Morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference Call for HSBC Holdings Plc's Earnings Release for 3Q 2021. For your information, this conference is being recorded. At this time, I will hand the call over to your host, Mr. Noel Quinn, Group Chief Executive.
Thank you. Good morning or afternoon wherever you are. Ewan is going to take the bulk of the call today and he will do that in the Future Q1 and Q3 announcements. For today though, let me start by saying that I'm really pleased with our 3rd quarter performance. We've had a strong quarter of profit generation across all regions, supported by another quarter of net ECL releases.
But most pleasing is the underlying revenue growth we're now seeing across the business. We feel that we're turning the corner on revenue after absorbing interest rate impacts over the last few quarters. We've got strong fee growth in all businesses. In Global Banking and Markets, revenue is starting to stabilize And that's against the backdrop of a large managed reduction in risk weighted assets and lending balances as we indicated back in February 2020. In terms of customer behavior, we're seeing a strong deposit performance without any material drawdown on the liquidity that we built up over the last 2 years.
The lending market was softer than we anticipated in the quarter, particularly in corporate loans. But the pipelines that we built up Position us well for when companies start investing in both the recovery and the low carbon transition. Our capital as our revenue starts to normalize, We've also looked to normalize our capital position. Capital returns to shareholders will be a big component of this And I'm pleased to announce a share buyback of $2,000,000,000 which we expect to start shortly. On our strategy, We're executing with exactly the kind of pace I promised in February.
We've made some important announcements in the quarter, including the acquisition of AXA Singapore. This complements our existing Singapore business very well and accelerates the build out of our product and distribution capabilities in one of the world's most important wealth markets. Pre COP26, we've been working incredibly hard with clients, governments and our industry peers on accelerating the low carbon transition. We're working with a range of partners to find new ways to open the sustainable finance market for projects and investors. A fortnight ago, we announced the pioneering partnership with Temasek To create a debt financing platform for sustainable infrastructure in Southeast Asia, which I believe provides an important model This is just one of a number of sustainability partnerships that we hope to announce in the coming weeks, And I look forward to updating you on those shortly.
In terms of the financial industry's contribution, The task force of international banks that I've been privileged to share over the recent months just released a guide for banks on setting and delivering net 0 targets. This is an unprecedented collaboration and makes an important contribution to help all banks operationalize the targets they've set. And importantly, to bring consistency and coherence for our customers, regulators and investors. I'm really excited about the months ahead. There's real dynamism and optimism within the business and we're focused on delivering growth in the areas we've targeted.
With the added benefit of interest rate rises on the horizon, We're in a strong position moving into 2022. With that, I'll hand over to Juergen to take him through the detail.
Thanks, Noel, and good morning or afternoon all. We had another good quarter, reported pretax profits $5,400,000,000 up 76% on last year's 3rd quarter with an annualized return on tangible equity of 9.1 Adjusted revenues were down 1% on last year's 3rd quarter, but up 1% excluding certain volatile items with a welcome return to more consistent top line growth across most of our business lines. Expected credit losses were $659,000,000 net release, our 3rd quarter in a row of net releases With net releases for the year to date of some $1,400,000,000 we still retain 31% of stage 1 and 2 ECL reserve build out we made in 2020. Operating expenses were broadly stable, Increases in investment and technology spend were offset by the impact of our cost saving initiatives. But due to some inflationary pressures, ongoing investment into growth and additional costs due to the impact and timing of recently announced M and A activity, we now expect our adjusted costs for 2021 2022 to remain broadly stable at around $32,000,000,000 excluding the UK bank levy.
Lending balances were down by 6,000,000,000 dollars or 1%. This was due to the repayment of $14,000,000,000 of short term IPA lending in Hong Kong. Stripping out the impact of the IPA loans, lending grew by $8,000,000,000 or 3% annualized during the quarter With further good growth in mortgage lending and trade finance, our core Tier 1 ratio was up 30 basis points at 15.9%, primarily due to a reduction in risk weighted assets. We now intend to reach our target for core Tier 1 of 14.5% by the end of 2022. This will reflect a combination of some regulatory driven RWA impacts, balance sheet growth and capital return.
Today's $2,000,000,000 buyback announcement is part of this Commitment to accelerate the normalization of our Core Tier 1 position. Our tangible net asset value per Share of $7.81 was unchanged in the second quarter. Turning to Slide 4, We're seeing good signs of growth returning across our global businesses. In Wealth and Personal Banking, we've continued to grow Asian net new money in private banking and asset Management, we've increased the value of new business and insurance by 59% year on year. We've hired 4 50 new wealth planners in Pinnacle, our new Chinese insurance venture.
We've kept our UK flow market share comfortably above our stock share And we've made good progress on new customer acquisition. In Commercial Banking, we're seeing encouraging trends in global trade With good market share growth in key markets such as Hong Kong and Singapore, and we've maintained a strong business pipeline with $64,000,000,000 In Global Banking and Markets, we saw more stable revenue compared to a strong performance in the Q3 last year, With good revenue growth in both security services and equities and GB and M's performance was achieved despite a 7% reduction in risk weighted assets year on year. Looking geographically, in Asia, we're seeing Strong underlying revenue trends, excluding insurance market impacts, revenues were up 7% quarter on quarter and 5% year on year. And in the UK ring fenced bank, revenues were up 2% quarter on quarter and 6 Importantly, we're delivering on our goal to be a leader in the transition to net zero. We've helped issue $170,000,000,000 of green bonds year to date, Including leading on a number of pioneering green bond offerings, such as the 1st U.
K. Green Gilt. And we're making good progress against the commitments we made in our AGM special resolution in May. Turning to Slide 5 and looking at 3rd quarter adjusted revenues as a whole. In Wealth and Personal Banking, headline revenues were down 3 on a year ago, but excluding market insurance market impacts, Wealth Management revenues grew by $145,000,000 or 7%.
This was mainly due to higher fee income and asset management and private banking together with insurance sales growth. Personal banking revenues fell by $31,000,000 due to the continuing impact of low interest rates on deposit margins. Commercial Banking revenues were 4% higher, driven by higher fee income across all products and growth in trade lending and deposit balances. In Global Banking and Markets, revenues were down 3%. This was due to slower customer activity in fixed income markets versus a strong Q3 last year.
However, equities benefited from both higher client activity And volatility in Asia and security services grew through higher fee income and assets under custody. Slide 6 shows the revenue trend quarter on quarter with growth in all three global businesses Excluding insurance market impacts, this has been driven by a combination of more stable net interest income Together with good fee income growth across all our businesses, up 10% year on year. We're increasingly confident We're turning the corner on revenue growth. Commercial Banking has grown. Wealth and Personal Banking is growing in Wealth Management and stabilizing in Retail Banking.
And Global Banking and Markets is close to that inflection point now that the bulk of its planned RWA reductions in the business are now complete. With the expectation of policy rates from 2022 onwards, we're now confident in seeing sustained revenue growth This coming year and beyond, which together with strong cost control will help drive a sustained improvement in core returns and operating jaws. On Slide 7, net interest income was $6,600,000,000 up 2% against the Q3 of 2020 on a reported basis and broadly stable compared with the Q2 of 2020 On rates, the net interest margin was 119 basis points, down 1 basis point on the 2nd quarter, primarily reflecting changes in balance sheet mix and continued weakness in HIBOR. Lending volumes were down on the quarter, But excluding the repayment of IPA loans, lending grew by $8,000,000,000 with continued good loan growth in mortgages in Hong Kong and the UK, together with the ongoing growth in our global trade franchise. For 2022, With our net interest margin stabilizing, policy rate rises on the horizon and loan growth building, we're increasingly confident on the outlook for net interest income.
On the next slide, we reported a net release of $659,000,000 of ECLs in the quarter compared with an $823,000,000 charge in the Q3 of 2020. The net release was across all our global businesses, reflecting a more stable economic outlook together with stage 3 charges that remained very low. Despite the net releases, we continue to retain a conservative outlook on risk. We still hold $1,200,000,000 or 31% of our 2020 COVID-nineteen uplift to Stage 1 and 2 ECL reserves. For the full year, we now expect net releases to be broadly in line with the net release in the 1st 9 months with perhaps a very modest net release in the 4th quarter after Stage 3 charges.
For 2022, we continue to expect the ECL charge for the full year to be lower than our medium term Through the cycle planning range of 30 to 40 basis points, with more modest ECL releases expected to continue into the first half of twenty twenty two, albeit with an expected net charge after Stage 3 impairments. Turning to Slide 9. 3rd quarter adjusted operating costs were broadly stable on the same period of last year, A $263,000,000 increase in technology spending and a $340,000,000 increase in investment and other costs were offset by a further $600,000,000 of cost program savings compared with the prior year With an associated cost to achieve of $400,000,000 To date, our cost programs have achieved savings of $2,600,000,000 Relative to our end 2022 target of at least $5,000,000,000 in cost savings and cumulative Cost to achieve spend to date has been $3,100,000,000 with an intention to still spend $7,000,000,000 through the end of 2022. In terms of outlook, with some inflationary and performance related pay pressures, ongoing investment spend And additional costs due to the impact and timing of recently announced acquisitions and disposals, we now expect 20212022 adjusted costs excluding the UK bank levy to be around $32,000,000,000 This is relative to our previous FX adjusted guidance of $31,300,000,000 for 20.22, which included the bank levy.
Turning to capital on Slide 10. Our core Tier 1 ratio was 15.9 percent, up 30 basis points in the quarter. This reflected a decrease in risk weighted assets from lower short term lending, favorable asset quality movements and FX, partially offset by a decrease in CET1, including around $1,700,000,000 for foreseeable dividends. Excluding FX movements, risk weighted assets fell by $14,400,000,000 in the 3rd quarter, driven by lower short term IPO loan exposures in Hong Kong and positive movements in asset quality. In the Q3, we made a regulatory deduction of 20 basis points for foreseeable dividends in the quarter.
This was based on 47 0.5 percent of our 3rd quarter EPS of $0.18 which is the midpoint of our 40% to 55% target payout ratio. The dividend accrual for 2021 so far is $3,800,000,000 after payment of the $0.07 This year interim dividend. Please remember that this is not guidance of our full year 2021 dividend intentions. The dividend accrual is purely a formulaic calculation that will draw up at the full year based upon the results and outlook at the time. When thinking about the payout ratio for 2021, we'll attach a much lower weight to unusually low ECLs as part of our EPS this year, together with a desire to see higher dividends per share in 20 We intend to normalize our core Tier 1 ratio over the coming quarters to be Back within our 14% to 14.5% target range by the end of 2022, driven by a combination of balance sheet growth, Capital returns and regulatory impacts.
Various things to note for your capital modeling through the end of 2022. We expect today's buyback announcement, the loss on sale of our French retail banking operations and the reversal of the current software capitalization benefit to each impact our core Tier 1 ratio by around 25 basis points And we also expect some $20,000,000,000 to $35,000,000,000 of regulatory drilling RWA uplifts in 2022. So in summary, this was another good quarter, good earnings diversity across the group, a broad based return to top line growth in most of Our businesses and continued strong control on costs. While the results were flattered by net TCL releases, We're happy to be turning the quarter on revenue with robust lending platforms, growth in trade and mortgage balances and the likelihood of earlier pipeline rate rises than previously anticipated, we're increasingly confident on the revenue growth outlook for 2022. We've included a few IFRS 17 slides in the appendix.
We intend to go through this in more detail On our follow-up call on Wednesday for sell side analysts, overall, we expect an initial downside adjustment to our insurance profits of around 2 thirds and a smaller percentage adjustment to insurance's tangible equity. Importantly, there'll be no significant impact on the group's regulatory capital and there'll be no impact on the dividend flows from our insurance Businesses to the group. Despite inflationary cost pressures and the impact of IFRS 17 implementation, We remain confident in achieving returns at or above our cost of capital over the next 3 years, together with delivering attractive growth and attractive capital returns. Finally, we're looking to normalize our core Tier run ratio over the coming quarters, of which today's buyback announcement is an important first step. With that, Sharon, if we could please open up for questions.
Thank you, Mr. Stevenson. Your first question today comes from the line of Andrew Coombs from Citi. Please go ahead. Your line is open.
Hi, Andy. Good morning. Thanks for taking my questions. I'll start with 1 on
the buybacks and then one on costs. So when you come out and quantify the $2,000,000,000 plus buyback. Can you just give us the metrics that you're using to size that? How you're thinking about this buyback, but also buybacks going forward? And basically the KPIs in your decision making process on the magnitude of those.
So that will
be the first question. The second question
is on the cost outlook where you've slightly changed your guidance and also the definition you're using. I think versus your old guidance, that's 1.5 and then adjusting to the levy, it looks like you've taken up the cost guidance by about 800,000,000 So if you just give a breakdown of what the moving parts are in the increase, how much of it is due to the timing around The M and A and divestments versus how much is inflationary pressures and how much is higher Compensation related to performance related pay. Thank you.
Yes. So, look, on Buybacks, Andy, as you would expect, it's part hard, part science. We our capital Position is obviously in a much better place than we had anticipated at the start of the year when we had said no buybacks for this year. We've had a combination of much higher profitability than we expected because of lower much lower ECLs, net releases And slower cost to achieve being expensed through the P and L. And risk weighted assets have also been lower than we anticipated, partly because of lower growth, but also because of lower credit rating migration.
I think, yes, within today's announcement is a commitment to get back to 14% to 14.5% by the end of 2022. Yes. We are committed to using excess capital if we can't find Attractive organic and inorganic growth opportunities. We previously talked on inorganic about wanting Spend up to $2,000,000,000 in M and A. We've announced a deal in For AXA Singapore for just over $500,000,000 So that will give you some color of the extent of M and A activity that you might see over the next year or I do think that, yes, we are likely to see if we What we think we'll achieve next year, some further buyback activity in 2022.
On costs, yes, I think your numbers are broadly right. If you add about $300,000,000 for M and A, Yes. In terms of the sort of roughly $500,000,000 in upwards, fuel cost, Yes. The bulk of that is compensation related, and you're right, part of it is variable pay. But I would sort of put it all in the bucket of compensation costs being higher.
Yes, broadly, Our total wage bill is about $19,000,000,000 out of the $32,000,000,000 of total costs. Yes, so if you've got Yes, dollars 500,000,000 of incremental inflation on that. It's about $2,500,000,000 2.5 percent, about $500,000,000 of extra compensation Yes, whether you put it into fixed pay or variable pay, I think we are seeing Sustained wage price pressure globally at the moment. But in terms of the incremental amount We put into the variable pay pool this year. It's significantly more than offset by the increase in profitability that we've seen.
I think if I could just add a comment there. To the extent that we've topped up variable pay, It's partly because we've had a good trading performance this year. And clearly, we've given some indications on our view of trading performance next year Being positive, and it would be right to have an appropriate level of variable pay at that point in time. In the event that that trading performance It does not materialize, then we have some flexibility on the variable pay. But it's right to also signal that there is some fixed pay Inflation pressures in the market generally within Financial Services at this point in time.
So the extra top up on cost It's a combination of fixed pay and variable pay as a consequence of the external environment and the trading performance at the bank.
And I think the last thing, Noel, also that's important is we've made a very conscious decision not to cut back on investment Despite that inflationary pressure in order to meet a self imposed cost target.
That's great. Thank you both. And also thank you for being first to put out the slides on IFRS 17 as well. Thank you.
Thank you. Your next question comes from the line of Tom Rayner from Numis. Please go ahead. Your line is open.
Hi, John. Yes, sir.
Good. Thank you. Hi, there, Noel. Hi, Ewan. 2, please.
Just a quick follow-up on costs and then one on revenue. You mentioned Ewan about €300,000,000 of the increased guidance is M and
A related. Can you give
us a sort of estimate of how much That M and A activity might add to the revenue over the sort of next 2 to 3 years, just to get a sense. And then just on revenue, you're clearly more positive on the revenue outlook and you flagged a number of areas. You didn't really comment, I don't think, on the outlook for the net interest margin. I look at your consensus and it only has an increase from Q3 right out to the end of 2023 of about 7 basis points. And if I just take your own rate sensitivity and sort of Multiply it by what's in being discounted by the market, there'd obviously be a multiple of 7 basis points.
I wonder if you could comment on the outlook for NIM specifically, please. Thank you.
Thanks. So on costs, look in the near term, I think AXA Singapore will add about $300,000,000 to revenues and $300,000,000 to costs. Obviously, we would expect that picture to move over time. But if you plug in $300,000,000 into 'twenty two On the revenue side, on NIM, you know I'm a change in every quarter, NIM forecast. But if you looked at current consensus, if you yes, it does look low relative to the Yes, consensus policy rate rises that we now see in the markets.
Yes, just as a reminder, our biggest single Sensitivity is the U. K, where our 25 basis point rise would add about $500,000,000 of income in the 1st year. And secondly, Hong Kong. And it does look like in the U. K, we will see 2, 3 rate rises Now and the end of 'twenty two, coming potentially as early as the next month or so.
Hong Kong maybe a bit slower, but Yes. One of the offsets to clear offsets to the guidance we're getting on cost today is the fact that we do think we're going to see Earlier and stronger rate rises than we had previously anticipated. We lost about $7,000,000,000 over the last year, 2 years or so as a result of the shift down on interest rates. So it's had a very, very material impact on us. And we do think with the policy rate outlook at the moment and consensus that we should start to claw back a meaningful amount of that in the next 2 to 3 years.
Super. Okay. Thank you very much.
Thank you. Your next question comes from the line of Raul Sinha from JPMorgan. Please go ahead. Your line is open.
Thank you. Good morning, afternoon, Ewan. A couple of questions from my side. Maybe firstly, just staying on the revenue line, I just wanted to understand the pandemic impacts that are still washing through your various businesses instead of holding back the revenue line. So I was wondering if you could comment on the Wealth business in Hong Kong With in light of all the travel restrictions, how you think the performance in this quarter has been held back and how that might shift over the next year or so.
And also in trade, obviously, you flagged a very strong improvement in trade balances. There's a lot of uncertainty around clearly what's happening in global trade. So any thoughts on the outlook there would be helpful. And then just a broader second question on China Real Estate. Thank you for the disclosure.
I think we all get Sort of your first order impacts and exposures are relatively limited. But I was wondering what you think about the second order impacts On your business in the mainland, just given defaults have spread beyond sort of single name into quite a few developers now. So how do you see that impacting the rest of your book and the rest of your business. Thanks.
Yes. So maybe I'll start off and then Noel, you can I had some comments then on trade and commercial real estate after I finish? Look, on Hong Kong and the border being shut, the I mean, you can see some direct impacts on things like Insurance franchise, we're not as exposed obviously to others like Peru and IIA to the Mainland Chinese insurance market, but it is a meaningful kicker to the performance of our insurance franchise in Hong Kong. Having said that, I think the value of new business in Q3 was in line with Q3 pre pandemic. Yes, you can see certain sectors in Hong Kong continuing to suffer.
Yes. The biggest border is the Hong Kong Mainland China border rather than the international border for Hong Kong, Given the pre pandemic above 50,000,000 Mainland Chinese were visiting Hong Kong in any given year. So we would expect as that border progressively reopens and it's been much slower than we would have anticipated Yes, 6 9 months ago that we will just see an incremental benefit coming through to the Hong Kong business. Yes. On trade, despite supply chain disruptions, I think we're pretty pleased with the Recovery that we're seeing in that business, people are holding higher working capital balances at the moment Yes, consistent with the uncertainty that exists in the supply chains.
But yes, we do view that as a temporary Feature of the global economy at the moment and that we will get back to more normality and more sustained growth in 'twenty 2. Yes, on the China real estate market, I mean, we've just been through, as you would expect, a pretty intensive review of Chinese real estate exposure, including the provisioning we've got against it, we're Just to repeat what we said today, we've got no direct exposure to With the exposure overall in aggregate commercial real estate, our commercial real estate in China is less than $20,000,000,000 In the context of a $1,000,000,000,000 loan portfolio. And I think the other thing you should read in rural is The fact that we're doing a buyback today and the size that we're doing it is that we're reasonably confident about where we're sitting in terms of our outlook. Noel, I don't know whether you want to add anything.
Just ironically on trade, there's a feature that The more uncertain global economics are is normally the time when trade finance Is in demand because of uncertainty over the supply chain, uncertainty over credit environment. So We've seen strong growth in trade balances. Part of that is a function of economic rebound. Part of that I think is The function of working capital cycles are longer today than they were pre COVID and pre pandemic Because of the tensions in the supply chain and the bottlenecks. And part of that is people tend to use documentary credit more in uncertain times than open account.
And therefore, they turn more to the financial services sector To finance trade in a structured manner rather than financing trade in an unstructured open account methodology. So I think there's a number of reasons. And then the 4th ingredient is frankly we are taking market share in trade In Asia, in particular, particularly in Hong Kong, Singapore. So those four dynamics, I think, are leading to Very strong double digit growth in trade. I think if you look at our trade balances from the end of last year to the end of September, We're up around about 18%, 20%.
If you do a year on year comparison September to September, I think we may be mid-twenty percent Growth in trade, particularly in Asia. So it's those four factors, I think, are playing into the trade performance. On China, the only other comment I'd make is, look, there is second order risk in whatever there's a market adjustment of that size taking place in a One of that size taking place in a particular industry sector and particularly one of the important commercial real estate, I think we're pretty comfortable with our position And we're staying very close to any potential second order risks. But I'll reinforce what Ewan said, we feel comfortable with our Our bank in China is performing well. It's had a good 9 months.
And we're well positioned on commercial real estate From a primary risk point of view, we think we're well positioned on any second order risk. But I'd be foolish if I said there was no second order risk. It potentially exists for all of us.
Thank you, Noel. Can I just follow-up on the trade margin? I don't know if you've seen A sort of shift in the trade margin within the business and if you expect that to shift going forward given what we're seeing in terms of the global trade picture? Thanks.
I'm not aware of any material shift in the margin. It's more of a volume game at the moment, but Ewan, is that your understanding?
Yeah, look, if anything, I think it's just ticked up by a few basis points, but nothing material.
Thanks so much.
Thank you. Your next question comes from the line of Manus Costello from Autonomous. Please go ahead. Your line is open.
Hi, Manas.
Hi. I just wanted to follow-up actually on those questions about the Hopefully post pandemic reopening, you gave us some data in the Q2 about credit card balances growing, but I haven't seen it so far This quarter, I wonder if you could talk to us about what you're seeing in unsecured. And you mentioned within the NIM that there was a negative mix shift which hurt the NIM. At what point will that mix shift change so as unsecured consumers starts to grow, presumably you'd start to see a positive benefit? Any color you could provide around that would be appreciated.
Thank you.
Yes. I mean, firstly, on NIM, 2 things were going on, I think, To sort of push it down 5 basis points in the quarter, firstly was HIBOR drifted down by a couple of basis points Over the quarter, we do hope we're now at the trough of that. And there is a mix shift With both a higher propensity of mortgage lower spread mortgage lending And the fact that we're continuing to increase our liquidity reserves at the moment. Yes. The unsecured was probably up about $1,000,000,000 underlying in the quarter For both across Hong Kong and U.
K. And about half and half across the 2 markets. What we are seeing is credit Card spending come back up closer to pre pandemic levels, but what we're not seeing yet are the balances Go up in line with that. I think that will yes, should happen over time. But at the moment, whether it's Commercial customers, all personal customers, and we're seeing the same thing in U.
K. Mortgages, for example. People are paying down debt when they can. And I think that's just a sign of confidence at the moment that we would expect to continue to improve As we continue to move away from the depths of COVID. Okay.
Thank you
very much.
Thank you. Your next question comes from the line of Yafai Tian from Citigroup. Please go ahead. Your line is open.
Thank you. I have a question around revenue. You gave a bit color that quite a lot of the Optimism is coming from the higher expected interest rate in some of your markets. Besides that interest rate shift, are there any Organic growth at HSBC is gaining market share that you think that we are sell side is missing that could drive more consensus revenue upgrades from non interest income? Thank you.
Yes. I mean, to be clear that we're not Reliance on interest rate rises to underpin the business plan that we've got. We're seeing With NIM stabilizing, we're probably going to see about 3% loan growth this year. We would expect mid single digit loan growth next year. So you would expect a healthy increase in net interest income next year with and without rate rises.
We're seeing very good growth in Fee income as we come out of COVID, I think it's up 10% year on year. So, yes, the core business at the moment Is seeing very good attractive growth. Interest rate rises will just come on top of that. And in terms of where we're growing, look, Noel said earlier, we're taking share in trade. We're up a couple of percentage points of share over the last year, both in Hong Kong and Singapore.
We're continuing to grow U. K. Mortgage share above stock share. I think we were sort of about 1% ahead of stock share in the quarter. Yes, we're growing the private bank, I think, ahead of peers, particularly Credit Suisse in Asia at the moment.
So, yes, most of our businesses, I think, are flat to gaining share.
Thank you.
Thank you. Your next question comes from the line of Guy Stebbings from Exane BNP. Please go ahead. Your line is open.
Hi, good morning. Thanks for taking the questions. The first one was back on costs and then one on RWA. So on costs and Jens, you briefly alluded to before the previous question, The link with the interest rate outlook, I mean, how much is the new guidance intertwined with market inflation and interest rate expectations? Or to put it another way, policy rates don't move higher in line with market expectations.
Should we expect you to come in lower than that guidance? And then the second question on RWAs. Consensus is nearly €70,000,000,000 higher by the end of next where we sit today. I appreciate there's some regulatory headwinds on the horizon that you flagged and you've now delivered a majority of the gross RWA sales you've guided to by the end of next year. But To mark RWA expectations, I think, of €9,000,000,000 next year look a little too conservative given the starting point and what you're seeing currently in terms of lack of credit migration?
Thank you.
Yes. Look, on cost, Yes, they are connected, but not a direct line between the inflationary pressure that we're seeing coming through the cost structure and the fact We expect to see earlier policy rate rises. To give everyone assurance, we are actively managing our cost base in line with what we previously We thought we're still committed to taking out $5,000,000,000 of costs over the period to the end of 2022, and we've done just over half of that so far. But on a $19,000,000,000 wage bill, if you see it, each percentage point is another $190,000,000 of cost Relative to where we were at the start of the year, we're definitely seeing more inflation. The offset for that should be policy rate rises coming earlier and stronger.
And if they do, that will comfortably offset The inflationary pressure we're seeing on costs. But we are not Going soft on cost just because we think that there is a potential of weight rises, that's not how we're operating the business. On RWAs, yes, I mean, I think we've given you Pretty much all of the inputs to model, I guess, we're more confident on the IWA growth outlook for lending growth outlook for next year, then I think it's currently in consensus. We've guided to mid single digit loan growth. Yes.
The other thing that we've given you the impacts on regulatory capital, You can plug in your own numbers in terms of we've given you our distribution policy on dividends. So the only things that you don't have is Yes. Well, the profitability is going to be next year, what buybacks we're going to do. And even on inorganic, we've tried to give you a steer as What the total quantum of financial and organic that we may do as well.
Okay. Thank you.
Thank you. Your next question comes from the line of Omar Khinan from Credit Suisse. Please go ahead. Your line is open.
Good morning. Thank you very much for taking the questions. I've got a few questions on rate sensitivity, please. I was hoping you could give some color around deposit betas in your rate sensitivity disclosure, Especially for the U. K.
And Hong Kong, given one of your peers reassessed The U. K. Rate sensitivity based on a sort of more realistic assumption of what deposit betas are likely to be. And any color that you can give on the proportion of deposits contractually linked to market rates in both those markets would be very helpful. And the second part of my question on rate sensitivity is the other currencies figure of €1,500,000,000 Could you perhaps just elaborate a little bit more about what the key sensitivities In terms of different currencies, are there because it's all it's about as big as the Hong Kong sensitivity?
Thank you.
Yes. So look on rate sensitivity, I think you should assume for the first one or 2 interest rate rises There will be a relatively low deposit feature on that and that we will try to capture a higher than average Capture out of those rate rises. I think over the longer term, typically, we work on the basis of about 40% to 50% deposit, Peter. But in the very, very short term with the first rate rise, I think it will be much lower than that. Yes, in terms of other currencies, India, Indian rupiah, renminbi, Yes, various emerging market currencies of which Mexico is important.
I'm sure if you follow-up with The IR team, they can give you a fuller breakdown of that.
That's wonderful. And could I just check the published sensitivity, is that based on 50%?
Yes. Well, it differs by product, by market, but roughly, yes.
Thank you very much.
Thank you. Your next question comes from the line of Aman Raka from Barclays. Please go ahead. Your line is open.
Good morning. Just most of my questions have been asked actually, but a couple of points of Clarification. So thanks very much for the IFRS 17 disclosure on the insurance business. In terms of the 2 thirds PBT impact that You kind of expect in 2023. I mean, I guess, that insurance profit that we would be making that adjustment to, Are we talking is it around a kind of $1,500,000,000 hit that we should be looking For kind of reporting PBT in 'twenty three?
Any clarification there would be really helpful. And then just a second on the cost to achieve. I know you're sticking with the guidance for $7,000,000,000 but it does imply that You're going to do a lot next year. I mean, could you help us understand exactly why you've not been able to spend it so far and kind of what you are going to be doing
Okay. So on PBT impacts, well, Yes, dollars 1,500,000,000 it obviously depends what your forecast is, but if that's 2 thirds of the insurance profits in that year, then Yes. It's probably not wildly out of line with what we think. But just again, just to repeat on IFRS 17, there's no impact on dividend flow from the insurance companies To the group, there's no impact on Group Quality 1. The timing of earnings recognition has changed.
So fundamental economics, we don't think has changed. The other thing that on tangible equity just been Because I know a few people have been playing around with numbers today. We think there'll be about a $3,000,000,000 plus The minus impact to tangible equity as a result of the shift and That kind of then will be negative, but minimal, and it's still tied in with our Commitment to get back to cost capital returns. On CTA, I think we'll think we'll probably spend about another $1,000,000,000 or so in Q4, with leases about $3,000,000,000 or so to spend in 'twenty two. Yes, we did have a slower delivery this year.
A big part of that was a lot of our change programs are being run-in India And they obviously had a pretty severe impact as a result of the pandemic, which meant that our hiring plans, Particularly technology resources that we intended to bring on board had been slower. So there's been about a 3 plus month delay Major programs at work and it's one of the reasons why as a result of that, we expect cost Pickup in Q4 because we've got this ramp up in investment coming into Q4.
That's great. Thank you.
Thank you. Your next question comes from the line of Rob Noble from Deutsche Bank. Please go ahead. Your line is open.
Good morning, all. Excuse me. Could you talk us through how interest rates are actually hedged in the various markets, maybe just the UK, Hong Kong and U. S. And then so will they actually see what sort of races do you actually need the insured rates to go up In all of those countries or will you benefit from higher rates in the market in some and not others?
And then secondly, just on the UK, where do you see your front book mortgage margins At the moment and in comparisons where they were where they are on the back book? And what do you think Recent swaps the increase in swaps, are they pushing rates up in the market in the UK now? Thank you.
So on the hedging program, look, Hong Kong is very short dated. Everything Prices typically in 1 to 3 months. The U. K, there is a 5 year rolling hedge that we have In place consistent with most U. K.
Peers, I think, which an average duration then of about 2.5 years. The U. S. Is slightly longer than the 5 years, albeit I think that will change once we divest ourselves out of the retail banking business. And it's not as material obviously as Hong Kong and U.
K. Yes, if you look at the structure of our assets and liabilities, they Do tend to be much more short dated than the average peer, which is a combination of the impact of the short dated nature of Hong Kong, But also in the commercial space, our trade business is relatively short dated as well. So the second question was Richard?
Sorry, it was on
from the mortgage margins versus Back book and why do
you think swap spreads will
Front book margins are probably slightly below back book margins currently for the first time in quite a while. Yes, we have seen some margin pressure coming through the U. K. Woolwich franchise. We do still think at current rates We're writing business comfortably above the cost of capital, but there has been some margin contraction.
Great. Thanks very much.
Thank you. Your next question comes from the line of Ed Firth from KBW. Please go ahead. Your line is open.
Hi, Ed.
Yes. Good morning, everybody. I'm sorry to go on about this interest rate sensitivity, but I guess it's quite crucial in terms of the outlook. But The bit I don't really understand is when I look at the currencies, if I look at your year 1 sensitivity, your sterling sensitivity is higher than your Hong Kong sensitivity. And yet your sterling is the bit that's hedged, the Hong Kong isn't.
And yet the total balances in Hong Kong Well, orders of
bank issued similar, but I guess you spend
a thing slightly higher in Hong Kong than they are in sterling. So I don't is it possible to help us a little bit on why This huge sensitivity in sterling and perhaps not so much in places like Hong Kong, which is short dated.
Yes. So look, I mean, firstly in Hong Kong, remember that Only around 50% of our deposit balances are Hong Kong dollars. So, yes, there is an impact of the Particularly U. S. Dollar book in Hong Kong, I think, in that interest rate sensitivity, which with the U.
S. Dollars about 40%, yes, 80% of the 50%, that's not Hong Kong dollars.
So
Yes. Look, I'll need to get you a detailed answer out of IR team, if you give them a call, but I assume our interest rate sensitivity analysis is correct.
I suspect it's about the assumptions. It's just I suppose with the thing we're struggling with in all areas, just trying to make sure that people can put in any assumptions they like
or whether it's It's actually going to happen,
I guess, is the key question. Yes, that's fair. But I mean, we do Take time to show that interest rate sensitivity and yes, it is supposed to be helpful guidance. Okay. No, that's great.
Thanks so much. I'll speak to Lyle.
Thank you. Your next question comes from the line of Martin Leitgeb from Goldman Sachs. Please go ahead. Your line is open.
Yes, good morning. Just a very quick follow-up on structural hedging. 1 of Your peers has announced its intention to deploy structural hedging a little bit more, just changing, I guess, some of the assumption on the stickiness of certain deposits. Is there scope just based on your comments that Hong Kong is very short dated, 40% of Hong Kong deposits are in U. S.
Dollar? Would there be scope to reassess some of those deposits and take a view maybe similar to the U. K. That deposits have a kind of behavior maturity of 5 years? And With that, could this be a source for additional income going forward?
And secondly, on capital, I mean, first of all, thank you for the 14% to 14.5% guidance now for FY 2022. Just in terms of thinking About the quarter 1 trajectory and at the end of scope for capital return for HSBC going forward over the medium term, should we use this 14, 14 point 5% as a kind of a range going forward. Where is the scope for capital to achieve lower? I'm just trying to get if there's still capital inefficiencies within the group This 14 to 14.5 range. Thank you.
Yes. So In terms of Hong Kong and the yes, I mean, part of the problem, Martin, as you know, it's a very short dated book, both on the asset and liability So the choice that we have always made is not to run currency risk to extend duration. There is probably, Yes, a low 100 of millions opportunity in the next few years through improved Management of our liquidity book, we've recently hired a few months ago the group treasurer out of UBS to come and run our treasury business. And So I think, yes, over the next 2 to 3 years, we'll probably get a few $100,000,000 of upside in terms of how we're managing our global liquidity pool. On capital, I would use the $14,500,000 over the next few years.
I think Our aspiration is to run it towards or end of that range if we can. Yes. As you think further out, there's obviously the impact of output floors and what that does and depending on where they're applied and the Act on capital positions of subsidiaries, etcetera, we're going to have to pay attention to. To get below 14%, Yes, I think we've got a big program of work to step up our capabilities in stress testing. I think Peak to trough all and stress is still too high.
But that will be a multi year program of work to And pre stress testing and then go after the sort of higher risk stress areas of the bank where we're not getting remunerated appropriately. But for the purposes of the foreseeable future, assume that 14% to 14.5% is where we're managing to. And if we can, we'll manage to the low end of that range.
Perfect. Thank you. Thank you very much.
Thank you. We will now take our final question from the line of Joseph Dickerson from Jefferies. Please go ahead. Your line is open.
Hi, good morning. Thanks for taking my question. Just on the cost versus benefit from rising rates, I guess You've made the point that you haven't lightened up on investment spend. Can we just should we therefore assume that the 90% or so of the rate sensitivity of whatever we might assume falls through to the bottom line. I guess what sort of quantum should we think about falls
through the bottom line? Well, I think the bulk of it, Frankly, I mean, it depends what inflationary pressure you put on a $19,000,000,000 wage bill and $52,000,000,000 total cost base. But yes, if relative to the previous guidance of flat cost, if you've got 1% to 2% inflation on that, that's $300,000,000 to $600,000,000 of incremental cost, which I think More than gets offset by the interest rate rises. I mean, what we saw over the last year is, Yes, the bulk of that we lost, we weren't able to offset with incremental cost savings. So I think We will keep cost control tight even if we see the benefit of rate rises coming through.
Thanks very much. Very helpful.
The amount of revenue that dropped off the P and L last year as a consequence of rate Reductions was?
Dollars 1,000,000,000 How much? Dollars 7,000,000,000 So
that gives you a sensitivity of the upside sensitivity of rates For the downside that we experienced relative to a 1 or 2 percentage points movement in cost. It's a highly leveraged ratio on revenue to cost.
Brilliant. Thank you.
Thank you. That was our final question. I will now hand back for closing remarks.
Look, I just no? Yes. Listen, thank you so much
for your time today. A couple of closing comments from me. First of all, I'm pleased, as I said at the beginning, with the performance of the business, and I'm pleased to see Good signs of growth, organic growth in fee income, balanced growth, Wealth Management, so that's good. I think more to come on that front. We remain absolutely committed to Driving our cost efficiencies as we indicated earlier this year.
We acknowledge that there are Some inflationary pressures through BP from good business performance and from underlying inflation, Well, we believe that there is offsetting revenue growth to compensate for that. And we remain committed to our return on capital target. So good progress, more still to do. We'll continue to transform the business and we'll continue to grow the business. Thank you for your time.
Thanks, everyone.
Thank you. Ladies and gentlemen, that concludes the call for the HSBC Sea Holdings PLC's earnings release for 3Q 2021. You may now disconnect.