit the ROE target. But again, what we do have the ability as HSBC to do is we don't need to raise equity or raise capital to get to these new whatever the Tier 1 ratio they require us to have is, because clearly we are generating substantial amounts of retained earnings and substantial amounts of PBT. But you're right, I don't know at this point in time whether the 12%-15% is a reasonable number because I don't know what the E is going to be. Yeah. And Alastair, if you think about the operational measures at the business level that we use here, it's return on risk-weighted assets. In the year, we generated return on risk-weighted assets of 2%, which is up on last year. You take out the effect of the legacy assets in GBM and the run-off portfolios in the U.S. consumer business, you're at 2.2%, which is very much in the range that we set for the group that triangulates the lower end of the 12%-15% range. So just on an operational level, you can see your way to the lower end, but that excludes, obviously, consideration of how equity develops, and that's the big uncertainty as Stuart laid out. In terms of looking at NIMs, with or without the impact of repos within the numbers, we saw net interest margin stabilizing in the second half of the year, particularly towards the end of the year. The rate of decline, as Stuart mentioned, has reduced significantly. This is all good news, but I would call it stability as opposed to recovery. So if you look at where NIM is at the end of 2013 versus 2012, we still have not recovered where we were at the end of 2012, and have some way to go in that regard. Looking at BoCom, again, you've got the prosaic elements of equity accounting under international accounting standards here, where we've got a market value in BoCom, which has traded well below book value of BoCom and our carrying value now for the better part of two years. As a consequence of which, and we do this for all our positions on a very regular basis, is reevaluate the accounting against the equity method using a value in use model. What we are really saying to you here is that we believe there is some point during 2014 where the carrying value is likely to exceed our value in use, and at that point, we would reverse out our share of the revenues and the profits of BoCom. That is what it boils down to. It in no way has an adverse effect on cash or capital, but certainly has an impact on reported profits probably for the second half of this year. Thank you. Just last stupid part of that question then. You will stop accruing BoCom's profits, or you will take a hit on the book value of it? No. What you will do is you will actually continue to accrue the profits, and you will take a reverse out of those profits to the extent that the carrying value exceeds the value in use. Now, bear in mind, this is driven largely by market value. So to the extent that market value is recovered, then our assessment of impairment would change. So this is not an irreversible change. This is just a reflection on an ongoing basis of our carrying value versus that of the value in use. Okay. Thank you. Thanks very much. Thanks, Alastair. Next, please. We will take our next question from Rahul Sinha from JP Morgan. Please go ahead. Morning, gents. Morning. Can I just follow up on the last one, then I've got two separate ones. Just on the BoCom accounting impact, I do get the fact that obviously it has no impact on cash flow or capital. Is there a broader point to think about your dividend payout ratio, while excluding the share of contribution from BoCom going forward, just given that there's volatility that causes to your earnings stream? Do you think that would be a reasonable way to look at your dividend payout ratio going forward? No, I wouldn't. I don't see BoCom having any adverse effect on dividend paying capability at all. The actual cash realized from BoCom in the form of dividends to us is a very, very small amount for the group on an ongoing basis. It's actually one of the features that drives the carrying value. Obviously, dividends would be a deduction from carrying value. So it's one of the things that continues to drive up carrying value against our value in use. So no, I would not reflect on this as having an adverse impact on the dividend paying capability of the group at all. Thanks. Just two other questions. Just wanted to test if you could share with us your estimate or your thoughts on what your Pillar 2A buffer might be. Some of the other U.K. banks have obviously given that number to us recently. So I was wondering if you might be able to do that as well. And then- Not inclined to provide that, Rahul. Right. That really is actually confidential between the PRA and the bank. I believe that one or two of our competitors had to appeal to the PRA for special permission to release that to you. We have a strong capital position, as Stuart mentioned. We generate capital to a very significant degree on a quarter-by-quarter basis, supporting strong dividend payments to the shareholder base. Our capital position, common equity Tier 1 at 10.9%, is certainly above our current understanding of what the PRA would require of us, substantially above that. But what we are not clear on, and this was the point that Stuart was making, is we don't know where the endpoint on this is. As the EBA finalizes ITS and RTS on the implementation of CRD4, and the PRA then interpret that for application in the U.K., the interaction of the various buffers as we work through the transitional period, and the size of those buffers, is actually what we need to understand. We will continue to work through the consultation process as the PRA is ready to engage in that. Hopefully, as 2014 rolls on, we will be able to give greater guidance to the marketplace about where we think that endpoint ultimately is, and going to an earlier question, hopefully inform where we think that has any impact on our ability to generate returns on equity and wider dividend distribution. It is an area where there is a lack of clarity right now, and at this stage, we do not particularly feel that it would be beneficial to anybody to do some gross speculation as to where it might end up. Okay. Then I get all the commentary about redeploying your capital into higher return on risk-weighted assets, and obviously, that is a very sensible strategy across the group. I am just a little bit worried about the fungibility of your capital across subsidiaries. I was wondering if you can comment on the excess capital that is now in the U.S., and what you might or might not be able to do in terms of redeploying that into higher return RWAs. Yeah, absolutely, Rahul. You follow the way in which we manage capital distribution within the group. The subsidiaries around the world return their surplus capital to us in the form of dividends. That then supports the dividend to the shareholder of HSBC Holdings plc, as well as supporting the redistribution of some of that capital back into the businesses to support growth in the various geographies through the legal entities in each of the markets in which we operate. That practice has not changed. Clearly, our subsidiaries around the various parts of the world are having to deal with how their local regulators implement Basel III as well. But in the round, that approach to capital management will remain absolutely consistent going forward. When you talk specifically to the U.S., as we've mentioned in the past, we believe we've got substantial surplus capital there, but we've also got a couple of businesses on which we're very focused on growing. Commercial banking is at the forefront of that, supported by GBM. As we've deployed to the major metropolitan and industrial centers, particularly in the West Coast of the U.S. and in the Midwest, we've seen the opportunity to grow the commercial banking business. The early stages of that is beginning to come through the numbers in the U.S., and we'll continue to deploy surplus capital to the development of those businesses, as well as the restructuring of the retail bank and wealth management business. There is an opportunity to deploy some of that surplus capital. But as we work through the results of the CCAR with the Federal Reserve, hopefully in the years ahead, we'll find a way to release some of that surplus capital, which we believe exists, back to the parent for deployment to other businesses around the world. Is there a specific catalyst, Iain, that you think might be the point at which we can expect a decision to be taken in the U.S. on deployment of that capital or dividend? Well, I think the outcome of the CCAR review by the Fed is important. We'll hear about that towards the end of March. Again, we carry very strong total capital ratios in the U.S. They're just under the 27% mark. Overall, we've got a core Tier 1 ratio of in excess of 13%, nearly 14% in the U.S. So we believe, on a quantitative basis, we'll be in good shape. On a qualitative basis, which by the way, is the basis on which a number of our peers in the U.S. have been challenged in terms of the overall process, the quality, the granularity of the data. Like our peers, we would expect to be given a list of things the Fed would like to see us improve on. But I think beyond CCAR, it is demonstrating the sustainability of profits coming through the U.S. business. It is continuing to make progress in the rundown of the finance company legacy assets, which the team and the finance company has done a great job over the course of the last 12-18 months. Then continue to make progress against the various regulatory matters, which we are in the process of investing quite significantly in. The DPA being one, but the continued focus on improving processes as it relates to mortgage lending and foreclosures would be another. We have got to make progress on those three fronts in my view. Until we have made some significant progress on the DPA, I think it is unlikely we will be given the right to dividend a surplus out to the parent. Thanks very much. Sorry, just to clarify, the DPA is till December 2017? Yeah, that is right. Yep. Okay, thanks. Bye. Next, please. We will take our next question from Dominic Chan from BNP Paribas. Please go ahead. Hi, Iain, Stuart. It looks like the momentum for net fee income and the insurance profit in the fourth quarter slowed down quite substantially in the fourth quarter last year, in particular in Europe and rest of Asia Pacific. I am just wondering the reason behind the slowdown in the fourth quarter, and what do you think the momentum going into the current year? Thank you. Dominic, I think certainly as it relates to fee income, I do not think that is necessarily the case. What we did see in the fourth quarter was some slowing, certainly, in terms of Global Banking and Markets in the rates business, where we saw revenues a little bit slower. I think when you look at overall revenue development, we certainly saw the impact of the continued runoff and disposition of real estate tranches within the U.S. portfolio. You see the impact of DVA, but that is considerably less than was the case in the same quarter last year. I think broadly speaking, fee income has held fairly steady. And we have seen an impact in terms of fourth quarter revenues in the other operating income line, and on the trading income, as I mentioned. But overall, fee income has remained reasonably steady. It's a little bit down in private banking, and that's driven principally by the repositioning within the global private bank that we're in the throes of doing. But in the round, fee income has remained fairly stable. Okay, thank you. Thanks, Dominic. Next, please. We will take our next question from Rohith Chandra-Rajan from Barclays. Please go ahead. Morning. Just one fairly general question, actually, just in terms of growth opportunities for 2014. You sort of note the volatility in selected emerging markets, but believe your GDP forecast is unchanged. Just wondering what your current perception is of growth opportunities within the return targets for 2014 versus 2013. How would you compare growth opportunities in the 2 years? Thanks. I think you've got to basically go by geography and then by business within geography. There's no rising tide that's going to lift all boats. If you look at where I think there'll be greater growth this year versus last, I think the U.K. for us, with U.K. GDP at 2.6%, one of our 2 home markets. We have a substantial footprint here. The competitive landscape should enable us to take market share in Commercial Banking, Global Banking Markets, and indeed in Retail Banking. You've seen that in our lending to SMEs. You've seen that in our Global Banking Markets business, and its market share in debt capital markets and foreign exchange and so on. You've actually seen it in Retail Banking with mortgages as a CMB, with lending to international SMEs. I think if you look around the world, I still think China's going to do 7% to 7.5% GDP growth, which will power the Pearl River Delta and Hong Kong. The ASEAN countries, particularly Malaysia, Singapore, should have reasonable GDP growth. Indonesia obviously needs to get through its election. Mexico, with the Pemex reforms, we think is probably a 4% or 5% GDP growth this year. Therefore, we can see substantial opportunities there. Then if you look at particular initiatives, for us, we don't think global trade goes into reverse. We think that some of the margin compression, or we see and know that some of the margin compression is actually moving through, it's kind of bottoming out. The volume growth that we've seen is appropriate to our market share in that regard. I still think RMB internationalization is a big macro play that will benefit this bank. I think the fact the RMB weakened by 1%, which has become a fascinating headline for some of the media, is actually a jolly good thing. You want a two-way market and a currency if you're going to internationalize it. So I think there's some specific dig-ins. Again, look at Retail Banking. We changed our commission structures last year to remove any linkage between commissions and individual products sold. That should improve the quality of those revenues, because it should substantially reduce any customer redress risk further down the track. In global banking markets, I think we've again proved that we have a differentiated model, which is something that we've been saying for quite some time. I think we'll continue, if anything, to take market share in the emerging markets, because if this emerging market volatility shakes out a few more competitors, then we stand ready to take that market share. Then in private banking, we're partway through a restructuring of that business. It will remain a core business for us. Last year, we saw $5 billion of new AUM introduced by the commercial bank to the private bank, which is a proof of the new model. We want most of our private banking clients to basically be the self-employed out of our commercial banking business, who eventually trade sell their business or IPO it. So you're not going to have, if you like, the rising tide lifts all boats of there's fantastic growth in X, Y, or Z, but we can see specific idiosyncratic opportunities that give us some confidence that we'll see growth in our revenue line this year. Okay, thanks very much. Thanks. Next, please. We will take our next question from Thomas Rayner from BNP Paribas. Please go ahead. Yes, good morning, everyone. Just two, please. The first one, just to clarify. The 25 to 35 basis points you flagged up from the floors, that is incremental to the $33 billion increase in RWAs in 2013, which was partly driven by the 45% floor. Is that correct? Yes. That is, yes, Tom. Yeah. That is correct. Thanks. Okay. Just following from that gives you, if I factor that in, I sort of pro forma start point of about 10.5%-10.6% fully loaded. We do not know Pillar 2A, but if we had a guess at it, we could, I think, make a case that your go-to capital ratio is going to be somewhere north of 12%, maybe closer to 13%. I am just wondering if with that in mind, you can update us on your thinking about the payout, because I know you focus on the 53% net of scrip as a percentage of earnings before variable pay. But we are up to 57% now on a traditional dividend payout. Can you just update us with that in mind, that whole capital accretion argument, please? Thank you. Tom, do you know something that we don't? Possibly. We probably should have a chat in that case. If you've got particular inroads at the PRA, we'd certainly like to learn about those. I'm not going to speculate on where this has ended up because we just do not know how the capital requirements are going to develop in terms of the interaction of buffers, the implementation of buffers over the course of the next 2 to 3 years. I think what is perhaps interesting is that the PRA has taken a view that they will, in effect, take all of the transitional arrangements and move them back to the beginning of 2014. So getting to an endpoint on a PRA basis is actually a little bit easier to the extent there are any transitional arrangements that actually are disadvantageous to us to the tune of about 10 basis points. Your starting point of 10.5 to 10.6 probably makes sense at an endpoint common equity Tier 1, January 1, 2014. But where we end up with the consideration of Pillar 2A, Pillar 2B, the implementation of a PRA buffer, countercyclical buffer, sectoral capital requirements, your guess is as good as mine. I can't really dig into your question a little bit further because you're guessing. Okay. It sounds as if the payout is the thing which would flex. Look, again. If something had to flex. Tom, this year, we generated, excluding the dividend, we generated $10.1 billion worth of capital. We have got a distribution in terms of how we have used that or deployed that with 53% retained for the future strength of the group, 35% back to shareholders, and 12% allocated to variable compensation. The capital generative ability of the operations around the group is what is important here. Going back to Stuart's earlier statement, we do not have any particular concerns about the ability to generate capital to fund dividends to the shareholders going forward. I think the question, and perhaps where this comes to the crux is around what the endpoint capital or equity requirements are and our ability to generate a 12%-15% return on equity, not necessarily whether we are able to generate sufficient returns and capital to continue to build dividends. Okay. Thank you very much. Thank you. Cheers. Thanks, Tom. Next one, please. We will take our next question from Ronit Ghose from Citigroup. Please go ahead. Yeah. Hi. Thanks. It is Ronit from Citigroup. Yeah. Just a couple of questions to follow up. First of all, on Hong Kong, there was very strong loan growth in the first half of last year for you, and there seems to be a bit of a slowdown in the second half. I just wonder if you could put some more color or commentary around that, and vice versa, deposit growth seems to have picked up in the second half. My second question is on GBM. If I go line by line, the rates business in Q4 has had a very tough quarter, and I know several of the peers have had a tough quarter as well. I was wondering if you could put some more color around, I'm assuming this is the European rates business. By contrast, equities looks like, unless I got my numbers wrong, looks like it's had a very, for a fourth quarter, your equity business has had a very good quarter. So anything on that as well? The final question is really on maybe a more big picture question on China. You're seeing a tightening in the shadow banking sector in terms of from a policy perspective, non-bank credit is down mid-teens, about 14%, 15% in January year and year. Do you see any risk of a spillover from that into either your mainland operations or into your Hong Kong operations? Yeah. Actually, let me just touch on two of the pieces, and then I'll let Iain deal with Hong Kong loan growth. Although that's probably the HKMA's cooling measures as they came in on the property market. Global banking markets' fourth quarter rates is the same as everyone else's fourth quarter rates. It's the European rates business. The equity stuff is stronger in the fourth quarter because we've built actually a very substantially successful business in Hong Kong, mostly in terms of equities. So there was actually quite a lot of activity fourth quarter Hong Kong that actually explains the equity number. I'll let Iain go into a bit more detail on GBM and Hong Kong loan growth. As for shadow banking, it's very hard to tell actually the size and scale of the issue relative to a country with $4 trillion of reserves and a centrally planned economic platform as to whether and where most of the banks are still state-owned. Indeed, the local government can simply start up a local government bond market, the bonds bought by the insurance companies and pension funds domestically as to how real a problem this is. The Western media clearly would like to see China have a problem. But actually, we're pretty confident there's 7% to 7.5% GDP growth. Right now, if you look at our exposure in China, we have exposure to the Chinese state-owned banks. Our exposure to corporates and SOEs is quite modest, and most of our China business is actually the high-quality Hong Kong developers that have gone north of the border and multinationals coming into China. We are very aware of this issue, and we are very aware of concerns around it. I do not, at the moment, in terms of China, think there is a particular concern that we are overly focused on beyond logical risk management. In terms of Hong Kong loan growth, I think two or three contributors here. The property lending continued to develop, so both from a residential and from a commercial real estate perspective, we continued to grow. I think certainly as the year progressed, we did begin to see some cooling in the residential market on the back of some of the measures, the further measures taken by the HKMA to try and cool things off on that front. Principally with respect to introduction of a floor, an RWA floor of 15% on new business. We continued to see reasonably good progression on credits we liked within the commercial real estate space across Hong Kong. We saw the trade and receivables finance business, the volumes that we saw, and although this is fairly short term in nature, and the margins took some compression, we saw some fairly significant step up in volumes in terms of the trade and receivables financing in that respect. Overall, that is really what drove lending in Hong Kong over the course of 2013 versus 2012. If you go through the line-by-line on sort of a management view of operating income within the GBM business, 2013 over 2012. Credit had a strong year. We were about $300 million ahead in it. The rates business was actually pretty much of a same story as it was in 2012. You will reflect on 2012 that we took a significant benefit in the first half of 2012 on the back of LTRO and tightening spreads in that business. Overall, the rates business held up pretty well. We did see a weaker fourth quarter, but generally in line with what we saw in the marketplace overall. Foreign exchange, very much of a sameness with last year, a performance that is very consistent. As Stuart said, the equities business continues to perform particularly well. We had a really strong year there, particularly in Asia Pacific. Capital financing, steady growth versus last year. Payments and cash management, steady growth. Security services, pretty much of a sameness with the previous year. Balance sheet management, as we previously guided, down about $600 million in 2012. Very much in line. That is a broad view of what you saw happening in GBM year on year. Great. Thank you. Just a very quick follow-up on Hong Kong. If I look at the second half of the year versus the first half growth rates, obviously in RBWM, but also I think in CMB, you have seen a slowdown in growth. I think you have seen a slowdown in growth versus the broader market based on HKMA numbers. I do not know if there is anything company specific above and beyond the slowdown in Hong Kong in the second half of the year. No. Do not think so. Certainly what you saw in Retail Bank Wealth Management was the slowing effect of HKMA measures. We talked about that. The market as a whole saw much slower rates and volumes in the global trade and receivables financing business in line with, if you like, economic development that we saw in that area in the second half of the year. But I would not point to anything particularly idiosyncratic at all. Got it. That is really clear. Thank you. Thanks very much. Next, please. We will take our next question from Fahed Kunwar from Redburn. Please go ahead. Hi. Morning. I had a few questions on margin and irritating the U.K. regulation. The first question, well, links the two, but thinking about your total capital requirement in the U.K. CRD4 has said that 1.5% AT1 need to be an issue, and you've seen a lot of European peers issuing those. Because of your high or low loans and deposit ratio, issuing those, what kind of impact do you see that having on margin? Also having to issue, whatever the number is, 4%-5% on Tier 2 that you have to issue. Do you see the issuance of those impacting margins? Would that mean you'd let your loans deposit ratio run up, or other unsecured funding would be left to mature? Okay. It depends really, again, on the future shape of regulation within the U.K. and perhaps more specifically, the ring-fence bank in the U.K. You're absolutely right. There's a requirement around 1.5% of Tier 1 instruments and 2% of Tier 2 instruments. But you'll recall already that we've got Tier 1 and Tier 2 instruments in issue, the eligibility of some of which will dissipate over the coming 10 years, as those amortize out under Basel III transitional requirements. But when we go to market, and we have gone to market in 2013 with Basel III compliant Tier 2 instruments, and our pricing on that was very competitive. Again, we saw pricing at spreads that in no way erodes our margin in this respect. We're talking about funding today that we can deploy into the market profitably. The question will become relevant at the point at which we've got to issue into the market a much higher proportion than we currently have issued, which we therefore against, and as you quite rightly point out, against the strong deposit base we've got, which would make it much more difficult to deploy profitably. But the extent to which that would be necessary, remains frankly impossible to determine at this point until we get better clarity on ring-fence banking regulation in the U.K. Thank you. My second question was, from your 10.5% starting point, I appreciate we have no idea what the end number will be, but the number is probably upward. It seems like the dividend payout ratio won't be flexed to get to that higher capital level. How are you thinking about potentially higher capital numbers without knowing them, when you're looking at growing your RWAs? One of your peers is talking about focusing on lower risk-weighted asset businesses to help grow that capital ratio. By definition, I guess that means lower margin businesses. How do you think about your risk-weighted asset growth in the context of potentially higher core Tier 1 requirements? In a manner that's entirely consistent with how we've thought about it in the last three years, which is on a risk-adjusted revenue basis. We focused on return and risk-weighted assets, target within the ranges that we've talked about at the investor updates and that we disclose in the financials. We have progressively, over the course of the last two years, moved within line with our risk appetite to a lower risk position. But that in no way precludes our ability to deploy risk-weighted assets profitably within the ranges that we've targeted for the business. Perfect. Okay. That's all. Thank you very much. Thanks very much. Next, please. We will take our next question from John Paul Crutchley from UBS. Please go ahead. Morning all. J.P. here. Just a couple of quick ones. Maybe just to follow on the capital debate. I guess I am struck by the juxtaposition actually of where you are, and clearly facing the uncertain road in terms of capital versus the announcement that came out of Citigroup on Friday afternoon or Friday evening, talking about taking their Tier 1 capital ratio target down to 9.5% from 10%, actually reducing that. I guess the question is, when you are having the debate and discussion with regulators, and if a group like yourself, which is clearly operating on a much broader global stage than just a pure U.K., to what degree does the old chestnut of level playing fields and actually trying to maintain common standards actually come into that debate? Are we essentially just pursuing a U.K.-led agenda here? The second and perhaps more prosaic question was just on the investment bank. I wonder if you could just comment on where we should expect the normal seasonal bounce in the rates and FX business, particularly in Q1, that we have normally seen in previous years. On the global banking markets business, there does appear to be seasonality to it. On regulation, Douglas has been sitting here drinking coffee, so he is going to answer this question. Douglas, who has a doctorate in this, will now go into detail. But yeah, look, J.P., there is seasonality, and there is seasonality. Yeah. Okay. Yeah. It is there again. Okay. Understood. I think what's playing through at the moment in global regulation is while everybody stands up and embraces the concept of a single framework for regulation, what you are seeing is increasingly, and for obvious reasons, the balkanization of capital regimes to suit the particular shape of the markets. Where the regulators have, again, understandably, a primary concern against their own political environment and their own taxpayer risk. I think it is very difficult. I do not think you would get a recognition from a regulator anywhere around the world that what they have got a responsibility to do is to create or contribute to a level playing field. I think they all believe in a set of minimum standards. They believe in as much harmonization as possible. But if they think there are steps necessary to protect their own market or to shape the banking system within their region or market in a particular way, they will do so. I think the stuff that came out from the Fed in the last couple of weeks on foreign banking organizations, I thought set out very clearly, very articulate in terms of why it was important, and the impact on the global economy was mentioned as being something they had taken into account but had not necessarily found compelling to be a level playing field. But for the reasons of saying it is important for the global market that we protect the U.S. system, and you can see why people would think like that. I think we are going to increasingly see differentials between markets, and that is just life. Thank you. Thanks very much. Next, please. We will take our next question from Mike Trippitt from Numis Securities. Please go ahead. Good morning. I understand the frustrations about an ROE target when we do not know what the E is going to be. I just, one, if I could pick up on Iain's comments, I think in answer to a couple of questions ago, on return on risk assets, and just get your thoughts around confidence level still to get into that. You are at the bottom of that 2.2%-2.6% range. I think at the time, middle of last year, you said you are not assuming any tailwind effect from rising rates in your target range. We have impairments at fairly low levels. I just wanted to understand what really drives the business up to the 2.6% level. I know that GBM, you are there, by the looks of it. But in commercial banking, a way to go yet. If you could give your thoughts around that, particularly given in the light of risk-weighted asset floors, and also just where we are in the cycle. Yeah. Mike, that is a good question. If you look at the progression on risk-weighted assets over the course of the last couple of years, the businesses are making progress quarter over quarter in terms of pricing business comprehensively. We have moved the return on risk-weighted assets from 1.8%, this is on a reported basis, from 1.8% to 2% this year. On an underlying basis, it is also 2%, but if you pull out the effect of the legacy runoff portfolios in GB&M and the consumer portfolios in the U.S., that gets us to the 2.2%. This is really a question of working one deal at a time and looking at the growth opportunities by market, differentiated by market, as Stuart described earlier, and pricing to these returns. I think we've improved the ability within the businesses to have transparency around the risk-weighted assets, and therefore the pricing to achieve the return on those risk-weighted assets at a much more granular level within the business. We continue to work on that with each of the global businesses in terms of building a more granular understanding of what really drives, A, the risk-weighted assets, and then obviously one thing in which we've always been very conscious is how you price in the marketplace competitively to achieve some of those returns. Again, it's not one story. It's not a particular rising tide that lifts all boats, but it's step by step by step, deal by deal to work through this, improving the granularity and visibility to data, and then pricing competitively in the marketplace. The progress over the course of the last couple of years is encouraging, and we just have to keep building on that. I don't know if I could just push you a little bit on the commercial banking business, though, which is sitting below your target range. Can you give some sort of calibration around, say, if we were to go back to a more normalized. Well, you talked about a bottoming out on trade finance margins. If they start to normalize again, what impact do you think that would have on return on RWAs? Clearly, the spread compression that we saw, particularly in Asia in the first half of this year, was marked. I think one of the answers to an earlier question was that we still haven't seen the level of pricing that we saw at the end of 2012 in that particular space. We're seeing stabilization coming in. I think perhaps one of the factors that is a particular benefit to HSBC is that as we see some of the liquidity move out of this market and some of the uncertainty around EM, which is certainly promulgated and promoted by the press, we continue to see growth opportunities across the significant majority of our markets in the emerging markets, whether it's Asia or further afield. As that pricing stabilizes, our liquidity helps us take share. Equally shown in LatAm. Yes, the compression has a significant effect on margins, and particularly in CMB in 2013, but we will build recovery from there as margins stabilize. It is not in our plans, but as we see interest rates hopefully improve over the next 18 to 24 months, that will continue to filter through. Thanks, Iain. Thanks. Next, please. We will take our next question from Vincent Chang from Goldman Sachs. Please go ahead. My question is on others categories, which is on page 92 of the annual report. I noticed last quarter, the first nine months of the year, the pre-tax profit was $66 million, and it became minus $2.45 million for the full year. I am just wondering if you can give us a bit breakdown on the quarter-on-quarter movements in these categories, and then also clarify, is that $1.4 billion Panama disposal gain booked under this category? Thank you. No, the Panama gain is booked in each business, in each global business. It was split between Commercial Banking, Global Banking and Markets, and Retail Banking and Wealth Management. It is not booked within other. In terms of the development of operating income, I think one of the most significant features is that the bank levy is booked in other, in terms of operating expense, and that is in the fourth quarter. The other is the movement in fair value of own debt. Those are the key differentiating features. In terms of, shall we say, ongoing revenues and expenses, fairly consistent. Yeah. Okay. The bank levy is $900 million. The fair debt is roughly $200 million, I suppose. But the movement is like $2.2 billion. I am wondering if I missed anything there. The fair value own debt for the quarter was $530 million. Oh, okay. The UK bank levy was $907 million. And ongoing operating expenses were very consistent across the quarters at about $450 million. Okay. Last year. Nothing. Okay, great. A comparison on last year would be Ping An, but Industrial Bank. That didn't come through again. There was a lower dividend on the Industrial Bank in the third quarter of this year. Okay. Thank you. It was the fourth quarter. Fourth quarter. There is no Industrial Bank dividend in the fourth quarter because we have reclassified it. I see. Okay. Thank you. Thank you. Okay, time for the last one, please. We will take our next question from Christopher Wheeler from Mediobanca. Please go ahead. Yes, it's now good afternoon, gentlemen. Two quick questions. The first one is on slide 17. Stuart, the strategic priorities for 2014-2016. You talk about redesigning key processes. I know, talking to John Flint, that you're redesigning, reworking the retail platform. Can you also just tell us, are you working on the other two major business platforms, Commercial and obviously, Global Banking and Markets? Will there be a cost to getting to the $2 billion to $3 billion of additional cost savings you're planning on? The final question, just really quickly, where are you in the de-risking of the European global private banking business? Obviously, you're now keeping Monaco. You told us that last quarter. How far along the road to really getting the business into the shape you want, where you feel really comfortable with it within the terms of the six filters. Thank you. Commercial Banking will have the same program that John's spoken to about in Retail Bank and Wealth Management, which Simon Cooper can give you a deep dive on. Commercial Banking was not run as a single global business, really, until Alan Keir began to get a grip on it in the last couple of 3 years. There is still significant opportunities to harmonize processes and procedures and to get out of the economies of scale that a firm of our size should have. Again, in CMB, you've got multiple internet platforms, just as you have in Retail Banking Wealth Management. They're just very simple things, obvious things like that, where we can get costs out. Global Banking and Markets less so. It's been run as a global business certainly since about 2003. There's less process synergy necessarily can come out of Global Banking and Markets. It's more advanced in that regard. As for the private bank- Sorry, Stuart. Is there a cost to this 2 to 3 savings, or will it be lost in the normal day-to-day costs of the two businesses? I expect it to be lost in the normal Okay day-to-day cost of the two businesses. There was Sorry. Thank you no structuring charge. Okay. Thank you. to this. On private banking, the bulk of the restructuring of the European or the Swiss business is behind us. The business that we have restructured is obviously the Republic one. So we bought Republic National Bank of New York. It had a client base that actually did not have a great deal of synergy with the rest of the HSBC Group. What I want to see going forward, and there is a great example in 2013, as I said earlier, of 5 billion of AUM coming from introductions from commercial banking to the private bank. I want basically the client base to be the client base that we always had in Singapore and Hong Kong, in the private bank of the Hongkong and Shanghai Banking Corporation, or actually the private bank of what used to be British Bank of the Middle East in Geneva. Which was the wealthy clients that we had in other parts of the bank in the Middle East or in Asia Pacific. So the bulk of the restructuring of the Swiss piece is behind us. We remain committed to our private banking business. We remain committed to actually Switzerland, which is a core proposition. What I would expect to find is that our own clients, if you like, inform most of our private banking clients, that most of our focus will be on onshore, and where we have an offshore proposition, it is on a tax transparent basis, i.e., it is on a disclosed funds basis. So I think that you should expect to see improvement in 2014 in the PBT of the private bank from where we stand here. Thank you very much. That is really helpful. Thank you. Thanks very much indeed. Thanks you all for your interest. Thank you. Thank you, ladies and gentlemen. That concludes the HSBC Holdings plc annual results call. You may now disconnect.

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