Good morning, ladies and gentlemen, and welcome to the analyst and investor call for HSBC Holdings Plc's Interim Results 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.
Good morning in London and good afternoon in Hong Kong. I've got Ewen with me today, and I'll hand over to him shortly to go through the detail of our Q2 performance. First, though, Tell of our Q2 performance. First, though, I'll start with a summary of the key highlights, Our progress against our transformation plans and in particular, what we're seeing with respect to growth. For the Q2, a good operating performance supported by a net release of expected credit losses Delivered reported pretax profits of $5,100,000,000 up $4,000,000,000 on last year's 2nd quarter.
We saw a return to profitability in all our regions in the first half, including good performances in both Europe And the U. S. Our U. K. Business performed well with a record quarter for mortgages in Q2.
We've generated good momentum behind our growth and transformation plans and made important decisions Our mass market retail business in the U. S. And our retail business in France. Our RWA and cost reduction programs are both on track. Our Asia wealth strategy is gaining traction with strong growth in Wealth balances.
We're seeing promising signs of early growth in both lending volumes and fee income, particularly in Asia. And we retained a strong capital ratio of 15.6%, which enables us to declare an interim dividend of $0.07 per share for the first half of the year. The next two slides look at the growth we're starting to see, particularly in Asia. In Wealth and Personal Banking, we've already seen strong traction in our Asia Wealth business, with global wealth balances up more than $250,000,000,000 or 18% in the last 12 months. This was driven chiefly by growth in assets under management rather than deposits.
We've extended sorry, expanded our Asia Wealth franchise, recruiting around 600 new frontline colleagues and growing affluent and high net worth customers in Asia by 7%. While it's early days, We're seeing promising productivity data from our Pinnacle Wealth Planners in Mainland China with exciting momentum within the business. Because of that, we're accelerating the rollout of Pinnacle to 5 new cities in Mainland China I'm planning to hire 100 more Wealth Planners this year than we had originally planned. In Commercial Banking, Pipeline growth is starting to translate into lending, with $8,000,000,000 of loan volume growth since the start of the year. Our approved lending limits in Asia are up 100% on last year's second half and 70% on pre pandemic levels.
These include renewals, refinancing and new facilities. There are also signs of a recovery in Asia trade with $6,700,000,000 of trade finance lending growth in the first half. In Global Banking and Markets, we've made good progress repositioning the franchise for growth. The proportion of RWAs allocated to Asia in GB and M is now 6 percentage points higher than the same point last year, With around onethree of non Asia RWAs supporting revenue booked in Asia. Collaboration with other businesses is a big part of the GB and M growth story, with collaboration revenue up 6% against last year's first half.
This was supported by investment in new digital market platforms, which are helping to support our Asia wealth strategy. Slide 4 goes deeper On the lending growth we're starting to see. We're seeing strong mortgage growth globally with Hong Kong drawdowns up 56% year on year and a record quarter for U. K. Mortgages.
Card balances are starting to recover in Hong Kong And the U. K. And elsewhere, up around $1,000,000,000 quarter on quarter. In Commercial Banking, We're seeing approved lending limit growth translating into term lending with loans up 2% versus the 1st quarter. Trade balances are up 9%, and we continue to capture market share in both Hong Kong and Singapore.
We're also continuing to grow our lending pipeline in Hong Kong and Asia, which bodes well for future quarters. Moving to Slide 5. Both our U. S. And European businesses saw a rebound in profits, And both are now well advanced in their transformations.
The U. S. Made around $500,000,000 of pretax profits, up from around $100,000,000 in last year's first half. Risk weighted assets in the U. S.
Are now 16% lower but at the same point last year, and costs are down around $100,000,000 year on year. We've announced the sale of our U. S. Mass market retail business, which is an important milestone in the reshaping of our U. S.
Portfolio. And we've also now completed the migration of fixed income derivatives trading book from New York to London. In Europe, we delivered $1,400,000,000 of pretax profits after recording a loss in last year's first half. Compared with a year ago, we've reduced RWAs by 16% and costs by 3%, which includes a $149,000,000 increase in variable pay. We've also signed a memorandum of understanding to sell our French Retail business.
Both our U. S. And European businesses are much better positioned to grow than at the start of the year. Slide 6 looks at our 2nd pillar, digitize at scale. Our technology spending is now 18% higher than Same period in 2018 and 4% higher than last year's first half.
This is making us a better and stronger bank, both operationally and in terms of the customer experience and providing material operating leverage as we grow the business. The proportion of payments that go straight through without manual intervention now stands at 96.7%. We're reducing account opening times, for example, including First Direct, where it now takes 10 minutes to open an account instead of 10 days. And we've introduced e signature for over 200 processes in Hong Kong, substantially reducing Both processing time and the use of physical forms. We're launching and scaling new digital products.
Our multi currency Global Money account launched last year in the U. S. And is now live in both Singapore and the UAE. We've launched Kinetic in the U. K, which already has more than 10,000 users and a 4.8 App Store rating.
And we're simplifying and automating trade finance. By 2023, our digital trade transformation aims to reduce 60 bespoke systems down to just 5. Clients and counterparties can already agree The wording of guarantees digitally, which is then fulfilled seamlessly in our back office, significantly reducing both time and effort. In Supply Chain Finance, we can now digitally onboard suppliers in 2 days rather than 8, helping clients to support their suppliers and increase the resilience of their supply chains. These are big innovations with a real world impact for our customers.
Slide 7 looks at energized for growth, our 3rd pillar. Our move to hybrid working is now well underway, with a 10% reduction in our global office footprint Since the start of 2020. 3 of our global business CEOs are in the process of relocating to Asia, And we made a number of key leadership appointments in Asia in the first half of the year. We're aiming to build a more diverse business. We've signed up to the WEFS Partnership for Racial Justice in Business and the UN LGBTI Standards of conduct for business.
We've also increased the proportion of female leaders to more than 31%, But we still much more to do. And we've hired more than 650 new graduates From 48 different countries, more than half of whom are female. Slide 8 looks at our final pillar, the transition to net 0. I was delighted and grateful That 99.7% of our shareholders backed our special resolution on climate change at our AGM in May. That was a strong endorsement of our climate strategy, which has, at its core, a commitment to support our customers on their transition to low carbon.
We're continuing to provide strong support to our customers on their transition journeys, Taking part in more sustainable financing in the first half of twenty twenty one than in the whole of 2020. We're working closely with our own suppliers to help them improve their climate reporting so that we can become net 0 in our operations and supply chain by 2,030. And we're building partnerships to unlock new climate solutions and make them investable. Joining forces with WWF and the World Resources Institute to bring new projects and technologies into commercial scale. Overall, it's still relatively early in the life of our growth and transformation plans, But I'm pleased with our progress so far.
Ewan will now take you through our results and update you on our targets.
Thanks, Noel, and good morning or afternoon, all. We had another solid quarter. Reported pretax profits of $5,100,000,000 that's up almost fivefold on last year's Q2 with an annualized return on tangible equity of 9.4% for the first half. Adjusted revenues were down 10% on last year's 2nd quarter due largely to the impact of the current rate environment, together with the comparison against a very strong global market second quarter last year. Importantly, we think we're now close to the trough in year on year revenues with volume growth in our lending businesses And our Wealth franchise is driving a recovery in the coming quarters.
Expected credit losses were $284,000,000 net release, Our 2nd quarter in a row of net releases, this reflects a continued improvement in the economic outlook for our central scenarios, Less extreme downside scenarios given the progress in global vaccinations and exceptionally low Stage III charges in both the first and second quarters. We still retain $2,400,000,000 of the Stage 1 and 2 ECL reserve buildup we made in 2020. Operating expenses were up 4%. This was due to both higher performance related pay accrual and higher technology spend. Despite this, we remain on track to deliver our target of broadly stable operating costs for the year ex the bank levy, subject, of course, to final decisions on the variable pay pool later in the year.
Lending and deposit balances were up 2% and 1%, As lending growth spread for us beyond Mortgages and Retail Banking and Trade Finance and Commercial Banking With increased confidence in higher loan growth in the second half of the year, our core Tier 1 ratio was down nearly 30 basis points at 15.6 Due primarily to our dividend accrual, our tangible net asset value per share of $7.81 was up $0.03 on the Q1, and we've declared an interim dividend of $0.07 per share for the first half of the year. We remain on track to deliver all of our medium term targets, including rebuilding to a return on tangible equity of at least 10%. Turning to Slide 10. We're continuing to shift the balance of the group's focus towards Asia through capital reallocation And the buildup of capabilities and people. However, as other regions start to recover from COVID-nineteen lows, We're also seeing much improved earnings diversity with profitability in all regions during the half.
Europe has gone from loss making in last year's first half to generating 22% of group profits in the first half of this year. This included a strong contribution from our UK ring fenced bank, which saw revenue growth of 12% in Wealth and Personal Banking and 7% in Commercial Banking. There are also good signs of recovery elsewhere, including the Middle East, the U. S. And Mexico.
We're also now seeing more balanced profitability across our global businesses, each business now generating roughly onethree of group profits in the first half, With a particularly strong recovery in Commercial Banking. Turning to Slide 11 And looking at the 2nd quarter adjusted revenues across the 3 global businesses. In Wealth and Personal Banking, revenues were down 4% on a year ago. Wealth Management revenues grew by $187,000,000 due mainly to an increase in the value of new business written in insurance And mutual fund sales growth in Hong Kong. Personal Banking revenues fell by $161,000,000 due to the impact of low interest rates On deposit margins, commercial banking revenues were 4% lower due mainly to the impact of low interest rates on global liquidity and cash management, But with good growth in trade balances in the quarter and early signs of growth across other commercial lending.
In Global Banking and Markets, revenues were down 23%. This was largely due to slower customer activity And lower volatility in the fixed income markets as compared with a particularly strong global markets performance in the same period last year. On Slide 12, net interest income was $6,600,000,000 down 5% against the Q2 of 2020 on a reported basis, but stable compared with the Q1 of 2021. On rates, The net interest margin was 120 basis points, down 1 basis point on the first quarter, primarily reflecting lower asset yields, which more than Lower funding costs. On volumes, we saw continued good loan growth in mortgages in Hong Kong And the U.
K. And strong commercial applications that have started to translate into drawdowns. For the remainder of the year, we're seeing signs that net interest income has now stabilized, and we expect loan growth to support net interest income in the second half. On the next slide, non interest income was $5,900,000,000 down 11% against last year's 2nd quarter due to the exceptionally strong global markets performance in the Q2 last year. However, we saw good fee income progression in all This is against last year's Q2 with strong performances in Wealth, Global Liquidity and Cash Management and Capital Markets and Advisory.
We expect customer activity and fee income to continue to strengthen as economic activity recovers, although the recovery path obviously remains Certain as a result of COVID-nineteen variance. On the next slide, we've reported a net release of $284,000,000 of expected credit losses in the quarter compared with a $4,200,000,000 charge in the Q2 of 2020. The net release was across all global businesses. This reflected an improved economic outlook, together with Stage 3 charges that remain very low in the quarter. Recognizing that The risks that still exist from the pandemic were continuing to hold around $2,400,000,000 of our 2020 COVID-nineteen uplift to Stage 1 and 2 ECL reserves.
Based on the current economic outlook, we now expect the ECL charge for the full year To be materially lower than our medium term through the cycle planning range of 30 to 40 basis points With the potential even for a net release for full year 2021 and further Stage 1 and 2 releases in the first half of twenty twenty two. Turning to Slide 15. 2nd quarter adjusted operating costs were $297,000,000 higher Than the same period last year, this was driven by higher performance related pay accrual of $367,000,000 and a $204,000,000 increase in technology investment. We made a further $484,000,000 To date, our cost programs have achieved savings of $2,000,000,000 relative to our year end 2022 target of $5,000,000,000 to $5,500,000,000 with cumulated cost to achieve spend of $2,700,000,000 Despite higher second quarter costs, we continue to expect our 2021 adjusted operating costs, excluding the benefit from a reduced bank levy to be broadly in line with 2020. Turning to capital on Slide 16.
Our Core Tier 1 ratio was 15.6%, down 27 basis points in the quarter. This reflected an increase in RWAs from lending growth, including a short term increase of around $10,000,000,000 from IPO loans in Hong Kong, together with a decrease in capital, including a $3,500,000,000 accrual for dividends. As signaled at the time of our Q1 results, we will include a deduction each quarter for dividend accruals. For the half year, that deduction was 0 point 1 $7 based on 47.5 percent of our first half EPS of $0.36 which is the midpoint of our 40% to 55% target payout ratio. To reiterate my comments from last quarter, they shouldn't be read as a signal or a forecast of our 2021 dividend intentions.
The dividend accrual is purely a formulaic calculation that will true up at the full year based on the results and outlook at the time. Reflecting the current improved economic outlook and improved operating environment in many of our markets, We now expect to move to our target payout range in 2021. We retain the flexibility to adjust Earnings per share for noncash significant items. And in 2022, we also intend to exclude the losses on the sale of French Retail Banking operations. When thinking about the payout ratio for 2021, we'll attach a lower weight to unusually low ECL charges or credits as part of this year's earnings per share, together with a desire Risk weighted assets rose by $13,500,000,000 in the 2nd quarter, driven by growth in Asia And the IPO loans already mentioned.
We now expect low single digit percentage growth in risk weighted assets for the full year. On the next slide, due to changes in the underlying calculation methodology, we've updated Our risk weighted asset savings targets on a like for like basis from $100,000,000,000 to $110,000,000,000 So far, we've made around $85,000,000,000 of transformation saves and remain fully on track to meet our target. On Slide 18, it's still early days in terms of our 2022 targets, but we've made good progress so far. We're on track to meet our cost and risk weighted asset savings targets, and we remain confident That we're on track for a return on tangible equity atorabove10% over the medium term. The shift to higher return areas is underway, And we're starting to see results from the growth opportunities we've identified.
As mentioned, we now intend to move to our target payout ratio in 20 As a reminder, our dividend policy aims to deliver sustainable cash dividends while retaining the flexibility to invest And growing the business in the future, supplemented by additional shareholder distributions, if appropriate. So in summary, this was another solid quarter for us, a near fivefold increase in pretax profits on the same period last year, With good earnings diversity across the group and evidence of strong execution in all areas of strategy. While the results were materially flattered by net release of ECLs, we can see early signs of a broadening recovery in lending With volume growth translating into revenue growth as our net interest margin stabilizes and growth in fee income across our businesses. Despite uncertainty on the pace of recovery from here, we remain on track with all of our medium term targets. And with that, our ability to achieve cost of capital returns and to fund attractive growth.
With that, Sharon, if we could please open up for questions.
Thank you, Mr. Stevenson. Off. We will take our first question from Martin Leitgeb from Goldman Sachs. Please go ahead.
Your line is open.
Yes, good morning and thank you
for the presentation and for taking my question, Itzhai. If I can just start with comments You made on the risk cost outlook, in particular, as we head into 2022. Given the current economic outlook, would there be a scenario that risk cost could also undershoot the 30 to 40 basis points at a full decycler range as we head into 2022, just considering the management overlays still in place. And related to that, I was just wondering in terms of how we should think of scope for capital return. I know there are comments in the presentation About the potential for step up in capital return, I think the dividend guidance is Clear.
How should we think about the scope for potential buybacks? Is that becoming increasingly a possibility in particular to head into 2022? And is that a key instrument in terms of how we should think about getting the core Tier one ratio back to a level of 14 to 14 €500,000,000 which is the 1,000,000. Thank you.
Ewen, do you want to handle both of those?
Yes. Thanks. Thanks, Martin. So on ECLs in 2022, I do think that we're going to continue to see I talked about earlier of having $2,400,000,000 of Stage 1 and Stage 2 reserves that we built up from last year is still in place. That's around 60% of the reserve buildup we put in place last year.
We do think that, that will unwind or to the That unwinds, it will unwind over probably the following 4 quarters. So there will be some benefit into the first half of twenty twenty two. I don't think that we'll begin to normalize on expected credit losses at this point until the second half of 'twenty two. On capital distributions, and I'll give a slightly fuller answer given I'm sure that there'll be several questions around this. Look, relative to the comments I made at the start of the year around our capital position and capital distributions, I think Sitting today, we are in a stronger position relative to what we thought.
We've seen a much improved credit outlook. It's our 2nd quarter of reserve releases and an expectation that we're going to continue to see additional releases over the coming 4 quarters. We've also had much lower credit rating migration than what we thought, leading to lower risk weighted asset growth Relative to what we thought a few months ago. So our Core Tier 1 ratio today is stronger than where we thought we'd be, and the outlook is better. We know that we've got some known knowings in terms of capital headwinds.
Yes. Software intangibles, which is around 25 basis points of benefit, we expect to get removed from the beginning of 2022. If you look in combination, I think there's around about 10 basis points of aggregate hit from the sales of our French And U. S. Retail Banking Franchises that will impact us into 'twenty two and 'twenty three.
And we've got various regulatory driven uplifts So for roundabout $40,000,000,000 uplift in risk weighted assets over the next 18 months. But equally, we know that we've just accrued under our accrual policy, dollars 0.17 of dividend This is the $0.07 that we've just declared. And we've still got at least $25,000,000,000 of RWA reductions In our RWA rundown program. Yes, we are committed to paying a sustainable and healthy dividend While continuing to progressively normalize our Corte-one capital position over the next 18 months, buybacks Will be one way for us to think about normalizing and using our surplus capital, and we'll continue to keep buybacks under review in the coming quarters. And I would note that, that tonality is different to what we said in previous quarters.
As you recall, at full year, we said that we wouldn't contemplate buybacks this year. We're now saying that we'll keep it under review.
That's very clear. 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.
Hi, Raul.
Good morning, everybody. A couple of questions from my side as well. Perhaps one just to follow-up, Ewan, on your comments. How would you define surplus capital For HSBC, I'm conscious you're talking about potential for growth opportunity after a very long period of time coming back onto the table. And obviously, you do have a very strong capital position with buybacks with writebacks to come, but also potential to deploy that capital.
So it's quite difficult from the outside to understand How much might be structurally excess surplus capital in Tel HPCs? Any thoughts on how we could go about doing that? That will be helpful. The second one is just to come back to the comment around NII stabilization. If I look at some of the moving parts within that, The HVAC NIM down 3 basis points in the quarter.
Again, UK NIM was down 3 basis points and quite a few of your UK peers are talking about NIM Pressure to come. And there's €9,000,000,000 order of sort of IPO funding in here in Q2 as well. So I'm just trying to understand what gives you the confidence That NII has finally stabilized. Is that more driven by the fact that you're seeing this card balance pick up? I mean, do you think that's So we like it to be an accretive sort of loan growth coming down the pipe or is there something in these Q2 trends that's perhaps overstating the pressures?
Thanks.
Yes. So on use of capital, Yes. Firstly, obviously, we've got organic growth. I think we're still setting sticking to our target of Mid single digit loan growth over the next coming quarters into 2022. And I'll come back to that in terms of where we're seeing that growth.
We also have been public about the fact that we are thinking about A number of small bolt on acquisitions, which are almost exclusively centered on the Asian wealth space. And I would use the word bolt on quite carefully. We are not looking at anything material. But in aggregate, We are looking at 3 or 4 opportunities in the wealth space across Asia at the moment. Yes, I think our Distribution policy as it relates to dividends is very clear, the 40% to 55% payout range.
As I said, for this year, I think you should expect us to be at the lower end of that range because of the Unusual benefit that we will have had from ECLs this year. And then on top of that, Buybacks on top of that. So I think you can sort of do the math and know what we're solving for. The only thing that you won't have on that is Yes, the bolt on acquisitions. But if you think of 3 or 4 smaller bolt on acquisitions of, say, dollars 500,000,000 each, We'll help in relation to that, Mats.
On net interest income stabilization, Yes, I think we are we've seen HIBOR now broadly stabilize. If I look at second quarter Of this year, the average HIBOR 1 month HIBOR rate was 9 basis points. I think in Q3 so far, it's Been around 8 basis points. So we are troughing now. I think if you look at the underlying growth, We had about $16,000,000,000 of loan growth in the second quarter.
You can take about €9,000,000,000 of that away for the Hong Kong IPO loans. You can add back 3 because we shifted the U. S. Portfolio that we're selling into held for sale, And there was probably up to $5,000,000,000 of GBM runoff, Global Banking and Markets runoff in the loan portfolio, particularly in the non ring fenced bank. So we think we grew the underlying loan portfolio by about $10,000,000,000 to $15,000,000,000 Which is about 1% to 1.5% growth in the quarter, which is 4% to 6% growth for the full year, which is very much in that run rate that I talked about.
Yes, you're right that there may be some still some modest income pressure in the U. K, but I think you saw this Quarter in the U. K, lending growth more than offset any decline in net interest margin, and we continue to remain confident about our ability to grow Faster than peers in the U. K, particularly in mortgages.
Got it. Thanks. Yes. Thanks very much for that.
Thank you. Your next question comes from the line of Tom Reiner from Numis. Please go ahead. Your line is open.
Hi, Tom.
Yes. Good morning, you and good morning, Mel. I was really going to push a bit more on the dividend policy. I think you've kind of explained it, I think, fairly well now that Obviously, if we see a big increase in I think, see the consensus payout, I think, this year is 50%. But it sounds like you're going to see Earnings beat because of the very low impairment number and therefore you're going to let the payout ratio drift down towards the bottom.
And I guess as things normalize, the payout just back up again. I mean, this is just not really just saying you've got a progressive dividend policy. I'm just wondering, do you actually need This target payout range, what sort of purpose is that served now? Or should we just be thinking you're looking to maintain a progressive dividend that you can increase each year? And secondly, I was going to also focus a little bit on to the NII guidance and whether That you're not specifically talking about NIM is indicative that you are expecting now more NIM pressure.
And it sounds like You are. But again, I wonder if you could talk to that with relating to signs of maybe slower growth in Asia. Maybe it's going to take longer for Interest rates normalized than we thought maybe a month or 2 ago. I wonder if you
could just talk to that as well, please. Thanks.
Yes. Firstly, on dividend policy, I don't think we've Said that we have a progressive dividend policy. We've said that we've got a 40% to 55% payout. I think obviously we're conscious The market's desire to have a progressive dividend policy, but it's not an official part of our policy. So We would expect, having said that, that we would ideally like 'twenty two dividends to be higher than 'twenty one dividends.
So yes, in the first half of this year, again, we accrued $0.17 versus the $0.07 we declared. We had an EPS of $0.36 in the 1st 6 months and we paid out $0.07 So we paid out just under 20% Of our earnings in the first half, so yes, mathematically, we do expect a more substantial payout in the second half of this year. And we would anticipate that 'twenty two dividend should be higher than 'twenty one dividends without committing to a progressive dividend policy. On net interest income, I don't think we're going to see, yeah, in aggregate much NIM pressure from here. Equally, I'm sort of loathed to call the bottom in NIM.
And I hate forecasting it for you. So but I do think the combination that if any relative NIM pressure from here, Coupled with stronger loan growth means that we are close to getting back into a cycle now of seeing net interest income grow. And I think certainly by the time we get into 2022, we'll definitely see net interest income grow Given NIM will definitely have, I think, stabilized by then. And on rates, Again, relative to where we were 6 months ago, where our planning position was that we were unlikely to See any policy rate rises probably until the very back end of 'twenty three or more certainly 2024. I think we're much more enthusiastic now that we may begin to see policy weights rising led by the U.
K. From sort of mid-twenty 2 onwards, and certainly, 2023 benefiting materially from higher policy rates.
And Tom, if I could just add a couple of comments on the NIM. Generally, we're seeing the volume growth, The new deal activity being transacted Good NIMs, good margins. We're not having to trade margin to get that volume growth. There is one area where There is a lot of activity, and that's U. K.
Mortgages. But even there, the margins we're generating on U. K. Mortgages are Above the back book margins, albeit they're slightly lower today than they would have been 3 or 6 months ago, but they're still well above The back book margins. So we're not seeing a trade off on margin for new business relative to volume in any significant degree.
And then on dividend policy, I just want to remind you, we put the dividend payout ratio 40% to 55% because we wanted to get the balance right between Distributing capital to generate a decent return for our investors, but also retaining sufficient capital to fund Future growth and future opportunities. Now to the extent that those future growth opportunities are not there, either organically or inorganically, Then we'll consider buybacks or capital return. But if we do see growth, then we have the ability to fund that growth Through retention of capital. And our previous policy probably didn't get that balance right. We were too much into distribution And not enough into funding future growth.
Thank you. Your next question comes from the line of Omar Keenan from Credit Suisse. Please go ahead. Your line is open.
Hi, Omar.
Good morning. Thank you very much for taking my questions. And so I just had a question on The Asia Wealth Management Strategy, just bearing in mind that you're looking at a couple of bolt on opportunities. When you look at the HSBC Wealth Management offering in Asia, where do you think might be a particular Geographic or product gaps that you might be looking To fill in. And secondly, just had a question on the UK business and mortgage growth, which strategically is looking to take market share.
I was wondering if there's ever Any thoughts around perhaps pursuing inorganic strategies there as well? Thank you.
Okay. Thanks, Omar. I'll take that, assuming the first one. On Wealth bolt ons, We're clearly looking at Pan Asia. We believe we have good organic growth opportunities with the platform we have in Hong Kong.
And therefore, That would be the primary focus, I think, in Hong Kong, would be primarily organic growth in Hong Kong. We're organically investing in China to grow our wealth business there. And we've given you the plans for that, recruiting an additional 3,000 people Over the medium term, with already 600 done in the first up until the first half this year. If you're looking at, therefore, where the bolt ons are likely to be, they're likely to be rest of Asia. In terms of capabilities, we're looking at both Products and distribution capabilities to accelerate our organic growth plans there.
We're willing to invest organically In the rest of Asia. But if we can find some bolt on acquisitions that can accelerate those organic investment plans, that would be helpful. We are looking at 3 to 4 as we speak, and they are a combination of products And distribution capabilities being acquired in areas such as insurance, high net worth wealth management And asset management. So those would be the primary areas of focus. On mortgage growth, just Ewan can fill you in a bit more on that.
But just for clarity, Our share of mortgages in the U. K. Was below our natural footprint share of customers in the U. K. And what we're doing is rebuilding to a more natural mortgage market share to match The market share of customers we have in the U.
K. And the banking market. So yes, we're taking market share from others, But it's to rebuild to where we believe we should be more naturally positioned.
I mean, maybe just to add a few more comments to what Noel said. If you look at our Current account market share by value, and we've got a more affluent customer base. We have about a 13% to 14% And share of current accounts, our stock share is currently 7.4% of mortgages. Yes, we are and have been consistently growing our flow share in excess of stock share. We grew Flow share around 8.5%, 8.6% in the quarter, about 100 basis points higher than our stock share.
And why are we able to do that? Partly is because, yes, if you went back a few years, we didn't have established broker distribution, Which as you know is around 70% of the market in terms of distribution. Over the last few years, we've fully built out Broker distribution, and we're sitting on a lot of excess liquidity in the U. K. Business, Which went up even further during COVID.
We think the returns on new business are highly attractive. So I think you should expect us to continue to target Higher growth in the mortgage market if we can continue to take share of the type of margins that we are currently seeing.
Thank you very much.
And sorry, on the you should read into that too that given that we have, We think substantial organic growth opportunity. We do not see the need to go out and invest in organically in the U. K. Mortgage market.
Thank you.
Thank you. Your next question comes from the line of Aman Raka from Barclays. Please go ahead. Your line is open.
Hi, Aman. Good morning, Noel. Good morning. Good morning, Ian. Yes, just one quick follow-up on mortgages, if I may, just around your The RoTE, I mean is there any chance that you could give us an indication of what kind of ROE you're booking on Mortgage as you currently observe it now.
And then just around GB and M, If I could ask around your expectations for the full year in that business and I know FICC was kind of down a decent chunk in Q2. I mean, how much of that do you think is down to normalizing markets versus Restructuring, and do you think we can continue to expect any kind of revenue attrition from restructuring this year in that business?
Yes. Look, on mortgages, we're not going to go into the detail, but we're earning returns on capital, Yes, materially above our cost of capital, yes, partly because, as you know, U. K. Mortgage risk weights are very low, and we've got plenty of excess funding. That is very accretive business for us.
On Global Banking and Markets, I think we've said previously that we expect 2021 to be down on 2020, but above 2019. I think that continues to be our position. As you know, the whole Street had a particularly Weak quarter in fixed income, partly because of the strength of fixed income a year ago. And we do think that there are some lines In that fixed income business that are important to us like FX that will naturally recover as customer activity recovers Both on the commercial side and the retail side out of COVID. Equities for us had actually had a really good quarter, outperformed peers, That is a relatively small part of our overall Global Banking and Markets franchise.
And Capital Markets and Advisory, Remember, we are weaker than some peers in the U. S, and we have stayed out of SPAC financings, which has been a big driver of some of the profitability of some of the peers. But overall, when we've done We don't see anything in there that other than sort of in the pack for fixed income and outperforming in equities.
Thank you. Can I just ask one quick follow-up on the mortgages? I mean there is set to be quite a lot of regulatory RWA inflation Coming down the pipes in the next 12 to 18 months. And then do you have any sense as to whether that might provide a floor The pricing at a system level, do you think the system is already pricing basically adjusting for this RWA inflation?
Yes. I mean, well, we are certainly thinking about that RWA uplift. I think in aggregate, I think the 10% floor at the portfolio level adds about $3,000,000,000 of RWA uplift for us, which is not material in The overall context of our U. K. Mortgage business, inevitably, if RWA flows by Or output flows by way down the track, then pricing will adjust accordingly, I think.
Okay. Thank you.
Thank you. Your next question comes from the line of Andrew Coombs, Citi, please go ahead. Your line is open.
Hi, Andy.
Good morning. 1 on costs and then 1 on Wealth, please. Just firstly on costs. You flagged the step up in variable pay this quarter, but your full year cost guidance is unchanged. So Just trying to understand that's just the timing issue in the variable pay or whether the mix of the costs in your full year guidance is perhaps slightly different So what your first thought?
That would be the first question. 2nd question on wealth. If I look at life insurance Investing distribution. The life insurance manufacturing number obviously has some benefit from market movement That makes up quite a big chunk of the revenue contribution this quarter. If we were to strip that out, do you think that's a more Normalized base level this quarter.
Obviously, you still got the offshore Sure. Sales come back, but perhaps you could just comment both on whether investment distributions and life insurance manufacturing This is a more normalized quarter and a fair base to run from from here.
Yes. Look, on costs for this year, I think there is a mix change going on of a few 100,000,000. Not all of that increase in variable pay is a sort of timing issue. Some of it is an increase in the variable pay accrual relative to what we thought. But yes, the mix shift, I think, Andy, is because We had anticipated in the second half that there were various line items that we would begin to see a return to normalization from COVID that we think is going to be much slower than what we previously anticipated.
So yes, generally, costs associated with running the bank like Travel, printing, office premises and the like, I think are going to run a few 100,000,000 lower than what we previously anticipated for this year, which offsets a slightly higher accrual into the variable people. So that's why we're sort of Still confident and committing to the flat cost target. On Wealth, I think, yes, you have to bifurcate between the domestic Hong Kong business. And what you see there is Actually, the Hong Kong business is doing okay and better than in previous quarters. And the Effectively, the international business, particularly the Mainland China business, which continues to be significantly impacted Because of the closure of the border, we don't expect that border to reopen until Q4 at the earliest.
So I wouldn't describe this quarter as a normalized quarter for Insurance. I would describe it as normalized probably for the Hong Kong business And continuing to be abnormally low for the China business.
And just on the cost A quick follow-up. If you're saying the P and E has actually been delayed and that's the offset, presumably you do expect the P and E to come back in 20 'twenty two, so is the hope that variable comp may also reverse slightly at that point?
No. I mean, look, I mean, I think I would Describe it as our that sort of margin for error in 'twenty two has tightened because of that Yes. Pay pressure that we're seeing relative to what we previously thought. You're right that those COVID related Savings should get back to more normal levels or what we describe as more normal levels in 'twenty two onwards. But remember also, I think embedded in that is it's new normal versus old normal.
For example, we've Reduced travel budget. If you looked in 2019, we were spending about $400,000,000 a year. We have taken that down to a run rate of $200,000,000 a year for planning purposes going forward from 'twenty two onwards. Yes, we've talked about the big savings that we see in head office expenses getting out of 40% of our And real estate ex branches over the next few years, which will reduce that part of our cost structure by just over 20%. But you're right.
Those numbers were already embedded into our full year 'twenty two cost target. So The other thing, just again, just for all of you, our cost target was based on constant FX. So What was $31,000,000,000 today is about $31,500,000,000 of cost for 'twenty two.
Thank you very much.
Thank you. Your next question comes from the line of Guy Stebbins from BNP Paribas. 21.
Just a couple of The first one was on margin. The mix has been diluted to them given the strength in Secure. Just wondered When you think about your loan growth and the 1% to 1.5% quarterly underlying growth and that's within consistent with your expectations going forward, within that, we should be assuming It's still going to be tilted slightly more towards secured. We can then obviously keep an eye on rates and other factors to come to judgment on NIM, but just helpful to think about how much of that Loan growth just to flow through into NII growth. And then just going back to distributions and timing.
You're €15,600,000,000 now, other very growth in the second half. It looks like you're guiding to €10,000,000,000 to €20,000,000,000 so 20, 30 basis points
of capital drag, Given the
call should be much lower in the second half and that's earnings to rise to the upside. So it feels like capital shouldn't move an awful lot in the second half, even Pro form a for the accrual. And if that's broadly correct and you're sat there with 100 and 150 basis points of headwind to the target come the end of the year, Can we take your comments around buybacks being a fiscal in sort of next 6 months depending on bolt ons? Is that fair? Thank you.
If I could just quickly take the new business comment. We're not expecting a Significant change in our mix between secured and unsecured. I think we see the portfolio having a similar balance to history. So we're not re weighting that portfolio mix. As you know, we tend to be more of a We do have a credit card business.
We do have unsecured lending. But in our Wealth business, we have a strong mortgage book. And in our commercial banking and wholesale business, it tends to be secured. So we don't see a significant change. Do you want to take the second question, Ewen?
Yes. So I think I'm not going to sort of comment on your maths in terms of where our core Tier 1 ratio may be at the end of the year, But I think we would be slightly more cautious than you in saying that we expect it to be in line with where we currently are. The partly, I think, because we are anticipating decent RWA growth in the second half of the year. But yes, overall in terms of yes, the main comment in relation to buybacks is, I mean, if you recall at full year results back in February, I said definitely no buybacks this year. We softened that language slightly at Q1.
We're softening it again now, And we will definitely keep it under review, and we're not we are no longer calling out that there's an absolute And on buybacks this year, so we'll keep it under review.
Okay. Thank you.
Thank you. We will now take our last question and it comes from the line of Manus Costello from Autonomous. Please go ahead. Your line is open.
Good morning, everyone. I wanted to just follow-up on the comments on insurance, Steve. You were talking about the offshore Sales coming back hopefully from Q4 onwards. I mean previously offshore insurance sales in Hong Kong made up about 40% of total Sales for that business, do you think we can get back to that kind of level quite quickly once the border reopens? Indeed, do you think there might even be a catch up of lost business from the last Couple of years coming through, setting you up for a very strong 2022 if the border reopen.
And secondly, And somewhat related, I wondered if you could give us any indication of how you think IFRS 17 will impact the business? Or if you can't indicate How it will impact the business? Can you tell us when you will give us some indication of how it impacts the business?
I think on the insurance, I mean, it's very hard to predict life after COVID relative to life before COVID because there are so many things that are changing. But we would expect a rebound. But also you've got to be cognizant of the fact we're investing in the Greater Bay Area. We're investing in Pinnacle. We're investing in our insurance capabilities and wealth management capabilities on Sure.
So we believe we'll be well positioned whether it comes back into Hong Kong or it stays in Hong Kong I'm sorry, stays in the Greater Bay Area. We'll be we'll have the ability to serve both markets.
Yes. And then, the question on IFRS 17, Manas, look, we're conscious of the fact that we owe the market an answer on this and some guidance around this. I think certainly In the next couple of quarters, no later than full year results, we'll give a Teach in on what we think the impact of IFRS 17 is. But yes, broadly, as you know, reported earnings will be Yes, lower materially lower than current reported earnings for the insurance business.
Okay. That's something to look forward to. Thank you very much.
It would be sad if that's something to look forward to, Manus.
Thank you. I will now hand the call back to Noel Quinn for closing remarks.
Thank you. Thanks, Sharon. So to wrap up, A good operating performance, supported by a net release of expected credit losses good earnings diversity, both by geography and by business. Good momentum behind our growth and transformation plans, With good delivery in all four pillars of our strategy: traction in our Asia Wealth strategy With strong growth in Wealth balances. Early growth in both lending volumes and fee income, particularly in Asia.
And we're on track in both our RWA and cost reduction programs. And confidence in delivering a ROCE At or above 10% over the medium term. Thank you for joining today. If you have any further questions, Do pick them up with Richard and the rest of the Investor Relations team. Thank you, and have a good summer.
Thanks,