Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference Call for HSBC Holdings Plc's Interim Results 2019. At this time, I will hand the call over to your host, Mr. Mark Tucker, Group Chairman.
Thank you, and good morning to everyone in London and good afternoon. Let's start again. Good morning and everyone in London, and good afternoon in Hong Kong, and welcome to the 2019 HSBC interim results call. With me today is Ewan Stephenson, our Group Chief Financial Officer. You would have all seen by now our announcement regarding John Flint, who is by mutual agreement with the board stepping down as Group Chief Executive.
I will say a few words about that and then hand over to Ewen, and Ewen will talk about our good interim results, which are a credit to John, the management team and the 238,000 HSBC people. The bank is very grateful to John for his personal commitment, dedication and the significant contribution he has made over his long career at HSBC. HSBC is clearly, as you've seen by today's results, in a strong position to deliver on its strategy. However, in the increasingly complex and challenging global environment in which the bank operates, the Board believes that a change is needed to make the most of the significant opportunities ahead of us. For this reason, we've initiated a process to find a new group chief executive and will be considering both internal and external candidates.
Noel Quinn has agreed to serve as interim group chief executive until a successor is appointed. Noel has been the Chief Executive of Global Commercial Banking since 2015. He is a proven leader with a strong track record of achieving business success, excellent client relationships and deep global experience. I'm sure we'll come back to this later and happy to answer any questions. But I think more importantly to go to Ewan now and the interim results.
Ewan?
Thanks, Mark. Morning or afternoon all. I'm now going to quickly step through the slide pack, which you can find on our Investor Relations website. Turning to Slide 1 and the key messages. We continue to make good progress in the first half.
Reported profits before tax were $12,400,000,000 that's up 16% on the first half of last year and adjusted profits before tax were up 7%. We're pleased with the progress we're making on improved cost control, which has helped drive a much stronger jaws performance. Our return on tangible equity in the first half was 11.2%. Results were flattered by an $828,000,000 dilution gain from the merger of Saudi British Bank and stable at the Q1 at 14.3%. We're announcing today a $1,000,000,000 buyback and that's part of our ongoing commitment to neutralize scrip dividends over time.
On outlook, we continue to progress towards our 2020 return on equity target, but the interest rate outlook has softened relative to the Q1 and geopolitical risks have heightened across many of our major markets. In response to this, we're actively managing costs and investment growth in order to respond to a more challenged revenue outlook. Looking at Slide 2 and progress against our eight strategic priorities. We're making good progress against most of these to call out a few. Asia continues to grow well for us with revenue growth in the first half of 9%.
We're continuing to build leadership in sustainable finance, an area where we see considerable growth opportunity over the coming years. And our UK ring fenced bank is growing both volumes and revenues and we continue to take market share in both mortgages and commercial banking. However, one priority where we're not on track is the turnaround of our U. S. Business.
While good underlying progress is being made on costs and capital, costs were down 7% in the Q2 relative to the Q2 in 2018. And we got CCAR approval to dividend defer the $1,800,000,000 of capital back to the group. The U. S. Revenue outlook has become more challenged in recent months.
There's been a sizable shift in U. S. Dollar interest rate expectations. So we're now not expecting to achieve a 6% return on tangible equity in 2020. But we recognize that current returns in the U.
S. Are not acceptable and it remains a firm priority of ours to improve these. Turning to outlook more generally on Slide 3, consistent with what I've just said about our U. S. Franchise, the interest rate outlook for the dollar block has shifted in recent months.
In addition, geopolitical risks have risen across many of our major markets, which creates additional volatility around our central base case. In the very near term, Brexit remains unresolved with skewed risk to the downside and trade tensions between the U. S. And China are progressively impacting the growth outlook for both markets. We're responding to this change revenue outlook with a tightened focus on costs.
We slowed investment growth and some of which you can see reflected in today's results. Going into the detail now on our results on Slide 4. In the first half, we had adjusted revenue growth of 8% and this excludes the dilution gain from the Saudi merger. Cost control has improved. First half cost growth was 3.5%, that's down from 5.6% for the full year in 2018.
And returns were up in the first half, a return on tangible equity of 11.2%, driving earnings per share up $0.06 to 0 point 42 On Slide 5, we continue to see robust top line growth, up 7% in the 2nd quarter and up 8% in the first half. Looking across the 4 global businesses in Retail Banking and Wealth Management, overall revenues were up 14% in the 2nd quarter. In Retail Banking, revenues were up 10%, driven by good lending growth and higher deposit margins and our insurance franchise had a strong quarter with the value of new business up 19%. Commercial Banking continued to grow strongly in the 2nd quarter with 8% revenue growth, But given the impact of interest rates and lower global trade flows, we do expect second half growth to moderate. In Global Banking and Markets, revenues were down 8% in the 2nd quarter and down 3% in the first half.
Most of our transaction franchises continue to perform strongly. Security Services, GLCM and GGRF had combined revenue growth in the Q2 of 10%, but this was offset by global markets down 11% and global banking down 8%. Global Private Banking had another good quarter, revenues up 8%. Total net new money inflows in the first half were $14,000,000,000 That's more than double the run rate we saw in the first half of twenty eighteen. In Corporate Center, revenues were up $185,000,000 on the Q2 in 2018.
Favorable valuation differences on long term debt and associated swaps together with reduced losses on legacy portfolios more than offset the expected lower revenues from balance sheet management. Turning to the next slide, net interest margin was up 3 basis points to 162 basis points in the 2nd quarter. Average interest earning assets grew by 1% and net interest income by 5%. Underlying this in Asia, net interest margin improved by 6 basis points. 1 month HIBOR in the 2nd quarter was much more supportive, up 70 basis points to an average of 2% across the quarter.
And in the UK ring fenced bank, NIM declined by 8 basis points in the quarter, driven by a combination of a changed asset mix towards mortgages, the continued issuance of MREL and the start of wholesale funding programs. On Slide 7, we're now showing progress on better cost control. Cost growth in the first half was 3.5%, down from 5.6% in the full year 2018. Significant work sits behind that. We've taken the decision to materially shift the 2020 cost run rate.
And so we've been working hard across the bank on various cost plans, some of which you see reflected in today's results. Severance costs were $199,000,000 in the 2nd quarter $248,000,000 in the first half. For the full year, we expect total severance costs in the order of $650,000,000 to $700,000,000 The payback on this is good with around 1 for 1 pretax annual savings. So we expect $650,000,000 to $700,000,000 of pre tax run rate benefits in full year 2020. Also note this quarter and significant items is a 5 $59,000,000 PPI charge.
This includes a provision for the official receiver for its bankrupt customers' claims. And for the remainder, it's a combination of modeling much higher information quest for July August relative to the first half run rate and the required auto conversion of these requests into complaints. Turning to Slide 8, we invested a further $1,200,000,000 in the second quarter and we're on track spend around $5,000,000,000 this year. That's up over 20% on 2018 and over a third on 2017. Given the changed outlook, we're now planning to spend around $14,500,000,000 to $15,000,000,000 over 2018 to 2020.
On a currency adjusted basis, that's towards the bottom end of the $15,000,000,000 to $17,000,000,000 range we announced last year. This should be put in perspective though, we're spending around $100,000,000 a week on investments. So we're talking about deferring less than 1 quarter of investment spend across 2019 2020 combined. On what we're investing in, around half is focused on growth and enhancing digital capabilities and the other half from productivity improvement and regulatory and mandatory investments. On the next slide on credit, ECLs continue to perform in line with expectations with credit charges of $555,000,000 or 22 basis points in the Q2.
With $1,100,000,000 of credit charges in the first half and from what we can see at this point, we remain comfortable with full year 2019 consensus of $2,700,000,000 I would however continue to caution on the UK in particular. It remains the market we're most focused on. UK provisioning will remain sensitive to forward economic guidance, which given the uncertainty around Brexit has considerable potential to diverge in the second half. Also note that we've changed the probability of an adverse trade scenario now at 10%, resulting in a modestly higher trade economic uncertainty charge. Turning to the next slide, our Core Tier 1 ratio remained stable at 14.3% during the Q2.
RWAs were up $6,500,000,000 in the 2nd quarter and up $20,700,000,000 in the first half. We expect full year RWAs to be broadly in line with the 2nd quarter, resulting in overall annual growth just above our 1% to 2% guidance range. As we've previously signaled, more of our RWA mitigation actions this year will fall into the second half. We're also announcing today a $1,000,000,000 buyback. This represents just over 10 basis points of core Tier 1 to be deducted in the Q3.
We think this creates the right capital management balance between continuing to execute against our commitment to neutralize script issuance over the medium term, while being appropriately conservative given Brexit uncertainties. Also note that our TNAV per share for the first half benefited by $0.10 per share. Our Q1 dividend will be accounted for when it is paid in the Q3. So this is purely a timing difference on recognition. To conclude, we've delivered a good set of numbers for the Q2 and the first half.
We continue to show good top line volume and revenue growth. We've made real progress in moderating cost growth. Credit conditions remain below long term trends and both profits and returns are growing. The $1,000,000,000 buyback announcement is a clear signal of our continued commitment to active capital management. But given the changed dollar block interest rate outlook, we're now facing a weaker revenue outlook for most of our businesses and we're operating with higher geopolitical uncertainty across various markets.
So while we're pleased with these results, we recognize the outlook has softened and we need to and are taking action to adjust for this. Mark and I will now take your questions. And before we do that, Mikaela, if you could please explain the procedure for Q and A.
We will now take our first question today from Martin Leitgeb of Goldman Sachs. Please go ahead. Your line is open.
Hi, Martin. Yes, good morning.
The first question, if I
may, is just trying to understand what the announcements from today might mean in terms of the broader strategy of the group. And I'm not sure whether this is the right timing or to what extent this can be answered at this stage. But just looking at the group, bulk of profitability coming from Hong Kong and UK Retail And obviously, given the incremental disclosure on ring fenced and non ring fenced, there remains to be what we can see a meaningful drag in terms of profitability from the non ring fenced bank. So I was just wondering if you could comment where this where we might be heading in terms of strategic direction and what measures you might undertake, particularly under nonwink fence bank in terms to improve profitability? And the second question is more with regard to capital management.
Just looking at your disclosure for the ring fenced bank, it seems to be that there is a payout ratio of close to 100% in terms to holdings. How should we think about that capital contribution going forward? So the UK ring fence bank being profitable, upstreaming bulk of profit, is this essentially going to be the source to help the group neutralize scrip going forward? Thank you.
Yes. So I think Mark will start on the first question, Martin, and then I'll add and I'll carry on after that.
Yes. Let me set context and I think Ewen can give you more detail, Martin. I think the way we think about this is we've agreed that the high level strategic priorities that shape our business and again, the there is total alignment between in the organization and agreement on the strategic direction. And these high level strategic priorities remain very firmly in place. Having said that, I think where the where we're looking to do more is on realizing and how we will go about realizing those priorities and let Ewan give you a sense of how we're thinking about that.
Yes. So, Martin, in terms of the non REMA Defense Bank, I would sort of bucket it along with the U. S. As well. Yes, geographically, clearly our most challenged return businesses, we have about 30% of our capital invested across the non ring fenced bank in the U.
S. The 2 businesses combined achieving extremely low returns at the moment. In terms of commonality across the 2, we've got loss making or breakeven retail businesses in the U. S. And France.
We've got multiyear plans to turn them around, which we're continuing to invest in. Wholesale Banking obviously faced quite challenged market conditions, both in the U. S. And particularly in Europe in the first half. And I think the commercial bank across most both markets is actually performing okay.
Both markets have a cost problem. Cost income ratio is in the mid-80s. So a focus on cost is a priority. In the U. S, we also have an issue with excess capital sitting in the U.
S. Business. I think the CCAR results from about a month or so ago is another important step in that, getting about $1,800,000,000 out of our U. S. Business in the coming months.
And I would say with some of the customer selection too, we're looking hard at that because we still got a lot of the corporate customers where we're not earning a sufficient return and we are trying to recycle capital away from those relationships, either reprice them or recycle them into better returning customers. But overall, I think we would ask that people be patient. Look, these turnarounds across these two markets is going to take time, but we recognize that the type of returns that we're achieving at the moment are not acceptable and need to be driven higher. On the ring fenced bank, I wouldn't read in or try and overly be too complex about dividend plays across the group. We think we've got adequate dividend serviceability and it would have no impact on our ability to continue to commit to neutralizing scrip dividend over time.
I think the overall challenge at the group level is a more complex issue. We've committed to keeping our core Tier 1 above 14%, which we think remains appropriate. You'll see in our pillar 3 documents some additional disclosures today around MREL and where it sits across the group and double leverage. That's another thing that we're managing too. And we're also cognizant of the fact that we've got some potential capital challenges on the horizon, Parcel III reform being 1 and the other is we're waiting to see where we end up on G SIB buffers at the end of the year.
If we were to bump up a buffer, which is not clear at the moment, that would come into effect on 1st January 2021. But in terms of the ring fenced bank cash flow, really no impact in terms of our dividend serviceability of the group.
Perfect. Thank you very much.
Our next question today comes from the line of Joseph Dickerson from Jefferies. Your line is open.
Hi, Joseph. Hi, good morning. I guess just a couple of quick questions. Mark, you know the region very well and alluding to some of the outlook comments on geopolitical risk. Would you consider the role of Chief Executive of HSBC because it seems like somebody with your experience in the region would be welcome at this point?
Secondly, on the U. S, just given the lack of progress on returns, I appreciate your point, and you can take out look to take out cost or put in further cost efficiencies. But is there a broader strategic issue with the scale of the business and the mix of business in the U. S. And with some sort of either M and A or divestiture be more appropriate in the medium term?
Thanks.
Joseph, thanks for the question. The answer is under no circumstances. I think the I spent 32 years as a CEO and that is, I think, a decent enough innings to justify. I have made a very conscious decision to be a Non Executive Chairman and that's what I intend to be. And I think we have people with much greater capability and much and youth on their side that can do a materially better job.
So I hope that's fairly clear.
Very clear. Yes. On the U. S, Joseph, I don't think it's a scale issue. There are plenty of businesses in the U.
S. With a similar scale to us earning much better returns. It's a combination of needing to be needing to drive higher revenues, reduce costs and be more efficient on capital. But I don't think it's a scale issue. We don't think we need M and A to solve our returns problem in the U.
S. And nor do we think the market would be particularly supportive of M and A. Equally, we think it's critical that we do have a meaningful presence in the U. S. It's critical to our global business.
And therefore, I don't think you should expect us to be reducing our presence in the U. S. Thank you.
Our next question today comes from Chris Manners from Barclays. Please go ahead. Your line is open.
Hi, Chris. Hey, good morning. So two questions, if I might. The first one was just to follow-up on the G SIB comments that you were making. I saw that Page 99 on your derivative disclosure showed your derivative notional was up about €5,000,000,000,000 half on half.
And I guess that was one of the bits that looked like it could push your GSIB score north of the magic 430. If you do trip into the next G SIB bucket, either this time or in the future, should we be adding 50 basis points to that greater than 14% capital target? Or should we assume that, that's sort of encapsulated within that? And then the second question was just an interest margin question. Obviously, good print in the quarter and above 3 basis points, A lot of that coming from the move in HIBOR and as you flagged that U.
K. Was a bit weaker. How should we think about that dynamic? Obviously, HIBOR has come down about 100 bps from the peak, but it's still running around the level that it was the average Q2. Maybe you could sort of walk us through the net interest margin drivers and whether we should be expecting slippage over the next sort of several quarters from the 162,000,000 and that's the revenue headwind, one of the revenue headwinds you're talking about or whether we would actually able to sort of see it stick around the same level?
Thank you. Yes. So on GCEP, look, we're comfortable with our 14% target for the time being. I don't think if we went up a bucket that we from what we can see today, that's going to change our view on what the appropriate Core Tier 1 ratio is for us. Remember, it's adding 50 basis points to our regulatory number and not our target.
So I think, look, for the time being, we're very comfortable that the 14% target is appropriate. The G SIB indicators are a bit of a blunt instrument. As you know, it's a set of basic indicators. And yes, we have much more sophisticated modeling on how we manage our capital base. There was a technical reason in relation to the increase in derivatives, but we've got some systems improvements going through.
So you should expect that number to come down. On NIM, this is my favorite debate with you all every quarter and how much I love not forecasting NIM. But given the recent rate cut in the U. S. And given the likely direction of further at least another rate cut this year, I think you all should expect them to come down.
And HIBOR, for the time being at least, has been relatively uncorrelated with U. S. Dollar interest rates. But at some point, if it connects, would be expected to come down as well. So overall, I think I would be unsurprised if NIM was lower at the end of the year.
Our next question today comes from the line of Tom Rayner from Numis. Please go ahead. Your line is open.
Hi, Tom. Hi, good morning. Good morning. Because you love it so much, Ewen, I thought I'll ask you another question on NIM, if that's okay.
Thank you.
I see as the one of the sort of negative offsets to the positive HIBOR was deposit mix shifting towards interest bearing. I think after Q1, you said that this had largely stopped in Hong Kong. So I'm just wondering, are we now seeing deposit mix issues elsewhere, such as in the UK? And I have a second question, just more on strategy, which may be for Mark as well. I don't know how you want to deal with that.
Do you want to ask that question now?
Yes. It's just when I look at what sort of changed today, it doesn't feel like that dramatic in that the revenue environment is worse. You're probably going to be doing a couple of percent per annum less revenue growth and therefore you've got to find a bit more cost to take out, yet we're changing the Chief Executive. And I'm just wondering if there's something else, a sort of broader strategic. And I know you've mentioned a few things, but a more sort of strategic view, which maybe John did not agree with.
And therefore, this is we are going to see change in direction, whether it's Wealth Management growth. So I just wonder if there's something more to it that you could add, Mark maybe could add some more color to. Thanks.
Yes. So on NIM, look, it may be unsurprising if as HIBOR goes up that you would see some shift out of on demand and current accounts into savings product. So I think the nature of how that migrates through the remainder of the year will depend very much on the direction of interest rates. I think in the UK, there were a few things going on. There was a deposit campaign at some point.
We had also the as I said earlier, we're continuing to issue MREL and the U. K. Ring fenced bank had very non diversified funding because it was only set up recently. So we started a few wholesale funding programs as well. Just a word on cost and then I'll hand over to Mark on the strategic point.
I mean, you alluded to the fact of lower cost growth. I mean, I think previously, we've guided to sort of lowtomidsingledigit cost growth. I think if you were to read that today, I would change low to very low and mid to low. So very low to low cost growth from here is what we're targeting.
Yes. Tom, yes, let me give you a sense. And I think starting with the clear point, there has been no disagreement with on strategy. I think everybody in the company is clearly aligned on these high level strategic priorities. I think the element of where we have work to do is how we go about realizing those priorities.
And I think across a number of elements of which Ewan has covered some of already amongst growth, how we make the most of our opportunities, be it regionally or locally, looking at the trade side, particularly how we extract value where we're strong. On resource allocation, again, how we best allocate people and capital, which again, Ewen has clearly spelt out. And against execution, again, simplifying and speeding up execution, those are the elements where I think going into an environment which we feel will become increasingly complex and challenging. We feel now will bring the right perspective and experience to this, and we will give him full accountability and responsibility for taking the group forward.
Our next question comes from the line of Edward Firth from KBW. Please go ahead. Your line is open.
Good morning.
Yes, good morning, everybody. I guess this is a question for Mark, and it's partly an area that's been covered. But you've talked a lot in the past about how the U. S. Business and I guess the European
business as well is we shouldn't
look at it European business as well is we shouldn't look at
it as a loan because actually there's a lot of interlinking businesses
elsewhere, particularly in Asia, which which actually make it a far more acceptable return than we might think.
And I suppose my first question is, do
you still believe that? And do you agree with that as a sort of broad concept? And I guess as a second point then, if that is the case, what can you point to which can make us assume that these businesses can get any better? Because it must be now 10 years since either of those businesses have made anywhere near their cost of equity return that there must have been 4 or 5 management teams in each of them. And it's not obvious to me in this environment what we can see that or what you can point to us, which makes you believe that these will get to a cost of equity return?
Thanks. I mean, I think that's sort of a joint question, Ed, in terms of how you and I can answer. I mean, I think in terms of belief in the network, belief in the exporting of opportunities across that network. The U. S.
Is a massive exporter of business across the network and I think is the most significant element of the group in terms of exporting value. And I think the power of the group and the network and the interlinkages, the understanding of trade collared doors is absolutely fundamental. And I think is gives us an advantage that no other bank on the planet has. And therefore, it's something that we do view as a material strength. And we can get better at it in terms of how we think about some of the different elements of region, how we think about the trade, how we think of extracting value where we're strong.
But fundamentally, I think the point you make in terms of Europe and the U. S. In terms of destruction of value are two areas of immense focus for us. I think Ewan has taken you through the U. S.
And I think can take you through Europe. I think there are many elements that we can do better in terms of both resource allocation and execution, which I think we're on the path to do. And I think we need to speed some of this stuff up.
Jero, do you want to
just talk about Europe a little bit as opposed to the year? Yes.
I mean, so Europe, well, the non ring fenced bank is a combination of UK European wholesale and retail commercial banking in France and commercial banking elsewhere, largely France and Germany in Continental Europe. I mean, the first thing I'd say about Europe is we're not alone. I mean you all know that returns for European Banking are weak, not helped by the interest rate outlook. We do think that there is significant upside from where we're currently sitting in returns. There is a significant cost issue in the non ring fenced bank that we're looking to add at.
It's got a cost income ratio in the mid-80s. We think we can reduce that materially. There is a customer selection issue that I that we have in Europe where many of the customer relationships are earning well below cost of capital returns. And we need to be harder with those relationships and either reprice them or exit those relationships. And I think we need to stay very, very focused on where we have a right to win and a right to be great, which is customers in Europe who want to do business elsewhere in the world, particularly in the Middle East and Asia and vice versa.
When we look at the travails of a number of our European peers, we're confident that we can drive a business to higher returns where we have some unique competitive advantages. But as I said, it's not going to be quick, but I think we recognize that current returns are unacceptable and we need to improve them.
Great. Okay. Thanks. I mean, is there any way at some point you can give us greater clarity on sort of putting some numbers around what then, let's say, the U. S.
Franchise creates in the group as a whole or customers in the U. S. Create in the
group as a whole? Because it's very
very difficult externally to really
have anything to add to that? Yes. No, I'm sure we can yes, I'll talk to Richard O'Connor and the IR team. I'm sure there's stuff that we can do to help explain that better.
Great. Thanks so much.
We will now take our next question from the line of Guy Stebbings from Exane BNP Paribas. Please go ahead. Your line is open.
Good morning, Jasmine. First question, if I could just come back to the CEO and the changes there, because if I'm honest, I'm struggling a little bit to really understand what has specifically changed. And if it's just execution and resource allocation, why John couldn't have delivered against that? And why the interim change in role for Knoll sort of changes what he can contribute from his current position, if you like. Can we read anything into the fact that Global Banking Markets was probably the weaker performing division in the period?
Most of the areas were perhaps better than expected. Is that a focus? Or is it more around much of focus on costs? And then just a second question was on buyback. The €1,000,000,000 won't neutralize the scrip on an annualized basis.
And I think you mentioned uncertainties around Brexit as a factor. If we were to see a more positive outlook regarding Brexit, should we take your comments to mean your view on capital such that you should be able to do further buybacks at that stage and underlying capital generation is still sufficient to neutralize the script? Thanks.
Okay. Thanks, Guy. Let me take the first part and clearly hand the second to Noel. I think we go back to what we've said. I think we're in a strong position to deliver on strategy, but the environment is changing in our view materially, becoming more complex, becoming more challenging.
And we feel that a change, again, both we and John feel the change is needed to really take the most of the opportunity to take the make the most of the opportunities ahead of us. And this is a decision about the future and how we see the future. And the realizing of those high level strategic priorities, we feel needs a different approach. And I think the elements that Knoll can bring to that, we view are significant and different enough to warrant where we the action we've taken.
Yes. On the buyback, we openly acknowledge that $1,000,000,000 buyback will be insufficient this year to neutralize for scrip for this year. I guess, what we said is we remain committed to the medium term target to neutralize it. I don't think you should expect if we wake up at end of 3rd quarter results with a more favorable Brexit outcome that we'll be back doing more buybacks this year. I think we'll take another view in beginning of 2020 as part of full year results.
Okay. Thank you.
We'll now take our next question from Manus Costello from Autonomous. Your line is open.
Hi, Manus. Good
morning. I had a couple of questions, please. Given the firstly, given the focus on growth, which you talked about, Mark, do you think your payout ratio of over 70% is still appropriate? We've seen a number of banks with payout ratios in that area look to cut it. I wonder if that's part of a strategic rethink that you might have with a new CEO if the focus is going to be on growth and RWA efficiencies start to fade?
My second question is around the complex environment that you're talking about. There's been some press reports that HSBC could be placed on a list of unreliable entities by the Chinese government. I wondered if you think there's any risk of that for HSBC and if that plays into your thinking about a complex environment, which you're concerned about? I
think Ewan is probably best to talk about the payout ratio and growth.
Yes. So look, on the payout ratio, dollars 0.51 per share is a high payout ratio. I mean, it was over 100 and we're migrating down from that from a few years ago. We that's why we've been very deliberate in our language of saying we expect to keep the dividend stable. And as returns improve, we expect that payout ratio to fall materially and to fall to a level where we think we can both fund the dividend, neutralize the script and continue to grow in the way that we want to grow.
I think the balancing item at the moment is the fact that we still see significant opportunity to both improve models and optimize RWAs with some customer relationships. As we do expect in the second half of this year to keep RWAs neutral while still growing credit assets. And we still think we've got potential over 2020 2021 to see further material RWA mitigation actions. At that point, we'll have returns higher and that will allow us to both fund the $0.51 dividend and grow in the way that we want to grow.
Let me take the second part. I think, as you know, we've been in China for over 153 years, and we have a clear and long term commitment to China. And if you look at what we're doing in time in terms of China's growth priorities, We're actively participating in the opening of China's financial markets. We're actively participating in the belt and load initiative. We're actively participating in the development of the Greater Bay Area.
We're actively participating in the internationalization of the M and B, and we're actively participating in the growth of Green Finance. And we look forward to continuing to support China's growth and economic prosperity. Our business operations in China continue as normal matters, and we are confident about our China business, and we don't comment on speculation.
Okay. Thank you.
We'll take our next question from Alastair Ryan from Bank of America.
A question for the Chairman really. What's the risk of a while you're trying to move things forward in the longer term, there's an extended period of something of a hiatus between a new CEO coming in now, getting his feet under the table and then possibly somebody different over a few months from now, which takes some time to get their feet under the table. How does one avoid that risk? Thank you.
So, Joao, in our view, there's that's not a risk. Nao has been given full authority to take things forward in the way that allow him the flexibility to make the decisions that he and executive team view as the best for the business. So on that basis, there should be no risk that there's going to be any hiatus period. I think we're going to get stayed in and no one understands that this we need to move with pace, ambition and decisiveness.
Our next question comes from Rahul Sinha from JPMorgan. Your line is open.
Hi, Rahul.
Hi. Thanks for taking my questions. I hope you don't mind if I ask 3. The first one, I was wondering if you could comment a little bit on Hong Kong in terms of the outlook for the second half and also your July performance, if there's anything there. It doesn't seem like there's anything in the numbers itself that were prompted, but it would be useful to get a comment along those lines.
The second one is on the RoTE and the decision to continue to target above 11% in 2020. Obviously, as you know, consensus is around 10%. In the first half of the year, if you take the gains out, you're obviously well below the 11 percent on my numbers. And obviously, you're flagging a difficult second half. So I was just wondering again what I might be missing on the 11%.
The third one, maybe more for Ewan, actually on the Basel III reform. I mean, you are now quite different from your peers in the sense that we don't actually get any indication about the potential RWA inflation for HSBC. And I was wondering if you might be able to put a range at least in terms of how much we can expect? Thank you.
Yes. So look on Hong Kong, as you've observed, you don't really see it at all in the first half numbers. Numbers were good. 2nd quarter was good. Revenues were up significantly.
Profits were up significantly. Yes, do we expect some impact in the second half? Yes, inevitably it will be. If the current situation continues for a prolonged period of time, it will impact confidence. It probably will have some impact on the retail sector.
Yes, a big driver of profitability though in the second half will be where does HIBOR go. And at the moment, it's remaining sort of comfortably higher than where it was in Q1 and which flowed through into good Q2 results. So it's difficult to sort of put all that together and say what does that mean for Hong Kong profitability in the second half. But for the time being, we're continuing to see decent growth and decent profit growth. On ROCE, a few things.
I think it's slightly unfair just to back out the Saudi dilution gain in the first half. If you do that, you should probably add back the PPI charge and add back the severance costs, which broadly get you back to the same point. However, that wasn't the bank levy as you know, the hits in Q4. Yes, as we look at consensus, you're right, consensus is currently sitting below 10%. I think, yes, as you think about the mix, there's a slightly different we're more bullish, I think, on revenue growth in The Street currently, particularly in non interest income and volumes.
On costs, I think as you can see today, we're signaling a much more rigorous approach on cost management. I'm pretty pleased with the progress we've made in the first half. We took cost growth down by 2 percentage points from the runway last year. And as I said earlier, I think we're managing for now very low to low cost growth from here over the next 18 months. There's a technical thing on the tax rate.
I think we're continuing to generate more of our earnings in lower tax jurisdictions. So the effective tax rate being modeled by the Street is probably 1 percentage points to 2 percentage points too high. And I think there's a partial offset in the interest rate environment. We think we're probably 2020 consensus on credit costs currently is potentially sitting marginally too high as well, which is an offset to the lower interest rate environment and the impact on NIM. But I think you can do the math and figure out that we're obviously substantially more bullish across a number of those lines to get to the gap between 10% 11%.
On Basel III reform, I've sort of openly acknowledged we've been a bit shy on this. It really is quite a complex story for us. Yes, we operate in 65 markets. We're dependent on an enormous amount of national discretions. We don't know whether in Europe here, we're solving in the UK for UK national discretion or European national discretion until we understand the course of Brexit.
As we look at large parts of Global Banking and Markets that are impacted by Basel Reform, I think as time goes by, we get increasingly more confident about being able to offset some of the more negative impacts of Basel Reform. So look, as soon as we feel sort of confident within a range, we'll tell you. We would continue to say we do expect some impact of Basel reform. So please don't take from my comments that this is going to be an answer of 0. We don't think it will be.
But relative to even when I joined 6 months ago, I think we've become more confident about our negative impacts of Basel. But as soon as we feel confident about a range, we'll tell you. My concern at the moment is we'd just be misleading you.
Take our next question from the line of Fahad Kunwar from Redburn. Please go ahead. Your line is open.
Hi, morning. Thanks for taking my questions. So the question on Audit Way reforms and the payout ratio. I think you've given a number before around, I think it was like $12,000,000,000 or $13,000,000,000 of model optimizations that are sitting with the PRA ready for approval. Is it these optimizations that are coming through in the second half of the year to give you confidence your risk weights will be flat and whilst you're growing the credit book?
And just a second question on that kind of more high level. How many more optimizations are through? So it feels like as margins are coming kind of down or at least under pressure, growing your balance sheet is going to be a key way of kind of hitting that revenue target, which you say you're more bullish on than consensus. But obviously, you're stuck on quite a high payout ratio as well. I think the previous CEO was kind of very much wedded to the dividend.
If it came to a point of thinking about a high payout ratio of dividend versus loan growth, how do you think about which one you would prioritize if margins stay as difficult as they are at the moment? Thanks.
Yes. Look, on the last point, I don't think we feel we need to have that discussion for the moment. So we're not having it. On RWA growth, I think modeling improvements is part of the answer. There's also a significant part, which is to do with recycling RWAs out of customer relationships where we're not achieving acceptable returns.
We're continuing to run off a considerably smaller legacy credit portfolio. So it's not just all model improvements and those model improvements are not just with the PRA. They sit across a number of regulators globally. But overall, it's something that I we track religiously. Yes, I run a meeting every month where we go through all of the RWA mitigation actions and have a pretty confident view about our ability to deliver within accepting that some of that is obviously beyond our control, such as timing of regulatory approval?
Sorry, on the first question, can I just on the second one, can I just ask, I know you won't get the answer to this, on the payout ratio, how obviously, you want to grow into a lower payout ratio, I understand that? How long would you accept the payout ratio as high as it is right now before you would ask that question and have that discussion?
Well, I think as you can see this year, we've continued to maintain the payout ratio that we're maintaining and we've grown our core Tier 1 ratio by 30 basis points. So we think for the time being, we can continue to commit to the $0.51 dividend and it's not a topic that we spend any time debating internally.
Thank you very much.
We'll now take our final question from the line of Magdalena Stocklosa from Morgan Stanley. Please go ahead.
Hi, Megan. Hi. Just three quick questions from me. The first one is about the details of your efficiency program. We have kind of seen the announcement EUR 650,000,000 to EUR 700,000,000 Could you give us a sense where it's coming from?
And how much of it would you consider kind of business as usual? And how much of it would you consider kind of more ambitious restructuring? And to a degree, whether do you whether you see that program potentially being bigger as the revenue pressures come through? So that's question number 1. Question number 2, your investment spend that you have shown us kind of this still has a lot of digitalization kind of some business investment, but it also has a lot of regulatory that amount of regulatory kind of spend too?
Or do you think you're kind of at the kind of end of that kind of tremendous regulatory inflation you've seen over the last couple of years and continuously investing in? And my last one is really a little bit kind of coming back to Hong Kong. Of course, we have seen the results given where the HIBOR was. But when you actually look at your kind of underlying client activity over the last quarter and now? And what do you see transactionally from the perspective of the pipelines?
Can you kind of already see the decline of confidence, the less of the activity given what the GDP has done and of course, what is happening politically? Thanks very much.
Okay. Well, just look on the last one, if you look at underlying growth trends, I mean, loan growth was 7% in the first half. So that doesn't feel like it's customer activity is being particularly impacted at this point. If you look at our new peer to peer Pay Me, we think we're now getting over 50% of peer to peer wallet share. We've just launched the B2C version of that.
We've got over 3,000 merchants signed up. So it doesn't feel like in Hong Kong that the underlying volume growth has been unduly infected. Look in context, in terms of the operational impacts on the business, there's been a few localized branch closures for very short periods of time. So fundamentally, I think Hong Kong remains robust. On investment spend, firstly, just to note, investment spend in the 1st 6 months was up 17% on the 1st 6 months of last year.
Regulatory spend, look, I would love to sit here and say we're now at peak regulatory spend. I mean, I do genuinely think that's probably the case, but I've been proven wrong on that in the past. But if we look at the sort of big reform programs we have ahead of us at the moment, I guess things like FRTB, Basel III reform, a new IFRS 17 accounting policy coming. We've got LIBOR transition. Those are all and I think still ongoing work on recovery and resolution planning.
There doesn't seem to be anything new getting added to the pipe. But certainly for the next 2 to 3 years, I think we're going to continue to be in peak regulatory spend until we're through the bulk of some of those programs. Then on the efficiency program, I think the bulk of it, I would describe as non BAU. That's why we're taking $650,000,000 to $700,000,000 of severance costs. Yes, remember across most parts of our business, we have 5% to 10% natural attrition rates.
So we can manage headcount down normally through just being much more selective on rehiring. This program is about 4% of our overall wage cost for less than 2% of the headcount. So you can read into that, that is at the more senior levels of the organization and therefore more strategic in terms of its focus. And I wouldn't pick out any particular area of the bank. It's been a pretty broad program impacting most parts of the bank.
Most of the people who are subject to this program have been notified, but not all and hence are sort of reluctance to go into sort of specific details on specific areas at this point.
Ewen, is it fair to say that it is that there's a disproportionate level which is impacting the business headcount or more of the central sanctions headcount?
Yes. I mean, I think it's been across the piece. In my own area, we've done some. Most areas of the bank have been involved in cutting headcount. But I mean, overall, I think we recognized several months ago that the revenue outlook that we had anticipated in June last year when we set up the strategy was going to be different.
And therefore, we needed to get to the 11% in a very different way. We needed to assume that revenue growth was going to be lower, and therefore we needed to materially shift down the cost growth. So we grew costs in 2018 at 5.6% and we're now signaling the fact that we expect for the next 18 months, we expect cost growth to be in the very to low single digits. So we do think we have taken pretty decisive action to shift that cost run rate.
Perfect. Thank you very much.
Let me just say a few words to end the call. Thank you, everybody, for being on the call. I think this is a great organization. As you've heard today, we have a strong business, we have committed people and we have incredible opportunities. The Board believes a change is needed to make the most of those opportunities ahead, and it's the role of the Board to make those decisions.
And I think we have acted in a way clearly and decisively from a position of strength with agreement with good results behind us with a clear strategy with very good bench strength. But this is a decision, as I said earlier on, about the future, and we believe that with Noel coming in, he brings pace, ambition, decisiveness, which are absolutely essential to capitalize on the opportunities ahead. So thank you again for your time this morning. Thank you for your questions, and I'm sure there'll be other follow ups.
Thanks a lot, and thanks, Mikaela.
Thank you, ladies and gentlemen. That concludes the call for the HSBC Holdings Plc interim results 2019. You may now disconnect.