Thank you, everyone. Welcome to the European track at the Barclays Global Financial Services Conference in New York. My name is Aman Rakkar. I'm head of U.K. and Irish banks. Delighted to be joined this morning by Pam Kaur, HSBC Group CFO. Pam, thank you very much for your time. We really appreciate you making your way over here.
Thank you, Aman. A real pleasure to be here.
Okay, cool. Let's kick things off. I've got the privilege of speaking to you for the first time after your news last week. You announced your plan to retire from HSBC after 13 years, including two years in the CFO role. Why now?
Thank you, Aman. Firstly, last week, exactly on September 8, I completed 40 years in the industry, and in 2027, I'll be finishing 14 years in HSBC, including two years as CFO. I'm really pleased that the bank is in a very strong position, both financially and strategically. I'm proud of the progress we've made on simplification, on our exits of non-core businesses, but most importantly, embedding the discipline for costs and investment prioritization, and that has delivered performance as well as value. For me, it seems now the right time to look at other opportunities in leadership roles where I can use the experience that I've gained in these last 40 years and continue to deliver value.
But for now, my immediate priority, as always, remains HSBC, both in terms of having an orderly transition with my successor, so that what we have built on to position ourselves well for future growth, which I am very confident about. And subsequent to that, I will continue as an advisor to our group CEO, Georges, on key strategic priorities. So beyond that, I have a very open mind, but I am excited, this is not a retirement, for new opportunities, and fundamentally, to continue to make meaningful contributions in whatever role I take. And the key driver for that would be to enhance value proposition wherever I go. But just to be clear, no announcement as of now.
So it doesn't sound like you're going to be on the beach after eight months.
Not at all. I don't think I'm the kind of person who'll be on the beach for a very, very long time.
Okay. All right. Well, thanks for addressing that. So if we turn to the HSBC, one of the key consistent themes recently has been the richness of the growth opportunity ahead of you, particularly across Asia and particularly your wealth business. How are you thinking about balancing growth investment against returns? And where are you most focused when allocating capital and cost today?
Firstly, we are very pleased that all four of our businesses are growing, and they are delivering returns above the minimum targets we set for ourselves in February. We have higher revenue opportunities, but we also have a few cost levers which we have been successful in pulling, both in terms of upgrading what we are getting from simplification.
The opportunities of cost redeployment from the exits that have been happening at pace. Having said all that, in the near term, our focus is much more on Hong Kong and wealth for the opportunities there, as well as to continue to accelerate the multi-year programs that we have in place in a range of areas.
Whether it is on data AI, whether it is with regard to the SME business in the U.K. or indeed in wholesale transaction banking in FX trade payments and security services.
From a capital perspective, I just want to remind everyone, we are fundamentally a relationship bank, so we are there to support our customers and their demands. But it has to be at the right level of return and also within our well-established risk appetite.
Mm-hmm. You mentioned Hong Kong. Your business there is exceptional. You are delivering profitability of around 45% ROTE in Q2. Strong growth is obviously supported by robust cross-border flows, particularly into your wealth business. At the same time, there has been a lot of focus on China's tightening of outbound investment policies and questions around sustainability of said flows. How do you see the outlook for the Hong Kong franchise, and how concerned should investors be about any meaningful impact around China's tightening?
Firstly, we are very pleased with the Hong Kong business. Just to give you a context, the 45% return on tangible equity is because we do the allocation based upon RWAs. Hong Kong is a very rich deposit business for us, and if we did the same tangible equity allocation based upon leverage exposure, then it will still be a very healthy ROTE well into 30% plus. Just want to give you that context. It is not always 45, but frankly, a mid-30s number on ROTE is also a very healthy number. From a Hong Kong business going forward, we are very encouraged by the continuing momentum we see, both for retail and corporate customers, in terms of participating in the ecosystem for Hong Kong, and Hong Kong's very strong position as the international financial center.
This has been reaffirmed in the most recent Five-Year Plan update from the Chinese mainland. Nothing changes there. From our own perspective, we are tracking very closely the new-to-bank customers. Through July and August, the number of new-to-bank customers has continued at the same level as the average for H1. This to me is a very encouraging indication, not just both in terms of the macro direction of travel, but also our strong ability to retain our market share in Hong Kong. Overall, in Asia, we are very much the number one business from a wealth perspective. In Q2, as we called out, our net new money at $ 22 billion, that increase was annualized at an 8% rate.
I think that was a very good metric to show how our wealth business continues to be strong, not just in Hong Kong, but also Pan Asia.
Mm-hmm. Okay. Ongoing confidence in Hong Kong and your wealth business. In terms of revenues, you are tracking well ahead of your medium-term growth aspirations. You did 6% in H1, but you are looking or you are guiding for revenues to build to 5% by 2028. As you accelerate investment, how confident are you that revenue growth can continue to outpace expectations from here?
Just to, again, reiterate, when we set targets, that is the minimum to which we manage the bank. They are certainly not the cap, and we continue to outperform if there are growth opportunities within our risk appetite and the market environment remains conducive. So far, we have seen broad-based momentum in revenue growth, even through Q3. For next year, I think there are a couple of factors we should consider. This year, a lot of growth has also come from the interest rate trajectory. We will see how that flows into next year. But also the revenues were higher than planned at the end of H1, and if that continues into H2, the kind of jump-off point for the next year is going to be higher.
You will have to look at what the growth rate is on a higher base, which is obviously more challenging, as opposed to from a lower base.
Yeah.
The second point to remember is we have continued to accelerate our exits from various businesses. That absolutely has an impact on revenue short term, because the cost that we release from there, we are not redeploying in new areas, we are just using it to redeploy into existing programs and to accelerate them. Nevertheless, there is a bit of time lag. It is not really going to work exactly quarter on quarter, and so on.
Yeah. On the business exits you mentioned, you have announced 15 exits since the start of 2025. Can you help us think about the impact of this on the group's P&L?
Just as a context, for the businesses we have exited, the impact on cost is $ 1.1 billion, and the equivalent in cost on revenue is around $2 billion. This year, the impact on that revenue is about a third of the $2 billion.
By the end of next year, it will be up to three quarters of the full $2 billion. This year, the impact is spread a bit between fees and banking NII. In 2027 and 2028, it is going to be much more from a banking NII perspective, just given some of the announcements we have done on Egypt retail, Australia, et cetera. I think that is how we need to factor in. Again, we will continue to redeploy those costs. We have already started doing it into investments in our core business areas. But the revenue impact, there will be a bit of a lag impact, and that impacts the growth, obviously.
I guess more broadly on costs, there is actually quite a lot going on, particularly after your H1 update. You have upgraded your Simplification Saves program. You are now looking for $2 billion from $1.5 billion previously. You are exiting businesses at pace. How should we think about the evolution of the cost base from here, and is there scope for additional operating leverage in your business?
Firstly, we do not track operating leverage as any specific metric or report to you on that. Of course, we look at revenue and cost investment for each of our individual businesses very closely.
I am very pleased to say that our cost-to-income ratio at this point of time is at the lowest it has ever been. With that as a backdrop, and the fact that we are going to continue to drive efficiencies in the run the bank, from an investment perspective we are looking at a number of factors. This year, we have our targets and costs, and of course, we will manage to those targets. What we did call out at half year is, if revenue continues to outperform at a level above the plan that we had set out at the beginning of the year, then in January we will consider if there is a need for an uplift on VP. That will have some impact on that cost base.
Of course, that will be the jump-off point for the future year. When it comes to the following years, what we need to consider is, yes, there are those tailwinds from upgraded simplification costs.
There's also the tailwind which comes from a redeployment, albeit some timing lags on the exits that we are doing. Most importantly, we do not want to give up on revenue opportunities. The baseline, of course, is inflation. If you look at inflation this year, looking for next year, growth inflation rates was around 3%. You look at that as the starting point, and then if there are areas where we see those growth opportunities, we will consider to add a little bit more on the cost base, and that's the guidance we've been going and giving through.
Over time, I do believe the rigor that we have on run the bank and the programs we have in place will give us enough latitude to be able to continue to invest more and stay within that envelope of sort of the 3%-4% range.
Perfect. I think I'm actually going to turn to the audience. Please, you've got these black remotes on your desk. If you please would participate, we've got three quick ARS questions that I think we'll rattle through at pace. Please do respond. How do you think about HSBC share price performance over the next 12 months relative to the SX7P? Okay. It's a pretty positive.
I'm really pleased that you are having this confidence in what we have done so far, and being conservative, we always tend to outperform, and that's what I'll be focused on full on as I serve in my role as CFO and beyond for the company. Thank you very much for that.
Second question, how do you think about the main earnings growth drivers for the bank from here? NII and fees.
Again, really pleased.
Sounds pretty similar.
Banking NII is literally our crown jewel, but we are absolutely focused on having greater rate of growth in our fee business in terms of the overall contribution to our revenues and bottom line. We will stay in line and perhaps even outperform.
Question three, how do you prefer the bank deploys excess capital? Okay. More organic growth. Seems like people have been listening to the kind of message that you and Georges have been putting out in recent months. I guess, look, turning to capital, your capital is a position of strength. Capital generation is strong. You did 100 basis points in Q2. How should we think about your capital allocation hierarchy from here, and in particular, the sustainability of buybacks within that, particularly as the growth opportunity evolves from here?
Firstly, thank you for listening to our messages. We've been clear in our communication. Our deployment of capital stack, given the starting point, which is very healthy of 100 basis points per quarter, starts with a 50% dividend payout ratio. So there is absolutely sacrosanct first priority. The next priority is to drive organic growth, exactly as you've called out in terms of business growth. But beyond that, I just want to reiterate, irrespective of where the share price is, share buybacks will remain as the preferred distribution method for excess capital. So that to me is really clear. Now, we have seen continuing strong growth in our organic businesses through this quarter, and let's see how the quarter ends. And we are putting our capital at work to get those good returns within our risk appetite, because that's really important for the long-term sustainable growth for this organization.
I do want to reiterate that we are now more hedged, and therefore less interest rate sensitive. And one of the tools we use is HTCS. And given what has happened to bond yield curves recently, this will have an impact of around mid-teen basis points on capital. So just to call it out. We are very comfortable with that because it's a timing factor, and given where we are on banking NII and how we have hedged, this will come back very quickly. But of course, these fluctuations do have some impact on the total quantum of share buybacks.
Happy to open the floor for any questions. Please don't be shy if you have anything to ask. Okay, cool. We'll continue with the focus on the businesses. In terms of the businesses that you're growing, you've highlighted strength on the trade side in the second quarter. Is there any kind of geographical or sub-sectoral theme to this growth, or is it more broad-based?
I think firstly, given the specialization we have in trade, our 5,000 trade specialists, our continuing engagement with our customers since last year is really showing how our trade business is not only number one, but our market share is growing across the globe. The key driver for growth is Asia, and that is the support we are giving to the major economies in Asia as their year-on-year export levels have grown. Just to quote a few numbers, China year-on-year export is up by 19%, Hong Kong is 39%, Korea is 51%, and Taiwan is 45%. Also, given the macro environment, there is a much greater demand in terms of trade-based lending.
Those trade loans are up 30% year-on-year, and they are up to now $120 billion. This is both in terms of how customers are adjusting their own supply chains, but also a desire to have more short-term lending as well, and more commercially linked. As a result, the trading revenues that we have recorded have been up 13% year-on-year, and they were $0.8 billion in Q2. For me, a business which is really a strong suit for HSBC, it is relatively a smaller part of the wholesale transaction banking fees, but this is a very important trend for us to reflect upon and to continue to maintain and invest so that we can not only stay in the number one position as the world's trade bank, but actually, even from that position, increase our market share.
Switching to the U.K., your second home market often receives a lot less attention from investors than some of your Asian businesses. But actually, performance has been remarkably strong, particularly within the commercial and corporate banking lending line. It is a key driver of loan growth at the group level. You have got a new CEO, a divisional CEO in place, and an investor update coming soon. I am interested in how you think about the role of the U.K. within HSBC's broader growth agenda.
U.K. is a very open market, and within that, we are the third largest bank in terms of revenue and deposit balances. Our sweet spot, again, is to be the number one from a U.K. trade perspective.
That, along with our domestic presence, gives us a very important role, both to support the U.K. economy through the ring-fenced bank, but more broadly also through the non-ring-fenced bank. I am going to look at the U.K. overall as a geography and the role we play in the trade agreements which the U.K. government has signed, where we are important on both sides of those agreements, whether it is with India, whether it is with China and so on. That is very encouraging. If I just look from a U.K. business, i.e., the ring-fenced bank perspective, you are right, the ROTE for that business is at 21%. We are very pleased that the revenues have grown by 5%. Lending U.K. has been absolutely stellar at a 7% growth. Deposits are at 4%. We have not had to overpay for the deposits. Pricing is very competitive.
Given all that, I am very pleased with what has happened with that business. Our investment in this business, again, is prioritizing those areas of strength for us in terms of the SME business banking and trade and international business for the U.K.
David Lindberg is our new CEO. He is looking at all of this, as well as looking at from the retail bank, how we do more investment in technology, in customer journeys, and that will continue to drive further growth in the U.K. He will be coming up with our U.K. CFO in November to, again, talk to investors more broadly on the U.K. business. I do not want anybody to in any way forget the U.K. It is just we have got four very strong businesses to talk about, and from time to time, the growth rate and in those opportunities, they may vary across those businesses.
We run a very hard rule in terms of how we prioritize investments. The good thing is they are all on a positive trajectory, so it does make choices hard sometimes, but it is a good way to progress.
I guess staying on the U.K., the U.K. government is keen to improve the competitiveness of financial services. How important is the kind of regulatory and tax framework in determining HSBC's willingness to invest and grow in the U.K.?
Tax is always something for the government, the authorities to decide, and it changes from time to time. We are a big major contributor to the taxes. Last year we paid $1 billion. You could look at both U.K. Corporation Tax as well as the 3% surcharge and the Bank Levy. We will continue to play a role in that. From a regulatory perspective, of course, different jurisdictions are on different trajectories with regard to how they are reviewing regulation. From my perspective, some of the dialogue we have had, with regard to the FPC's desire to open the U.K. economy for growth, they have been very important, fruitful dialogues, as well as some of the responses we have got on the changing on the ring-fenced bank rules to give greater flexibility. I think that has been highly appreciated.
We have looked at the most recent, obviously changes from a leverage perspective. On leverage requirements at an operating entity level, it is beneficial for us. It gives us an ability to be more flexible in how we deploy our balance sheets and how we look at business strategy across those balance sheets. However, from a group perspective, these leverage requirements are not beneficial. They are marginally detrimental. We continue the dialogue to work through and support the business, in the U.K. Most importantly, we have identified key sectors in the U.K. economy.
Whether it is to do with infrastructure, whether it is to do with innovation, pharma, bio-life sciences. In those areas, we have this active dialogue with the government to say how we can lean in more, and obviously how we can support our customers through that process. The trade agreements is the other piece, which I mentioned. More to do. Some of the requirements that have come in have been partially beneficial to us, and in some cases, not as much for some fair banks.
Hang Seng. You have now taken full ownership of it. How is the integration progressing? What opportunities does full ownership create that were not previously available to you? I guess if I can ask, is there any scope in your mind around exceeding some of the kind of value creation of that?
The sort of bottom line on the value creation from Hang Seng are the $900 million that sort of phase, not by $9 billion, which you have called out before, but I am going to just give you a bit of a context. Hang Seng Bank last year, pre-ECL, was $3.4 billion profit. That is after that initial charge of $1 billion. In normal times, before China commercial real estate and Hong Kong commercial real estate issues, the easier charge for Hang Seng Bank used to be $100 million- $400 million a year. I do believe as Hong Kong commercial real estate has stabilized, the opportunity for bottom-line growth for Hang Seng will be quite considerable. That will be over and above the $900 I have mentioned.
Very specifically, in terms of how things have improved, we have already seen that the new-to-bank customer flow in Q2 in Hang Seng has doubled. We are also now co-creating in terms of products as well as use of technology apps and customer journeys so that Hang Seng Bank can equally participate with the growth that is coming from the Chinese mainland and more broadly in the ecosystem. From a wholesale perspective.
Now, if I sit back a bit, some of the things we have done, whether in terms of how we are looking at portfolios across both Hang Seng Bank and HSBC, we have created that capacity within Hang Seng Bank where the NPLs are lower. There is more room in the balance sheet to diversify lending beyond commercial real estate.
Because we were always looking at compliance and risk requirements at the same level of rigor and robustness for Hang Seng Bank and HSBC, there has been no negative surprise. The market, everybody was asking us, it is just proven, it is just business as usual because we use the same yardstick on both. Given all that, I am very positive that beyond the benefits which are running well on track.
Both in terms of the cost synergies and the revenue synergies, the real points of reference in terms of where we are seeing actual growth today and the capacity we are creating for additional lending, as well as flexibility of capital upstreaming, that is all very positive and actually is ahead of trajectory. We have done some of it and there will be more to do. In very short order.
Yeah. Look, I guess, you kind of referenced it there. There's been a number of high-profile credit events this year across the industry. Although actually some of that appears to be somewhat idiosyncratic rather than something more systemic. How would you characterize the underlying credit environment today? Specifically, could you also comment on the fallout of the Middle East? I guess you referenced commercial real estate.
Thank you, Aman. Really good question because I really do believe, not just for HSBC, but for the financial services sector overall and the industry, credit will be something to be really closely monitored, both for the rest of this year and next year.
Now, when I look at credit overall from an HSBC perspective, I'm going to unbundle it in sort of three areas. The first area for me is to say our own guidance. Our guidance, there's been an uptick, as you know, but it's been driven by two factors. One, idiosyncratic fraud-related loss in the first quarter, but also with regard to the reserve we've built for the Middle East. We have done a lot of work in terms of managing concentration risk, not just from a fraud and that particular private credit asset class, but also across various sectors. So I feel very comfortable in that space. In terms of the Middle East, the actual losses we've seen directly related to the Middle East are very low so far, $ 34 million as we called out in the middle of the year. There's been no big surprises there.
However, the $ 300 million reserve that we built given that the conflict continues, we will be more cautious in terms of the timing of the release of that reserve. Obviously, as the conflict persists, there are some broader macro things to consider because with higher inflation, higher interest rates, what we are seeing is that in pockets across the globe, U.K., Hong Kong, and the rest, Stage three losses, small size, because it's typically at the lower end of the mid-market where we keep our exposure quite tight, they have increased, and that trend will continue. From a retail perspective, I feel very comfortable because we have de-risked Mexico retail and the losses there are much lower, and it's more of a premium end book. Similarly for the rest of the world, because our exposures are more at the premium affluent end, we feel very comfortable.
On credit cards, we are relatively a smaller player. I do feel that as inflation, high interest rate comes, that is something at an industry level we need to be very watchful of. Very specifically coming down to Hong Kong commercial real estate, what we are seeing is not really many what I would call new impairments. There is a bit of a time lag where on existing impairments, there is a slight uptick in terms of valuations, so you can build some of your total reserves and ECL as a consequence. Overall, what is very encouraging is that residential sector is really in a very good spot. There has been an 18% increase in valuations year on year if I compare August 25 with August 26.
There is also a lot of what I would say economic momentum in Hong Kong, not just from Chinese mainland, but also in terms of Hong Kong as an international financial center and the support from financial services growth, new Initial Public Offerings and so on. We see retail activity has also picked up, and there has been 15 months consecutively of growth in retail spending.
That is really important because from a retail sales perspective, the overall quantum of retail sales is also up 9% if I compare year on year July 25 with July 26. Having said that, will there be pockets of retail exposure where, as I said, there could be some additional ECLs or impairments? Yes, but very contained. The last is really talking about the office space. Office space in core central areas, the demand has really picked up. We are seeing that both in terms of price valuations but also rentals. That is coming up a lot from financial services, and that segment of the office sector is normalizing.
However, there remains what I would call areas in the office sector, which are beyond the core central areas, where due to excess in supply there is still some pressure. When we look at our guidance, we factor in this residual Hong Kong commercial real estate risk as part of that guidance. That will continue for most of this year and through next year, but obviously it is gradually reducing over time as it gets to BAU.
Perfect. Deposit competition. You got an amazing deposit franchise. It is a key driver of your franchise value. But deposit competition is a theme that is coming up across the sector. What are you seeing across your footprint?
If I look at really the deposit dynamics, from a U.K. and Hong Kong perspective, we are in a very strong position. I mean, overall in our $1.8 trillion of deposits, 70%, so $1.3 trillion are instant access demand deposits. And those really represent the operating accounts of our customers, and they are typically very sticky and high quality. We haven't really had to pay more for our deposits. Having said that, we are very mindful of the competition. We have surplus customer deposits in every of our four businesses across all jurisdictions and geographies.
From my perspective, it's an area to be mindful because there'll be heavy competitive pressure, particularly where there are peers who don't have the similar advantage as our deposit franchise. We will manage it very carefully, but for now, we feel we have sufficient room in terms of the loan growth trajectory, which is sitting quite well, particularly in our home markets, to continue. I just want to add one point. The growth we are seeing in our home markets is a continuing story, both for U.K. and Hong Kong.
The reason it's upticked so much for Hong Kong is that in the past, and I've always called it out, we always had growth in lending at a growth level. But we saw a lot of early repayments, particularly in the unsecured portfolio, which was conglomerate-based developers who had enough cash flow and were de-risking. Now that the market is stabilizing, we are not seeing that. The growth in our lending is coming straight to the bottom line, and it's in line with what I thought and talked about probably about five or six quarters ago.
Perfect. Happy to try the room again if anyone's got any burning questions for Pam. Okay, perfect. Well, look, we're exactly two minutes.
You can ask another question, happy.
Do you know what? I will ask you a question.
Of course.
I would love to ask you about banking NII.
Of course.
It is remiss that we would have a 40-minute discussion and not talk about the dominant driver of revenues. But obviously, the curve has repriced higher. You upgraded your guidance for greater than $46 billion. Just kind of interested in how we should think about that, mindful of what is going on right now?
With the interest rate curves, clearly, from a banking NII overall and the growth you are seeing in lending, which is new, and the growth on deposits, which is continuing, that gives you both the volume and the margin impact. That is all very positive. HIBOR is at 2.91% as of the close of day today in Hong Kong. That is all very positive. I do want to remind you of two things in banking NII.
Yeah.
Firstly, given some of the sales we are doing of our non-core businesses in 2027, 2028, there will be more impact on banking NII, so there would be a headwind because of that. Secondly, we are now more hedged against interest rate sensitivity, which is a great thing from a medium to longer term.
However, in the short term, as we have seen in the recent quarters, and given that we have HTCS exposures as well, and the bond yield curves, if they continue to be choppy the way they have been, there is a direct impact overall on our capital. I think you need to look at all of these things in the round.
Yeah.
Overall, yes, more positive than negative, given where we are, but there are headwinds as well. Last but not least, you have to always see that, yes, banking NII is important, but for the health and sustainable growth of our franchise.
Fee and income really matter, and I am so pleased everybody is recognizing that that is the area where we want to have that alpha growth as well as accelerated investment. So overall, well-positioned for growth, and I am really pleased, given my own announcement, that I am able to say with great confidence that the trajectory for the organization on what we have built, both revenue and profitability terms, is very strong, robust, and sustainable.
Thank you so much. We are exactly on time. That is perfect. Thank you very much, everyone, for your attendance, and thank you very much, Pam.