This presentation and subsequent discussion may contain certain forward looking statements with respect to the financial condition, results of operation, capital position and business of the group. These forward looking statements represent the group's expectations or beliefs concerning future events and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Additional detailed information concerning important factors that could cause actual results to differ materially is available in our earnings release. Past performance cannot be relied on as a guide to future performance. This presentation contains non GAAP financial information.
Reconciliation of the difference between the non GAAP financial measurements with the most direct comparable measures under GAAP is provided in the earnings release available at www.hsbc.com. The analyst and investor conference call for HSBC Holdings Plc Earnings Release for 1Q 2019 will begin in 2 minutes. Following the presentation, there will be the opportunity to address questions to HSBC's Executive Directors. Good morning, ladies and gentlemen, and welcome to the Investment Analyst Conference Call for HSBC Holdings Plc Earnings Release for 1Q 2019. For your information, this conference is being recorded today.
At this time, I will hand the call over to your host, Mr. Ewan Stevenson, Group Chief Financial Officer.
Thanks, Sharon. It's Ewan here. Good morning, afternoon, whatever time zone you're in, and thanks a lot for taking the time to join the call. I was going to plan to speak for just over 10 minutes and then there'll be plenty of time for your questions at the end. You'll be able to find a full set of slides on the Investors section of our website.
Rather than running through that deck slide by slide, I'm just going to provide some overall comments on Q1 and then the slides are there to provide some additional detail for you. On today's results, on the basis of the headline numbers, obviously, a very good quarter, bottom line profit of $4,900,000,000 and even if you ignore certain favorable items included in adjusted earnings, still a good quarter overall. On a reported basis, Q1 on Q1 revenues up 5% post tax profits on an adjusted basis, revenues were up 9.2% and cost growth moderated to 3.2% this quarter, meant that we had a very healthy adjusted jaws of a positive 6% in the quarter. On the balance sheet, we grew lending by 7% from Q1 2018 and we grew deposits by 2%. And despite a 1.6% increase in RWAs this quarter, around a third of which came from the day 1 impact of IFRS 16.
Core Tier 1 improved by 30 basis points to 14.3%. Fully deleted TNAV was $7.02 that's up $0.04 in the quarter. Looking at the adjusted revenue in more detail, firstly by business line in Retail Banking and Wealth Management, revenues were up 10% on Q1. This was underpinned by loan growth of 9%, notably in mortgages in the UK and Hong Kong. Wealth Management revenues were up against the strong Q1 last year.
Much of that growth came from insurance manufacturing with revenues up 66% in part benefiting from particularly strong equity markets this quarter. In Commercial Banking, revenues were up 11% on Q1 that was underpinned by loan growth of 8%. We grew revenues across all major products and all regions with a particularly strong performance by Global Liquidity and Cash Management. We're also continuing to see decent revenue growth in Global Trade and Receivables Finance on the back of higher margins in Asia and higher balances in the UK. In Global Banking and Markets, overall revenue growth was up a very credible 3%.
Global Banking and Global Markets revenues were softer, down 9% 5% respectively, but were more than offset by other business lines, particularly the strong performance of our transaction banking businesses, notably Global Liquidity and Cash Management, and we did see some positive valuation gains on CVA and FEA. In Global Private Banking, while revenues were down 4% on Q1 last year, this was mainly due to a repositioning of our U. S. Private banking franchise. We did attract $10,000,000,000 in net new money in the quarter with strong growth in Asia, particularly in Hong Kong.
Also a word on Corporate Center, where revenues were up almost $200,000,000 on Q1 last year, largely due to the non recurrence of a loss from a bond reclassification under IFRS 9 and favorable valuation differences on long term debt and associated swaps. On a geographic basis, we continue to see particularly good growth in Asia. Hong Kong revenues were up 8%, thanks in part to good loan growth. Ex Hong Kong revenues in Asia were up 14%, albeit flattered by some favorable items, but with robust underlying growth in Mainland China and in the ASEAN region, notably in Vietnam and Singapore. Volumes were good in most Asian markets and we continue to see strong new business trends in Insurance and Private Banking.
In the UK, growth slowed, but was still up 5% Q1 on Q1. Retail Banking and Wealth Management and Commercial Banking performed particularly well, delivering year on year loan growth of 10% 7%, respectively. And in Latin America, headline revenues were up 42% in part due to $157,000,000 in combined gains from the stake sales and 2 small card and payment businesses. You can find details on significant items and other items in the appendix of the presentation. If you adjust for those other items, we highlight in our adjusted revenues, you would have seen underlying revenue growth in the quarter of around 3% to 4%.
As you all know, we do have natural sensitivity in some of our revenue streams in Global Banking and Markets around 30% of its revenues are more volatile quarter on quarter And in other parts of the group like our wealth and insurance manufacturing franchises, we have natural revenue volatility linked to strength or weaknesses of markets. Just as a reminder, a 10% uplift in equity markets equates to around 200,000,000 dollars of positive revenues in insurance manufacturing and a 10% decline around a $200,000,000 loss in revenues. Turning to net interest income and net interest margin. Net interest income was up 5% year on year and down versus Q4 due to a 2 day lower count day count in Q1, the impact of Argentinian hyperinflation and the impact of IFRS 16. NIM was down 4 basis points in Q1 versus Q4, but down 2.2 basis points once you exclude the impact of Argentinian hyperinflation and the impact of IFRS 16.
The other 2 basis point decline was largely driven by Hong Kong, which saw lower 1 month HIBOR, a Q1 average of around 130 basis points, which was an average of 30 basis points lower than Q4. I'd also note that 1 month HIBOR is currently sitting at over 2%. As a reminder on HIBOR sensitivity, 100 basis point uplift in interest rates benefits net interest income by over $700,000,000 as disclosed in the relevant table in the full year 2018 results. As we look forward, given underlying loan growth, we continue to expect modest net interest income growth in 2019. On operating costs, we're focused on slowing down the growth rate.
As we said at the full year, the revenue outlook has become more uncertain since our strategy update last June, and we recognize the need to show more cost discipline because of that. We started this in Q4 last year, but please be patient, it won't happen overnight. Decisions on costs take time to be reflected into the P and L. Growth in adjusted operating costs was 3.2% over the quarter. This included around $100,000,000 or 15% increase in investment spend through the P and L versus Q1 last year.
The bulk of which was spent on enhancing digital capabilities across our global businesses. Key investments to call out in the Q1 in RBWM were investing in a new global mobile platform, providing customers with a central hub for products and services. And in commercial banking, we're making a substantive ongoing investment into our global trade and cash management platforms and developing online platforms that will automate aspects of business banking, both in Hong Kong and the UK. We've remained committed to investing sensibly and sustainably. And as we guided to at our strategy update last year, we expect to increase investment this year to around $5,000,000,000 with $1,000,000,000 spent in Q1.
We will, however, continue to proactively manage investment in line with the more uncertain outlook. The majority of investment will continue to be on growth and technology aligned to our strategic plans. On credit, I would repeat what John and I said at full year results in late February. Credit conditions remain relatively benign in most markets, but we remain vigilant on the UK, where we expect prevailing uncertainty, particularly around Brexit to continue impacting business and consumer confidence. Overall credit costs were $585,000,000 in Q1, some 24 basis points on an annualized basis with similar credit conditions to those seen in the latter half of the last year.
If you exclude the additional UK overlays we took in Q4, we saw a few specific cases in Commercial Banking this quarter, mainly in the UK versus some recoveries in the prior quarter last year. On the outlook for credit, our views remain unchanged. We expect credit costs to pick up this year and into 2020 and are comfortable with current consensus for this year. Just to remind you, the range of potential economic outcomes in the UK remain broad due to Brexit uncertainty and could either positively or negatively affect future provisioning trends. Turning to core Tier 1 and buybacks, core equity Tier 1 ratio improved by 30 basis points in the quarter to 14.3% with stronger profits and other favorable FX and reserve movements more than offsetting the impact of a $14,200,000,000 uplift in RWAs, of which $4,500,000,000 was from the day 1 impact of IFRS 16.
Continued strong loan growth will put pressure on gross RWA uplifts, but the actions we are targeting to mitigate RWAs should help lower net growth to around 2% for full year 2019, if you were to exclude the IFRS 16 impacts I just talked about. We expect these mitigation actions to be heavily weighted towards the second half of the year. We will take a decision on any full year 2019 buyback at the interim results in August. We remain committed to the discipline of script neutralization, subject to regulatory approval, and it remains a core plank of our capital management approach. So in summary, we had a good quarter, particularly set against a more challenging Q4 last year.
We recognize the headline results are significantly flatted by some favorable items, but even ignoring those items, top line revenue growth continues to be solid and strongest in the areas we've targeted for growth, particularly Asia. We've moderated our cost growth relative to last year's run rate. Credit conditions continue to be relatively benign and we've just recorded a strong bottom line profit of $4,900,000,000 Return on tangible equity was up to 10.6 percent, EPS was up 40% to $0.21 and we've improved our core Tier 1 ratio by 30 basis points. But we're not planning on Q1 being repeatable for the full year, but we remain cautiously optimistic for 2019 and committed to meeting our return on tangible equity target in 2020. On outlook, we recognize that a combination of geopolitical outcomes, volatile interest rates and the direction of markets could impact our results this year and into 2020.
We remain alive to those risks and we'll continue to proactively manage costs and investment accordingly. So we're happy with the quarter and the start we've made to the year. We've got a lot of work to do in order to be happy with the full year, but it does give us a very good base to build on. Our focus remains on executing the strategy we announced in June last year and meeting our financial targets that underpin that. With that, I'll now open up to take questions.
If I could now hand over to Sharon, please.
Thank you, Mr. Stevenson. We will now take our first question from Chris Manners, Barclays.
Hey, good morning, Ewen. Thanks for the opening remarks. Just two questions, if I may. The first one was about the buyback and the fact you're going to take a decision at the half year. Does that mean that you might not do the buyback and we should think about this as a sort of phasing that you're going to neutralize scrip over the course of years?
And do you want to manage the capital ratio more dynamically? Or is it just a sort of a formality rubber stamp approval? And then the second question was on the NII and the net interest margin. I guess that the net interest margin has missed what people were looking for a little bit there. Maybe just to zoom in on one part of it.
In the UK, you've actually managed to hold your net interest margin flat, but you've slowed your mortgage volume growth. Can we ask just a little bit about how you think about pricing there? Obviously, you've only got 5% risk weight density on that UK mortgage book. Risk weightings are going to be increasing, but you've still got a lot of surplus liquidity. So maybe if you could just talk us through a little bit on your thoughts on that dynamic of margin versus volume in the UK business?
Thank you.
Yes. Thanks. Look on the buyback, it's more the forward than latter. It's definitely not a signal of rubber stamping buyback as part of Q2 results announcement. Yes, as we yes, to give you some things to think about around our core Tier 1, we've obviously have a target of having our core Tier 1 ratio above 14%.
It was at 14% at year end. It benefited from some favorable FX and reserve movements to the sort of 14.3% at the end of Q1. Underlying that was about a 40 basis points core Tier 1 underlying capital generation in the quarter. Yes, we're continuing to see very good top line loan growth, which is obviously putting pressure on upwards gross RWA increases. We've got a whole bunch of RWA mitigation actions that we're planning, some of which are things like model improvements.
Yes, those model improvements obviously sitting with regulators, some of which could be delayed in terms of timing and there's uncertainty around quantum and execution of some of those actions. And we've also got Brexit uncertainty. So John and I would just like to get to another quarter of data and then take a view with the benefit of sort of sitting towards the end of July on what the full year outlook is for our capital base and take a decision then on buybacks. Yes, if that were ultimately to mean there'd be no buyback in 2019, if that was the decision at that point, then we're still committed to the underlying neutralization of scrip over time. But it was a yes, we take it as positive, the fact that our core Tier 1 went up 30 basis points in the quarter.
Okay. So if you could save 20 or 30 basis points by not neutralizing the script this year, but that puts you in a more comfortable capital position, you might do it. But then if we look forward to 2020 2021, you would eventually neutralize it and get the share count back to where it was.
Will be the Yes. And then fundamentally, if we see the opportunity to continue to put on good loan growth, I think we're always going to take an opportunity to put on good loan growth if we think that's achieving returns above the cost of capital. And in many parts of the world, we are seeing good loan growth that meet that criteria at the moment. On the second question on NIM, I'm sure yours will be the first of a number of questions on the top of the NIM. But on the UK, we did take some pricing decisions in Q4 to test pricing elasticity.
We did as a result of that, we did see a slightly slower flow share in mortgages in Q1. It was about 7.1% flow share, still ahead of our stock share on 6.6%. That meant the NIM stayed stable at about 2 21 basis points. But yes, we remain committed to continuing to grow our UK mortgage book ahead of our stock share. Again, just to repeat, we've got a natural share on the liability side of sort of low double digit.
And therefore, with the stock share sitting below 7%, we do see ample opportunity to grow that mortgage portfolio over the coming years.
Got you. And on the point about only having a 5% risk weight on the UK mortgage book and potential that you have that risk weight going up? And would that change your return profile and some of your decision making? Or you're already pricing for that?
Yes, it's a bit of both. I mean, look, we're obviously going to price to the depending on the product, duration of that product, we're obviously going to price with one eye in mind to Basel III reform coming down the track. And but even today, if you were to fully load that into pricing, we still think that we're earning very attractive returns on our UK mortgage book. And today highly attractive returns.
Understood. Thanks very much for the questions.
Chris, I mean, the other dynamic that I think everyone should obviously be alive to, which has nothing to do with mortgage pricing is just at some point, we need to refinance the term funding scheme. There was about $120,000,000,000 of GFS funding out in the market at the end of last year. We didn't take any of that, but we're obviously alive to the impact on deposit pricing that may see, which again may have an influence on where people choose or otherwise to price mortgages in the coming periods.
Okay. So we could see a bit more firming in mortgage spreads you think?
Depending on what's happening on the deposit side, I think.
Thanks.
Thank you. Your next question comes from Tom Rayner from Numis. Your line is open.
Hi, Tom.
Thank you. Good morning, you and hi. A couple, please. Just one on the margin. Just looking at where consensus is currently expecting it to go, it looks like it's trending to about 1.7 percent by 2021 versus the sort of 1.59%.
I hear what you say about LIBOR having moved back up. Also, the gap against dollar LIBOR has closed. So I guess they're both helpful. Is that enough, do you think, to offset some of the competitive pressures you're seeing from the deposit switching in Hong Kong and elsewhere? I mean, are you comfortable with that consensus margin trajectory at the moment?
I have a second one on costs. If you want me to do it now or
So I love just NIM. I don't like forecasting NIM, but yes, we just printed 159 in the quarter and consensus for the full year is sitting at 166. Yes, even if you factor in a more positive, if you were to adjust the same high book curve stays where it is for the full year, I don't think that gets you back to 166 for the full year. So, yes, we do expect some of that gap if HIBOR was to stay where it was to narrow. I don't think that gets you back to where current consensus is.
But equally, we think and we continue to see, we think growth in average interest earning assets that's been consistently higher than where consensus has been. So if you look at it on an aggregate net interest income basis, yes, there's probably some gap to consensus today, but it's not as big as purely implied by the NIM gap that we saw in Q1.
Yes. I get that 2019 consensus looks pretty tough, but I was just thinking 2021, it's not a lot of margin expansion over that sort of period. I just wondered if you still Well, I mean, can you
predict policy rates for me in over 2020 2021. Tom, I would happily try. I mean, interest rates are bubbling around so much. We would have expected going into the start of this year to have seen a rate rise in the U. S.
And a positive environment going into 2020. That doesn't look to be the case anymore.
Okay. Thank you. And just on cost, yes, you took $1,000,000,000 of investment, I think, in Q1. And I think your target for the full year is $5,000,000 Can you say anything about the phasing of the remaining 4 as we go through the year? Is this going to be fairly sort of evenly spread or is that going to affect the revenue?
Just to unpack costs, yes, there was 3.2% adjusted cost growth in the quarter. I think that was slightly flatted because there was a back levy charge in Q1 of last year and there was also a very small impact of hyperinflation and benefiting the numbers in Q1 of this year. If you were to back those two things out, that cost growth would have been about 3.8%. Within that, there was about 15% growth in the P and L impact of investments towards the $1,000,000,000 or just under $1,000,000,000 For the remaining period of the year, therefore, you should expect investment spend and the impact of that investment spend on the cost structure to increase, which will obviously put a bit of upward pressure on cost growth. And I think that therefore the other is on us is to manage more actively the other part of the cost base, the run the bank cost base more proactively over the remainder of the year.
But there will be a ramp up starting in Q2. Okay. All right. Super. Thank you very much.
Thanks.
Our next question comes from the line Fahed Kunwar from Redburn.
I said two quick follow ups to Tom's questions, to be honest. On the margins, I just want to understand, when you said in 2020 when you expected a rate rise, that looks unlikely now. When we think about if there are no rate rises going forward, should we still expect loan growth of 4%, NII growth of 5% consensus in the sense that actually people still expect margin expansion. It feels like it's unlikely we're going to get margin expansion now going ahead without rising rates. And I completely appreciate volume growth could still meet your NII expectations on the margin side of things.
Without rate rises, is it too much to expect kind of NII to be tracking ahead of loan growth is the first question. And the second question was just on the capital, the kind of movement in the fair value to comprehensive income. I think it was about a 10 basis point boost to capital, which explains probably a 30 or beat. Is that a permanent change? Or is there anything that means that would reverse over the course of the year?
And just a bit more color on that would be grand. Thank you.
Yes. Look, on the latter note, AFS gains and cash flow hedging reserve movement. So I don't think you should assume that, that is sort of a yes, that swings around a bit and hence it's sort of linked to the commentary on buybacks too. It's good that we got those benefits in Q1, but we're not sort of yes, they could swing around. On NIM, look mathematically, what you say has to be right.
I'm obviously we're not going to build your models for you, but I just observed that we're far more sensitive to IBOR than we are to U. S. Dollar rate impacts. So yes, that will be a bigger driver. But yes, the biggest single driver of net interest income growth in the coming years is driven by underlying volume growth.
That's great. Thank you very much.
Our next question comes from Guy Stebbings, Exane BNP Paribas. Your line is open.
Good morning. Thanks for taking the question.
Can I
just come back to cost briefly? And then I had a follow-up on RWAs. Thanks for the color so far. I mean, if we take the 3.8%, I think you said underlying growth, should we be thinking of the phasing of the investment spend this year and the salary rises to come through as putting incremental pressure on that sort of figure? Or whether the actions you're sort of outlining should mean we should see a significant offset to that?
And are you able to give any color around some of those actions you're hoping to take? So that was the first question. And then on RWAs, thanks for the guidance for this year. I mean, as we look into next year, would you be able to give any guidance in terms of some of the regulatory drivers of the RWA movement slightly to come through over 2020, 2021, etcetera? And does that have any bearing in terms of size, timing of buybacks or can be absorbed through the normal course of business?
Yes. So look, on costs, we have natural inflation in our cost base of around 3%. So if we were to do nothing and keep the headcount flat and not change our approach to investment year on year, you would expect natural cost growth in the business of around 3%. The fact that we're spending more on investment adds about 1% or so on top of that in terms of additional cost growth, which gets you say to around about the 4% level that you saw in Q1 of this year. So yes, depending on the flex on that investment spend or but the main priority I think is broadly to keep headcount relatively flat while we're continuing to put on volume growth And therefore, the investment we're making in investments we're making should in turn drive productivity improvement, which allows us to continue to achieve that objective.
So I don't think we're talking about any significant cost program across the bank. What we're talking about is just sensible cost discipline. When I looked at last year and the 5.6% increase in costs that we had, which was very much what we planned to do, we just had about $1,000,000,000 revenue shortfall in November December because the market impacts meant that we went from what was anticipated to be a positive jaws to negative. I just feel more comfortable trying to plan on the basis that we can manage costs to below that sort of run rate that I just talked about. On RWAs, putting Basel III reform to one side, I still think we're trying to manage towards about a 2% RWA growth in 2020.
I know we talked about 1% to 2%. I'm sort of comfortable at the higher end of the range, not the lower end of the range. I did talk about as part of full year results that we are anticipating some RWA impacts as a result of expected decision on French mortgages, which is going to impact the whole sector, which will be about $3,000,000,000 or $4,000,000,000 I suspect, uplift in RWAs at some point. And then on Basel III reform, I think we continue to be cautious on providing guidance until we've got a bit more data and clarity about the implementation of the rules. And yes, we've got an acute degree of complexity given that we're waiting on about 60 national regulators in terms of discretions.
So when we are comfortable with talking, we will talk, but I would just encourage everyone not to assume that the answer is 0. There clearly will be some impact because of Basel III reform. And then we have to then work through what that would imply or otherwise for our core Tier 1 targets as well. And whether if RWAs are going to go up in the absence of a change in the risk profile of the bank, whether we should also be rethinking what our core Tier 1 target is as well.
Okay. Thanks very much.
Our next question comes from the line of Magdalena Stoklosa, Morgan Stanley. Your line is open.
Hi, Magdalena.
Hello. Hello. Good morning. Two questions on your balance sheet really, but more on the underlying business. On the Slides 1213, when you showed us the details of of Global Retail and Global Commercial segments, the loans, of course, have outgrown deposits quite significantly kind of year over year.
And I'm just wondering if you could kind of give us a sense of how that relative growth, how much of it was literally just underlying business conditions versus your deliberate pricing strategy to drive 1 versus another? And 2, how do you think this is likely to move forward, let's just say 2019, 2020?
Yes. Look, on the lending side, I don't think it's driven by any particular pricing strategy. Yes, in the ring fenced bank in the UK, we clearly as a result of ring fencing, as we've talked about, our full year results ended up with excess of deposits sitting in the ring fenced bank and equally a liquidity shortfall sitting in the non ring fenced bank. So we also didn't have going back a couple of years, a well developed distribution channel through intermediary mortgages. We've now set that up.
So we used to have a very, very low market share in intermediary mortgages, which is about 70% of mortgage distribution in the UK. So we just think, as I talked about earlier, if we've got a low double digit natural share of liabilities, we should have asset side share that's substantially higher than where we sit today. In Asia, Asia has grown and we're just taking advantage of Asian growth. In context, if you were to look at our overall Mainland Chinese market share, it's sort of less than 0.2% or something. So our ability to grow in the Greater Bay Area at sustainably high growth rates really comes back to your sort of question on deposit growth, which is, yes, how can we fund that growth because we've got ample opportunity in Hong Kong and the surrounding region to grow loans.
On the deposit growth, yes, some of that was deliberate. We do have some very large liquidity surpluses in some parts of the world, particularly Hong Kong and the UK, and we've been taking advantage of those liquidity surpluses, deposit surpluses to grow loans rather than the need to grow deposits. That's clearly not sort of sustainable proposition over the long, long term. So you would expect over time to see deposit growth, I think, to begin to increase and that gap would narrow. And in Q1, there were just some sort of one offs in the commercial side that sort of impacted the headline deposit growth in some of the places, particularly Hong Kong.
But Ewan, just to follow-up on this one. If when you look at your underlying activity per segment, per kind of country, where do you actually see the loan growth delta to the upside? Or where do you expect potential surprises? Where I suppose, where do you see the relative strength?
Well, if you look at if you break down our business by where are we, at 10% plus say market share in lending and deposits, UK, Mexico and Hong Kong. Hong Kong, you should expect our market share to broadly grow in line with the market, I think, between us and between us and Hang Seng, we are already around 40% of mortgage origination. So is that going to change significantly on the upside? I don't think so. So in the UK, we do think we're underweight and we on the asset side and we do have the ability to grow.
We do think on the commercial side, for example, in the UK with Brexit that plays to our competitive strengths as corporates develop new international relationships. In Mexico, again, we should plus and minus grow in line with the market. Every other place that we do business is different. Every other place that we do business, we have the ability to grow substantially higher than market growth rates if we choose to and we can fund that growth through deposit growth. So for example, in the U.
S, the business plan is premised on us taking share off from a base of very low share. In Mainland China, our premise in ASEAN region, same thing. In some of the other markets, we do business like Canada and Australia, where we're not part of the big incumbent banks there. We've been growing both businesses very nicely. So I think the answer is a very nuanced answer depending on which market we're in, in the established markets away from the UK, where we are a part of the sort of larger banks in those markets, our growth rate should be more in line with market in those markets, U.
K. And the other markets where we effectively have got significant upside to grow loan growth ahead of market growth rates.
Thank you.
Our next question comes from the line of Jason Napier, UBS. Your line is open.
Hi, Jason. Good morning.
Hi, Ewen. Just one question and I wonder whether it links to your answer to the previous one and that's around the emphasis that we've heard in the past around positive jaws. In today's release, you obviously cite that you've had 6 percent jaws in Q1, but a big chunk of that obviously comes down to sort of market movements and so on. I think John's emphasized that at an organizational level, kind of weaning yourself off restructuring budgets and so on, you've liked the discipline of positive jaws. Just to sort of wonder whether you could give us color on how do you deal with things like market moves when you think about these things?
Isn't on the side emphasizing the longer term growth of the organization kind of more important? And then just for clarity sake, are you still committed to delivering positive jaws for the full year, excluding things like market moves? Jaws for the full year excluding things like market moves? Thank you.
Yes. So I think we've always committed to positive jaws and we haven't tried to sort of adjust to get to an adjusted to positive jaws within that. So we certainly took the hit last year from in Q4 when we because of adverse market movements, we recorded a negative jaws rather than a positive jaws. But in terms of how we target, for us, the difficulty is there is no perfect yes, there are imperfections with whatever we would communicate around cost targets to the markets. Cost income jaws are imperfect because while we can control costs, we're obviously not fully in control as you point out of some of the revenue line items.
So there is market and interest rate sensitivity in our top line that does mean that while we can have a base planning assumption of what our revenues are going to be for the year, things that sit entirely beyond management control, such as what happened in November December last year means that we need to manage to a gap to ensure that we would get to positive jaws. Equally, setting hard cost targets, we don't think is right either because we can flex our cost base according to what the growth opportunity is. And if we see growth opportunity, then we want to invest for that. So managing to an absolute cost number to us doesn't make sense either. So yes, John's right, jaws is a good discipline internally.
It's not a perfect metric because we're not in total control of some of the revenue line items. But it's a decent metric to manage to and what but fundamentally, I'm managing both to jaws and to absolute cost growth personally.
And just to follow-up on that, I mean, at your level and at John's level, the jaws thing sort of makes sense. How does that work at a kind of global business level? Or does it devote to them in exactly the same way?
Well, it depends on the business. So yes, it depends where they are in terms of their own respective investment programs. So for example, we're investing very heavily this year in an investment program in commercial. So it may well be within commercial, you have negative jaws. We're comfortable with that because we know that elsewhere in the business, we're going to have positive jaws to offset that.
So at the individual business level, they are not held each individual business is not held positive jaws because we don't think that's the right thing to do. Where we've got an individual business that needs to invest for longer term value creation, we're not going to hold them to positive jaws.
Thank you very much. That's helpful.
Your next question comes from the line of Alastair Ryan, Bank of America. Your line is open.
Hi, Alastair.
Hi, thank you. Good morning, afternoon. Just on some helpful new disclosure you've given us the last couple of quarters and you've been around long enough now for us to start picking on you about it. The non ring fenced bank in Europe, other, I know you never really set the bank up for those, but they don't look like they're doing that well. They've got a lot of cost.
I know the corporate center is in there, but also the corporate center is partly being sort of revealed by the carving out of the UK ring fenced bank. Is that where you're looking at cost really in the levers that you're going to pull these areas that are set up almost for a different HSBC that was more European, less Asian, I guess. And if you're going to if you've seen the revenue opportunities in Asia, one assumes you're not going to be pulling too hard on the cost there. Is that the right way of thinking about where the cost flex comes?
Well, So, I mean, yes, if you
look at how our capital is invested around the globe and yes, some of the numbers are not perfect because obviously in places like Europe and the U. S, we absorb cost of relationship banking where revenues are booked elsewhere on the planet. But even if you adjust for that, yes, the U. S. And Continental Europe are where we have our biggest strategic challenges at the moment in terms of returns.
So yes, those are 2 areas that we're focused on, more focused on how do we turn around those businesses, which is a mix of yes, some it's a mix of revenues, costs and capital, frankly, for both those two businesses. So the current performance of non ring fenced bank is not good enough. We recognize that we need to improve it, Not dissimilar to a situation, although the underlying business drivers are different to what we have in the U. S. As well.
Your next question comes from the line of Manus Castello, Autonomous. Your line is open.
Hi, Manus.
Hi, thanks for taking the question. I wanted to come back to HIBOR, please. I wanted to ask why it's so volatile. It's a naive question, but if you could shed any light on that, it'd be useful. But perhaps more relevant, given the volatility over the last 12, 18 months, is it changing the way that you're approaching A and M in Hong Kong at all?
Or should we still expect that same kind of sensitivity to flow through? Because obviously, it has a somewhat different impact if it's winging around.
Yes. Look, I'm probably not the world's expert on hybrid at this point, but my learning curve is rapidly improving. But look, basically there are huge money flows is my understanding in and out of China, which just means that HIBOR swings around substantially even though it is linked somewhat to U. S. Dollar interest rates.
Another feature, Manus, of the Hong Kong market is on the asset side and the liability side, all have repricing mechanisms typically around 1 3 months. So, yes, what you see within any given quarter is a very rapid translation that you wouldn't see in other markets between a change in the underlying interest rate curve into the underlying P and L. And you can see that, I think, if you look at our full year disclosure, you look at the amount of the basis point sensitivity we show for 25 and 100 basis points shifts in interest rates, we have a far higher year 1 impact as a percentage of a 5 year rolling impact than we would for other banks that I've seen.
But even if that's going to be much more volatile in future, you're happy taking incremental volatility into NII?
Well, yes, you're talking about having to fundamentally change customer behavior in terms of the product offering. And at the moment, can you do that? Possibly, but it's very unusual to change customer behavior and customer preferences for particularly on the asset side for product. So depending on which market we are in the world, we tend to be a taker of the product preferences of customers in those markets. So I don't think you should look on non interest income, clearly, we are growing that substantially and we do see one of the features for us we think in Hong Kong is a substantial opportunity on the wealth side, both in terms of private banking, affluent banking, asset management on the insurance side, which should provide some offset to that.
But yes, do I think over the next couple of years, we're going to see a fundamental shift in our interest rate sensitivity to Hong Kong? No.
Got it. Thank you.
Your next question comes from Joseph Dickerson from Jefferies. Your line is open.
Hi, Eun. So much of this call has been focused on net interest income. But looking at the other half of your revenue base, there's a very interesting ongoing story in terms of liquidity, your global liquidity management revenues, which were particularly strong. And I thought it was nice to see that the chart looking at the funded assets that support those, and those were only up 4%. So I guess that seems like it's been a fairly sustainable business for you.
So are these the type of growth rates that we can expect? Because I know you don't want anybody to annualize anything from Q1, but these have been consistently strong. What's driving that strength and can it continue, firstly? And also on the non interest income, I think you said in February you were above budget in the early stages of Q1. If your peers are any read across, you probably have some ongoing momentum in the markets business in Q2.
If you could comment on that, that would be great. And then the 4% increase in FTEs, what's that like 9,000 plus new people year on year? I guess, where are these FTEs going in terms of your business units and lines? That would be quite helpful.
Yes. So on GLCM, it's a mix of 2 things I think is going on. 1 is we think we are taking share, particularly against Western banks in Asia. And we've seen some, in some cases, some fairly significant market share gains. It is a business we've been investing in.
It is a business we're very good at. But it also there is some benefit from higher interest rates coming through there. So yes, that interest rate benefit should begin to moderate over time. And whether we can continue to achieve the strong share gains, we'll see. But yes, we do think that is a business where we are competitively advantaged.
On markets, I think I would just note that our business is not the same as some of the peers who have been reporting. Our bias is much more Asia, a bit of Europe rather than the U. S. So I think some of the commentary has been a recovery in U. S.
Markets. You can see that, for example, in the U. S. IPO markets, Hong Kong was the biggest IPO market in the world last year and is still relatively slow at this point. So I don't think we've seen the recovery into April that some of our peers have seen or seem to be talking about in recent results announcements.
But like your local markets are up quite a bit though, or up sorry, but not quite a bit, but they're up. They performed well and volumes have been a little bit better in Q2.
Yes. And the other thing I would say about Global Banking and Markets for us is it's a very different business mix. So Q1 on Q1 revenues were up 3%. Yes, FICC was down about 4%, which we viewed as a pretty good performance relative to peers. Equities headline was down 8%, but there's a one off in there and if you strip that out, it was a weaker performance.
And then the transaction businesses are doing very, very well, which means, yes, for us, the performance of GB and M, it's the nuance around our business is very, very different to others. Look, on headcount, where are we investing in headcount today? We've got more frontline staff. We're investing in the Hong Kong Wealth and Private Banking Businesses. We're putting people into China.
I think the other dynamic that you should expect to see with us and probably all the banks is a shift out of contracted resource in the UK into full time staff. So yes, we do put publish, I think, contractors and you would expect that number to come down as the year progresses, which is really just in some cases a shift from contractor headcount to FTE headcount. And this is very much driven by, I think it's IR 30 5, a new tax position of HMRC in relation to contractors.
Your next question comes from Raul Sinha, JPMorgan. Your line is open.
Good morning, Raul.
Rob. Good morning. Thanks for taking my questions. Maybe just a follow-up on the costs and then a broader question on the RoTE target. Firstly, on the cost growth, I mean, you talked about on a clean adjusted basis, if we take out the sort of levy comparator from last year, the cost growth was about 3.8% year on year.
And then obviously, investment spend is likely to intensify through the year. So I was wondering on a net basis, should we be expecting cost saves to be sort of ramping up from the Q1 level, so that you kind of hold the cost growth number around the same level? Or does that 3.8 number effectively represent something that is a start and you will invest from here?
Well, look, I mean, I think for Q2, you could see that drift up because we investment spend will go up. Yes, I was hoping by the time we get to Q4, we'll have better discipline around run the bank cost base. And therefore, yes, Q2 costs may well go up as a growth rate. But over the full year, I would hope by the time we get into Q4, what you'll begin to see is run the bank costs of helping offset that growth rate.
Okay. And then just linked to that, I was wondering what do you think about the challenge that is represented by the 11% RoTE target that obviously you've come into. I mean you've done 10.6% on your own numbers, but that excludes the levy in Q1. And maybe growth picks up from here, but credit is still very benign. And obviously, there's you're doing $5,000,000,000 of investment, but there are plenty of big banks around the world that are probably doing even more.
So I was just wondering how you think about the building blocks to the RoTE target given where we are today?
Yes. So yes, I guess we've been persistently more bullish in our ability to grow top line. I hear what you say on other big banks in the world. Other big banks in the world obviously don't have our advantage position in parts of the world that are growing. So you can be a big bank and investing a lot in the market, but it's not growing and you're not going to still not going to grow a lot.
Your cost may go down, but your top line is not going to go up. But yes, we think that there is more top line upside than we're currently getting credit for. And all of the discussion on NIM, if NIM instead of coming down, begins to stabilize and go up a bit because of improved Hong Kong interest rates, then all of that volume growth at that point drops through to the drops through to revenues. I think on costs, I think we can control costs a bit better than what we're getting credit for in consensus at the moment. I don't think we have a big difference of view on credit costs.
I think on tax charges, we do think that our effective tax rate is probably going to trend towards a couple of basis points, percentage points below where we're currently getting credit for. And I think when you put all of those drivers together, and it does require a supportive sort of underlying macro environment. Yes, we're still confident that we can get to the 11% in that context, but we would note that that leads to several different outcomes relative to where consensus is for 2020. The other thing I would say going into 2021, which I think a number of you have picked up is obviously, bank levy moves to a very different place in 2021. We think it trends to around 400,000,000 in 2021, which relative to today is about a $500,000,000 sort of pre and post tax benefit to our numbers.
Got it. Thank you very much.
Your next question comes from the line of John Peace from Credit Suisse. Your line is
open. Hi, John. Hi, morning.
So firstly, could you talk about the very strong net new money in Global Private Banking in the first quarter? How sustainable do you think that is? And are you seeing any improvement in risk appetite from Asian private clients? And the second question is one of your European peers today saw a capital surprise from RWA mitigation in global markets. So I just wondered if you saw any opportunities there as part of your overall RWA mitigation or if your different mix means that's less relevant?
Thank you.
Yes. So look, on the second question, I don't know, sorry, I've been tied up since about 5 this morning on 4th, so I don't know what the RWA mitigation action was. But certainly embedded in our number in our forecast of RWA guidance is quite significant RWA mitigation actions across the businesses. So yes, we do have significant RWA mitigate because it's not like we've developed a special source where we can grow top line at the rate that we're growing top line and still commit to underlying RWA growth of 2%. So, there is a significant amount of RWA mitigation actions built into our plans already, But I'm not sure what the specific thing is that you're talking about.
On private banking, it was a very strong quarter for net new money. In context, Q1 was more than the entire net new money of full year 2018. So is that going to be sustainable? Maybe, maybe not. But yes, we've got a new management team in place at Private Banking, Antonio Simoes.
Yes, it's a business I think with huge potential. If you look at the current returns that we're getting out of that business, there should be significant potential to improve returns and improve profitability in the coming years. We're obviously in Asia. We think we've been significantly under punching our weight in the region. We've got a big focus.
And when we look at our product offering, we think we are uniquely competitively advantaged because no other bank, a lot of the banks we're competing with cannot bring that mix of ultrahighnetworthprivate banking, commercial banking and investment banking together as one complete package for customers. Many of them are either fighting on one leg or 2 legs. So we do see significant potential in that business. Great. Thank you.
Your last question comes from the line of Martin Leitgeb from Goldman Sachs.
Hi, Martin.
Yes, good morning. Good morning, Eun. I have one follow-up question, just building on some of the earlier comments and questions made. And I mean, if I take either the return guidance or the return consensus at this stage and square that up with your comments made on RWA growth. And I think if I heard correctly, that was around 2% from here.
And even if taking into consideration scrip utilization, that means either the core Tier 1 ratio is going to edge higher over the coming years or there's a a meaningful amount of capital available for further growth from here for the franchise. And I just wanted to ask you a bit in terms of what areas of growth are you most excited about? I think you flagged before both opportunities for growth within the lending business, where you are below 10% market share, you could gain share. But equally, in the non lending business, I don't think you flagged Asset Management, Wealth, Private Banking and so forth. And I was just wondering if you could steer us a bit more in what where you would be most excited about growth and whether this would be predominantly organic or whether that could also be the scope for smaller inorganic steps?
Thank you.
Yes. Look, so just on that very last point, none of our plans are currently premised on any inorganic activity and we think we can deliver our plan without any of that. When we your point on capital, as returns improve, yes, we have progressively better and better capital generation in excess of funding the current distribution policy. Yes, some of that capital, just caution, yes, we're less than 3 years away now to Basel III implementation. So, yes, we are going to have to build up some capital in anticipation of likely higher RWAs under Basel.
Although, as I said earlier, we still haven't worked through the whether there is an offset and if so, how much or whether that would drive you to a different core Tier 1 target over time. In terms of where we're excited about growth, look, Asia Wealth, the Greater Bay Area, which is Macau, Hong Kong and Pearl River Delta, we think, yes, should be offer exceptional growth opportunities. We see significant opportunities to build and take share in the ASEAN region. UK, as we've talked about, we think we can continue to grow better than market. Yes, we're in other markets like Mexico, where the growth upside is material.
And then in some of the other areas where we've got a lot of capital, it's mainly on a returns uplift focus, particularly U. S. And the non ring fenced bank that we talked about earlier. But overall, given the markets that we're in, particularly in Asia and some parts of other places like the Middle East and Mexico, we have natural growth opportunities that are substantive. So if that's enough, Martin, I
Very clear. Thank you.
Okay. Look, thanks everyone for joining the call today and thanks for your questions and thanks for the relatively few questions on NIM. But Sharon, with that, if we could please end the call. And just before I finish, obviously, Richard O'Connor and his team are happy to take any follow-up questions you've got during the day. But thanks all for joining.
Thank you, ladies and gentlemen. That concludes the call for the HSBC Holdings Plc earnings release for 1Q 2019. You may now
disconnect.