Earnings Call: Q4 2011

Feb 27, 2012

Good morning, ladies and gentlemen, and welcome to the Investors and Analyst Conference Call for HSBC Holdings plc's 2011 annual results. For information, this conference is being recorded. At this time, I will hand the call over to your host for today, Mr. Douglas Flint, Group Chairman. Thank you very much. Hello, and a very warm welcome to everyone who has joined us today. As I was introduced, this is Douglas Flint, Group Chairman. With me, Stuart Gulliver, Group Chief Executive, and Iain Mackay, Group Finance Director. Before we start, can I just say that at our board meeting on Friday, both I and the board expressed to management our satisfaction with the progress made during 2011. We have begun to execute the strategy that we set out in May last year, reshaping the group, positioning the business for growth, and continuing to build sustainable long-term value for shareholders. In a moment, Stuart will talk you through the highlights for the year. Ian will take a detailed look at our financial performance. Finally, Stuart will cover the performance of the business against our strategic objectives in more detail. Stuart, over to you. Thanks, Douglas. We will cover the detailed financials in a moment, but I want to start by pulling out the key points for 2011. As you can see, reported profit before tax was $21.9 billion, up 15% on 2010. On an underlying basis, profit before tax was $17.7 billion, down 6% on 2010. We have increased dividends paid to our shareholders by 14% to $0.41, paying $7.3 billion to our owners. As you will see later on, this is less than the amount we retained to strengthen the capital base of the bank and reinvest for the future, but more than the total variable pay for all of our staff worldwide. We think these proportions are correct. We also increased earnings per share by 26% to $0.92 compared with 2010. Moving on to the key highlights. First, you may recall we announced an overhaul and redesign of HSBC last May. I am pleased to be able to say that we gained traction in the first seven months of a three-year journey designed to simplify the structure and improve the management and control of the firm, thereby improving returns and positioning HSBC for growth. We got off to a quick start announcing the disposal or closure of 19 non-strategic businesses, of which 16 were during 2011, including two large transactions in the U.S. When completed, these transactions should represent a reduction of around $50 billion of risk-weighted assets and a transfer to the acquirers of the equivalent of around 12,000 full-time employees. The capital will be redeployed in our growth businesses. We also began to delayer the bank with four programs to improve our efficiency and effectiveness. These are designed not only to reduce cost and bureaucracy, but also to improve controls. All three aims are equally important. Second, we position the business for growth. People, especially here in the U.K., often forget that the global economy actually continued to grow in 2011, with GDP in faster-growing markets rising by 6.1% and developed markets by 1.3%. Our businesses outside the U.K. accounted for 80% of revenues and over 90% of our profit before tax. We grew revenues by 10% in the faster-growing markets. In commercial banking, we saw record revenues, and profits were up 30% compared to 2010 as we continued to establish our market leadership in global trade, which is a heritage business for HSBC. Our operating expenses for the year were $41.5 billion but include notable items, restructuring costs, and investment in faster-growing markets. The operating expenses increased $3.2 billion compared to 2010, and this breaks down as follows: $1.1 billion in higher staff costs, $1 billion increase in restructuring costs recorded in 2011, and $1 billion in other notable items. The higher staff costs were driven largely by wage inflation in Asia-Pacific and Latin America. You will recall we said in May that we would meet these costs to ensure we remain competitive in our key markets. Most critically, our investments in markets such as Asia and Latin America and in commercial banking drove profit before tax growth and had positive jaws, showing that this investment has indeed paid off. Included in restructuring costs are staff-related expenses of $542 million, impairments of certain software projects of $325 million, and with the remainder being premises-related. Included under the other notable items are customer redress costs in the U.K. of $898 million, the U.K. bank levy of $570 million, and a provision for U.S. mortgage foreclosure and servicing matters of $237 million, in part offset by a U.K. pension credit of $587 million. Ian will cover all of this in more detail later. Since we announced our strategy last May, we have already achieved sustainable cost savings of $900 million. This is equivalent to $1.3 billion on an annualized basis. We have also identified a strong pipeline of further sustainable savings to deliver towards the upper end of our target range of $2.5 billion-$3.5 billion by the end of 2013. Third, our return on average shareholders' equity was 10.9%, up from 9.5% in 2010, though this includes favorable fair value movements on our own debt. We have set an ROE target of 12%-15% and remain confident, as I said at the third quarter interim, of hitting 12%, and the reason's quite straightforward. An ROE of 12%-15% is supported by a pre-tax return on risk-weighted assets of 10.8%-2.6%. The Hongkong and Shanghai Banking Corporation, at a 21.6% ROE, is well above that range, and commercial banking was already firmly within its return on risk-weighted assets target range. The overall return of the group continues to be depressed by the capital deployed in the U.S. consumer finance business and in legacy credit businesses in global banking and markets. Excluding these businesses, which are all in runoff, and the U.S. cards business, which we are selling, the remainder of the group achieved a return of 2.2%, which is well within the target range of 12%-15% ROE. So that is why we're confident that we will hit our 12%-15% target by the end of 2013, as promised to our shareholders. Fourth, we continue to generate material amounts of capital. Profit attributable to ordinary shareholders was up 27% to $16.2 billion. $7.3 billion was declared in dividends from after-tax earnings in respect of the year. This compares with $3.4 billion of variable pay awards on the same after-tax basis for the year. Retained earnings were $12.8 billion to strengthen our capital base and to reinvest in future growth. I'm pleased that we're able to show a distribution where for each 100 units, we retain 50, give 35 to our shareholders, and pass 15 to our staff through variable pay. We believe this is an appropriate balance. Now, turning to the financial highlights and to recap. We generated earnings per share of $0.92, up 26% on the prior year. Our board approved a dividend of $0.14 for the fourth quarter, bringing the total dividend in respect of 2011 to $0.41, making a total of $7.3 billion USD compared to $0.36 in 2010, an increase of 14% year-on-year. The return on average shareholders' equity was 10.9%, giving us confidence that we will hit our target of 12%-15%. On a reported basis, the cost-efficiency ratio worsened from 55.2% to 57.5%, on an underlying basis to 61%. I touched on the cost numbers a moment ago, and this together with flat revenues year-on-year explain the move. Our Core Tier 1 ratio was 10.1% at 31 December 2011, down from 10.5% in the prior year, reflecting the introduction of Basel 2.5 and loan growth. It is worth reminding ourselves that here we are growing, not shrinking our balance sheet, and this includes increasing our lending to commercial banking customers. This, by the way, is in line with the guidance we penciled in on our Core Tier 1 range as we journey towards Basel III. As this next slide highlights, the heritage of HSBC and where we are seeing growth. It shows the regional profit breakdown, highlighting the contribution of the faster-growing regions, the impact of events in the Eurozone, and the run-off business in North America. You can also see some of the striking growth in target markets where we have invested and are already seeing great returns, such as China, India, and Brazil. In mainland China, our organic business saw very strong growth, up 236% to $705 million USD. Whilst our results in North America continue to be adversely affected by losses in the U.S. consumer finance business, in Canada, where we have a billion-dollar business led by commercial banking, PBT was up year-on-year. This business is also important in that it is the blueprint for our reshaping program in the United States of America. I'll come back to this slide a little later on. I'll now hand over to Iain to talk through in detail our financial performance. Thanks, Stuart. This slide shows the reported results, highlighting pressures on revenue and costs, although Stuart has indicated there are signs of real progress in both areas. A significant improvement in loan impairment charges, increased income from our associates, mainly driven by our Chinese associates, and a reduction in the effective tax rate. Looking at numbers on an underlying basis. Revenue was $68.1 billion, broadly in line with the prior year. We saw strong revenue growth in faster-growing regions. This included a significant contribution from commercial banking and retail banking and wealth management outside North America, and over half of our global banking and markets business lines. In each case, growth has been driven by targeted investment. We experienced headwinds from the turmoil in the Eurozone, which impacted on credit and rates revenue, most notably in Europe. Lower income in balance sheet management, as expected, and the continued managed reduction of our run-off portfolio in the U.S. Loan impairment charges were down, notably in the U.S. consumer finance portfolios. More broadly, credit costs remained stable, although where we have realized significant growth in commercial banking lending in Latin America and Hong Kong, we have experienced slightly higher loan impairment charges. Operating expenses were $41.5 billion, up 8% on the prior year. This was due in part to an increase in staff compensation and inflation in faster-growing markets. Increased compliance and regulatory costs in Europe and North America, and in part, a number of notable items which are detailed in the appendix of this slide pack. Looking at revenues. In faster-growing markets, revenues grew by 10%, accounting for 49% of group revenues, up from 44% in 2010. We saw record revenues in commercial banking, with higher lending in Asia and Latin America, which helped deliver a 30% increase in profit before tax and strong positive jaws for this business. Collaborative revenues from sales of global banking markets products to commercial banking customers grew strongly in all regions by more than $500 million in 2011. Global banking markets revenues were up in all regions except North America and Europe, and in six of our nine global banking and markets business lines, reflecting investment in recent years. We also grew retail banking and wealth management revenues in these regions. Elsewhere, revenues were driven down by the impact of Eurozone credits and rates, lower revenues in balance sheet management, and a decline in revenues in North America due to continuing runoff of portfolios in the U.S. More on operating expenses, although Stuart has provided a good deal of detail in this regard. Cost growth reflected areas of business expansion and wage inflation, notably in Asia and Latin America. In global banking and markets, costs rose as we invested in the business, for example, in our e-commerce platforms and foreign exchange, and as a consequence of increased compliance and regulatory costs in the U.S. and Europe. Separately, we recorded an increase in notable items of $1 billion, including customer redress programs in the U.K., principally relating to PPI, the UK bank levy, a provision for U.S. mortgage foreclosure and servicing matters, and as mentioned, there is more detail in the appendix. As we reshaped the business, we incurred additional restructuring costs of $1.1 billion. This includes staff-related costs of $542 million and impairments in certain software projects of $325 million, with the balance covering premises and other related costs. We reduced headcount by 11,000 against the end of the first quarter, this being the peak for full-time employees. Looking at the cost efficiency ratio, you can clearly see the positive effects of growth in commercial banking and in the faster-growing regions, and the impact of revenue headwinds in North America and global banking markets in Europe. Looking at the cost progression, you can see the stabilization of operating costs through the year, excluding notable items. This has begun to reflect the pattern in headcount. We are focused on delivering efficiency through the deployment of globally consistent business models, lean and efficient support functions driving governance and control, and a better mix of front office to back-office deployment. We have made real progress in turning the ship on this front. We realized $900 million of sustainable saves, more than $1.3 billion annualized, and have a very robust pipeline of projects in the delivery process, which will take us to the upper end of our target range. This is very much about culture change at HSBC, and the focus is and will remain intense. Turning now to credit quality. In 2011, there was a significant improvement in credit quality, particularly in North America and Europe. The most significant improvement came in retail banking and wealth management in North America. In the fourth quarter, loan impairment charges decreased by $900 million compared with the prior quarter as a result of lower increases in both delinquency levels and costs to obtain collateral. HSBC Finance continued to be affected by the extended foreclosure timelines. However, the overall charge was lower than in Q3. There was also a notable improvement in the U.K. due to improved delinquency rates. As we signaled in our interim management statement in November, we saw deterioration in loan impairment charges in the third quarter in the U.S. consumer finance portfolios. This reflected worsening delinquency rates compared with the first half of the year, and a rise in our loan impairment allowances as a result of an increase in the expected cost to obtain and realize collateral following delays in foreclosure processing. In commercial banking, an improvement in loan impairment charges in North America and Europe was partly offset by deterioration in Brazil as a consequence of business growth in this area. Regarding the Eurozone, our exposure to distressed countries is modest, at $4.8 billion to governments and sovereigns in total. Looking at capital adequacy, our ability to generate capital and funding remains strong. The Core Tier 1 ratio was 10.1% at 31st December, down from 10.5% in the prior year. This reflects an increase in risk-weighted assets due to the effect of the introduction of Basel 2.5, and more importantly, growth in lending balances, notably in commercial banking, including in our associates and mainland China. We took action to mitigate this effect. We expanded the VaR consolidation of market risk and reduced our global banking and markets legacy positions, in addition to the continued rundown of U.S. consumer finance portfolios. Disposals announced, once completed, will further add to the strengthening of capital ratios through a reduction of some $50 billion of risk-weighted assets. This next slide shows the impact of the transition to Basel III, as required at the end of 2013, based on the balance sheet at the end of 2011. Mitigation actions include, but are not limited to, disposals, notably the sale of our U.S. card and retail business. This is the most significant risk-weighted asset disposition. Continued runoff of our U.S. CML portfolio, active management, and rundown of our legacy credit positions, and actions to manage credit valuation adjustment. It is worth noting that our outlook on the impact of Basel III and our actions to mitigate the effects remain very consistent with that expressed during our Investor Strategy Day in May of last year. I think it goes without saying, but I will say it anyway, there remains significant uncertainty on the regulatory front. Importantly on this chart, we do not show the impact of any capital generation or business growth, an important feature over the course of the next couple of years. This slide gives you a picture of what we do with our profit. On the left, you can see our allocation of profit spread between dividends, net of scrip, variable pay net of tax, and retained earnings, which we retain in order to put back into the economy, generate future growth, and maintain our strong capital position. We believe this reflects responsible allocation of the firm's resources, appropriately aligned to current regulatory goals and the interests of our shareholders, and reflects a long-held management philosophy at HSBC. On variable pay, as you can see, the bonus pool was slightly smaller than the prior year, and in Global Banking and Markets it was down 26%. I will now hand back to Stuart to talk through the business performance set against our strategic targets. Thanks, Iain. I want to take you quickly through our strategic scorecard, exactly as I set it out at the Investor Strategy Day. We said we would improve our capital deployment through the use of the Five Filters framework, and since then, we have announced the disposal or closure of 19 businesses, 16 of which were announced during 2011, and three so far this year. We do have a number of further transactions in the pipeline. We also set out to improve our cost efficiency. Since May, we have achieved $900 million of sustainable savings, which annualizes at about $1.3 billion. To improve our organizational efficiency and effectiveness, we have developed consistent global business models in Commercial Banking and Retail Banking and Wealth Management. We have redesigned and re-engineered our global functions, processes, and IT. We are creating a leaner group, removing layers of management to give staff greater responsibility, improve decision-making and controls, and to reduce bureaucracy. This de-layering process has already begun in our major markets. We have identified a strong pipeline of further sustainable cost savings to deliver at the upper end of our target range of $2.5 billion-$3.5 billion by the end of 2013. We have also made material progress in positioning the business for growth, particularly in the faster-growing markets and in Commercial Banking, and these are already paying dividends. We have set a 12%-15% target return on average shareholders' equity. In 2011, we came in at 10.9%, which included favorable fair value movements on our own debt. As I have explained, we are putting our operational focus on improving our return on risk-weighted assets, which obviously is a key driver of ROE. Here it is important to note, in the lower table, that our return on risk-weighted assets, excluding the U.S. consumer finance portfolio and certain legacy credit businesses in Global Banking and Markets, is 2.2%. That is why we are confident that we will hit our 12%-15% ROE target by the end of 2013. We reflected on this slide earlier, that this picture epitomizes the opportunity and the challenge for us. We have an enviable footprint in many of the markets that are most important to global economic growth now, and from where the marginal GDP growth in the world will come over the next 25 years. This shows what we have been able to accomplish in 2011, and the outlook for 2012 remains positive. In each of these markets, Retail Banking and Wealth Management, Commercial Banking, and Global Banking and Markets invested and drove growth, with a strong focus in Commercial Banking and Global Banking and Markets on international connectivity. You will recall that connectivity was one of our Five Filters. It is also worth noting, since in the West we have not seen interest rate rises for some time, that in several of these markets, including in China and in India, we saw upward movements in policy rates, which, given our strong deposit-led funding position, was of benefit to us. The same will be true in other countries at some point in the future. Moving now on to global businesses, which in 2011 were led by Commercial Banking. First of all, turning to Commercial Banking. Commercial Banking reported record profit before tax of $7.9 billion, 30% higher than the prior year. Over the last five years, our cumulative profit before tax in Commercial Banking is $32.7 billion. Pretty much all of this has been organic since we had no material M&A. In 2011, revenues in Asia, Latin America, and the Middle East were up 20%, led by Brazil, Hong Kong, and mainland China. We improved connectivity across the group as revenues from sales of Global Banking and Markets products to Commercial Banking customers grew strongly in all regions. This generated more than $500 million of incremental revenue in 2011. We have also continued to establish our market leadership in global trade, helping businesses around the world. Research by Oliver Wyman shows that HSBC now has a 9% share of bank-financed global trade, and we financed half a trillion dollars of trade globally in 2011. Trade revenue increased by 22% to $2.6 billion, of which 75% was generated in faster-growing regions. We also exceeded our 2011 lending intentions under the Project Merlin agreement with the U.K. government, both in terms of total and SME facilities. Bank of England statistics showed U.K. bank net SME lending fell 6% in 2011. Ours increased 4%. Just last week, we established a GBP 4 billion fund here in the U.K. to support SMEs conducting international trade. During the second half, we also rolled out a globally consistent operating model across the business, driving efficiency gains. Revenue growth outpaced cost growth, and Commercial Banking delivered 8% positive jaws. Turning next to Global Banking and Markets. Global Banking and Markets reported profit before tax of $7 billion, which was 23% lower than 2010. Pre-tax return on risk-weighted assets was 1.8%. If you exclude the legacy credit businesses, which are in runoff, that return is 2.1%, which is within our target range. This is important because it gives us confidence that even in the post-crisis world, this business model is capable of producing the returns that we require. The strength of the business was demonstrated by the fact that revenues grew strongly in all of the faster-growing regions and in six of our nine business lines. These included securities services, payments and cash management, equities, foreign exchange and financing, and equity capital markets, with growth coming particularly by region in the rest of Asia Pacific and in Latin America. We continue to invest in the business to support growth, for example, in e-commerce platforms to improve our product offerings in foreign exchange. Our EFX platform is now live in Hong Kong, London, and New York, and this investment contributed to the 16% rise in foreign exchange revenues in 2011, an investment expense that again resulted in returns for our shareholders. We began to see some market share gains, in particular in global banking markets and CMB, in the Middle East and Asia, as European banks focused on other priorities. In retail banking and wealth management, reported profit before tax was $6.6 billion, up 6% on 2010. In this business, the pre-tax return on risk-weighted assets was 1.2%, but excluding the U.S. consumer portfolio, return is actually 3.9%, which is above our target range. While the business does continue to be affected by the U.S. run-off portfolio, we did actually grow revenues in Asia and Latin America by over 7% during the year. We have also put the business through the Five Filters analysis to improve our portfolio and drive superior returns. As a result, we announced 15 disposals or transactions with more in the pipeline. We also continue to reposition our consumer finance portfolios in Mexico, India, and the U.A.E. In summary, 2011 was a year of material progress for HSBC. In the seven months since May, we have gained traction in delivering our three-year strategy. We saw a strong performance in faster-growing markets, and we had a record year in commercial banking. We remain confident that we can deliver our target of a return on equity of 12%-15% by the end of 2013. Our strategy is the primary lever to improve the group's performance, so we are increasing the intensity of execution in 2012. Finally, I am pleased to report that we had a good start to the year with a strong performance in January. We will now take your questions, but before we begin, the operator will explain the procedure and introduce our first question. Operator? Thank you. Thank you, Mr. Gulliver. If you'd 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 star two. 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. We'll now move to our first question today, which comes from Alastair Ryan of UBS. Please go ahead. Your line is open. Good morning. Thank you. A couple of things. First, just the mix of higher dividend on a somewhat lower capital base. Now, clearly, you've got plenty of capital, and the distributions have been relatively low historically, but just whether we can read anything into the regulatory environment that you've been facing, which has been very aggressive in the past couple of years, whether there's any signs of moderation. I guess one for Douglas, and then for perhaps Iain and Stuart, the pace of the legacy portfolios declining in significance. Fourth quarter was perhaps better at Household than we or others had expected. Whether that rundown is now smoother than the sort of choppy waters in the second half, and also the legacy credit portfolio down to $35 billion, but whether you've an aspiration to get that out quickly, see balance sheets clean, or whether it's more about not impacting revenues too greatly. Just as you say on the line with- Alastair, Douglas, on the dividend, I think as far as the regulatory environment is concerned, we did get some good progress last year in terms of the ICB and the U.S. and CRD4 in Europe and some of the The aspects that look more troubling have been moderated, at least in principle, so far. I think while there's an awful long way to go, there was some progress made in 2011. I think one of the other things that impacts thinking about the dividend, as Stuart has said, in relation to the legacy business, both in North America and elements of credit portfolios in Global Banking and Markets. These will run off over some years from now, and that releases capital, which I think is one of the factors on the board's mind as we think about the opportunity to have a progressive dividend. But that really takes you into the question about how fast will those business run down. I'll pass over to Stuart. I think also, Alastair, we set 2012 at three lots of $0.09, which is the same obviously as the first three of 2011, which gives us a bit of flexibility in terms of the regulatory environment. Yes, there is capital release as these run down, but the regulatory environment is getting more clear. But we equally want to retain some flexibility in that regard, which is why we set it at three lots of $0.09. On the run of portfolios, I'll let Iain talk in a little bit of detail in a moment. But to your point about, and I think which is you're asking is, would we look to sell down some of those portfolios if the opportunity arose? Actually, we've been looking at doing this anyway, and we've been doing it in Global Banking and Markets for quite some time, and it's a very simple mathematical calculation as to whether the RWA is so large and the cost of capital therefore is greater than effectively the mark to market loss to be taken to just clear it off the books. We've set up a team of people now around the Household portfolio to be able to deal with reverse inquiries that may be coming in from investors who are probably outside the banking industry that may be looking to take pockets of residential property. As I say, for some time now in Global Banking and Markets, we've had a team doing exactly the same thing with the legacy books there. It's a very simple mathematical calculation. If we could accelerate it and use some of the gains from various disposals, if it made more sense to take losses to get them off the book than to continue to pay for the capital against such large risk-weighted assets, we'll choose to do that. Yeah, Alastair, in terms of how the runoff portfolio in the U.S. is running down, the pace has remained fairly consistent when compared to last year. We ran down those portfolios by a little bit over $9 billion, nearly $10 billion this year, which is reasonably comparable to what we did 2010 over 2009. We are sitting at $49.5 billion at the end of the year. That is compared to about, excuse me, about $80 billion at the end of 2009. The rate at which it is running down is reasonably consistent, even although that portfolio continues to mature and in a pretty horrible U.S. housing market. The way that runs down continues to be fairly consistent even from 2009, where the proportion that is charged off versus the proportion that is paid down is actually fairly consistent as well. In terms of how that reflects on our capital base, although the book values have come down by nearly $10 billion, the risk-weighted asset reduction was less than four, and within that, the FSA asked us to put a little bit of a capital override on this book as well, while we continue to work with them on some of the modeling around the rundown in the portfolio. Although we see the book values run down very much in a consistent manner, we are not getting the full benefit of that coming through capital. But as we continue to run it down, we would expect to see capital release build over time. Thank you. Thank you. Now move to our next question from Chris Manners of Morgan Stanley. Your line is now open. Good morning, everyone, and thanks for taking my questions. Good morning. I just had a couple of questions for you on Asia. Firstly, just on the loan growth. In Hong Kong, you had flat loans in the third quarter and the fourth quarter. Rest of Asia Pacific also had quite slow loan growth. So I was just interested in how you saw that loan growth continuing going forward. Do you see more opportunities there to increase the LD ratio? Secondly, just on the impairment charges, I know that obviously you are running below the normalized level. Are we seeing an uptick in impairment charge in Asia, or are we actually still seeing quite a benign environment? Just, yeah, those two comments would be very helpful. We are still seeing quite a benign environment. There is no sign of an uptick. Indeed, even if we normalize to averages over the last five, six, seven years, actually, they are still at quite low levels compared to other parts of the world. So even the normalized charge is quite manageable. On loan growth, no, we will continue to build our business up there as opportunities arise. There is no override either coming from the center to slow down growth. It will be driven by business opportunities as they arise. We are expecting positive GDP growth in Asia Pacific, so I would expect the book to continue to grow. Thanks very much. Thank you. Thank you. We now move to our next question from Rohith Chandra-Rajan from Barclays Capital. Your line is now open. Morning. Couple of questions on costs, if I could please. Just trying to look at the quarter-on-quarter trend in the cost and stripping out some of the notable items that you highlight, although I'm not quite sure about the quarterly allocation of those. I just wanted to confirm whether this was consistent with your thinking that if we strip out the additional PPI charge restructuring, and U.S. mortgage servicing costs, the fourth quarter costs were broadly flat on the third quarter, or down if you also stripped out the UK bank levy. That was the first question. Then secondly, you highlighted $1.3 billion run rate of cost savings, confident of getting towards the upper end of the $2.5 billion-$3.5 billion target range. I'm just wondering how we should think about the trajectory to get there. So particularly, how much might be achieved in 2012. Thanks. Yeah, if you make those adjustments, yeah, the third, fourth quarters were flat. The thing I think to look at in terms of trajectory, and this is why we put the slide in, is the decline in headcount. So you can see, basically, if you think about it, we had a strategy day in May. We started effectively restructuring the firm. A lot of the acceleration effectively takes place in the fourth quarter and continues on into this year. So one of the reasons we gave you that chart on headcount is clearly that informs a lot of where the costs come from. So we would expect to show more progress in this area during 2012. Thank you. Could I ask an unrelated question actually, just on the U.S., if there's any update on the sale of the cards business and when that is sold, any further comment you can provide on ability to repatriate that capital? We need to close the transaction, first and foremost, and then really then see how the regulator's positioned. I don't think there's any more clarity we can provide today on that. I certainly don't think you should be penciling in for 2012, that capital coming out of the United States. Okay. Thank you. Thanks. Actually, also bear in mind that we are looking to develop commercial banking business in the U.S., which will consume some of that capital. Next question please. Thank you, sir. The next question now comes from Michael Helsby from Merrill Lynch. Your line is now open. Thank you. I just want to follow up on the question Chris asked on loan growth. I noticed that commercial banking loan growth was negative. If you look at its second half versus first half, that is clearly a very notable slowdown, and that revenue actually fell Q-on-Q in the fourth quarter. Also just again, there was a huge slowdown in the rate of growth in Hong Kong and in rest of Asia in the second half. I was just wondering, I appreciate that you clearly want to grow those business, but what went on that was special in the second half, which broke that trend very significantly? Just on costs. I was looking at slide 11. I just want to clarify the comment that you just made on flat Q-on-Q, where you strip out the noticeable items. The fourth quarter cost line of $9.7 billion versus $9.4 billion. Is there something else in that 9.7 that we need to be aware of? I was actually quite surprised that it was running a little bit higher given the weaker revenue environment. Clearly, if I look at that slide, that is the second highest quarter in the last eight. So if you just give us a little bit more color on what went on in the fourth quarter, please. Yeah, sure. On CMB, actually lending continued to grow, so I am not sure quite what you are looking at there. It might be a currency translation effect coming out of local currency balance sheets. Whatever you have picked up is not actually what is happening. Okay. In dollars they are shrinking. Well, loans and advances to customers on the data we all have has continued to grow. Okay. Asia-Pacific or Hong Kong in particular, obviously we have grown it at a very aggressive pace, as I think you have remarked on a couple of times. As we caught up on the fact that we have put our foot off the gas in 2008, 2009, when we did the rights issue. Obviously, what we now have is we believe we have caught up. So any future growth is really dependent on GDP and business opportunities that come up rather than taking back market share that we may have lost. That, by definition, is at a lower rate. On the cost, there is a big restructuring cost number in there. There is. There is higher restructuring within the fourth quarter. There are slightly higher legal and compliance costs in the fourth quarter, mostly in the U.S. Those are probably the two features that you are picking up there, Michael. Okay. So they are not in your notable items? No, because individually they are not that particularly significant. Right. Okay, cool. Thank you very much. Thank you. Thanks. Next, please. Thank you. Our next question now comes from Christopher Wheeler from Mediobanca. Your line is now open. Yes, good morning. A couple of questions. Perhaps the first one to go back to the U.S. business and to talk about the settlement on U.S. foreclosures. Perhaps could you tell us your position in terms of the settlement that has taken place with the big banks? Are you now moving towards a situation where you can start to foreclose again? How long will it take for you to get your procedures agreed? Then perhaps talk a little bit about what you think that might do, both to the speed of the runoff and obviously any additional costs that you might have to take through the P&L in terms of that agreement. That is the first question. The second one is a pretty simple one. Just want to confirm on slide 14 where you have very kindly given us the Basel III update. I assume that the 0.1 adjustment to Basel III capital means that this is without the additional capital deductions that will be phased in between 2013 and 2019. I think that is the case, but would just appreciate a clarification. Thank you. I will take your last question first, Chris. Sure. What we've shown you on page 14 takes you only through the end of 2013. It does not take you all the way through to 2018 and 2019 for the simple reason that the world and the regulatory environment remains particularly uncertain, whether it's with respect to calibration of CRD4, the possible impact of capital requirements and PLAC requirements under ICB, G-SIBs, so on and so forth. We take it through to 2013 because we've got reasonable line of sight to 2013. We do not take it beyond simply because of the uncertainty on that point. Good. Thank you. As relates to the U.S. settlement, the big five, as it were, have reached a settlement. As you see in the financial statements, we did take a provision in the fourth quarter for settlement as it relates to similar conditions as the top five. However, those discussions are still in a very early stage with the Department of Housing and Urban Development, which is the agency that the U.S. government's assigned to settle with the other nine banks that are involved in this. So there were 14 in total, as you'll recall. In terms of the specific details about how that settlement works out, it's still very fluid. Frankly, the reserve that we took was based on the best possible information that we had, based on the stage of progress within those discussions. I think overall, the fact that we are reaching, as an industry, this stage of development in the U.S., it's good for recovery of the housing market. Clearly, the amount of work that we and others have done in terms of improving the quality of administrative procedures around foreclosure processes has us back doing foreclosures in 48 out of the 49 states in which we operate in the U.S. This is all good. It will ultimately lead to some form of sustainability in the recovery of the U.S. marketplace. I think that's still some time to take. As I mentioned earlier, the runoff of our book continues to progress very much in line with our expectations. As we learn more on participating in the settlement processes with the Department of Housing and Urban Development, we'll keep people posted. But I think we've taken a view based on all the information we've got available at this point, and are reasonably happy with that. Okay. Thank you very much. Really helpful. Thank you. Next one, please. Thank you. Our next question comes from Ian Gordon from Investec. Your line is now open. Hi, it's Ian Gordon from Investec. Just two, please. I can see the group net interest margin is still edging down, but could you just update me on your views in terms of the development of the margin in Hong Kong and Asia Pacific in particular, where you certainly referenced some asset spread expansion at the Q3 call? The second question, forgive me for raising it again, but just in relation to the $3.5 billion reduction in CMB lending in Hong Kong in the second half of 2011. I see in the text you reference a reduction in certain trade finance loans in CMB. Is it ex that item that, Stuart, you're referencing the underlying growth? Thanks. Let me take the net interest margin in Asia for the moment. Comparing 2011 and 2010, net interest margin expanded from 183 basis points to 191 basis points. There's a number of factors that bear that out. Certainly, if you look specifically at Hong Kong, with a slightly higher instance of HIBOR-based lending products, margins tended to narrow very slightly in Hong Kong over the course of the year. Outside the Hong Kong market, the opportunity to reprice assets, movements in policy rates in some countries like China, India, Australia, for example, certainly helped, both in terms of asset pricing as well as the yield that we can pick up on the liability side of the balance sheet. Overall, performance in net interest margin in the Asia Pacific region was fairly positive and continued a trend that we talked about at the third quarter. That's about it on the net interest margin front. On the commercial banking front, I think broadly, we saw continued growth as far as lending saw, and acknowledged at the third quarter that we had slowed the rate of growth in the second half of the year, partly because of, frankly, some moves taken by regulators in mainland China and Hong Kong to slow down the supply of credit or to constrain the supply of credit in those marketplaces. Our businesses were a function of that, but we very much continued to focus on the growth of the businesses. John? If I may. There's two things. The Hong Kong one is a particular piece of trade finance that went backwards and forwards between the mainland and Hong Kong, which was then discouraged by the regulators. This was taking place in all bank balance sheets. So it's a specific item that doesn't really inform anything about the underlying trend of growth of commercial banking. If you look at the footings overall, the reported CMB lending down in the second half is due to currency. If you look at places like India, Latin America, and bear in mind that we're reporting in dollars, actually there's a currency decline that comes through in the dollar numbers. The underlying is actually up 2%. The Hong Kong is specifically a bills-based financing thing between the mainland and Hong Kong that has kind of gone away, but did not really inform a huge amount of our P&L anyway. The overall footings are due to currency moves in Latin America and India in particular. Local currency against USD. Okay, thanks very much. Okay, thank you. Next, please. Thank you. Our next question now comes from Ronit Ghose from Citi. Your line is now open. Great. Thank you. I had a couple of questions on capital. First of all, thanks for the Basel III guidance for 2013. When we try to estimate a fully look-through number, we get to slightly below 9% end 2013 on Basel III. I wondered if you could share any thoughts on that. Secondly, on the dividend, you set the first three quarters the same as this year or 2011. Are you committed to a progressive dividend policy? Finally, on Hong Kong, with the risk of irritating management here, can you just confirm that that back and forth to the mainland is all done now, and that rundown in trade finance, particularly in Hang Seng Bank, is basically an '11 event. Thank you. We are still committed to a progressive dividend policy, but we obviously want to retain the optionality to see how 2012 evolves. About free capital. Certainly on capital. As I mentioned earlier, Ronit, we've really given a view to the end of 2013 and have not gone beyond that, based primarily on the fact that there's still enormous amounts of uncertainty. However, certainly as we reflect on the out years, our guidance that we gave you back on the Investor Day around how we saw the impact on our capital base coming from the broader implementation of Basel III remains highly consistent. Even as we updated our ability to generate mitigating actions as well as further interpretive guidance comes around with the implementation of those capital requirements. The guidance remains very consistent with what we gave you back in May of last year. On the trade finance point, yes. Okay, thanks. Get the next one, please. Thank you. Our next question now comes from Bruce Packard from Seymour Pierce. Your line is now open. Good morning. Yes. Just looking on the face of the balance sheet, there's some quite large movements in trading assets and also derivatives. I was just wondering, is there something fundamental going on there, or is that just noise? Well, there was a concerted effort over the second half of the year, and particularly the fourth quarter, to manage down trading asset exposures, and I think that's what you're seeing coming through. In terms of derivative valuations, it's really a function of market movements. As you looked at spreads widening, narrowing and then widening again in the fourth quarter, that particularly informs the valuation of derivatives, principally interest rate derivatives that we have both in the trading portfolios as well as the broader management of the business. Overall, what has informed the trading reduction was a purposeful effort on the part of Samir and the team to move down their exposure to trading assets in the fourth quarter, which, by the way, tends to be a function that we undertake at the end of each year as we close out particular positions. Okay, thanks. Thank you. We now move to our next question from Alistair Scarff from Bank of America, Merrill Lynch. Your line is now open. Good evening, gentlemen. Thank you for your time this evening. Just wondering if I could ask two quick questions. Firstly, in regard to dollar liquidity in your faster-growing markets, we are hearing from various banks that there has been a tightening. Is that something you have observed? If so, are you seeing a better pricing environment for dollar liquidity? Second question relates to trade finance. Is trade finance under the new Basel 2.5 and Basel III, is the risk weighting going to change materially? If so, how will that affect the bank's position, obviously, with a 9% market share in that space? How will the capital be impacted? Thank you. Okay. In terms of liquidity, we continue everywhere to operate with a very conservative AD ratio. It has not really had an impact on us. So we have not really seen a particular squeeze on margins in U.S. dollars. Where we have seen a margin squeeze on the liability side has been in places like Brazil, because rates went up, and in places like the U.K., where the state-owned banks are looking to deal with AD ratios substantially above 100. But we have not seen effectively margin compression because of competition for dollar liquidity in the emerging markets. Absolutely, Stuart. When you look at trade finance and Basel III, this is actually, Alistair, one of those areas which is still open to pretty broad interpretation and discussion as it relates to CRD IV and the development of that. As you are probably well aware, there was a fairly healthy level of consultation and debate around the possible impact on specifically that guidance on growth and the growth agenda, particularly in European environments. So it is one of those areas of uncertainty, but I think we are making real headway in terms of persuading the powers that be that from a trade finance perspective, they need to seriously revisit and are revisiting the implementation of Basel III through CRD IV. Great. If I could have just one final follow-up in relation to your FTE count. Is the momentum that you have shown since the first quarter of 2011, is this trajectory something which we would expect to see as you intensify the execution of your strategy? Or has the lion's share of the headcount aspect, net, of course, net headcount aspect, been taken out, and we could look for more of a stabilization of headcount around current levels on an aggregate group basis? No. You should assume that there are further reductions to come. Brilliant. Thank you, Stuart. Thanks. Thank you. We now move to our next question from Robert Law from Nomura. Your line is now open. Good morning, everybody. I had two questions, please. Firstly, on the targets that you have restated for 2013, and I know you give these targets serious consideration when you put them out. If I look at the cost-income ratio, whether you make it underlying or reported or whatever, you have just reported about 60%. I then look at where consensus is for 2013. Again, consensus is somewhere around the 56% type level, so well above the top end of your target range. I just wanted to invite you to comment on what you think the market might be missing in terms of the assumption of the kind of cost-income ratio targets that you have got for 2013. That is the first one. Second point, more briefly, could you comment on the outlook this year and then in subsequent years for the BSM revenue, please? Thank you. Yeah, sure. Robert, on BSM, I think the kind of rough guidance would be $2.5 billion to $3 billion for 2012, would be a reasonable place to put BSM. Beyond that? Sorry? Beyond that? Two and a half. Thank you. On the cost efficiency ratio, clearly you are right, in the sense that we have somewhat trapped ourselves by putting a ratio in as opposed to expense target. But actually, in order to keep the pressure up within the firm, we will have to stick to aiming to that 52. But actually, what we think will happen is that we will hit the cost side and the revenue side to some extent in our control, and the revenue side to some extent, not in our control, because it depends on what happens in things like the Eurozone. As things stand at the moment, we stick to it. We will revisit this at the strategy day in May. But you are right, we have got a ratio that at this moment appears to be somewhat heroic compared to where we are. We are absolutely determined to get the $2.5 billion-$3.5 billion of sustainable cost saves out of the firm. That is what we will program to do. What we will need to think is whether we, in fact, bring alongside the cost efficiency ratio an absolute expense target, and whether that might be a sensible thing to introduce in addition to the cost efficiency ratio. Right. Okay, as a supplementary to that, the restructuring charges you have taken at the moment were about $1 billion last year. In the assumptions you have made and the targets, do those go to zero by the time the targets come into effect? I think, Robert, as we gave a little bit more detail on what is inside that $1.1 billion, we have got $542 million relates to people and about $320 odd million, $325 million that relates to software programs. We have very much dealt with legacy software issues, I think, in the numbers that we put in there. I think it would be unlikely to see that recur. If you equate the $542 to the actions we have already taken in terms of delayering the firm and striking the right focus around deployment of our human resources, then it probably helps inform a little bit what sort of restructuring charges might look like as we continue to work through the reshaping of the firm. But certainly, by the time we reach the middle tail end of 2013, we would have expected to have worked through the majority of restructuring charges. Many thanks. You are welcome, Robert. Thanks. Next, please. Thank you. Our next question now comes from Gary Greenwood from Shore Capital. Your line is now open. Oh, hi. I just had two brief questions. The first was on Asia. You mentioned that you were taking market share in GBM as European banks withdrew capacity. Are you doing that whilst maintaining prices? Are you seeing opportunities to reprice upwards as well? The second question was just following on from Robert's question on cost-income ratio. I think your previous guidance, when you talked about return on equity, you had guided towards the bottom end of the range by the end of 2013. I am guessing from what you are saying on cost-income ratio, that that is probably still true, that you are looking towards the bottom end of the range on the ROE guidance. Thank you. Yeah, in November, I actually said on both that we would have to go to the bottom end of both ranges. So 12 on the ROE, 52 on the cost efficiency, and nothing has changed in terms of those being the logical ends of the ranges to aim for. In terms of European bank and taking market share, there at the moment is no ability to flex pricing because we are not the only guys. The American banks, the regional banks, regional Asians and the Chinese banks are all in good shape and are competing for the business. Okay, thank you very much. Thank you. Thank you. I move to our next question from Tom Rayner from Exane BNP Paribas. Your line is now open. Good morning. It is Tom Rayner from BNP here. Just a couple of questions, please. One, just on the dividend payout slide, where you show the pie charts with the variable pay, the retained earnings, and the dividend. Just want to make sure I do understand how that links to a desired payout ratio in terms of ordinary dividends relative to earnings in any particular year. Because I think if I understand it rightly, the pro forma number you refer to is before variable pay, and the dividend number includes dividends to non-ordinary equity. I am just trying to get a sense versus, I think, what was a 44% payout ratio in 2011. What are you trying to tell us, if anything, with that slide? I have a second question, please. Right. On the dividend payout ratio, we are 42.4% is the payout ratio, which is in the range that we talked about at Strategy Day of 40%-60% of a payout ratio. When you track across to the slide in the deck, which gives you a broad framework for the distribution, or if you like, the allocation of our profitability. This reflects If you like, a philosophy, which in many of the previous years in HSBC, not all admittedly, but in many previous years, has been a faithful reflection of what we've done, where we focus on retaining the majority of the profits that we generate in any given year to retained earnings to build capital and reinvest back into the business. As a distribution in any given year, somewhere in the range of 35% of that profit attributable to the year, and then 15% on an after-tax basis for variable compensation. There is not a direct mathematical link between the dividend payout ratio that we've reflected in our financial statements and that which is reflected on this chart. I think one thing to note is that in each year, we tend to get a fairly healthy contribution by scrip take-up within our business. And generally speaking, that probably contributes for the difference between what we have on the page of 35% and a payout ratio between 40% to 60% within our targets. Okay? Okay. If we add the scrip in. Well, okay. If you added the scrip- It's classified. You'd be, yeah, okay. Fair enough. Yeah. Just the second one, sorry to just go back to the loan growth, but, I know I can tell it seems somewhat irritating that people are trying to draw the wrong conclusions about what the volume growth is doing in different parts. But if you look at the disclosure, I think it is quite hard to get back to an underlying constant currency growth, certainly in the second half. The full year underlying that you report was -1% for group loan growth, and obviously there's a U.S. runoff within that, and there's all sorts of currency issue. Is there anything you can tell us or anywhere you can point us to within your release or within the presentation? The big technical is the Hong Kong. There was a significant pop-up in 2011, which you can see in HSBC in Hong Kong and in Hang Seng in Hong Kong, of basically USD loans backed with RMB collateral. Which the Hong Kong Monetary Authority then cracked down on, want of a better expression, because it obviously involved significant onshore/offshore arbitrage between Hong Kong and the mainland. Therefore, a chunk of the trade-related lending in Hang Seng and HSBC in Hong Kong increased from December 2010 to June 2011, and then back down again to December 2011 is that phenomenon. But if, again, if you look at Hong Kong, 31st December 2010 to 31st December 2011, total gross loans and advances go from $49.2 billion to $55.5 billion. It's just that they were at $59.1 billion at the half year and came back down again because of this one technical aspect. Then you're left with the runoff of the loan portfolio in the United States and currency adjustment. And there's one other element in the U.S., is that the cards and retail services business and the branch network, those loans and advances, as well as associated liabilities, have been classified as held for sale. So they've come out of the loans and advances number. So when you look at the loans and advances number on the overall balance sheet, you've got to look at other to get back to the customer loans and advances if you like you first thought of. So if you go to the balance sheet stuff on page 104 of the annual report and accounts, and also the balance sheet page, which is on page 32, you'll see in it that loans and advances to customers are $940 billion. What you are looking at is 958 at the end of 2010. Of course, we have reclassified the businesses that are up for sale, and they sit in other assets, which has gone up from 145 to 156. Yep. Okay. $40 billion has been reclassified. Yep. That is why- If you could That is why we are kind of talking at cross purposes, I think. I think so. In terms of where you think the underlying clean growth It is up 3.3%, excluding reclassification year on year and excluding the blip in the middle of the year due to particular activity in Hong Kong. That is three. Would that have been stronger in the second half than the first? No. No. First half. First half stronger than the second. Okay. All right. Thanks for that. The massive confusing thing is the reclassification of the businesses now held for sale. Yeah. The RMB/US dollar bit in Hong Kong. Okay, lovely. Thanks for that. Thank you. Okay, time for the last questions. Certainly. Our last question now comes from Raul Sinha from JP Morgan. Your line is now open. Hi, good morning. If I can have two just to wrap up then. Firstly, one for Stuart. Stuart, can we have your thoughts on the LTRO, please? What was- Sure what was the reason for the take-up, and what do you plan to do with the proceeds? Secondly, if you could comment on GBM performance, how you finished the year in Q4 and how you started the year in 2012. Particularly credit and rates were quite difficult areas for you in Q3 and Q4. Do you expect some of that to alleviate in 2012? Yeah, certainly. Look, the LTRO. In the first round of the LTRO, we took $5.2 billion, of which $5 billion was in France and the remainder was in Greece and in Spain. The reason that we took the money was quite straightforward. Clearly, we don't need it. We've got $129.9 billion lying with central banks at the end of the year, and our advances to deposits ratio of 75% means that we have $313 billion more deposits than we have customer advances. The reason we did it is actually, frankly, because we think it adds-- The LTRO, we think, is a great move by the ECB, which helped stabilize the European situation. We felt that actually it did not contain any stigma, and indeed by ourselves going into it actually helps remove the stigma. What we've also done with it is So what are we using it for? It sits in France, the biggest chunk, and effectively it is financing lending to French corporates and our participation in the French short-term government bond market. What we've also done with it is we've ring-fenced it so that it does not contribute to bonus pools. What it will do is offer positive carry, and that positive carry will add to the capital base of the French bank, which will increase the ability of the French bank to lend to French companies. We've done it really in line with the authorities, because we think it was a very, very significant stabilization of the Eurozone system. That's why we did it. We've ring-fenced it so it doesn't benefit any bonus pool, and it basically helps us build up capital within France, which we'll use to expand our business. As I say, bear in mind, we were sitting with 130 billion of cash with central banks at the end of the year and a very strong AD ratio. Therefore, we also think by doing this, it kind of removes the stigmatization that anyone else might feel about it. Actually, it's similar to what we did in 2008, when the special liquidity scheme of the Bank of England was put together. We also participated, at the request of the Bank of England in that, again, so everyone was in it. Again, that was a situation where, frankly, we didn't need it, and actually, we left the money in our Nostro account with the Bank of England. That's really what's behind that, and we'll probably, in the second round, borrow about 320 million, which again, will be in Greece, Spain, and Italy. Those will be effectively funding corporate loan books. Global Banking and Markets. The fourth quarter was difficult because of the Eurozone. The credit and rates piece was actually particularly acute, to be honest, in the third quarter. The third quarter were very, very difficult. Fourth quarter recovered somewhat. January has been actually very good, which I'm sure it has been for most people who've held their positions. I can't really comment on February because we haven't finished the month yet. Okay. Thanks so much. Thank you. Okay. That brings us to end. Just in closing, I would just like to recap our key headlines. Strong growth in the faster-growing regions, a record year in commercial banking. I think we have made good progress in the first year of a three-year strategy. Progress to simplify the structure and improve the management of the firm, thereby improving returns and positioning HSBC for growth. We will be in touch soon about the first quarter IMS and the strategy day in May. But in the meantime, thank you all very much for your time. Thank you. Thank you. Ladies and gentlemen, that concludes the HSBC Holdings plc annual results call. You may now disconnect.