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 uncertainty 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 two minutes.
Following the presentation, there will be the opportunity to address questions to HSBC's executive directors. To ask a question today, please press star and one. Good morning, ladies and gentlemen, and welcome to the Investor and 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. Ewen Stevenson, Group Chief Financial Officer.
Thanks, Sharon. It's Ewen 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 will be plenty of time for your questions at the end. You will be able to find a full set of slides on the investor section of our website. Rather than running through that deck slide by slide, I am 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 $4.9 billion. 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 up $0.31. EPS up. 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%. Despite a 1.6% increase in RWAs this quarter, around a third of which came from the day one impact of IFRS 16, Core Tier 1 improved by 30 basis points to 14.3%. Fully diluted 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 U.K. and Hong Kong. Wealth management revenues were up against a 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 in 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 U.K. In Global Banking and Markets, overall revenue growth was up a very credible 3%.
Global Banking and Global Markets revenues were softer, down 9% and 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. We did see some positive valuation gains on CVA and FVA. 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 billion 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 million 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 U.K., 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% and 7% respectively. In Latin America, headline revenues were up 42%, in part due to $157 million in combined gains from the stake sales in two 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%-4%. 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. In other parts of the group, like our wealth and insurance manufacturing franchises, we have natural revenue volatility linked to the strength or weaknesses of markets. Just as a reminder, a 10% uplift in equity markets equates to around $200 million of positive revenues in insurance manufacturing, and a 10% decline around a $200 million 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 two-day lower day count in Q1, the impact of Argentinian hyperinflation, and the impact of IFRS 16. NIM was down four basis points in Q1 versus Q4, but down two basis points once you exclude the impact of Argentinian hyperinflation and the impact of IFRS 16. The other two basis point decline was largely driven by Hong Kong, which saw lower one-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 one-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 million, 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 cost take time to be reflected into the P&L. Growth in adjusted operating costs was 3.2% over the quarter. This included around $100 million or 15% increase in investment spend through the P&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 first quarter.
In RBWM, we're investing in a new global mobile platform, providing customers with a central hub for products and services. 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 U.K. We remain 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 billion, with $1 billion 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 the full year results in late February. Credit conditions remain relatively benign in most markets.
We remain vigilant on the U.K., where we expect prevailing uncertainty, particularly around Brexit, to continue impacting business and consumer confidence. Overall credit costs were $585 million 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 U.K. overlays we took in Q4. We saw a few specific cases in commercial banking this quarter, mainly in the U.K., 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 U.K. 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 $14.2 billion uplift in RWAs, of which $4.5 billion was from the day one 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.
In summary, we had a good quarter, particularly set against a more challenging Q4 last year. We recognize the headline results are significantly flattered by some favorable items. 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 $4.9 billion. Return on tangible equity was up to 10.6%, EPS was up 40% to $0.21, and we've improved our Core Tier 1 ratio by 30 basis points.
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 will continue to proactively manage costs and investment accordingly. We're happy with the quarter, 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. 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. If you'd like to ask a question today, please press star one on your telephone keypad. Please ensure that the mute function on your telephone is switched off. If you find your question has been answered, you may remove yourself from the queue by pressing the hash key. Once again, to ask a question, please press star one. Please ensure that the mute function on your telephone is switched off. We will now take our first question from Chris Manners, Barclays.
Hi, Chris.
The line is open.
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 a course of years, but you want to manage the capital ratio more dynamically? Is it just a sort of a formality, rubber stamp approval? 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 U.K., you've actually managed to hold your net interest margin flat, but you've slowed your mortgage volume growth. Could we ask just a little bit about how you think about pricing there? Obviously, you've only got 5% risk-weight density on that U.K. mortgage book. Risk-weightings are going to be increasing, but you've still got a lot of surplus liquidity. Maybe if you could just talk us through a little bit on your thoughts on that dynamic of margin versus volume in the U.K. business. Thank you.
Yeah. Thanks. Look, on the buyback, it's more the former than the latter. It's definitely not a signal of a rubber-stamping buyback as part of Q2 results announcement. 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. That's 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. 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.
Those model improvements are 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. We've also got Brexit uncertainty. 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. 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. We take it as positive the fact that our Core Tier 1 went up 30 basis points in the quarter.
Okay. If you could save 20 or 30 basis points by not neutralizing the scrip this year, that puts you in a more comfortable capital position, you might do it. If we look forward to 2020 and 2021, you would eventually neutralize it and get the share count back to where it was, would be the plan?
Yeah, look, 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. 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 topic of NIM. On the U.K., we did take some pricing decisions in Q4, to test pricing elasticity. 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 that NIM stayed stable at about 221 basis points.
Yeah, we remain committed to continuing to grow our U.K. 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 digits and therefore, with the stock share sitting below 7%, yeah, we do see ample opportunity to grow that mortgage portfolio over the coming years.
Got you. On the point about only having a 5% risk weight on the U.K. mortgage book.
Yep
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?
Yeah, it's a bit of both. Look, we're obviously going to price to the, depending on the product and the duration of that product. We're obviously going to price, with one eye in mind to, Basel III reform coming down the track. Even today, if you were to fully load that into pricing, we still think that we're earning very attractive returns on our U.K. mortgage book. Today, highly attractive returns.
Understood. Thanks very much for the questions.
Chris, the other dynamic that I think everyone should obviously be alive to, which is nothing to do with mortgage pricing, is just, at some point we need to refinance the Term Funding Scheme. There was about GBP 120 billion of TFS 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. We could see a bit more firming in mortgage spreads, do 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, Ewen. 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% by 2021 versus the sort of 1.59%. I hear what you say about HIBOR, 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? 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
I'd love just on NIM. You know I don't like forecasting NIM, but we just printed 159 in the quarter, and consensus for the full year is sitting at 166. Even if you factor in a more positive, if you were to adjust as soon HIBOR curve stays where it is for the full year, I don't think that gets you back to 166 for the full year. 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. Equally, we think and we continue to see, we think growth and average interest in assets that's been consistently higher than where consensus has been.
If you look at it on an aggregate net interest income basis, 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.
Yeah. I get that '19 consensus looks pretty tough. I was just thinking 2021, it's not a lot of margin expansion over that sort of period.
Well, I mean.
attempting, keep defending
could produce policy rates for me in over 2020 and 2021, Tom, I would happily try. I mean, interest rates are bubbling around so much. We would've 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. Just on costs.
On costs
you took $1 billion of investment, I think, in Q1.
Yep
your target for the full year is five. Can you say anything about the phasing of the remaining four as we go through the year? Is this going to be fairly, sort of evenly spread?
Yeah, I mean.
another revenue?
Just to unpick costs. There was 3.2% adjusted cost growth in the quarter. I think that was slightly flattered because there was a bank levy charge in Q1 of last year, and there was also a very small impact of hyperinflation benefiting the numbers in Q1 of this year. If you were to back those two things out, that cost growth would've been about 3.8%. Within that, there was about 15% growth in the P&L impact of investments towards the $ billion or just under $1 billion. For the remaining period of the year, 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.
I think the onus is on us is to manage more actively the other part of the cost base, the run-of-the-bank cost base, more proactively over the remainder of the year. 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 of Fahed Kunwar from Redburn. Your line is open.
Morning.
Morning. Thanks for taking the questions. I just had two quick follow-ups to Tom's questions, to be honest. On the margins, I was trying 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% as consensus does, 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. I completely appreciate volume growth could still meet your NII expectations, but 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.
The second question was just on the capital, the kind of movement in the fair value through 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? Just a bit more color on that would be grand. Thank you.
Yeah, look on the latter, no. AFS gains and cash flow hedging reserve movements. I don't think you should assume that that is sort of a that swings around a bit, and hence it's sort of linked to the commentary on buybacks too. That it's good that we got those benefits in Q1, but we're not sort of, they could swing around. On NIM, look, mathematically, what you say has to be right. I'm obviously not going to build your models for you, but I just observe that we're far more sensitive to high vol than we are to US dollar rate impacts. Yeah, that will be a bigger driver. 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.
Hi there.
Morning. Thanks for taking the question. Can I just come back to costs briefly, 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-
Yeah
Should we be thinking of the phasing of the investment spend this year when 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? Are you able to give any color around some of those actions you're hoping to take? That was the first question. 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 movements likely to come through over 2020, 2021, et cetera? Does that have any bearing in terms of size, timing of buybacks or can be absorbed through the normal course of business? Thanks.
Look on costs, we have natural inflation in our cost base of around 3%. 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. Depending on the flex on that investment spend. The main priority, I think, is broadly to keep headcount relatively flat while we're continuing to put on volume growth. And therefore, the investments we're making should in turn drive productivity improvement, which allows us to continue to achieve that objective.
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 cost that we had, which was very much what we planned to do, we just had about a $1 billion revenue shortfall in November and 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 2% RWA growth in 2020. I know we've talked about 1%-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 an expected decision on French mortgages, which is going to impact the whole sector, which will be about $3 billion or $4 billion, I suspect, uplift in RWAs at some point. 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 we've got an acute degree of complexity given that we're waiting on about 60 national regulators in terms of discretions. When we are comfortable with talking, we will talk, but I would just encourage everyone not to assume that the answer is zero.
There clearly will be some impact, because of Basel III reform. We have to then work through what that would imply or otherwise for our Core Tier 1 targets as well. 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, Magda.
Hello, good morning. Two questions on your balance sheet, really, but more on the underlying business. On the slides 12 and 13, when you showed us the details of Global Retail and Global Commercial segments. The loans, of course, have outgrown deposits quite significantly year-over-year. I'm just wondering if you could 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 one versus another. Two, how do you think this is likely to move forward, let's just say 2019, 2020?
On the lending side, I don't think it's driven by any particular pricing strategy. In the ring-fence bank in the U.K., we clearly, as a result of ring-fencing, as we've talked about at full year results, ended up with an excess of deposits sitting in the ring-fence bank, and equally a liquidity shortfall sitting in the non-ring-fence bank. 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. We used to have a very low market share in intermediary mortgages, which is about 70% of mortgage distribution in the U.K. We just think, as I talked about earlier, if we've got a low double-digit natural share of liabilities, we should have an asset side share that's substantially higher than where we sit today.
In Asia's growing, we're just taking advantage of Asian growth. In context, if you were to look at our overall mainland Chinese market share, it's less than 0.2% or something. Our ability to grow in the Greater Bay Area at sustainably high growth rates really comes back to your question on deposit growth, which is 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, some of that was deliberate. We do have some very large liquidity surpluses in some parts of the world, particularly Hong Kong and the U.K. 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 a sustainable proposition over the long term.
You would expect over time to see deposit growth, I think, to begin to increase, that gap would narrow. In Q1, there were just some one-offs in the commercial side that impacted the headline deposit growth in some of the places, particularly Hong Kong.
Ewen, just to follow up on this one. If when you look at your underlying activity per segment, per country, where do you actually see the loan growth delta to the upside? Where do you expect potential surprises? I suppose, where do you see the relative strength?
Well, if you break down our business by where we have plus 10%, say, market share in lending and deposits, U.K., 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 Hang Seng, we are already around 40% of mortgage origination. Is that going to change significantly on the upside? I don't think so. In the U.K., we do think we're underweight on the asset side, and we do have the ability to grow. We do think on the commercial side, for example, in the U.K. with Brexit, that plays to our competitive strengths as corporates develop new international relationships. In Mexico, again, we should plus or 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. 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 the 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. I think the answer is a very nuanced answer depending on which market we're in. In the established markets away from the U.K., where we are a part of the 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.
Morning. 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% jaws in Q1, but a big chunk of that obviously comes down to market movements and so on.
Yep.
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 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 cost side emphasizing the longer-term growth of the organization more important? Then just for clarity's sake, are you still committed to delivering positive jaws for the full year, excluding things like market moves? Thank you.
Yeah. I think we've always committed to positive jaws. We haven't tried to get to an adjusted to positive jaws within that. We certainly took the hit last year in Q4 when because of adverse market movements, we recorded a negative jaws rather than a positive jaws. In terms of how we took it, for us, the difficulty is 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.
There is market and interest rate sensitivity in our top line that does mean that while we can have a base planning assumption on what our revenues are going to be for the year, things that sit entirely beyond management control, such as what happened in November and 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. If we see growth opportunity, then we want to invest for that. Managing to an absolute cost number to us doesn't make sense either. Yeah, 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.
It's a decent metric to manage to. Fundamentally, I'm managing both the jaws and absolute cost growth personally.
Just to follow up on that, 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? Does it devolve to them in exactly the same way?
It depends on the business. Yeah, it depends where they are in terms of their own respective investment programs. For example, we're investing very heavily this year in an investment program in commercial. 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. At the individual business level, each individual business is not held to 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. Morning, afternoon. Just on some helpful new disclosure you've given us the last couple of quarters, you've been around long enough now for us to start picking on you about it. The non-ring-fenced bank and Europe other-
Yes
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's in there, but also the corporate center's partly being sort of revealed by the carving out the U.K. ring-fenced bank. Is that where you're looking at costs really in the levers that you're going to pull? These are areas that were set up almost for a different HSBC that was more European, less Asian, I guess. If you're seeing 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?
If you look at how our capital is invested around the globe, 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.
Yeah.
Even if you adjust for that, the U.S. and continental Europe are where we have our biggest strategic challenges at the moment in terms of returns. Those are two areas that we're focused on, more focused on how do we turn around those businesses, which is a mix of revenues, costs, and capital, frankly, for both those two businesses. The current performance of our non-ring-fenced bank is not good enough. We recognize that. We need to improve it. Not dissimilar to our situation, although the underlying business drivers are different to what we have in the U.S. as well.
Clear. Thank you.
Your next question comes from the line of Manus Costello, Autonomous. Your line is open.
Hi, Manus.
Hi. Thanks for taking the question. I want to come back to HIBOR, please. I wanted to ask why it's so volatile. Might be a naive question, but if you could shed any light on that, it'd be useful. Perhaps more relevant, given the volatility over the last 12, 18 months, is it changing the way that you're approaching ALM 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 swinging around.
Yeah, look, I'm probably not the world's expert on HIBOR at this point, my learning curve is rapidly improving. 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 US 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 one or three months. Yeah, 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&L. 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 point shifts in interest rates. We have a far higher year one impact as a percentage of a five-year rolling impact than we would for other banks that I've seen.
Even if that's going to be much more volatile in future, you're happy taking that incremental volatility into NII?
Yeah. You're talking about having to fundamentally change customer behavior in terms of the product offering. At the moment, can you do that? Possibly. It's very unusual to change customer behavior and customer preferences, particularly on the asset side, for product. Depending on which market we are in the world, we tend to be a taker of the product preferences of customers in those markets.
NII.
Yeah. 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. Yeah, 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.
Much of the call has been focused on net interest income. 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 the chart looking at the funded assets that support those, and those were only up 4%. I guess that seems like it's been a fairly sustainable business for you. 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? Can it continue, firstly? 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've probably had some ongoing momentum in the markets business, in Q2. If you could comment on that would be great.
The 4% increase in FTEs, what's that like 9,000 plus new people year-over-year? I guess where are these FTEs going in terms of your business units and lines? That would be quite helpful. Thank you.
Yeah. On the GLCM, it's a mix of two things I think is going on. One is we think we are taking share, particularly against western banks in Asia. 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. It also, there is some benefit from higher interest rates coming through there. Yeah, that interest rate benefit should begin to moderate over time. Whether we can continue to achieve the strong share gains, we'll see. Yeah, 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've been reporting. Our bias is much more Asia, a bit of Europe rather than the U.S.
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, is still relatively slow at this point. 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.
Your local markets are up quite a bit, though. Are up, sorry, not quite a bit, they're up. They've performed well and volumes have been a little better in Q2.
Yeah, look, I mean, the other thing I would say about Global Banking and Markets for us is, it's a very different business mix. Q1 on Q1, revenues were up 3%. Yeah, FIC was down about 4%, which we viewed as a pretty good performance relative to peers. Equities headline was down 8%, there's a one-off in there, and if you strip that out, it was a weaker performance. The transaction businesses are doing very well, which means, yeah, for us, the performance of GB&M, the nuance around our business is 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 contractor resource in the U.K., into full-time staff. Yeah, we do put, publish, I think, contractors. 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. This is very much driven by, I think it's IR35, a new tax position of HMRC in relation to contractors.
Okay. Can't wait to analyze that one. Thanks, Ewen.
Your next question comes from Rahul Sinha, JPMorgan. Your line is open.
Hi, Rahul.
Morning.
Morning.
Thanks for taking my questions. Maybe just to 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 you take out the sort of levy comparator from last year, the cost growth was about 3.8%.
Yeah
Year-over-year. Obviously investment spend is likely to intensify through the year. 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 investment spend will go up. Yeah, I would hope by the time we get to Q4, we'll have better discipline around run-the-bank cost base. Therefore, yeah, Q2 costs may well go up as a growth rate. 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 off helping offset that growth rate.
Okay. Just linked to that.
Can you hear me?
Yeah. 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.
Yep.
Maybe growth picks up from here, but credit is still very benign. Obviously you're doing $5 billion of investment, but there are plenty of big banks around the world that are probably doing even more. I was just wondering how you think about the building blocks to that ROTE target, given where we are today.
Yep. I guess we've been persistently more bullish on 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. You can be a big bank and investing a lot in the market, but it's not growing and you're not going to grow a lot. Your costs may go down, but your top-line's not going to go up. Yeah, we think that there is more top-line upside than we're currently getting credit for. 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, all of that volume growth at that point 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. I think when you put all of those drivers together, and it does require a supportive underlying macro environment. We're still confident that we can get to the 11% in that context. We would note 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.
Yeah
moves to a very different place in 2021. We think it trends to around $400 million in 2021, which relative to today is about a half a billion dollar pre- and post-tax benefit to our numbers.
Got it. Thank you. Thank you very much.
Your next question comes from the line of Jon Peace from Credit Suisse. Your line is open.
Hi, Jon.
Hi, morning. 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? Are you seeing any improvement in risk appetite from Asian private clients? The second question is, one of your European peers today saw a capital surprise from RWA mitigation in Global Markets. 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.
Yeah. Look, on the second question, I don't know. Sorry, I've been tied up since about 5:00 this morning on calls, so I don't know what the RWA mitigation action was. Certainly embedded in our forecast of RWA guidance is quite significant RWA mitigation actions across the businesses. Yeah, we do have significant RWA mitigate because it's not like we've developed a special sauce where we can grow top line at the rate that we're growing top line and still commit to underlying RWA growth of 2%. 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.
Is that going to be sustainable? Maybe, maybe not. We've got a new management team in place at private banking, António Simões. 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 ultra-high net worth private banking, commercial banking, and investment banking together as one complete package for customers. Many of them are either fighting on one leg or two legs.
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, Ewen. I have one follow-up question, just building on some of the earlier comments and questions made. 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. Even if taking into consideration scrip neutralization, that means either the quarter 1 ratio is going to edge higher over the coming years or there's a meaningful amount of capital available for further growth from here for the franchise. 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 think you flagged asset management, wealth, private banking, and so forth. I was just wondering if you could steer us a bit more in where you would be most excited about growth and whether this would be predominantly organic or whether there could also be the scope for smaller inorganic steps. Thank you.
Yeah. Look, just on that very last point, none of our plans are currently premised on any inorganic activity. We think we can deliver our plan without any of that. With your point on capital, as returns improve, we have progressively better and better capital generation in excess of funding the current distribution policy. Some of that capital, I just caution, we're less than three years away now to Basel III implementation. 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 whether there is an offset and if so, how much, for whether that would drive you to a different quarter 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 should offer exceptional growth opportunities. We see significant opportunities to build and take share in the ASEAN region. U.K., as we've talked about, we think we can continue to grow better than market. We're in other markets like Mexico, where the growth upside is material. 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. Overall, given the markets that we're in, particularly in Asia, and some other places like the Middle East and Mexico, we have natural growth opportunities that are substantive. If that's enough, Martin?
We're very clear. Thank you.
Thanks everyone for joining the call today, and thanks for your questions, and thanks for the relatively few questions on NIM. Sharon, with that, if we could please end the call. 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. 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.