Good morning, ladies and gentlemen, and thank you for joining us this morning. Before we get into the details of the presentation that Niall and Ewan will make, I wanted to just set aside a few minutes just to give you some context. During the quarter of the last year, the Board determined that it had 2 major priorities. One was to ensure that a new group chief executive was selected and the other was the need to enhance performance, accelerate pace and improve our sustainable returns. Collectively, we concluded that both were urgent challenges and that we needed to tackle them immediately and separately.
We have always seen that these have needed to be parallel processes with independent timescales and the Board, I can promise you, has been fully engaged in both. Let me deal first with the Group CEO selection process. The Board has embarked on a very thorough and rigorous process to search for and identify a new CEO. That process is well underway and it's the Board's intention to announce the outcome within the 6 to 12 month timescale that we outlined in August. Turning now to the business update.
We saw a pressing need to reallocate capital away from underperforming businesses to support the growth of higher return businesses, particularly where we have competitive advantage. The Board and executive are also acutely aware of the need to improve efficiency, reduce costs and inject pace. And we've been working hard on this and it is to Noel's credit that he has grasped the issues and tackled the task with energy and resolve. He and the rest of the executive team have worked very closely with the Board to formulate and determine the plans that they have announced today. And as you've seen, they amount to a very significant shift in the allocation of the bank's capital and resources.
They build on a natural and inherent strengths of the organization and are designed to significantly improve sustainable returns for our shareholders. I think finally, and I think just worth mentioning, important to mention and to recognize the continuing exceptional work of our team, of our staff across the world, particularly those in Mainland China and Hong Kong, who are dealing with the impacts of COVID-nineteen on both our customers and the bank. The Board and I want to make it clear that we owe them enormous gratitude and thanks for their continuing dedication, their care and their immense professionalism. Having said all of that, let me now pass over to Niall and Ewan to take you through the details.
Thank you, Mark. And good morning to everyone in London and good afternoon to everyone listening or watching in Hong Kong. We have two objectives today. The first is to take you through our Q4 and full year results for 2019. And the second is to tell you how we're going to address the underperforming parts of the business and simplify the group to increase returns, reduce our cost base and create capacity to invest in growth and technology.
We're going to do this in 3 parts. First, Ewan will take you through the numbers for 2019. I'll then talk about our plan. And then back to Ewan to cover the financial implications of that plan, and then we'll take questions. So I'll now pass straight over to Ewan for him to talk about our results.
Thanks, Noel, and good morning or afternoon, all. On the Q4, it was a decent set of results. Adjusted revenues were up 3%, reflecting both a weaker quarter in 2018, but also the continuing strength of our stronger performing franchises, While adjusted profits were up 29% due to the goodwill impairment of $7,300,000,000 we made a reported loss before tax of $3,900,000,000 As I'll go on to shortly, Hong Kong continues to produce very resilient results in the Q4 with adjusted profits up 3% relative to a year before. But given the continuing impact of the coronavirus that we're seeing this year, we do expect a weaker first half. A few particular points to call out.
The headline results for the Q4 were impacted at a headline basis because of the large goodwill impairment. This reflected the weakened interest rate outlook and revenue outlook and the changed long term growth rate assumptions. As you know, the goodwill impairment has no impact on Core Tier 1. The UK ringfenced bank was impacted by further redress costs, dollars 224,000,000 in the 4th quarter, driven mainly by sharply higher expected litigation costs in relation to PPI. We're making progress on reducing our cost run rate, down by half from 5.6% to just under 3% in 2019.
And second half costs were lower than first half costs. Our Core Tier 1 was up 40 basis points to 14.7%. We've reduced net risk weighted assets in the quarter by $22,000,000,000 including a $19,000,000,000 reduction in Global Banking and Markets. On Slide 4, group continues to be underpinned by a strong set of franchises, all showing continued attractive growth rates. In Retail Banking and Wealth Management, full year adjusted revenues were up 9% with good growth in deposits, mortgage balances and customer numbers.
The turnaround of Global Private Banking continues with net new money of $23,000,000,000 in the year. Commercial Banking revenues were up 6%, underpinned by strong growth in both lending and deposits. And for our Global Transaction Banking franchise, revenues were up 3% and that's despite the impact of a softer interest rate environment. In Asia, revenue is up 7 percent overall with good growth across most of the region and the UK ring fence bank had revenue growth of 3% underpinned by deposit balance and mortgage growth. Turning to the next slide and to go into more detail on Hong Kong.
Macro conditions progressively became more challenging in the second half and remain challenging given the sharp and unfolding impact of the coronavirus. Despite these macro conditions last year, 2019 performance remained resilient, adjusted revenue growth of 7%, credit quality remaining robust and profits before tax of $12,100,000,000 On Slide 6, as we said over recent quarters, we've also got businesses or parts of businesses that need to improve. Our non room fenced bank is impacted by a combination of high costs and challenging conditions for the sector overall. Revenues were down 3% in the full year and as part of those Global Banking and Markets had a weak year in Europe with sharply lower revenues driving an 80% reduction in pretax profits. Our U.
S. Turnaround has been impacted by the changed U. S. Outlook for interest rates. Full year revenues were down 3% and profits before tax down 39%.
Our retail banking and wealth management and private businesses in the U. S. Were loss making in the year and profits in Commercial Banking and Global Banking and Markets fell both fell by more than 20%. Turning to the detail of the full year results on Slide 7. Across most segments in our global businesses, we saw strong revenue growth in 2019.
Total adjusted revenues up 6%. In Retail Banking and Wealth Management, revenues up 9%, including 7% in Retail Banking, due mainly to lending and deposit growth in Hong Kong, Latin America and the UK and up 13% in Wealth Management, principally from higher life insurance revenue, including positive market impacts. In Commercial Banking, revenues up 6% with Global Liquidity and Cash Management up 6% and Credit and Lending up 5%. Trade Finance had slower revenue growth in 2018, impacted by the ongoing U. S.-China trade dispute.
Within Global Banking and Markets, while revenues were down 1% overall, Transaction Banking showed good revenue growth, up 2%, but Global Markets had a tougher year with revenues declining by 8%. And within Global Private Banking, revenues were up 5%, underpinned by our best net new money performance since 2,008. On Slide 8, 4th quarter revenues were up 9% overall or almost $1,200,000,000 That's despite $300,000,000 of lower corporate center revenues. This quarter included a much stronger franchise by the Wealth Management franchise given the turnaround from weak markets in the Q4 of the previous year and our best 4th quarter revenue performance in Global Banking and Markets for 4 years. In Commercial Banking and Retail Banking, we can begin to see the impact of lower policy rates with further headwinds expected in 2020.
On the next slide, adjusted net interest income was broadly stable from the 3rd quarter and the net interest margin was unchanged at 156 basis points, helped by lower provisions from UK redress programs and releases relating to Argentinian hyperinflation. Our Asian franchise experienced some asset margin compression with the net interest margin down 5 basis points. And in the UK, ring fenced bank, while the headline net interest margin was up 2 basis points, excluding lower UK redress provisions, the underlying net interest margin was broadly stable at around 200 basis points. Turning to costs, excluding the UK bank levy, adjusted operating were up 2.7% in the Q4 relative to the Q4 of 2018. Our cost run rate this year was down by half and slightly better in the second half than the first.
And that's despite higher investment spend, up 10% from the previous year. For your models in 2020, you should assume that our aim is to have adjusted operating costs broadly stable on 2019 and adjusted revenues down very modestly with RWA disposal costs taken to significant items. Turning to the next slide on credit. Credit costs were down 5 basis points to 28 basis points in the 4th quarter. This reflected a number of items in the UK.
We reduced our allowances for economic uncertainty by $99,000,000 to $311,000,000 Against this in Hong Kong, we increased our overlay by $56,000,000 to $138,000,000 and we took incremental provisions in Argentina of some $125,000,000 Second half credit costs were 31 basis points, so we're now at the low end of our expected 30 basis points to 40 basis points of through the cycle range. Given the impact of the coronavirus, we expect a continuing downturn in Hong Kong in the first half of this year and we anticipate that we'll need to take additional expected credit losses into our Q1 results. I would caution, however, the impact of the virus could vary materially, in part dependent on the time taken to contain the virus with additional expected credit losses only part of a broader potential set of financial impacts on the group, including lower revenues and volumes and credit rating deterioration driving higher risk weighted assets. On capital adequacy, our core Tier 1 ratio improved 40 basis points in the quarter to 14.7%. This reflected a material reduction in RWAs in the 4th quarter that I'll go into detail on the next slide.
We set out the detail of the risk weighted assets here of and return on tangible equity walks during 2019 for risk weighted assets. We reduced these by almost $22,000,000,000 during the year with the bulk of this coming in the Q4. We took a very conscious decision to accelerate our risk weighted asset plans in Global Banking and Markets, resulting in a $19,000,000,000 reduction in that business in the final quarter. Looking forward, we're sensitive to a number of potential headwinds and risks, including a forecast Q1 2020 RWA uplift of around $10,000,000 due to modeling and regulatory changes and a similar amount from revenue growth. For our return on tangible equity, it declined by 20 basis points during the year to 8.4%.
This reflected a stable overall performance, but was impacted by a 50 basis point negative impact from intangible movements, primarily due to present value in force movements in our insurance business. So to summarize on the 2019 financial performance before handing back to Noel, for the full year, adjusted revenues up 6%, adjusted profits up 5%, in part reflecting much better cost discipline, with positive jaws of over 3% and a return on tangible equity of 8.4%. Our core Tier 1 ratio was up 70 basis points in the year to 14.7%, in part due to a significant RWA reduction in Global Banking and Markets. However, despite this continuing progress last year, we recognize the need to continue to drive up group returns to significantly improve areas of the group with lower returns currently. This requires a new cost and RWA reduction plan that Noel will now step through.
Thanks, Ewan. I'll talk about our plans to increase returns in a second. But first, I want to say a few words about the coronavirus outbreak. This is clearly something we're observing closely, and I'd like to pay tribute to the resilience that our people have shown during this very difficult time and to thank them for their amazing commitment. Our first priority is obviously the well-being of our people and our customers, and we will continue to do all that we can to provide support and ensure their safety.
There will inevitably be a short term economic impact that will doubtless affect our clients, and we will do all that we can to support them. However, the long term strategic importance and attractiveness of Mainland China, Hong Kong and the broader Asian region remains unchanged. And the region as a whole remains a key part of our strategy. Turning to our plan. We intend to deliver on 3 action programs between now and 2022.
We will implement an RWA upgrade program, stripping out low returning RWAs from the underperforming parts of our business and redeploying them into higher returning areas. We will execute a $4,500,000,000 cost reduction program to reduce total costs even as we invest in the business. And we will simplify HSBC to increase revenue synergies and accelerate the pace of execution. We will target the following in 2022: a gross RWA reduction of more than $100,000,000,000 a reduced cost base of $31,000,000,000 or lower and a CET1 ratio in the range of 14% to 15%. Taken together, these should help us achieve our main target of a return on tangible equity of 10% to 12% by 2022.
With the full year benefit of cost reductions and redeployed RWAs flowing into subsequent years. To be clear, I do not consider 12% to be a ceiling for the group. I think we can go higher, and we will aspire to do so. This is a deep and fundamental restructuring of the bank that will enable us to deliver on our strategy and our potential. Crucially, it's not dependent on market conditions.
It's focused on things that we can control. Our first task is to upgrade the return profile of RWAs. We plan to remove more than 100,000,000,000 of low returning RWAs and reinvest them in high growth, high returning activities in other parts of the business. As you know, we have a very strong heritage with a wholesale and personal client base centered around the faster growing, higher returning markets of the world, a differentiated proposition serving the banking needs of middle market entrepreneurial businesses globally a personal banking franchise grounded in 3 scale and attractive markets: in Hong Kong, the U. K.
And Mexico and a strong international wealth business with circa $1,400,000,000,000 of client assets. That core franchise delivers strong inherent ROTE and sustainable growth potential. These are the parts of the business that we want to continue to grow. However, as I mentioned at our Q3 results, we have parts of the organization, our U. S.
Business and the non ring fenced bank in the U. K. And Continental Europe that are not producing acceptable returns, particularly in Global Banking and Markets. These are the business businesses we intend to reshape. Let's start with Europe.
We want to focus our footprint in Europe on our international wholesale and transaction banking franchises and connect our clients better to our international network, particularly Asia and the Middle East. By 2022, we intend to reduce the net RWAs in the non ring fenced bank by around 35%. And within that, to reduce Global Banking and Markets RWAs by around 50%. We also intend to reduce our non ring fenced bank costs by around 25%. We plan to do this by focusing our client coverage on clients that value our international network and presence, particularly in Asia and the Middle East, rather than serving pure domestic clients.
We will scale back the amount of capital we deploy to our rates business and exit capital and leverage intensive product lines such as G10, long term derivative, Market Making in the U. K. We will focus our European Investment Banking activities on supporting U. K. Mid market corporates and capital flows and transactions between Europe and the faster growing markets of the world.
London will remain an investment banking hub to support our global clients. We will reduce our equity sales and equity research activities in Europe to match our client footprint. And we will transition our structured product capabilities from the U. K. To Asia, where the opportunity for profitable growth is greater.
And we'll continue to invest in our transaction banking and financing capabilities. We recognize the need to take action to address our Retail Banking operations in France, and a strategic review is ongoing. We will provide an update on that review when it is appropriate to do so. But we have not assumed any change to our current business model in the forecast shared with you today. Turning to the U.
S. We are one of the leading wholesale and transaction banking franchises and the leading trade bank in the world. So we need a meaningful presence in the U. S. But we need a new approach that generates acceptable returns.
As in Europe, we're going to focus on our strengths. We'll reposition HSBC USA as an international client focused corporate bank anchored in Commercial Banking and Global Banking with a focused retail offering for international and affluent clients. This will be a fundamentally different business to today's. We will consolidate select fixed income activity in London and reduce U. S.
Global Markets RWAs by around 45%. We will reinvest the majority of the RWAs saved into Commercial Banking and Retail Banking. In Commercial Banking, we'll expand our coverage of mid market corporates who trade in the U. S. And internationally.
And in Retail Banking, we will expand our product offering and increase our investment in digital. We'll refocus our retail banking presence to serve globally mobile clients, reducing our branch network in the U. S. By around 30%. We considered a number of options with respect to U.
S. Retail banking, including exiting it completely. But our retail deposit base in the U. S. Provides an important source of stable liquidity for our wholesale banking and global transaction banking activities.
And we believe we can connect our personal banking operations in the U. S. To our personal banking operations in the rest of the world, just as we have in Wholesale Banking. Finally, and partly as a consequence of these changes, we'll embark upon a major cost and consolidation program in the U. S.
That should reduce our total costs by between 10% 15%. The big difference between this and previous U. S. Turnaround plans is that all of these changes are within our control. We are not reliant on favorable market conditions, and we have a new management team that is totally focused on delivering these plans.
The outcome should be a leaner, more focused business, delivering higher sustainable returns. Moving on to Global Banking and Markets. It is worth taking a step back and considering the type of business that we want Global Banking and Markets to be. We want to continue to serve large long term capital providers, public sector entities and global corporate and financial institutions who can use our international network, particularly in the faster growing markets. We want to do this as the top transaction bank and a leading global financing house and to reinforce our position as the foremost international bank in Asia and the Middle East.
To deliver this, we will invest in Asia and the Middle East to cement our position as a top 3 corporate and investment bank across both Global Banking and Commercial Banking clients. We will continue to invest in our Global Transaction Banking franchise to defend our market leadership and deliver sustainable growth. We will strengthen our investment banking capabilities in Asia and in the Middle East, while maintaining a global investment banking hub in London. And we will build leading emerging markets and financing capabilities in global markets and enhance our institutional clients business. We will also improve collaboration with other businesses.
Currently, Global Banking and Markets and Commercial Banking both own their own products and operations capabilities. They cross sell fairly successfully today, but we want to offer our clients a much more integrated service. To drive revenue synergies, we will reorganize our product teams to serve both frontline businesses. And to drive cost synergies, we'll combine the operational support infrastructure for Global Banking and Commercial Banking. We will also to continue to invest in the digital systems and solutions that will improve the service we offer our clients.
So here's where we intend to reinvest the RWAs that we save. Even in the current environment, we see significant opportunities for growth. Our Transaction Banking businesses are a major revenue driver for the group, and we'll continue to do so. We have an excellent opportunity to build our international wealth franchise, particularly in Asia and among the international Asian community. Asia as a whole is a core engine of growth for the business over the next few years.
We will continue to invest in the expansion of our business in China generally, the Greater Bay Area in particular and across Southeast Asia. Given our heritage in the Middle East and the many market reforms that are taking place, we believe we are in a strong position to take advantage of the significant opportunities that will arise. We also intend to continue capturing market share in the U. K. Ring fenced bank as we have in recent quarters, and we see strong growth momentum in our business in Mexico.
We will also be investing more in technology, improving our digital platforms to expand our reach and improve customer experience. Turning to cost reduction and simplification. There are 3 paths to a reduced cost base and a simpler business. First, we will take out costs associated with the activities we choose to exit. 2nd, we'll keep investing in technology to reengineer manual or legacy processes, removing costs and improving the customer experience.
3rd, we will organize ourselves in a less matrixed and fragmented fashion, leading to lower cost, increased accountability and greater agility. The net effect of these changes will be a simpler, more streamlined business. We expect savings of $4,500,000,000 from this cost program, which will allow us to substantially reduce our cash run rate. Our intention is to target total adjusted costs of no more than $31,000,000,000 in 2022. Many of the changes we're going to make will have a material impact on the cost and complexity involved in running the group.
1st, we will combine Retail Banking and Wealth Management and Global Private Banking to create 1 new global business, which we will call Wealth and Personal Banking. Not only will this increase our ability to find revenue synergies within a much larger Wealth business, It means we can remove many layers and support structures associated with running 2 global businesses. 2nd, and as already mentioned, we will merge the back and middle offices for our Wholesale Banking businesses. This will help us sell more products to more clients, but it will also reduce duplication and increase collaboration. 3rd, we are simplifying the way we manage our geographies.
Where previously we had 7 geographies, we will now have 4 covering Asia, the U. K, the U. S. And the rest of the world. Each of these will be represented on the Group Executive Committee, which will be smaller than before.
This will increase accountability, reduce complexity and improve our ability to execute at pace. 4th, we will be able to reorganize our global functions to match the size and simplified structure of our frontline teams. And finally, we as an executive committee will be increasingly incentivized via our school cards to deliver the right outcome for the bank as a whole, not just for our individual business units or functions. This represents one of the deepest restructuring and simplification programs in our history. It will help us not only to reduce our cost base, but also to become a more collaborative, empowered, customer centric business while maintaining or enhancing our risk framework.
Taken together, these actions will significantly change the shape of the group. The new Wealth and Personal Banking Business and Commercial Banking will occupy a greater share of RWAs for the group, while the share of Global Banking and Markets will reduce from 31% to less than 25%. On a geographical basis, Asia and the U. K, Ring Fence Bank will be the main beneficiaries from the reduction in RWAs currently allocated to the non ring fenced bank and the U. S.
So in summary, since Q3, we have developed a detailed restructuring plan to address the low return portfolios of Europe and the U. S. And to reshape Global Banking and Markets. We have plans to reallocate freed up capital into higher growth, higher return businesses and markets. We have begun an ambitious simplification and cost reduction program while increasing IT investment.
This is a robust plan built around things we can control, predicated on reasonable revenue growth assumptions, combined with significant cost reduction and capital efficiency programs. We have reorganized our management structure to deliver at pace. We have established a dedicated transformation team to focus on executing the restructuring with a separate team focused on building future growth strategies. And since my appointment in August, we have taken tough decisions to deliver quick results. In the Q4, we reduced RWAs by $22,000,000,000 We reversed the direction of travel on both cost and headcount, and we refreshed the executive management team to position us for execution.
Now we need to evidence continued delivery, and I am totally committed to doing that. Back to you, Iain.
Thanks, Noel. To take you through the broad financial implications of what Noel has just outlined, we expect to have risk weighted assets in 2022 that are broadly in line with year end 2019, with reductions in the nonroom fenced bank, the U. S. And parts of Global Banking and Markets, increasing our capacity to invest in both planned growth and priority markets and to deal with the expected impact of regulatory changes. Over the same 3 year period, we're also planning in the leverage exposure of global markets.
We're targeting an annual cost base of $31,000,000,000 or less in 2022, which translates into a return on tangible equity in that year of 10% to 12%. And we want to do this while maintaining our core Tier 1 ratio in the range of 14% to 15%. For clarity, these targets exclude the impact of any business disposals. On the next slide, on risk weighted assets, we're planning to materially reduce RWAs in the non room fenced bank and to a lesser extent in the U. S.
And as part of this and given that almost 60% of the RWAs across those two entities are Global Banking and Markets related, we're specifically targeting a material reduction in capital allocation to that business. Largely offsetting this is planned growth in other franchises. The core underlying RWA growth across the group is currently at around 4% to 5% per annum. So over a 3 year period, we'll largely offset the RWA reduction we're planning. On Basel III reform, at this point, we've become less concerned about the day 1 net impact.
We now see a relatively limited uplift post mitigation actions we're planning to take. On the next slide, we set out where we expect the gross RWA reduction to be achieved. The bulk of the reduction and revenue impact we're targeting is expected to come from Global Banking and Markets and, to a lesser extent, Commercial Banking. The rundown program is likely to take 3 years to execute with a dedicated team now set up to execute this. The disposal losses of the RWA rundown program in Global Banking and Markets is expected to cost in the order of $1,200,000,000 and this will be taken into significant items, spread mainly over 20202021, with the associated net revenue loss expected to be in the order of $2,500,000,000 We're also targeting a gross reduction in leverage exposure of $250,000,000,000 in the non room fenced bank in the U.
S, partially offset by around $50,000,000,000 of anticipated growth in the global markets franchise in Asia. On the next slide, we expect RWAs at the end of 'twenty two to be broadly in line with where they were at the end of 2019. 2020 revenues will be impacted by the impact of lower interest rates and the assumed non repeat of certain positive revenue items in 2019. These items include positive market impacts in insurance and disposal gains, which in total totaled to around $500,000,000 We intend to reduce RWAs by over And we intend to redeploy these risk weighted assets in areas of higher revenue and lower costincome ratios, particularly over the medium to longer term. The reduction and redeployment of RWAs and associated revenue impacts will be spread fairly evenly over the 3 years of our plan, and we do expect further benefits from the redeployment of RWAs to flow into 2023 beyond.
On the next slide, the targeted gross reduction in RWAs help us fund the cost of the restructuring, the underlying growth in RWAs from our stronger performing franchises and the anticipated net impact of Basel III reform. However, our current group capital group returns are insufficient to fund both the natural growth in our business and to fully immunize the scrip dividend. So in order to bridge to 2022, when we expect to have higher returns, we're suspending the buyback for this year and next. We're also shifting our guidance on our Core Tier 1 ratio. We're still targeting to be above 14%, but signaling today that over the next 3 years, we expect to be at the higher end of a 14% to 15% range from 'twenty one onwards.
Over the medium term, as we target reducing gross peak to trough stress in the group and seek to further optimize today's capital inefficiency that comes from our subsidiary structure, we plan to reduce our core Tier one ratio back to the lower end of the 14% to 15% range. Turning to costs, we plan to substantially reduce our cost run rate to $31,000,000,000 or better by 2022. Given underlying inflation over this period and the expected reduction in the bank levy, this reflects a real reduction in the order of 10%. With the shift to higher yielding RWAs over the same period, we expect a material operating profit improvement over the next 3 years. The cost reductions broadly fall into 3 buckets.
Direct cost savings relating to business reductions, these amount to around 45% of the total the organization simplification that Noel has just outlined, including a substantial restructuring of group central costs. This amounts to around 35% of total savings. And for the remainder, technology investment that leads to increased levels of automation and productivity accounting to around 20% of the total. The cost program will require intense focus on delivery. There are almost 200 separate cost initiatives underpinning this.
Progress will be monitored through a tight central oversight team with some of those cost initiatives starting today. On Slide 33, we expect cost to achieve to have been substantially completed by 2022 with full run rate benefits achieved in subsequent years. Expected cost savings of $4,500,000,000 from this new cost program phased across the 3 years, dollars 1,000,000,000 to be delivered in 2020, a further $2,000,000,000 in 2021 and the remainder in 2022. We expect that additional restructuring costs in the order of $6,000,000,000 will be required with more than 90% of these costs incurred this year and next. So to conclude from me before handing back to Noel, we believe we're setting out an ambitious but realistic plan to achieve a number of objectives.
Firstly, to materially improve our overall group returns by 2022. That allows us both to grow how we want to grow and to fund our current distribution policy. Secondly, to take capital and cost away from underperforming franchises so we can continue to invest where we have stronger returns and growth prospects And lastly, to simplify our currently overly complex structure, reducing the overall group and central costs and improving the capital efficiency of the group.
Thanks, Ewan. So to quickly summarize. Strong revenue growth in our target areas and good cost discipline in 2019. A firm intention to grow returns, create the capacity to invest and to build a platform for sustainable growth. Our robust plan to restructure our U.
S. And European businesses, reposition Global Banking and Markets and reallocate capital to higher growth businesses, all while simplifying the group. A path to a return on tangible equity of 10% to 12% in 2022. Through a gross risk weighted asset reduction program of more than $100,000,000,000 and a gross cost reduction of around $4,500,000,000 by the end of 2022. We also have a strong ambition to seek additional strategic opportunities for growth and higher returns and a commitment to deliver.
With that, we're happy to take questions. And I think Richard will step up and thank you.
Thanks, Noel. We've got some questions from the web. But before we take some of those, we'll take a few from the audience. Can I ask you to give your name institution, wait for the mic please? If we can at least to start with limit them to 2 per person and we'll try and go around you know a few times.
So we'll do a few from the floor start and then go to the web from there. Raul?
Hi, good morning. It's Raul Sundar from JPMorgan. Maybe 2 please. One on the strategy, I guess for the plan to work the capital redeployment will be the key element. And I really appreciate the detail you've given us on where you're taking capital away.
But I was wondering if you give us more detail about where you're going to capital put where you're going to put that capital into? And apart from the areas in terms of geographies and businesses, could you also talk about whether the plan is organic or whether also you might consider inorganic options?
So I'll deal with the second one first. The plans that are before you and the forecast that are before you are all based on organic activity. There's no inorganic assumed in those plans. 2nd, on capital redeployment. We still believe and has have seen in 2019 strong growth in Asia, in the Middle East, in our U.
K. Business. And we want to continue to fuel that growth and we see that growth continuing going forward. We've also seen extremely strong growth in Mexico. And let me just recall, Mexico today or in 2019 achieved a return on tangible equity of 15 percent.
And that business has extremely strong growth momentum still in it. So we want to provide that. In terms of Asia, to be more specific, we see still growth potential in our International Commercial Banking franchise. That proposition is well positioned to continue to grow. I think we have a unique and differentiated position in international mid market
It goes both ways too. Equally, there's no disposals built into these numbers. So to the extent that there's disposals, you should factor that on top of what we're announcing today. And in terms of organic growth, I'd just point you to look at some of the underlying growth rates that we've had in places like Asia over the last decade. And yes, there's a near term impact from the coronavirus, but we do think there's a secular growth opportunity in trade and wealth in Asia over the next 10 to 15 years and that we are relatively uniquely placed currently to take advantage of that.
Just to give you one example of that in Asia. Commercial Banking, I remember when I took over that business at the end of 2010, we had a balance sheet at that point of around about $80,000,000,000 Today, that balance sheet is closer to, I think, $135,000,000,000 and still has potential to grow. So we want to continue to fuel that investment.
Martin? Thank you.
Yes, good morning. Martin Leitgeb from Goldman Sachs. Could I just follow-up on the capital comments earlier? And I was just wondering under what time frame should we consider HSBC to return to this kind of more normalized capital level of closer to the lower end of the 14% to 15% range rather than the 15% range you're kind of signaling over the next 3 years for the restructuring period? And the second question more strategically, and I was just wondering HSBC U.
K. Sort of ring fenced bank, how strategic do you consider it within the group context, just bearing in mind, obviously, the limitation imposed by ring fencing on the utilization of retail deposits?
I'll deal with the second one first. We see it as a very strategically important part of the portfolio. It generates inherently high returns. If you look at the underlying returns of the UK business and the UK market, it's an attractive market. We've seen growth in market share and growth in our own business in both retail banking and commercial banking.
And we believe it will become increasingly connected to the rest of the world in a post Brexit world. So it's strategically important. Ewan, do you want to go to capital? I'll
go into a bit more detail on comments and guidance around capital. Look, in the very near term, we're obviously sensitive to the fact that we're doing significant restructuring and the precise timing of restructuring charges in IWA rundown over that period can vary and hence why we want some capital flexibility. Secondly, the final rules on Basel reform haven't been settled. So yes, what we see embedded in the numbers today is a net increase of less than 2%. So if we've gone back, I think if I was presenting views about a year ago, when I was reluctant to do so, it was because we could see that there was a path to significant mitigation.
In the medium term, we've got 2 big structural issues that we're working through as a bank. Firstly, we have enormous complexity in the group because of the subsidiary structure. Our largest single balance sheet has less than 30% of the group assets. If you compare us to U. S.
Peers, typically 70% of one balance sheet is the dominant balance sheet in the group. As a result, we have an enormous amount of capital and efficiency across the group. We're also subject to 64 markets where in some markets, for example, we're held to standardized rules and not able to take advantage of advanced modeling. So there's a progressive work plan on that over the next few years. And the second issue that we're dealing with is we've still got, I think, a significant level of peak to trough stress across the group.
Some of that is getting addressed as part of this restructuring. For example, we're planning to substantially reduce the principal investment business that sits in the non room fenced bank. One of the core reasons for doing that is not the fact that it produces attractive returns under base, but under stress, it has enormous stress characteristics. So I think if we can make progress and solve those and make progress on those two issues, I think we can comfortably reduce down to the lower end of that range. In terms of timing, that's why I use language of medium term because it's difficult to be precise.
Claire, just behind Martin.
Good morning. It's Claire Kane from Credit Suisse. A couple of follow ups. Firstly, on the capital. In the event that you're unable to redeploy all the RWAs, and do know you're planning to redeploy them in quite low risk weighted asset businesses in RBWM and Transaction Banking.
And the capital ratio was to go well north of your 15% range over the next 2 years, would you consider buying back shares? Or would you rather that was all built up to 2022? And what is the basis for your RoTE target? So the TNAV, clearly, if you build up a lot of surplus capital, that would dilute returns. So should we expect that you are in the mid area of your 14% to 15% range by 2022 and all surplus capital would be distributed at that point?
Well, look, on the latter point first, I think we've said that we expect to be at the higher end of the range in 2022, So embedded in that 10% to 12%. ROCE target is the higher end of the 14% to 15% core Tier 1 being held in that year. The other thing I would say on returns is we don't think 2022 is a clean year either for revenues because we've reinvested revenues into new customer relationships where the revenue buildup takes time. And secondly, we haven't got full run rate costs in 2022. So we do think that there's further upside on the return as you go out.
On capital, I mean, firstly, I mean, we have a high degree of confidence, I guess, in our ability to redeploy £100,000,000,000 of RWAs over the next 3 years. If we were to end up in a scenario where that wasn't the case, we're not going to just sit and allow our capital ratios to accrete well in excess of what we need them to do. But it's our current expectation that we're not doing buybacks for 2 years if that was to change because the RWA profile and the capital position of the bank was very, very different. We would relook at it at that point.
Know just on the reasonableness of our growth assumptions. Even today, with all of the challenges that exist around coronavirus, we're seeing a strong pipeline of activity in our business globally in so I think we're very confident that we can deliver that growth plan. We've had delivered that or more in the past. So we believe we have made reasonable assumptions on the growth and that it can be delivered.
Before we go to the floor, there's a couple from the web on the coronavirus. Firstly, do your Q4 ACO assumptions, do they take into account the coronavirus or is it the 31st December? And secondly one for Jason maybe with UBS, DBS did made some revenue guidance recently on the impact of the coronavirus. Can you talk a little bit more about expected impacts from that please?
Yes. So for accounting purposes, coronavirus is a post balance sheet event. So it's not in our 2019 forward economic guidance at that point. It will be obviously, reflected in the forward economic guidance as part of Q1 reporting. To give you some numbers, embedded into our disclosures in the annual report and accounts today is various adverse scenarios for Hong Kong economic performance.
What's the downside the most extreme downside scenario in there, I would say, makes an assumption that the coronavirus is still continuing in the second half of this year. If you look at that and that was to become the central scenario, there would be about $600,000,000 of additional loan losses provisions required. We don't think we're going to be anywhere like that in Q1. But it's not the only revenue it's not the only P and L impact and capital impact. As I said earlier, yes, there will be revenue impact, which will become progressively more acute if the coronavirus was to continue beyond the next month to 6 weeks.
There would also be the risk of credit rating migration amongst the wholesale book in Hong Kong, which would lead to IWA inflation. We think that the Q1 impact as we sit here today is probably range bound in the order of about 200,000,000 to 500,000,000 dollars relative to our previous planning assumptions. I think if the virus is still prevailing beyond that, we'll come back as part of Q1 reporting to give you a much fuller update on what we think the impact is at that point. But it really is a yes, when we look at the modeling, it's really a call on predominantly a call at this point on how long does it take to contain the virus when you look across the various scenarios that we're trying to model at the moment. But underlying that, I think when you look at the underlying credit performance of the book, as Noel said, Q1 was Q4 was good and January was certainly robust.
We are getting some positive offsets against this because HIBOR, in particular, continues to remain elevated relative to previous planning assumptions as well.
There's a few questions on the web from the likes of Tom Rayner, Jason Napier and Magnus Costello on. Can you talk a little bit more about the revenue loss from the Ardway reductions, the timing thereof, the timing of reinvestment, should you expect revenue losses earlier in the plan and a hockey stick towards the end? Can we just have a little bit more detail on the $100,000,000,000 reductions and $100,000,000,000 reinvestment, please?
Yes. So there's we thought we were providing a decent amount of guidance, but it appears that there's still a few gaps. The on you'll see in one of the charts that we've got in the presentation some sort of bar charts, and please don't get your rulers out to try and measure across. But for Global Banking and Markets, we signaled about a $2,500,000,000 reduction as a result of the RWA rundown. That excludes the costs associated with the rundown, which we will treat as a significant item.
We do think offsetting that will be some degree of revenue improvement over the next 3 years. Therefore, we think order of magnitude Global Banking and Markets revenues will probably be down in the order of about $1,000,000,000 relative to last year's run rate by the time we get to 2022. And the material impact, as you can see on the bar charts that are in the slides, is in Global Banking and Markets. For 2020, overall, we've talked about a very modest reduction in revenue impact. We've got interest rate headwinds.
We've set that out about $1,100,000,000 of lower interest income as a result of a reduction in rates have been going on in 2019 and some assumed reduction in 2020. The bulk of that will hit 2020. We've got about $500,000,000 of 1 offs that were in 2019 that we're not expecting a repeat off in terms of our forecasting. Offsetting that is a decent amount of growth that we're continuing to see in our underlying business. And I think the last part of that was the timing across the period.
Yes, broadly, yes, we think the revenue reduction from the RWA runoff and the revenue growth from the RWAs we're putting on is evenly sort of spread in terms of the buildup and rundown over the 3 year period.
But I'd add one other point and that is one of the reasons we're doing the organizational simplification and the cost reduction program is to make sure we have some mitigation so that we don't end up with stranded costs, should the revenue go down on the reduction program for RWAs, but there'll be a time lag for the revenue coming up elsewhere. So I think you've got to take the 2 in the round. It's the revenue reduction build on the RWA Redeployment program and the cost reduction program that gives us more assurance on managing the situation.
It's Guy Stebbings from Exane BNP Paribas. Can I come back firstly to capital being created from the plan? If we think about the €100,000,000,000 of gross takeout that you're guiding to, but in the plan, no buybacks before 2022. So you've only got the ordinary dividend, which most people would have had in their numbers. I mean, should we be inferring that the plan itself doesn't release any capital if you do redeploy?
But incremental to that, it's really about any business disposals, which creates that additional capacity. Is that the right way to be thinking about it?
I'm just going to think about that for a second. So the $100,000,000,000 of IWA reduction would release $14,000,000,000 to $15,000,000,000 of capital for us, offset by the after tax cost of the restructuring cost and the RWA rundown cost. So that still creates capital in that program. But it's all embedded in the statements around suspension of the buyback for 2 years. The second part of the question is?
Well, it's just if we're looking at a capital ratio in 2022 broadly aligns where we are today, We're saying no buybacks before 2022. Implicitly, that assumes that there's no net capital release versus our previous guidance, but you're obviously not including with that any disposals, which seems like it could be the big delta?
Yes. If those disposals create value, I mean, obviously, it depends on the realization process proceeds of those disposals and so possibly. But I don't I mean, if you think about some of the stuff that's been speculated about in the press, just remember that we have a lot of network markets that are relatively small. If we were to dispose of any of them, I don't think it's going to have a material impact on our capital base overall. So yes, the big drivers is things like interest rates, the speed of the RWA rundown, the speed of the redeployment.
Yes, all of that is going to have a far greater impact on the capital position at the bank.
Can I just come back to the capital target quickly and the peak to trough stresses that you referenced? I mean, if we look at the Bank of England stress test and we look at the other component parts of the capital stack, consider some trapped capital, it still feels like quite a conservative target. So is this very much an internal stress that you're applying that just
It's not it's certainly not driven by what the regulators think. We will always drive our capital targets by the higher of regulatory constraints and what we think. We have a more conservative view than the PRA on where our capital position should be. I think, look, an offset to that is we are the best rated of the UK banks, as you know, with our credit ratings. We get wholesale funding costs, therefore, that are substantially cheaper than our competitors.
We've always wanted to position ourselves as a very strongly rated strong balance sheet bank. We get the benefit of that through funding costs. But it's certainly not driven by any conversation we've been having with the PRO.
So we can't lean on new bank of being in distillational stress testing this year as a guide.
Well, the stress testing issue is our own internal issue. It's something that we've recently strengthened our stress testing team under new leadership. And we do think that we can make material progress over the next few years on reducing the pizza trough delta that we're seeing in our stress test results.
Could you give us a little bit more sense of the of your cost trajectory, this particularly Slide 32 that I'm referring to? And the thought assumptions are embedded in your severance costs over the next over the time of the restructuring, but also you could give us a direction of where the investments go and also the sense of the flex in that cost base. So we've got the €31,000,000,000 at the end of 2022. Should the revenue surprise on the upside or the downside, how will that number flex to?
If you can tell me how the revenues will flex, I'll tell you how the cost flex. I mean, clearly, we position the cost base to be in the context of the revenue growth opportunity. At the moment, based on the current assumptions, we believe €31,000,000,000 or less is an appropriate position. Should the economy and the growth be better, we'll invest in the business. Should it be different, we'll take a different course of action.
And you can see on Slide 32, there is a light gray bar there that has a significant component of investment and growth. But broadly, we expect costs to be flat, down, down in the next 3 years. And getting down to €31,000,000,000 by the time you take the underlying inflation rate in the bank at the moment, it's about 2.5 percent per annum. We are expecting a $700,000,000 that order of magnitude reduction in the bank levy from 2022 onwards. If you back those 2 out, I mean, what's embedded in the plan is about a 10% reduction in real terms.
But importantly, there's a significant component in there for growth investment. If we don't see the growth coming, we'll just scale back that growth investment.
And the severance?
Severance. Well, they are detailed assumptions based on where people are leaving and what the cost of them leaving, which vary substantially across the world. So severance costs in Continental Europe, as you know, are substantially higher than they are in other parts of the world, but all of that is reflected into the numbers. And we've provided breakdown on one of the slides of what the breakdown of the cost to achieve are with about 40% of that, I think, is severance related.
And we gave you the timing of that CTA as well. So you have that timing.
And then the other important thing to remember on some of the job cut numbers that have been stated today, we currently have attrition of 25,000 people a year. So in the context of the 35,000 job number over 3 years, we anticipate about 75,000 people leaving the bank naturally over the next 3 years. And if we can be smart on recruitment against that, we can materially reduce headcount over a 3 year period without having pay any severance cost against that.
It's Arman Rakhar from Barclays. I'm just going to come back to capital and run the risk of asking too detailed a question. It's just to interrogate the kind of cautiousness that's the message that's coming across regarding capital. I mean, basically, when I do some pretty crude back of the envelope math, it does look like you're going to accrete pretty significant capital over the plan period, even if you do redeploy the EUR 100,000,000,000 of RWAs? I mean, basically, if profits are broadly maintained at their current level, you're going to pay away basically half of that in the dividend post the script.
And if I times that by 3, obviously, we've got to take out the restructuring charge. It does basically look like you're going to build about 150 basis points to 160 basis points of capital from where you are now, so well above 16. I mean, first of all, is there anything there that you disagree with? And secondly, does that mean that there's some kind of intangible asset build or some CET1 deduction that we should be mindful of over the plan period?
Yes. It's hard to have the debate in the absence of numbers, but the it feels a little bit high. I mean, maybe if you can sort of step through your model with IR afterwards, we can figure out why. But sort of go back to Claire's question earlier. If we see our capital ratio as equating comfortably above 15%, we're not going to allow that to happen, and we will manage our capital base appropriately for how much capital we need.
In the same way, in 2019, we undertook $1,000,000,000 buyback as we felt we had the capacity to do that, so we did it. So if we are being cautious, that's a good thing. And if we do accrete more capital than we think because of our caution, then we'll take action against that.
A couple on Hong Kong from the web. One from Ronit Ghosh on the Q4 Asia NIM down 5 basis points. Is that the effective run rate for Asia NIM going forward? Can you talk a little bit about that? And then from Vincent Gu asking about the Stage 2 growth in Hong Kong balances in second half and provide a bit more color on what drove that please?
Yes. On Asian NIM, we did see some asset margin compression. The other thing is a significant portion of Hong Kong deposit base is U. S. Dollar based.
So U. S. Dollar interest rates are down. So you will see ongoing impact of that. I've given up since I've arrived at the bank trying to predict the trajectory of HIBOR, but we're obviously very sensitive to the trajectory of HIBOR.
And in some ways, as I said earlier, it's sort of linked to the coronavirus, where it's remaining high at the moment. So but we would expect HIBOR this year, and we've got that in our economic forecast to decline at some point during the year. In terms of the Stage 2, I mean, look, Hong Kong, pre the coronavirus, has been facing some difficult economic circumstances. And all you're seeing is the natural migration, I think, of that credit book. But Richard will have the numbers.
But the underlying, if you looked, with FOB, the quality of the Hong Kong credit book is, yes, you have to imagine some extremely difficult scenarios, as I said earlier, shifting to assuming that coronavirus that continues for most of this year only gets you to incremental provisioning of $600,000,000 in Hong Kong. So we don't expect anything like that. But we do expect some increase in provisioning this year.
Hi, Ian Gordon from Investec. Can I just have one question on the U? S. Please? Correct me if I'm wrong, but I don't think there's any suggestion that the U.
S. Will ever be anything other than the drag to group returns. So obviously, I welcome what you've announced retaking capital out of GBM and slashing costs within the retail business. But in terms of the reallocation within that geography, is it based on genuine enthusiasm for the opportunities you see or is it based on some other structural restriction, e. G.
Scale requirements, time it takes to extract capital under CCAR or something else?
We do see that the plan delivering acceptable returns in the U. S. Business over the medium term. So we see a significant increase in returns. That's a combination of the reduction in the balance sheet in the Global Markets business, a refocusing of the retail business.
We do believe there is an opportunity to serve international clients in the U. S, but we also believe it's important to have a stable balance sheet in the U. S. To support our global market leading capabilities in transaction banking and trade. And that the package together is the right package.
We did look hard at what we do in the U. S. And did we look to dispose of the retail business. We looked hard at that. We don't think that's the right answer.
To be honest, if I wanted an easy headline and I wanted an easier day to day, I'd have just made the decision to sell the U. S. Retail business. But I genuinely don't believe that's the right answer for us as a bank. I don't think it's the right answer for our business in the U.
S. Or for our business globally. You got to remember, we are the market leading global transaction banking business. And circa 70% of that transaction banking business is denominated in U. S.
Dollars. We cannot put that business at risk by having a subscale inappropriate or high risk business in the U. S. That is not able to fund itself. So that is an important part of buying HSBC is that Global Transaction Banking business.
Now many people said we wouldn't be able to turn around the Mexico retail business 5, 6 years ago and were advising us to sell that at that point in time. Well, Nuno is here in the room today. Him and his management team in Mexico have done an excellent job. That business today is growing significantly double digit year on year and high double digit. And it's generating return on tangible equity today of 15% with strong momentum for future growth.
We have to achieve that same outcome in the U. S, not just because of the U. S. Business, because of what it means to be in the U. S.
For our broader HSBC strategy. So the easier decision for me would have been to make the sale decision. The harder decision gets me less headlines today and possibly less support is to do what we believe is right for the bank. And that's the decision we've taken. And we'll give our team the support to do it.
Please remember as well, we've chosen a strategy for retail banking now that is different to the past. In the past, on the East Coast, we were largely a mass market, full service, sub regional bank in Retail Banking. On the West Coast, we were more of an affluent internationally orientated bank. I don't think it's appropriate to run both strategies together alongside each other. It's inconsistent.
If we're to choose a strategy for retail banking in the U. S, it's to support the international and more affluent sector of the marketplace in the U. S. And our belief is that's a big market segment. It's in excess of 40,000,000 people.
Our brand plays into that market segment well. It's our job to make sure we can do it profitably and that's what we'll be focused on. But it's a big enough market segment to be meaningful. In fact, it's bigger than most countries we're in, frankly. And I know I don't believe you have to be a full service national bank in the U.
S. In order to make money. But we have to prove that to you over time.
There's also just a couple of other things you won't see on the capital side in the headline numbers that, yes, while I talked about a sort of less than 2% uplift on day 1 because of Basel reform, In the U. S, there's about a 15% uplift in the numbers. So while we're showing you a sort of stable RWA picture, actually that reflects a significant reduction in RWAs offset by anticipated inflation. So the Basel reform across the globe is not uniform in how it impacts different legal entities. The second thing is today, if you look at the U.
S. Filings, you'll see that U. S. RWAs are about 40% higher than PRA RWAs. So a significant part of this plan is optimizing that gap.
And there is significant equity release that's embedded in this plan out of the U. S. Business back to the group over the next 3 to 4 years. Part of that goes to some of the structural issues that I was talking about earlier in terms of the double leverage and subsidiary complexity that we're dealing with.
And then back to Rob.
Hi, it's Joe Dickerson from Jefferies. I guess this is the first restructuring plan post crisis that really seeks to address the middle and back office. How many can you give us a sense of how much headcount is going to actually come out of what we used to call the corporate center or corporate HQ? Secondly, I see that you made a small release of the UK uncertainty overlay and there's I think $311,000,000 left in that provision, which is a little bit higher than the low end of what you're calling out for coronavirus. What do you need to see to release the remainder of that?
Is it certainty of a trade bill? What are the things we need to look for? Because there's pretty much an offset there.
I'll let Ewan answer the second one, and I'll give you an answer on the first, if I can. We're not giving individual headcount targets or detail at this stage on either any subregion or business line or the center. What I will say is, I firmly believe that it's absolutely important to not only reduce the cost of the superstructure of HSBC in order to provide some mitigation to the RWA redeployment program, so that I don't end up with stranded costs. But I also think it's an important thing to do to empower the organization with greater agility and greater pace to de layer, de matrix. And I think we've had a structure in place that served us well post the financial crisis and through the DPA.
We had to build up a more substantial complex support structure for the businesses during that period. But I think in a phase that we're going into, we need more agility and simplicity. And therefore, that requires our central cost base to go down. And I want to recreate a much more clinical divide between what is the holding company or the group of HSBC and that which should be there, separate from that which should be in the countries to allow the countries to make growth happen. So I'm not going to give you any specific headcount targets on that.
We can help you try to model that later, but nothing at this point in time. On the second point, Ewen?
Yes. Just on we've broken out in one of the slides about 60% of the cost savings are coming from the back and the middle office. And sort of just personalize it to the bit I run, I mean, if you look at the finance department today, very manual with sort of poor customer control and cost outcomes as a result of that. We've got a 3 to 4 year plan to create a single data warehouse and heavily use the cloud, which should lead to a dramatic improvement in the productivity of the department as a result of that. And we can see similar efficiency programs across much of the back office and middle office.
And we've just got a new CEO, John Henshaw, who's got a deep background in technology and has led similar restructurings at other organizations he's led. So again, both on the technology side and the operation side, again, we see significant opportunity for efficiency benefits, all of which are reflected in today's cost announcement. On the UK overlay, I think part of what you're seeing is the fact that the UK stressing the UK portfolio under extreme stress results in higher levels of provisioning than you would see in Hong Kong because it goes back to the fundamental credit quality of the Hong Kong business rather than any reflection on the UK. Post the big triggering event in Q4 for the writeback of part of the overlay was the election, which reduced some of the probabilities associated with some of the downside scenarios. I think in terms of releasing a significant amount of further overlay in the UK, we're just going to have to see how the forward economic guidance shifts during the year with yes, there's still quite a broad spectrum of views around the UK economy, particularly as we continue to negotiate the exit from Europe this year.
I will say on the U. K. Economy, it surprised me on the upside how resilient the U. K. Corporate base has been through the 3 years leading up to the point we're at now.
One more for the way, and then we'll take 2 more from the floor. Rael and John, still lots of questions on hard ways and capital and buybacks as you'd expect. One with a slightly different flavor from Mann and Castello is your plan assumes 4% to 5% growth in organic RWAs. To fund that you need to get a return above right at the top of your 10% to 12% ROCE target. What happens if you don't reach that top end of the range?
How will you fund growth in the future or is the dividend at risk? That's from Manus, Costello.
Well, firstly, let me just and Ewan will cover it, but let me first of all make a comment. The RWAs we've taken out are probably yielding at the moment between 2% to 3%. The RWAs we're putting back in, we're assuming will yield much closer to 5% to 6%. So just taking out 1 the RWAs and redeploying them, you're getting a revenue and a margin uplift as a consequence of that, because actually the market segments is coming back into a higher yield in returns than the market segments is coming out of. So you're going to get that margin enhancement as a consequence of that transformation program.
Ewan?
Yes. I don't think the math is right actually in terms of needing to get to the top end of the 10% to 12% ROCE range for the reinvestment. That's not what's embedded in the numbers. There's a significant amount of growth embedded in the plan that's not particularly RWA intensive, to be sustainable with this distribution policy, we need to be targeting returns of about 11% to 12% return on tangible equity. We think this plan delivers that by 2022.
We don't think 2022 is optimized for returns. As I talked about earlier, we're right at the top end of that 14% to 15% range on capital. We think we can further optimize that. We think there's more revenue upside as we get the benefit of the reinvestment of the yard will raise. And we think we've got the full run rate benefit of costs still to come through into 'twenty three.
But the previous plan that we set out in June, just over 18 months ago, was very much premised on getting to that 11% RoTE that we think we need to be. The interest rate environment fundamentally changed on us. 2020 interest rates are probably about 150 basis points lower than what we thought they were going to be when that plan was set up. So hence, why we've had to adjust the plan. We think this plan gets us back to that place by 2022.
And we think it has inherent logic to it, which allows us to sustain the distribution policy and grow the bank at about that 4% to 5% growth rate.
Raul and then John.
A couple of follow ups for me. The capital ratio looks like it's going to go backwards in Q1. So I was just wondering if I can follow-up on what you said in your opening remarks, Ewan. There's €10,000,000,000 of model changes and there's €10,000,000,000 of inflation from is that from business growth?
Yes. So we think over this year, there's probably about well, firstly, on the capital ratios, I think it wouldn't be surprising if it fell back about 20 basis points in the quarter. I'd heavily caveat that because it depends on coronavirus. But we think there's about $15,000,000,000 of headwinds this year on regulatory related, modeling related issues that were of which about $10,000,000,000 or just under $10,000,000 should come through this quarter. The other 10 that we see is relating to business growth.
Part of that, there's always a significant reduction in balance sheet in Q4, particularly around balance sheet management and parts of GB and M, where it comes back on earlier in the New Year. But also, we're continuing to see decent growth in Retail Banking and Commercial Banking. So our current guidance is out of the ways we'll be up about $20,000,000,000 also in Q1.
Thank you. And the second one is on GBM specifically. I think in the past, we've looked at divisional returns across HSBC, and I'm struggling to kind of go back to that. Maybe it's not relevant anymore. But can you talk about where the standalone GBM returns would look like under your plan relative to the 10% to 12% post the merging of the middle and the back office?
Yes. My only hesitation because we've also got the corporate center reallocation process that we're intending to roll out in the second half of this year, which has some impact on the returns. But this materially improves the return profile of GB and M through the period of the plan.
Is that in the 10% to 12% or is still below? Yes.
Sorry, I'm just struggling to get the numbers straight in my head post the reallocation. But relative to the current returns, the returns are materially high.
Last question from John at the back.
Thank you. It's John Cronin from Goodbody. Just a few specifically on the U. K. Actually in relation to flow share development in mortgages in the year to date, anything you can say on that?
Additionally, the recent modest improvement in deposit funding conditions in the market, how do you anticipate that will pass through in terms of pricing? Or should we expect potentially some NIM accretion there? And finally, anything you can say on the ROCE's you're currently printing on new mortgage flow? I think you gave us some numbers on that before. Thank you.
So in terms of flow share in Q4 for mortgages was just over 7%. So we're continuing quarter on quarter to put on flow share in excess of stock share in mortgages in the UK. We think we can continue to do that. As we've talked about previously, we have about a 13% to 14% share of current accounts by value. We have about 10% share of consumer credit, and we're sitting at just under 7% share of stock mortgages.
So we do think there's a long term opportunity for us to continue to accrete share in mortgages. On NIM, I would be a bit cautious because it continues to be we don't have it, but the term funding scheme needs to be refinanced by the sector. It's not obvious to me how that gets refinanced without some pressure on deposit funding at some point. The new the return on tangible equity for the new business on mortgages is comfortably ahead of cost of capital. It's very royalty equivalent because of relatively low risk weightings attached to that business.
The other thing I would say on the return overall in the UK, the return on tangible equity, the UK, it is impacted because we have a very large pension surplus. That pension surplus helps in terms of a stress test because we don't need to hold capital against the pension plan for the stress test because we've got the surplus. But if you were to adjust all that out, I think returns for the UK business would be a couple of 100 basis points higher than we showed.
I'd just like to add a couple of comments as well about our plans to create a combined Wealth and Personal Banking business. There are 2 principal drivers behind that. One is, and probably the most important one, is revenue synergy. We believe that bringing the wealth management capability of our private bank and to be able to extend that product capability and those services to a broader client base gives us significant growth opportunities in revenue across the whole personal customer base. Equally, we believe there are benefits in sharing the architecture and the skills that are being developed in and the capabilities that are being developed in our retail banking business, particularly in the area of digitization, that we can transfer those benefits into for the benefit of our private bank clients.
So we believe there are opportunities for growth and revenue from bringing those two businesses together. There are also some cost synergies, but that is not the primary purpose for doing it. The primary purpose for doing it is to facilitate future growth. And some of the benefits will be the scale operations that are being built up in Retail Banking can be leveraged to continue to grow our Private Banking proposition for our Private Banking clients at a much faster pace without having to correspondingly grow the cost base alongside it. So we believe that combination is a powerful one.
Does and we also believe the opportunity for continued growth in our business in the area of Wealth Management is one that we should focus on. And we're looking at further activities and strategies that can take that business on to even higher growth rates. So just wanted to add that to the comment on the U. K. Retail business.
That's no more formal questions. There's team Coffey at the back. So do speak to the team as the whole of the Executive Committee here. So I do note them and ask them questions as well. But thanks very much for your time everyone.