Earnings Call: Q4 2012

Mar 4, 2013

Hello, and welcome. With me are Stuart Gulliver, the Group Chief Executive, and Iain Mackay, the Group Finance Director. Before we start, I would like to say that the board feels that there is a great deal to be positive about in the group's performance in 2012. We also start 2013 in a strong position with our capital base already in line with our current understanding of where we need to be in complying with Basel III end state, as quantified by our regulator. Stuart and his team has made considerable progress in delivering on the strategy that was set out in May 2011, reshaping the group, positioning the business for organic growth, and continuing to build long-term shareholder value. That progress, together with the capital position, has allowed the board not only to increase the dividend per share in respect of the year by 10%, but to plan to increase the first three interim dividends per share in 2013 by 11% to $0.10 per share. Stuart will now talk you through the highlights for the year. Iain will take a detailed look at financial performance, and finally, Stuart will cover strategy in more detail. Stuart, over to you. Thanks, Otis. I want to start by pulling out the key points. At the Investor Day in May 2011, we undertook to grow, simplify, and restructure the business and to strengthen our capital base. We have delivered on all of these initiatives in 2012, and we are very well-positioned to grow organically in 2013. Underlying revenue grew by 7% in 2012, particularly in Global Banking and Markets and in Commercial Banking. Revenues from the closer collaboration between Global Banking and Markets and Commercial Banking increased by 5%. We also continue to simplify and restructure HSBC, announcing the sale or closure of 26 businesses or non-core investments in 2012 and another four already in 2013, bringing the total to 47 disposals and closures since May of 2011. We also continue to eliminate unnecessary bureaucracy and streamline internal processes. This achieved an additional $2 billion in sustainable cost savings, taking our total annualized cost savings to $3.6 billion. It means that we have surpassed the cumulative savings target that we set for ourselves in May 2011, one year early. Our underlying cost did in fact grow by 11% to $41.9 billion, largely due to $5.7 billion of notable items and considerable organic investment back into the business. Reported profit before tax was $20.6 billion, down 6% on 2011, but of course, this included $5.2 billion of adverse fair value movements on our own debt. Underlying profit before tax was $16.4 billion, up 18% on 2011, and it is on an underlying basis that we measure our performance. Let me explain underlying. To be clear, the underlying number excludes the impact of fair value movements on our own debt and foreign currency translation differences. It also excludes disposals and acquisitions, as well as the operating results for the businesses acquired or disposed of during the period. It does not exclude notable cost items. Those notable items affecting both reported, and therefore the underlying numbers, include fines and penalties of $1.9 billion paid to the U.S. authorities in relation to past inadequate compliance with anti-money laundering and sanction laws, and cost of $2.3 billion in respect of U.K. customer redress. The underlying's up 18%, including those notable items. Our return on equity at 8.4% was affected by a combination of the notable items, a higher tax charge, and $5.2 billion of adverse movements in the fair value of our own debt. The fair value of own debt compares with a favorable movement of $3.9 billion in 2011. There's a total swing between the two years, 2011, 2012, on fair value of own debt of $9.1 billion. Really importantly, our capital base has strengthened considerably. At the end of 2012, we had a Core Tier 1 capital ratio of 12.3%, up from 10.1% in December 2011. This is driven by capital generation and a reduction in risk-weighted assets following disposals and the de-risking of the business. We're going to have a Basel III common equity Tier 1 ratio of 10.3% after some management actions in 2013, which we have certainty on, which gives us extremely strong capacity for organic growth. As a result, dividends declared in respect to 2012 were $0.45 per ordinary share, up 10% on 2011, with a fourth interim dividend for 2012 of $0.18 per ordinary share. The total dividend declared was $8.3 billion. Because we believe we're fully Basel III compliant, we have the confidence, therefore, to set the first three dividends for 2013 at a planned $0.10 per ordinary share, up 11%. Here are the financial highlights, which reiterate much of what I've already covered. The main point here is that based on our current understanding, we are already really well-placed to comply with full Basel III capital rules. This slide then illustrates where we're seeing growth, notably in Hong Kong, India, Canada, and Brazil. The result in the rest of Asia Pacific was affected by adverse fair value movements of $553 million on the contingent forward sale contract related to the Ping An deal. This effect was offset when the Ping An deal completed in February of this year. You can clearly see the impact of customer redress provisions in Europe, particularly in the U.K. The North American results benefited from lower loan impairment charges, partially offset by the fines and penalties levied by the U.S. authorities. These numbers also show a clear progress in the run-off of our legacy portfolios in the United States. I'll now hand over to Iain to talk through the financial performance. Thanks, Stuart. This slide shows the reported results highlighting growth in revenues, a significant improvement in loan impairment charges, increased costs, mainly due to notable items, considerable adverse movements in fair value from changes in credit spread in our own debt, and an increase in the effective tax rate. Turning to underlying performance, our underlying numbers eliminate changes in the fair value of our long-term debt due to credit spreads, which were $9.1 billion on a year-over-year basis. Remove any gains or losses on disposals, as well as the operating results for those businesses in 2011 and 2012, and eliminate foreign currency differences. They do not eliminate notable items. As an aside on fair value on debt, we continue to press the International Accounting Standards Board and the European authorities to adopt the accounting standard to eliminate this element from our numbers. To be clear, it has no impact on our business performance now or in the future. Underlying revenue was $63.5 billion in 2012, a 7% increase from the previous year. Loan impairment charges were down 22%, primarily reflecting a decrease in North America and continued improvement in the U.K. Operating expenses were $41.9 billion, up 11% on 2011. This primarily reflects the settlement of past inadequate compliance to anti-money laundering and sanction laws, increased provisions for U.K. customer redress programs. The key point in this slide is here. Underlying profit before tax of $16.4 billion is up 18% over 2011. The revenue growth of 7% was driven primarily by Global Banking and Markets and Commercial Banking. More than half of the group's underlying revenue was generated in faster-growing regions. Global Banking and Markets revenues rose by 10%, primarily due to higher rates and credit income, particularly in Europe, as credit spreads tightened and investor sentiment improved. In Commercial Banking, revenue grew by 8% in the year, reflecting increased net interest income as a result of average balance sheet growth. Customer loans and advances grew in all regions, with over half of this growth coming from Hong Kong, rest of Asia Pacific, and Latin America, driven by trade-related lending. Customer deposits also rose as we continued to attract deposits through payments and cash management products. Collaborative revenues from sales of Global Banking and Markets products to Commercial Banking customers increased by 5%. Retail Banking and Wealth Management revenue grew, most notably in Hong Kong and Latin America. Moving to operating expenses. We recorded $2 billion of additional sustainable cost saves in 2012 as a result of our operational effectiveness programs. This brings our total annualized cost savings to $3.6 billion since the start of 2011, which, as Stuart said earlier, exceeds the cumulative target for sustainable savings that we set ourselves in 2011. We have a strong pipeline in excess of $1 billion for 2013. Underlying costs were $41.9 billion, which represents an 11% increase on 2011. Here we've isolated the most significant items that have contributed to movement in our costs. These included $2.2 billion in U.K. customer redress, $1.9 billion in U.S. enforcement and regulatory matters, and $876 million of restructuring charges. The provisions for U.K. customer redress include estimates of $1.7 billion for possible mis-selling in relation to Payment Protection Insurance and $598 million in relation to interest rate protection products. A bit more detail on PPI. As the redress process began, we have provided a total of $2.4 billion, of which $1.2 billion has been paid to current or former customers. Other than these items, we have remaining operating expenses of $36.8 billion for 2012, which amounts to an increase of 2% on 2011. This compares with 7% growth in underlying revenues. The remaining operating expenses increased for four main reasons. Inflationary pressures, for example, in wages and salaries in certain of our Latin American and Asian markets. Implementation of strategic initiatives which required significant expenditure, including costs related to the sale of the U.S. cards and retail services business, and operating expenses relating to business acquisitions in the Middle East. Investment in regulatory compliance infrastructure, mainly in the U.S., and also litigation costs. In terms of our global businesses, we invested significantly in infrastructure to improve our customer experience and revenue generation. For example, in terms of our RBWM foreign exchange capabilities, we enhanced our international wire services, completed the online launch of dual currency deposits in Asian markets, and improved market access to foreign exchange trading. We continued to expand our commodity and structured trade finance offering across CMB and GBM. In payments and cash management, where volumes have grown at twice the rate of the market globally since 2010, our investment in new products to improve customer experience, such as HSBCnet Mobile, generated new mandates. In Q4, our operating expenses increased against Q3, largely driven by business simplification and restructuring costs and investment in growing the business. We show here the underlying cost efficiency ratio with the impact of notable items. This reflects disciplined cost management and strong underlying revenue growth. We have developed a strong pipeline of sustainable cost savings projects for 2013, and implementation is well underway. We will exceed the top end of the target range of cost savings that we set out in May 2011. The number of full-time equivalent staff reduced by more than 27,700 during 2012, ending the year 10% lower than at the end of 2011. Our focus on cost management and on achieving positive jaws is intense and ongoing. Turning to credit quality, we saw a marked reduction in loan impairment charges in 2012 of $2.2 billion compared to the prior year. This largely reflects improvements in North America, mainly from the continued decline in lending balances and improved delinquency rates on the consumer and mortgage lending portfolio. Europe also saw an improvement on the back of lower credit risk provisions on available for sale asset-backed securities and lower loan impairment charges in RBWM, especially in the U.K. These were partially offset by higher loan impairment charges in Latin America, notably from higher delinquency rates in Brazil. The group's Core Tier 1 ratio improved from 10.1% at the end of 2011 to 12.3% at the end of 2012. This reflected the capital generation of the group's operations and disposal gains, strengthening Core Tier 1 capital by $17 billion. Profit contributed $18 billion to capital growth. Other movements in capital included decreases in our regulatory filters on the sale of Ping An and card and retail services business, and also foreign exchange effects. We also reduced our RWA by $86 billion. Just over half of this reduction came from disposals, and the rest largely from de-risking the balance sheet. You will note that the change in RWA due to either model or methodology changes was insignificant. Certain countries have recently begun their staged implementation of Basel III. For the group, the FSA has established a capital floor which sets a minimum common equity Tier 1 ratio, calculated on a Basel III endpoint basis. This is to be achieved by the end of this year and effectively accelerates our implementation of Basel III. We are very well positioned with respect to the FSA's objective. We have set out our Basel III position in more detail. This is the position as applied to the end of the 2012 balance sheet, including the completion of the Ping An disposal in February and mitigation actions in relation to immaterial holdings. The new regulations are still being negotiated, and we have not preempted the outcome by taking account of the potentially beneficial changes still subject to debate. Our strength in capital generation, the steps taken in managing the balance sheet, and benefits of disposals generate a common equity Tier 1 ratio of 10.3% after management actions on an endpoint Basel III basis. There is still considerable uncertainty with respect to the final details of CRD IV, notably regarding the calibration and implementation of countercyclical buffers and buffers for systemically important banks. Further uncertainty exists with respect to future guidance from the Financial Policy Committee of the Bank of England. The deterioration of a return on equity from 10.9% to 8.4% is largely a consequence of the significant impact from an adverse swing in the fair value of our own debt, the impact of notable items, and significant growth in our capital. This is partly offset by gains on disposals and growth from improving profitability. The bottom right table reflects improving performance in the return on RWA in most of our global businesses. Whilst our completed disposals strengthen our capital, this bigger E represents a drag on return on equity in the short term. This provides capacity to support organic growth and a progressive dividend policy. However, in the short term, it remains clear that a conservative stance is merited pending clarification of future regulatory requirements. As a group, our current return on RWA stands at 1.5%. However, if we exclude the run-off portfolios, that number increases to 1.9%. Within that 1.9%, notable items represented a drag of 70 basis points on return on RWA. Looking at return on RWA by region, we see good performance in Hong Kong, the rest of Asia Pacific, the Middle East and Latin America. However, we face pressures in Europe, which was affected by changes in the fair value of our own debt and customer redress, and in North America, which was subject to negative impact of the legacy run-off portfolio and regulatory fines and penalties. This slide shows the allocation of our attributable profit after adding back variable pay in 2011 and 2012. As you can see, in 2011, we were able to show a distribution where we retained 50%, distributed 35% to our shareholders, and paid 15% to our staff through variable pay. In 2012, that distribution was changed, that we retained 60% to boost capital, distributed 29% to our shareholders, and 11% to our staff in the form of variable compensation. We have reduced the proportion of our profits allocated to variable pay, both in real terms and in proportion to allocation for dividends, thus maintaining an appropriate balance for 2012. We increased dividend payments to shareholders by 10% on a per share basis and 12% on a USD basis. Our strong capital position has also given us the confidence to increase the fourth quarter dividend for 2012 to $0.18 per share, and to plan the first three interim dividends for 2013 at $0.10 per share, an increase of 11%. I will now hand back to Stuart to talk through the business performance set against our strategic targets. Thanks, Iain. To recap on strategic progress, we have grown revenues in HSBC with strong results in commercial banking, which actually was a record year, and global banking and markets. More than half of our revenues came from faster-growing regions. We have announced the disposal or closure of 47 businesses since 2011, with a number of significant disposals and closures in 2012, and indeed, at the start of this year, 2013. These include the sale of our cards and retail services business in the U.S.A., our Asian general insurance businesses, our stake in Ping An, and our business in Panama. We have also continued to increase efficiency and control, surpassing our cumulative target for sustainable cost savings, whilst investing in stronger compliance and growing the business. As Iain has already mentioned, our credit quality has improved. The end result of all of this is that we have been able to build capital and raise the dividend for the fourth quarter of 2012 and the first three quarters of 2013. To reiterate, this gives us a strong platform for organic growth and allows us to continue our progressive dividend policy. Moving on to the global businesses, which in 2012 were led by commercial banking and global banking and markets. First, taking a look at commercial banking, this business reported another record profit before tax in 2012, reinforcing our status as the number one global trade finance bank. Underlying revenues grew by 8% in the year, with revenue increases in all regions. Our strong international network continues to offer a distinctive presence in key markets with major trade flows. Revenue in faster-growing regions grew by 10%, representing now 55% of revenues in 2012, clearly illustrating the benefits of our strategy. We have also continued to support small and medium-sized businesses through the recovery. To give one example, in the first half of 2012, we launched an international SME fund in the U.K. to support U.K. businesses that trade or aspire to trade internationally. By the end of 2012, our lending through the fund totaled £5.1 billion, comfortably exceeding our original target of £4 billion. We also expanded our global network of dedicated China desks to cover our top markets, representing about half of the world's GDP. Turning next to global banking markets, this business recorded underlying profit before tax of $8.4 billion, which was 24% higher than in 2011. Global banking markets generated revenue growth of 10%, due primarily to significantly higher revenues in rates and credit, notably in Europe. It also achieved record-reported revenues in Hong Kong, in rest of Asia Pacific, and in Latin America, again, clearly illustrating the benefit of our strategy. In total, the faster-growing regions now account for 51% of total global banking and markets revenues in 2012. 2012 was also a landmark year in that we issued in the U.K. the first international renminbi bond outside Chinese sovereign territory. This reinforced our leading position in growing the international renminbi market. 2012 was a year of transition in RBWM as we grew the business, increased revenues in faster-growing markets, reduced the headcount, and improved the productivity. We recorded underlying PBT of $4 billion against $0.9 billion in 2011, driven largely by significantly lower loan impairment charges in the U.S. run-off portfolio. We announced 17 new disposals and closures in 2012, bringing the total to 34 since 2011. Twelve of these transactions completed in 2012. We are exiting the general insurance manufacturing business and focusing on life insurance manufacturing only where we have scale. We continue to explore options to accelerate the run-off of our U.S. consumer finance business and have identified certain loan pools that we intend to sell as the market conditions improve. Now, before I finish, a quick word on outlook. As you've heard, we have a strong capital position, which allows us to pursue further organic growth in 2013. We've had a good start to the year in which the business has performed well and made further progress on transactions. In our view, the Chinese economy bottomed out towards the end of 2012, and there will be no hard landing in China. The outlook looks reasonable for 2013, and this will benefit our business. Most importantly, we have reestablished our position as one of the best-capitalized banks in the world. Our capital strength, combined with our ability to grow the business, has given us the confidence to plan an increase in interim dividends for the first three quarters of 2013 by 11% to $0.10 per ordinary share. We're now happy to take your questions, but before we begin, the operator will explain the procedure and introduce our first question. Operator? Thank you, Mr. Kellacher. 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. Your first question comes from Chirantan Barua from Sanford Bernstein. Please ask your question. Morning, everyone. Morning. I have two quick questions. The first one is on a potential move back to Hong Kong. There's been so much regulatory pressure around tax disclosures by geography, which will definitely impact you. Plus, we've seen compensation and the U.K. redresses. When will the board rethink that decision of going back to Hong Kong? The second question is around capital. It's great that you've increased the dividend, but you're obviously releasing a lot of capital around the world. Your Basel III is also solid. Can you give us some guidance around where you're looking at deploying this over the next 2 years, or if you should expect significant capital back to shareholders? Thank you. Okay. I'll take the second one, and then Douglas can talk about Hong Kong. You're right, we've reached a stage where we probably now have strengthened the capital base of the firm to a point that we're back to a more normal usage of retained earnings. Over the last 3, 4 years, we've been building up our capital base to reach the new regulatory norm of a much-strengthened capital base. At the same time, trying to get clear water between ourselves and other banks, because we've always tried to run this firm with more capital than our peer group, and we're kind of back in that situation. What we plan to do is to invest that capital organically. That money will be put to work in Asia Pacific, obviously in Hong Kong, China, rest of Asia Pacific, in Latin America, in the Middle East, and then selectively in the U.K., where we've also grown the amount of business we do in SME lending, in mortgage lending, and indeed in North America or in Canada. I think that we will look quite clearly to try and grow the balance sheet, grow the business, increase the retained earnings, and through that route, increase the dividend. The dividend, absolutely, you can take comfort from where we said there's a progressive dividend policy, there will be a progressive dividend policy. What we'd be looking to do with this capital is to deploy it in the business and return it to shareholders through dividend. What we are not saying at this point in time is that we have no idea how to deploy this, and therefore we should be returning it to shareholders as a big block. That is not on our radar screen. We reckon that this gives us a very sweet opportunity to continue to take market share and continue to actually grow the revenue base of HSBC after a period in which, if you like, a large chunk of retained earnings has had to go to build the capital base up. I will let Douglas talk about Hong Kong. Sure. Let me answer with a number of points. First of all, I do not think one can consider any sort of strategic move, or certainly of the importance to the one you have described, without knowing where the regulatory position will end up. There is a huge amount of uncertainty globally in terms of extraterritoriality and in relation to the application of regulatory level playing fields, and so on. Until we have a very clear picture of where all this is going to land, and many of the things you have discussed are still in the melting pot. They are not finalized yet. It would be foolish to embark upon any kind of consideration. Secondly, moving the head office to anywhere would not have any impact on the businesses, the very substantial businesses that we have based in Europe. They would still be faced with the European regulatory and legislative burdens or requirements. Thirdly, this is something we will only do, as I said, once the profile of world regulation has settled down and once we have had the chance to analyze it very fully ourselves and talk to our shareholders. It is premature, very premature even to talk about it. It is not on the agenda. If I could just also add one comment. We believe very strongly that having a developed market presence in the U.K., France, Germany, places like Canada, et cetera, is actually key to the overall trade and capital flow proposition of the group. If you recall, when we set out at the investor day, we said we sit across a neat geography. It is going to define most of the growth for the next 25 years. But actually, that is also true if you are sitting running a major corporate in the U.K., France, Germany. You are going to be looking at the same set of emerging markets. Therefore, our ability to finance that is to some great degree predicated on having operations in the U.K., France, Germany, et cetera. Because by banking people domestically, we then get to do their cross-border business. We do not see a situation where we would want to change HSBC into being purely emerging market. Therefore, as Douglas says, the businesses that stay in Europe will still be subject to the same European requirements, irrespective of where you put the head office. The real short answer is it is way too soon to make a call on this kind of stuff, and we would need to consult very widely with shareholders once effectively there is some certainty around the whole thing. Perfect. Thank you. Thanks very much indeed. Next one, please. The next question comes from Raul Sinha at JP Morgan. Your line is open. Morning, gentlemen. Morning. Could I have just two quick questions, please? Firstly, Stuart, could you address the question on balance sheet shape, and the shape of group mix in terms of profitability between EM and DM, given, obviously, you've sold Ping An, which is quite a highly profitable business. Do you think that you can reinvest that capital to bring back your group shape in line with what you think long term it should be? Yeah, we clearly will try very hard to do just that. Clearly, yes, Ping An, as an associate, contributed a chunk. But of course, the problem with Ping An, fantastic financial investment, but we did no business with Ping An. At the point we bought Ping An, the only way you could own Ping An was through our stock. Once Ping An listed, it's very hard to say to our own shareholders, "Buy our shares so that we can buy the shares in a company that you can actually buy yourself," unless there was a chunk of business taking place because of the shareholding. Which, by the way, there is with BoCom, but there wasn't with Ping An. Ping An would have been a deduction from capital in due course under Basel III rules. Therefore, the challenge that colleagues in Asia Pacific have, and in Latin America and in the Middle East, is absolutely to put that money that's been released to work to make sure that we don't have a dilution effect, and absolutely in the emerging markets. Because the mix that we've kind of got to, which is sort of 50/50 now between emerging markets and the developed world, of course, is in part also flattered by the fact the developed world's been loss-making. We are absolutely very focused on getting that shift. So it's kind of 50/50 or perhaps slightly tailored in favor of the emerging market. Within, for example, global banking and markets, about 70% of the PBT of global banking markets actually comes from the emerging markets. So it's a challenge that frankly, we've got to do. I'm reasonably confident we can do it. There will undoubtedly be a lag. We are not going to be able to put the entire billion, $9.4 billion to work on day one, but that is absolutely what the team is tasked with doing. Excellent. Thanks. The second one is quickly on balance sheet management. The revenue line there seems to have tailed off quite a bit during the year. It is now only $700 million in Q4. Is there anything we should read into that? What do you think we should be thinking about as an outlook for next year? I think I have kind of guided this way for some time, and we have always exceeded the guidance, because opportunities have come up during the year. But I think it is a kind of, again, it is a $2.5 billion type of number that you should be thinking about for BSM as the sort of baseline. Then it really depends on the shape of the curves. It is a short-term book. It is kind of three years and under. It does not contain really any credit risk. It is a sovereign bond book, interbank lending. It has a large chunk of money still parked with central banks because we remain quite risk averse. Now, obviously, if the curves steepen up a bit, there will be an opportunity to reinvest a chunk of this, on steeper curves in the kind of naught to three-year area, which may result in a higher outturn than the $2.5 billion. But it literally runs down pretty fast, this book. So it really depends on the reinvestment opportunity, which is always hard to call at the beginning of a year. So I think you should work on the assumption it is $2.5 billion, and not read anything into the $700 million other than the opportunities that we saw to get on the curves have kind of matured. Because we have had some steepness in the kind of one, two-year area versus three, six months, which effectively run off. Okay. Thanks so much. Thank you. Next, please. Thank you. Our next question comes from Chris Manners from Morgan Stanley. Your line is open. Good morning, everyone. Morning, Chris. Morning. I have two questions for you, if I may. The first one was on the cost base. Obviously, good news that you are able to exceed the top end of your sort of $2.5 billion-$3.5 billion cost saving guidance. I was just wondering if you could maybe flesh out a little bit what sort of absolute numbers we should be looking for in the future years. I know that, obviously, in your slide deck, you have tried to give a view of that, and that seemed to change by about 2% year on year. The underlying cost base, if you will. Just trying to work out how that should trend. I think you have called it remaining operating expenses on slide 10. That is probably exactly right. 2%. We should just have your remaining operating expenses sort of couple of percent a year for inflation. Well, don't forget there are two things that we need to invest in. We need to invest in faster-growing markets, because this is about releasing costs that have effectively built up through inefficiency by re-engineering the firm and then redeploying them where we can get a great return. So, 2% underlying, as it were, will undoubtedly result in positive jaws, and we are not trying to shrink the firm. What we are trying to do is run it in a much more effective way. So there is wage price inflation. There is need to invest in systems. We are running now with an additional at least $500 million a year of compliance and regulatory costs, which I think is a permanent feature. All of that kind of bakes into that number. Then I will let Iain talk in revenues underlying where people are looking at me complete horror here. My accounting colleagues opposite me are looking like I have obviously said something terrible. So I will now let Iain define the exact basis on which the 2% was defined. Thanks. I will talk about adjusted underlying, which will make the accounts look even less happy. Chris, we have given you the details here, which I think helps you sort of navigate through some of the large items that are in this P&L. Clearly, the goal from a management perspective is to clearly in terms of the investment around compliance and regulatory capability, which was an incremental $300 million, mostly in the U.S. in 2012, is to ensure that those sorts of fines and penalties are not a feature of the future. In terms of the U.K. customer redress programs, that is clearly PPI and interest rate hedging products. In PPI, we have put $2.4 billion aside since the onset of this. We have got $1.2 billion worth that has been distributed to customers, and we think about 15 months worth of coverage based on current incoming claims rate, as well as the uphold rate against those claims. The redress process on the hedging, interest rate hedging actually has not started yet. The FSA is still working through with the skilled persons to define the final criteria for progressing, but that should get underway very, very shortly. But as yet, there has been no significant disbursements against that almost 600 million that we have provided. So the focus here is on running the firm on an ongoing basis, ensuring that we have got the right governance and controls in place to ensure that we do not have these sorts of fall-throughs from customer redress, whether in the U.K. or elsewhere in the world, and ensuring compliance from a regulatory and conduct perspective. I think the guidance we've given you is the best we can give you right now. There's a strong focus around sustainable saves. We've got a pipeline of over $1 billion for 2013. A lot of that is underway from an execution perspective. Although we've done a great deal from a people and structures perspective, we've got the global business models deployed, we've got the global function models deployed. But in terms of re-engineering core processes and driving efficiency and quality of execution from a customer perspective, from a back office and a governance perspective, there's still a great deal of opportunity available to us. Okay, that makes a lot of sense. Could I ask one more question? Sure On the capital planning side? Obviously, 9.0% fully loaded Basel III quarter one, a long way ahead of some of your other U.K. and European peers. I just wanted to work out why you couldn't raise the dividend a little bit more. Is it the HKMA putting up risk weights on mortgages or the FSA capital exercise, or is it actually just the organic growth focus? Just trying to work out why, given the high scrip component of your dividend, why you couldn't take it a little bit more. No, it's a fair question, Chris. Look, I think the main thing to point out here is that a couple of things to mention. We've got a capital floor set for us by the FSA, which is just a normal prudential regulatory measure from the supervisor. When you look at our Basel III endpoint basis that we've set out here on the 2012 balance sheet, we're in very good shape against that. When you think about other mitigating actions that are out there in front of us, which we've talked about before in terms of running off the legacy credits in global banking and markets, running off the CML portfolio and trying to accelerate that as market conditions continue to improve, hopefully. There's another healthy chunk of mitigating actions which are already in the flow from that standpoint. But the focus is on growing the firm from organic perspective, and Stuart's spoken about that at length. The other feature, which is just simply around, I think, natural caution at the moment, until CRD IV is signed into a final set of regulations with the interpretive guidance around that, both from a European perspective as well as local regulators, some degree of conservatism is merited here. That is, within current regulatory guidelines under CRD IV, a great deal of discretion that can be exercised around countercyclical buffers, systemic buffers for banks which are systemic to the globe as well as to nationally. So I think there's just a natural degree of conservatism. But what Stuart said is where the focus is growing the firm organically and through that growth, growing the dividend. That's very fair. Thank you very much, guys. Thank you. Thanks, Chris. Thanks. Next, please. The next question comes from Rohith Chandra-Rajan from Barclays. Your line is open. Hi, thank you. Rohith Chandra-Rajan at Barclays. The same two topics, actually, if I could. Firstly, just on costs. Iain, could you clarify what you mean by the 1 billion additional savings to come through, or at least additional pipeline for 2013? Is that some of the $3.6 billion run rate dropping through, or is it incremental additional cost saves? Incremental. It is on top of it. Okay, that is great. So that would take you to above 4.6 and there is potentially more to come. Is that the message? No, it gets us to 4.6, and we will talk about the more to come in May. Okay, thank you. Just on the capital, you have been very clear about your desire to grow the business organically. Just in terms of where you are on a fully loaded Basel III basis today, what you said about the FSA floor, presumably that is inside your 9.5%-10.5% range that you have talked about before. Just wondering if the organic opportunities are such that you end up being materially ahead of the top of the 9.5%-10.5% range, what the reaction would be from a capital planning perspective? The same answer as I gave to Chris from Morgan Stanley, I think. Well, my understanding of that answer was that you're looking to grow the business organically and that would build retained earnings and drive the dividend payout. Yeah, look, if we build the business up, it will also increase risk-weighted assets, which will obviously consume some of the capital ratio, and hopefully the profit on it would help us drive the dividend. If you're thinking about a situation where we're above 10.5 and there isn't growth opportunity- Yeah We'd have to think at that point in time about what we would do with dividends. What we don't want to do at this stage is not being given the opportunity after five years of rebuilding a fortress balance sheet, to not be able to deploy that fortress balance sheet in a competitive fashion. If the opportunities aren't out there, then obviously the progressive dividend comment would remain very valid. It would be a progressive dividend. I think you need to give us a couple of years to have a try and go at it. Okay. No, that's great. Thank you very much. Thanks. Next, please. The next question comes from Chintan Joshi from Nomura. Your line is open. Hi, good morning. Good morning. Can I ask a few questions on slide 14? It's probably for Ian, I guess. Sure. When I compare your new guidance to the one you gave us in the first half stage. At the first half stage, the impact from Basel III was 2.1%. Now it's gone up to 3.3%, but you're introducing additional mitigation of about 0.5%. So let's call it 2.8%. What are these moving parts? What is this new mitigation that you're highlighting? And what confidence do you have in these moving parts? Thanks. Good question, Chintan. Look, you're absolutely right in terms of the movements here, and what it really comes down to is a slightly, well, one, change in the balance of composition within HSBC. So the basis on which we're assessing and applying CRD IV changes, as we've interpreted them thus far, has changed slightly. I think there are a couple of main items that I can walk through here. One is with respect to immaterial holdings, principally in banks, insurance companies. And there's a particular treatment there as it relates to our holdings in equities and equity derivatives in that space, that would probably add about 50 to 52 to 54 basis points in terms of incremental impact on the capital ratio. However, by the same token, and that's what we've laid out on the chart on page 14, we are very confident that should that guidance that's currently sitting in CRD IV remain in place within the European environment, that we are absolutely able to mitigate that on a short-term basis in its entirety. The interesting thing around that particular guidance is outside the European Union, there tends to be a slightly different interpretation. So I think that's an area that's still up for debate as we work through the final stages of CRD IV. There's a couple of other elements that have changed over the course of the last six months, which bring in some of the changes in that regard. There's a slightly higher impact coming through from PVA. There's a slightly higher impact coming through from our own share deduction. Again, this primarily relates to a slightly more conservative interpretation of what we're reading through CRD IV. Then there's an impact in terms of own credit spread in the trading book that's coming through. When you add all of that up, and I've got a fairly detailed schedule in front of me, the main impacts that are coming through is the treatment of the material holdings, which is about the 52, 54 basis points. Then there's about 67 other basis points that are coming through from a slightly more conservative reading of elements within CRD IV. What's your insight into when we can get a good amount of confidence on that additional 50 basis points of mitigation? Basically taking you from 9.8 to 10.3, by when do you think we'll get that clarity? When the rules are finalized. If the rules are finalized the way they are, then we will Well, we know exactly what it is now, but in terms of- If the rules aren't clarified in a particular way, there's a second mitigation that we can exercise, which is frankly, to exit the activity that creates that capital requirement. Yeah. Either the rules get clarified and it releases the 50, or we're going to exit the business and it releases the 50. Yeah. There's no equivocation around that. It is there- It will be at 10.3. Yeah. What is the ROE of that activity? Is it substantially different from the group? No. No. Okay. It will not be diluted. It's a very small P&L impact in our business, should we have to close that business. Okay. That's good to hear. if I can continue on capital, and maybe for Stuart, I understand your answers to Rohit and to Chira and Chris. if I look at the equation, your return on core Tier 1 capital Basel III is something like 14%, and your underlying growth of revenues is about 7%, which on RWA basis is even lower. the equation, even if you continue to grow, is not tallying up, which means you are building up capital quite quickly. How much can we push you to give us clarity on the invest today? Even if you grow- Shall we talk about that in May? We'll put it in May, Chintan. Look, honestly, it's going to be one of those things that will be a nice problem to have, because either we can find a way of investing it, grow the PBT, and grow the dividend that way, or we'll be giving it back. But we need, I think, to at least set out very clearly, the opportunity that we think as management that should be given to us to not return it to shareholders till we've had a crack at actually organically, and I stress organically, not by doing acquisitions, to put it to work. Yeah, we'll absolutely debate it in May. Okay. One more on cost, if I could follow up. The underlying cost inflation, so the underlying underlying is 2%, but that includes a lot of cost savings that you've achieved this year. If you're saying underlying underlying is 2% again next year, then it sounds like cost savings will be very similar to the run rate achieved in 2012. Is that fair? I think we go back to the point we said, we've got a pipeline of sustainable saves of 1 billion. We continue to build that pipeline. We continue to execute against the programs. I think when you look at the investment that we made, and I think we've given some detail on slide 10 here, Chintan, around the sort of things that we've done from an investment perspective this year. Clearly, some inflationary pressures, principally in the emerging markets. We've invested certainly around strategic initiatives, which is primarily around portfolio realignment in the U.S. and some acquisitions in the cost of those acquisitions in the Middle East. The investment in compliance and growth and the infrastructure is 800 million overall, of which about 300 million is incremental with respect to compliance, and 500 million with respect to growth and building out the infrastructure. It's things like systems and capability, product capability. And then as it relates to litigation fines and penalties, we've got some of the costs associated with that, about $500 million. So there are features that have been quite unique to 2012, as I'm sure you would agree, that are reflected in that cost base. But there is clearly an intention to go on and keep generating sustainable saves, which will support organic growth within the business and investment in that organic growth. Understood. One final quick one. A quick update on the disposals that you are planning in the CML portfolio. How's that going? We should have something to announce on the non-real estate piece in the next few weeks. The real estate stuff, the $3.8 billion we talk about in the annual report and accounts, that we'll parcel that up and sell it over the next 24 months or so. They're very specific carve-out transactions. They're highly customized. The kind of written down piece is harder to do. We will do it. The $3.7 billion of non-real estate, that's imminent. Thank you. Thanks very much. Next, please. The next question comes from Tom Rayner from Exane BNP Paribas. Your line is open. Morning, Stuart. Morning, Ian. Morning, Tom. Morning. Just on the similar things, I guess. Slide 14, I think was always going to be a focus. From the answers you've given, am I right in assuming that the actions needed to offset the additional negative impact of Basel III, which has gone from 2.1 to 3.3, could all be covered by changes in CRD4 versus the draft of 2011, and potentially, from runoff of legacy assets which won't have, thus, any impact on revenue, profits or dividend-paying capacity? Is that a fair interpretation of what you've said? I have a second question, please. I think what we're actually saying, Tom, is that we've done that. Okay? What we've not included in this 10.3 are any of the benefits from future runoff of the CML or legacy credit portfolios. What we've done is we've taken the 2012 balance sheet and applied Basel III end state, meaning 2022, and applied that based on a reading of the CRD4 as published in July of 2011, with a strict interpretation around that. Under that set of guidance, we're sitting in a position with 10.3% core equity Tier 1, with actions that have been taken. We are sitting there with further things that we can do that, should this interpretation change, again, there's further mitigation opportunities to us. Yeah. I was just thinking about the potential impact of those things that you've done on the P&L going forward. Because I think, I might be wrong, but at the half year stage, did you not say 1.1% benefit from capital from the legacy runoff is- Yeah, that's right. Yeah. with that, as long as you've modeled the legacy runoff properly, then I'm just trying to get a sense. There shouldn't necessarily be a potentially big P&L impact from the actions you've put in place. No, understanding this, the P&L coming out of the CML legacy book is today a drag on the profitability of the firm overall to a significant degree. By the same token, the transactions to which Stuart referred to recently, in the short term, absolutely will have a negative PBT impact. Those portfolios will almost certainly be disposed of at a loss. No, definitely at a loss. At a loss. They will release risk-weighted assets and create capital. Absolutely. I'm just thinking of ongoing. As you recall, we have significant amounts of surplus capital sitting in the US, and there's a good use for that. Yeah, absolutely. Sure. Okay. Just moving on to the underlying. Don't want to get anyone in trouble but- You're not allowed to say that. You're not allowed to say that. I'm sorry. I mean. I've already been yellow carded. You have to say adjusted underlying, apparently. Adjusted underlying. I think I agree with you that 2% looked like the number. When I do the same thing for revenue, using your starting point of plus seven and adjusting for the notable items, I get revenue growth running at about plus eight. I was just wondering if you could comment on that revenue trend going forward. Is that a reasonable reflection of what the continuing business, currency adjusted underlying revenue number might look like? I think what it reflects, Tom, is that you're a very good mathematician. Well, my teacher never used to say that, but very nice. Not rightly. I think it reflects that we've got reasonably good jaws. Yeah, that's what we would like to think we'd be able to continue to do with that. Okay. Thanks very much. That's the execution of what we spent two years putting in place. Yeah. Okay, brilliant. Thanks a lot. Thank you. Next, please. Your next question comes from J.P. Crutchley at UBS. Your line is open. Yeah. Morning, gents. Morning. Covered most of the areas. I just want to maybe cover two quick business areas, if you could comment. Firstly, the weak rates performance in Q4. Was that just bad positioning, or we should be aware of any particular issue there? Secondly, perhaps more broadly, on the finance company in the U.S. As that now gets smaller, to what degree are you more willing to maybe try and cut your losses and maybe take a larger hit, but actually sell portfolios on and actually just remove the legacy drag of that, rather than just letting it bleed quarter by quarter by quarter? If you could just comment on those two, please. Okay. The fourth quarter in rates is actually the CVA. Yeah. It's not bad trading at all. It's a change of accounting. Okay. JP, we did refinements in the fourth quarter to the CVA, DVA. We've always accounted for CVA, but we did some refinements to the methodology in the fourth quarter, in consideration of really market consistency, if you like. The net impact to the revenue line in that regard was just a shade under $400 million when you consider CVA, DVA. The most significant impact was to the rates book. That was about $500 million on the rates income line, and that was implemented in the fourth quarter. That's something to bear in mind. When you think about revenues overall for the group in the fourth quarter, there were two key features. There was the implementation of CVA, DVA, which was a net effect of slightly less than $400 million. There was the derivative, the embedded derivative within the Ping An second tranche, which was a loss of $553 million in the fourth quarter, and that reversed in the first quarter, in actual fact, in February, when we completed the second tranche. There's nothing underlying to do with the rates book. That's helpful. Thank you. then on the finance company. the $3.7 billion of the non-real estate, which as you said just now, should get announced imminently. The $3.8 billion of real estate stuff that we're looking to tranche up into probably parcels of $500, $600 million and sell into the market. to be honest, as we start to get more of that going, and actually assuming that the property market in the U.S. continues to show some recovery, then there's no reason why we might not look to get more out. Because in a way, there are very customized carve-outs that we're having to do on the portfolio. As we get more and more experience of doing that, I think the ability to continue to sell more than the 3.8 is clearly very real. We have no desire to hold on to it any longer than we need to hold on to it. the reality is the market's not been there over the last couple of years, but perhaps is beginning to become possible as we go forward. Thank you. Okay, next please. Next question comes from Ronit Ghosh from Citi. Your line is now open. Great. Thank you. It's Ronit from Citi. First question is on Hong Kong, and then I had another question on rest of Asia and LatAm. Stuart, back on the third quarter numbers, you rightly pointed out that China and Greater China were turning, and you've seen in your CMB results quite a good NII in the second half of last year. When I look at what's happening in Hong Kong and sort of HKMA stats, it's very early days, but January Q1 has started very strongly. Is there any color, forward-looking kind of comments you can make about sort of volume growth, particularly CMB volume growth for Hong Kong? My second question is a bit more negative. When I look at the rest of Asia Pacific and LatAm, and I'm looking specifically at RBWM and CMB in commercial banking, so if you like non-GBM banking. Looks like NII is either flat or down in the second half of last year versus the first half, despite either some volume growth or flat volumes. Looks like there's quite a bit of spread pressure going on. I just wanted to check I'm not missing anything or there aren't any big sort of funnies or one-offs. Rest of Asia, ex-Hong Kong and LatAm in core banking, NII looks to me weak. I just wondered if you could comment on that. There's nothing particular in CMB in Hong Kong other than, yeah, the year has started quite well. The Hong Kong economy benefits from the fact that, as I say, we think that the Chinese economy bottomed in the third quarter, and therefore Hong Kong as a massive port and center of trade, and a lot of that Hong Kong CMB business is trade, is a kind of second order beneficiary of that. The outlook in the CMB piece in Hong Kong looks fairly constructive. Yeah, if we take a look at net interest income for the rest of Asia Pacific, specifically looking at net interest margins, Ronit, it's actually held up remarkably well considering where you see base interest rates. The loss in net interest margin when comparing the second half of 2012, when compared to the first half, is a couple of basis points. In terms overall, net interest income is actually holding up pretty well. Right. Because if I look at the rest of Asia Pacific, there's pretty decent volume growth in the second half. NII, particularly in RBWM, looks like it's down half and half, CMB's up a little bit. I haven't done the math on the basis points, but it just looks optically like a bigger drop on margins in those two businesses together. Maybe it's more pronounced in LatAm, where your NII is actually down quite meaningfully second half versus first half. LatAm is more pronounced, but that's also due to absolute rate changes- Yeah In Brazil. It's mainly Brazil driven. Okay. Yeah. The other thing that's going through ROAP, but it's not going through the net interest margin, is the Ping An derivative is booked in rest of Asia Pacific. Yeah, it is. there's a $550 million loss in ROAP in December, but that's in trading income, and it reverses out in January when we close the Ping An deal. We'll do some digging around and get around to you off the call, but we don't- Sure recognize what you're picking up here. Okay. Thanks. Appreciate it. Thank you. Next, please. Your next question comes from Christopher Wheeler at Mediobanca. Your line is open. Yes. Good morning, gentlemen. A couple of questions again, one for you on capital. Iain, can you give us any clue really as to where the Basel III ratio now sits in the US businesses? Because clearly, it's a subject that's going to become quite important as you continue to hopefully sell down the CML books. But also, you always give us an answer that when we ask you, when can you get some capital out of the United States, you tend to say, hopefully at the end of next year. Now, obviously, we're in the new year now, I wonder if that's still really your answer, because obviously this is a very tricky situation post the fine that you suffered on, or the settlements you had on money laundering. The second question, really, Stuart, is you've been very clear on what you want to do with excess capital. I think there's no doubt about that. However, you have really danced around the philosophical question of when we get to a few years down the line, and your strategy, which has made pretty impressive progress in two years, whether you are completely opposed to buybacks. Because obviously you already have a pretty high payout ratio. I guess what investors are asking me is this a philosophical issue or is it something you will consider hopefully two years down the line when there's some more certainty and perhaps you haven't got all the reinvestment opportunities you'd like? Okay. Can I take the second one first, and then Iain can take the other one. There's no philosophical issue. You may have noticed that in the AGM last year, we actually put through a resolution to enable us to buy back stock, which is the first time we've had that resolution in place. Yeah. The issue will be a combination, I think of honestly two things. Is there opportunity there? Will the regulator allow us to? It strikes me that the first thing we might choose to do, and to be clear, this is probably 2015, 2016, what we might choose to do is to sterilize the scrip. I don't want to get rid of the scrip dividend program. It's incredibly important to the Asian investor base, which is 30% of the register. Actually, it's taken up often by the institutions because there is an efficient market when the option has value. There may be a logic eventually in at least sterilizing the scrip. There's no philosophical issue on this. I just think, first of all, we need to try and actually deploy it. Secondly, we need the regulatory environment to have settled so we know actually what the end-to-end state of capital is. There's absolutely no philosophical issue. Indeed, that's proven by the fact that we put it into last year's AGM, and we'll renew it this year as well. Okay. That's really helpful. I think that means that maybe a special dividend without scrip may be the other option you have rather than buyouts. You have the whole range, I guess, if that's what- Yeah. Look, we have all of these things. Indeed, if we reach this point, we'd need to go and talk to the major shareholders to see, frankly, what they would be looking to, which they favor. Yeah, we'd have all of those, but don't assume this is a '13 or '14 type of issue, as it were. There is no philosophical problem with that concept of buying back. No, I don't think the timing is an issue. I just think it's important there. Thank you very much. That was very helpful. Perhaps Ian would give me his comments on the U.S. Yeah. We clearly need to meet more frequently, Chris, because I don't think I've said next year for a couple of years on the capital in the U.S. Certainly throughout 2012, for fairly obvious reasons. I think the U.S. bank is well-capitalized. There is substantial amounts of surplus capital sitting there. The issue is really little to do with running the business, but a great deal to do with progress that we need to demonstrate to the U.S. regulator on a number of fronts. One is the continued successful rundown of the CML portfolio. I think, frankly, the stabilization that we seem to be seeing in the U.S. housing markets will be helpful, although I suspect sequestration probably isn't terribly helpful in that regard. I think the other aspect is that we clearly have to make progress in terms of resolving the cease and desist consent decrees- Yes that are in place at the U.S. bank. I think until we've made progress in that regard, it's improbable that the OCC or the Fed would be inclined to see significant amount of capital flow out of the U.S. in the form of dividends back to the parent. The last, but by no means least, I think that the DPA is just one other aspect of regulatory control, notwithstanding the fact that it's not specifically focused on the Fed or the OCC, that I think the U.S. authorities will expect us to make significant progress against. We've got quite a few things that we are making real progress on. Ian and the team in the U.S. have been hammering away at the cease and desist, as well as the overall profitability of the business for a couple of years now, and there's progress being made there. I do think that there's a couple of headwinds which will make it difficult for us to dividend out surplus capital in the U.S. for certainly a couple of years to come. Okay, thanks for the update, Ian. Appreciate it. Thanks very much. We have time for one last one. Thank you. We will take our last question today from Michael Helsby at Merrill Lynch. Your line is open. Yep. Afternoon, gents. Hi. I've just got two questions on bad debts, and then just a final one on ROE, if that's okay. Firstly, clearly, bad debt's very low in Hong Kong, Asia, Middle East, and Europe. I think it's about 33 bps for the year. We've talked about this before, but are you happy with that 33 basis points as a sustainable level? I was wondering if you could give us an update of what you're seeing on the ground at the moment in terms of forward-looking credit metrics. The second question on bad debt is, you've just been talking about the portfolios you're intending to sell in the U.S. I'm just mindful that you booked a $1.7 billion, give or take, loss in the US GAAP accounts. Is it still reasonable that we should expect that to come through in the IFRS numbers when these portfolios finally drop off? As I say, I've got a separate one on ROE. I can give it you now, or Should we- Just hang on a sec, and we'll just- Okay. Give these two. Yeah. On the loan impairment charges, Michael, I think in this interest rate environment, the portfolios continue to hold up. We've seen improvement in the U.K. Retail Bank Wealth Management. The stress, to the extent we've seen it in commercial banking, has been, I think, well managed by the business. We have seen a couple of individual accounts come through. When you look at the rest of Asia Pacific, the collective impairment charges remain very stable. I think improvement within the Chinese economy coming through, which we seem to see bottoming out in the latter part of last year, is almost certainly helpful. Again, to the extent that we saw any uptick in those markets, it was individually assessed, specific corporate names that we'd had under fairly close scrutiny for a little bit of time anyway. The increase that we did see was obviously in Latin America, and specifically in Brazil, as we saw that economy slow down in the latter part of 2011. Actions we've taken actually are flattening out the delinquency rates in that portfolio. I think while the interest rates that we see prevail to a significant degree, particularly within the developing market, the portfolio seems to be in pretty good shape. Okay. Thank you. On the U.S., again, I think as Stuart mentioned earlier, we're likely to have the non-real estate personal lending portfolio deal completed within the next few weeks, and we'll have the first tranche on the defaulted real estate loans going into the market for pricing in the next couple of weeks also. I think it's probably until we get a reaction back on pricing in the defaulted loans portfolios, it's probably difficult to say. I think the The accounting, obviously, from a U.S. GAAP perspective to IFRS is slightly different, particularly in the application of it with respect to timing of recognition of losses. I think there's certainly nothing that I would advise you is particularly different. Okay, thanks. That's clear. ROE. just finally to wrap up on ROE, clearly you've done an amazing job boosting the capital, and there's been a lot of questions on this call about what next. The flip side to that is that clearly it dilutes your ROE a bit quicker. I think you've got on your slide 15, you've got your go at sort of what you think the underlying ROE is at 8.4%. Now, I did it a slightly different way in that I took your ongoing profits, and then I normalized for your $2.5 billion of balance sheet management revenue and the dilution from Industrial Bank. Actually it gets you to about the same number, about 8.5. You give us quite a good steer on cost inflation, in absolute terms. I was wondering, A, if your 12% ROE target kind of increasingly looks certainly out of reach for 2013. I was wondering if you could comment on that and whether you still think it is a valid target for 2014. Thank you. I still think it's a valid target. I think the ROE of 12%-15% has to remain a valid target. If you look on slide 15 at the geographic region return on risk-weighted assets and the global business return on risk-weighted assets, you can see we have a problem in the UK and a problem in the USA, and basically, both of those manifest themselves as problems in retail banking, wealth management. The rest of the firm generates an ROE even with the Tier 1 capital ratio that we're talking about, substantially in excess of that 12%-15%. And therefore, as we run down-- Actually, to be fair, there's also a legacy book sitting in Europe and global banking markets of certain conduits. As we run those down, we will liberate that return. Now, the target ranges for 2013 are baked because we set three years worth of targets. The 12 to 15 and the 48 to 52 is baked. You are probably correct that the 12 to 15 will prove very hard to get to in 2013. We're not going to remove it because what I don't want to be, to be honest, Michael, is to find that we actually exceed it in a couple of years' time, and then we've removed it, as it were, because you can see where the problem is. Yeah. You can see a whole bunch of things that are absolutely in this range. The fact of the matter is that things that we couldn't foresee quite as easily in 2011 have come to sort of detract from this ROE. That target will have to remain in place. This firm increasingly, as well as we shift the business mix towards the emerging markets, as we continue to invest in CMB and global banking markets, and as the legacy books run down, we'll actually hit that ROE number on the 10.3 fully loaded Basel 3 basis. Yeah, it's going to take a bit longer than we'd hoped. The direction of travel is clearly there. I think from many of the investor conversations that I have and Iain have, the large institutional investors are clearly very focused on that direction of travel and the trend, and seem to remain very supportive of the fact that clearly we are trending towards this. Okay. That's clear. Thank you. Thanks very much indeed. Okay. That's all the time we have. If I can just recap. We grew the business. We increased revenues in the three main businesses. Really importantly, we've reestablished our position as one of the best capitalized banks in the world, providing a solid platform for organic growth. This has allowed us to increase the dividend to $8.3 billion and to plan an increase in interim dividends of 11% for the first three quarters of 2013 at 10 cents a quarter. We have surpassed the cumulative savings target that we set for ourselves in May of 2011, and we continue to maintain a sharp focus on implementing our strategy and therefore making the group easier to manage and control. Thank you very much for your time and for your interest in HSBC. Thank you.