Good morning and good afternoon, everybody, and thank you for joining us at today's results presentation. We posted a strong set of results for the first half of the year, with income up 10% on a normalized constant currency basis, supported by continued positive momentum in the second quarter, which was up 11% and generating a 10.1% return on tangible equity. We're also announcing today a new share buyback of $500 million to start imminently as we actively manage our capital with the aim of returning in the region of $5 billion to shareholders over the next three years. We've achieved all this by actively supporting our clients and communities in what continue to be challenging conditions.
The external environment is likely to remain difficult to predict in light of the ongoing Russia-Ukraine war, the continuing impacts of COVID-19, and widespread supply chain disruptions. Recession risks are rising in the U.S. and Europe, and central banks are compelled to raise interest rates to address rapid and sizable increases in inflation. However, in the East, many of the markets in which we operate are showing early stages of a post-pandemic recovery. China is deploying strong policy stimulus that should kickstart the economy, boosting domestic and regional activity. We are well equipped to navigate this complex macroeconomic picture with the solid risk management foundations that the group has built over time and the resilience of our diversified business model.
With this backdrop, we remain confident in achieving the financial and strategic targets laid out back in February to deliver at least a 10% return on tangible equity by 2024 or earlier if the rates and operational stars align. I'll come back and provide a more detailed update on the encouraging progress we're making against the five strategic actions that we set out, as well as our strategic priorities after Andy has talked us through our first half results. We will both then be available for Q&A as usual. Andy, over to you.
Thank you, Bill, and good morning and good afternoon, everybody. I'll start with the first half highlights before providing more color on what has been a strong financial performance for the first six months of the year. First half operating income of $8.1 billion, excluding DVA, was up 10% on a constant currency basis and after normalizing for the 2021 IFRS 9 interest income adjustment. This growth was largely driven by a 12% increase in net interest income and a record half for financial markets, partially offset by a more subdued wealth management performance. Expenses were up 6% at constant currency and excluding higher performance rated pay accruals, with cost efficiency savings more than offsetting increased investment spend. This resulted in 2% positive income to cost jaws for the first half.
Credit impairment for the first six months of the year was $267 million. This compares to a net release of $47 million for the same period last year. The resultant underlying operating profit for the half year was therefore $2.8 billion, up 7% when compared to last year on a constant currency basis. All this led to a return on tangible equity of 10.1%. Loans and advances were down 1% in the second quarter on a headline level. When you adjust for currency translation and excluding the impact of RWA optimization actions, there was underlying growth of 2%. Risk-weighted assets reduced by a further $6 billion in the second quarter to $255 billion, driven mainly by currency translation and further optimization actions.
Our CET1 ratio was 13.9%, which remains towards the top of our 13%-14% target range. As Bill said, we have just announced a new $500 million share buyback, leaving us with a strong capital position to fund future business growth and have capacity for more shareholder returns over time. Looking at income now in more detail. Income overall was up 9%, excluding DVA and on a constant currency basis, and was up 10% after normalizing for the IFRS 9 interest income adjustment in the second quarter of 2021. Income growth was driven by a record half in financial markets, up 18% excluding DVA, with a strong performance in macro trading, which benefited from high levels of volatility, increased client flows, and elevated commodity prices.
FM income also included a $212 million mark-to-market gain on liabilities driven by the current market volatility. Some of this gain may well reverse out over the coming quarters if conditions stabilize and spreads narrow. Transaction banking income was up 14%, reflecting encouraging signs of economic recovery across a number of our markets, with the cash management business benefiting from the rising rate environment up 25%. Retail products income was up 11%, with deposit margins improving as interest rate rises started to flow through, particularly in the second quarter, driving a 37% increase in deposit and other income. Treasury and other income was up 39%, mainly from the structural hedges we put in place earlier in the year and the benefit from rising rates.
Lending and portfolio management was down 20%, impacted by the execution of the RWA optimization initiatives in the CCIB segment, mainly in the first quarter. Lastly, wealth management was down 16%. Two main factors at play here. Firstly, the extensive COVID-19 measures that were in place across Hong Kong, China, and Taiwan for much of the first half reduced customer and sales activity. Secondly, investor sentiment remained very weak, negatively affecting market sensitive products. While income growth in the first quarter was driven by FM, in the second quarter, we saw a more balanced picture with transaction banking and retail products growing strongly, helping to drive the second quarter income growth rate up to 11%.
Looking at our top 10 markets, which account for around 80% of the group's income, most showed good income growth, with only two markets, Hong Kong and Taiwan, down year-on-year, both negatively impacted by COVID and weaker market sentiment. Looking at the early trading numbers for July, in financial markets, we continue to see similar levels of client flow to those we experienced in the second quarter, as well as ongoing elevated volatility. In wealth management, we are starting to see signs of recovery in Hong Kong. However, we remain cautious given the challenging market conditions, particularly with varying degrees of COVID lockdowns continuing across China. Let me now provide a little more color on the 45% of our income that is interest rate dependent.
Statutory net interest income was up 13% to around $400 million on a constant currency basis in the first half of 2021. This was driven by two things, a 5% underlying growth in interest earning assets after adjusting for FX and the impact of RWA optimization actions, which was particularly encouraging to see given the varying economic conditions being faced by our clients across our markets. It was also driven by 11% increase in the normalized NIM, compared with the same period last year, driven by higher interest rates. We are already seeing transmission of interest rate increases into our U.S. dollar book. CASA deposit betas have so far been lower than expected, and we have seen some early signs of migration from CASA into time deposits.
With the margin having bottomed out in the third quarter last year, we have now had three quarters of sequential increases, with the second quarter margin of 1.35% increasing by a further 6 basis points compared to the first quarter. This quarter-on-quarter increase in the NIM reflects a 10 basis point expansion from rising rates, partially offset by 3 basis points contraction from changes in product mix and a further 1 basis point from treasury hedging activity. This is a picture we expect to see over the next couple of quarters, rising interest rates driving NIM expansion with some increased dampening effect from our hedging activity, mix changes, and increase in deposit betas as we go through the cycle. While dampening our short-term rate sensitivity, our structural hedge will protect our NIM as and when rates fall.
Given the relatively modest size of our overall hedging program, rising rates remain a material tailwind for the group. Finally, on net interest income, we have updated our interest rate sensitivities to reflect the impact of further rate rises since we've now experienced the first 150 basis points also of increases. The positive impact from the next 100 basis points of rate rise is now $750 million in the first year, rising thereafter as fixed duration exposures subsequently reprice. This reduction in sensitivity is due to the impact in Hong Kong of the migration of mortgages to the prime rate cap and some of the rate rise benefit already being captured by treasury hedges.
In summary, as we previously guided, we expect the NIM to continue to gradually increase through the remainder of 2022, with the full year average NIM likely to be around 140 basis points. Turning to the other 55% of our group income, fees and other income, which was up 7% at constant currency excluding DVA. This has two component parts which moved in opposite directions. Net trading and other income was up 21% excluding DVA, driven by a record financial markets trading performance. Net fees and commissions were down 9% year- on- year, due largely to the softer performance in wealth management, which I covered earlier. Moving on to how our client segments performed, I'll keep this reasonably high level.
CCIB income, which accounts for broadly 60% of group income, was up 16% on a constant currency basis, benefiting from the record financial markets performance, asset growth, and the positive impact of rising rates on transaction banking cash. CPBB income was broadly flat, reflecting a continuingly subdued wealth management performance, but a nice pickup in retail products in Q2, with deposit income being particularly strong. We continue to invest in the venture segment with expenses up 26% as we look to develop interconnected ecosystems across multiple markets. We have included three slides in the appendix of the supporting slide pack available on our website with further details on the various ventures. Now turning to our geographic regions where we saw good all around growth.
Our largest region, Asia, delivered a resilient performance with income up 4% on a constant currency basis and a return on tangible equity of 12%. While our largest market, Hong Kong, was understandably, given the COVID challenges, down 5%. Eight of the 10 largest markets in the region delivered income growth and five of those grew at double-digit. We even experienced growth in China in Q2 despite the lockdowns. In the Africa and Middle East region, income was up 8% on a constant currency basis. We saw some very strong market performances with the UAE, Pakistan, and South Africa all producing strong double-digit growth. The region's profits increased by 28% to $0.6 billion. We did say that we would move our AME exit markets into restructuring.
However, to keep the comparative analysis as clean as possible, we have decided to leave them as is for this set of results. The markets will be reported in restructuring when we are further advanced in the disposal process. Finally, in Europe and Americas, we saw very strong income growth, up 48%, driven by the strong financial markets performance and the region's operating profits more than doubled. Europe and Americas is also a key origination center with its offshore network income up 10%. Bill will be talking more about the value of our network later. Looking briefly at our top five markets. Hong Kong's income was down 5% in the first half, impacted by the resurgence of COVID-19 in the first quarter and generally weak market sentiment. The second quarter was, however, stronger off the back of higher interest rates and some recovery in business momentum.
The Singapore economy has rebounded as the country continues to reopen post-COVID. Our business has performed well with income up 10%, with financial markets, cash and deposits being notably bright spots. Profits were up by 7% and returns up by one percentage point. It's a similar story in India, with a healthy post-COVID recovery reflected in good economic growth. Income in India was up strongly, with 14% growth for the first six months of the year, driving profit up by 9%. The Korean economy has navigated the pandemic well, maintaining low single-digit GDP growth, and our Korea franchise continues to go from strength to strength. Income was up 14% and expenses were down 3%, reflecting the restructuring action we took last year. This helped drive a 27% increase in operating profits and a mid-teens ROTI.
Our China business grew income 6% year-on-year to produce its best ever first half income result. This was driven mainly by CCIB, more than offsetting a weak wealth management performance as a result of the ongoing COVID containment measures. Lastly, our four optimization markets continued to deliver strong bottom line growth, with operating profits up in aggregate 24% at three quarters of a billion dollars. Just seven years ago, they lost more than $1 billion. Now, turning to expenses. Total operating expenses were $5.3 billion for the first six months of the year, up 6% at constant currency and after normalizing for relatively higher accruals this year, reflecting our currently improved trading outlook. Investment related spend was up $100 million, including a $39 million increase in our ventures segment.
This was more than offset by the delivery of around $200 million of expense efficiency savings in the first six months of the year, including the closure of an additional 31 branches in CPBB. Looking now at credit impairment. Charges for the first half totaled $267 million. This compares to a net release of $47 million for the same period last year. This represents a loan loss rate of 15 basis points, still low, but starting to move gradually towards the medium-term range of 30-35 basis points. There were three major items driving this charge, mostly arising in the first quarter. $237 million on stage three assets relating to China commercial real estate exposures.
$70 million relating to the sovereign downgrade of Sri Lanka, offset by a $129 million release from our management overlays. This included releasing $160 million from our COVID overlay, but increasing our overlay in relation to the China commercial real estate sector by $31 million- $126 million. We continue to monitor the situation very closely and remain alert to the challenges this sector is facing given the current external market conditions. Turning now to RWAs, which were down a net $16 billion or 6% in the first six months of the year, there were many moving parts. Starting with the $14 billion of increases, $6 billion from regulatory changes that were effective from the first of January this year, and $8 billion of asset growth and mix.
This increase was offset by around $30 billion of RWA reductions, including $14 billion from efficiency actions, primarily in the first quarter, positive credit migration of $6 billion, and an $8 billion favorable impact from FX movements. Lastly, looking at the capital position, we closed 2021 with a CET1 of 14.1% and are ending the first half at 13.9% towards the top of our target range. Profit generation and the benefit of reduced RWAs added a combined 150 basis points to the CET1 ratio during the first half. This has been offset by a number of items, primarily 100 basis points from regulatory changes and the $750 million share buyback, in addition to 50 basis points from instruments fair value through other comprehensive income on the treasury portfolio.
Finally, looking ahead for the rest of this year, as I mentioned in my opening comments, our financial performance in the first six months of the year has been very strong. As Bill said, we are making encouraging early progress against the strategic priorities that we highlighted in February. However, external conditions remain difficult to predict, particularly in the West. Taking account of our current performance and the external environment, we have updated our guidance. We now expect 2022 income growth, excluding DVA, of around 10% on a constant currency basis, significantly ahead of our earlier expectations for the year. We have also updated the currency translation impact, which we're currently forecasting to be around a $0.4 billion headwind.
As previously guided, we expect further NIM progression in the second half of the year, taking the outlook for the full year average to be around 140 basis points and around 160 basis points for 2023. We now expect operating expenses, excluding the U.K. bank levy, of around $10.6 billion for 2022. This is net of around $0.3 billion of foreign exchange translation benefits based on the current outlook for exchange rates. It does include increased performance-related pay. As a result, we now expect the currency translation impact to be a net drag of around $100 million to pre-provision operating profit as a result of the scale of the dollar strengthening across multiple currencies impacting our income more than our expenses.
We're also adjusting our risk-weighted asset growth expectations for the impact of currency translation and now expect it to be broadly similar to 2021 on a constant currency basis. As previously guided, credit impairment is expected to normalize over time towards the medium-term loan loss rate of 30-35 basis points. We fully intend to operate dynamically within the 13%-14% range, taking account of business opportunities and the macro outlook. We remain fully focused and confident in delivering on our 10% ROTCE target by 2024, if not earlier, dependent on interest rates and the broader operating environment. With that, I will hand back to Bill to update on our strategic progress.
Thank you, Andy. Back in February, we highlighted five strategic actions to help us achieve our 2024 targets. Since then, geopolitical and macroeconomic volatility has adversely impacted the global economy. It appears at this stage that the Asian markets have been less affected than those in the West, and as Andy mentioned, several are rebounding well from the COVID-19 pandemic. As you can see, this is coming through in our results. Against this backdrop, our strategic actions remain highly appropriate and serve as catalysts for the whole organization. I'm extremely pleased with the progress we've made since we set out these commitments. I've already talked about our latest action on shareholder returns, and I will now run through the other strategic actions. Firstly, in CCIB, we're going to drive improved returns, targeting an improvement in income return on risk-weighted assets by 160 basis points.
In the first six months of the year, income return on risk-weighted assets was 6%, already a 110 basis point improvement from 2021. That was driven by strong growth in income from financial institution clients, up 11%, which now accounts for 44% of CCIB income. In addition, the CCIB team successfully delivered around a third of their $22 billion three year RWA optimization target in the first half of this year, enabling the business to remain well under their RWA target for 2024. In CPBB, the team has made steady early progress on their journey to transform profitability, with a cost income ratio down two percentage points since the end of last year to 72%.
Of their $500 million three year gross expenses savings target, they have delivered $98 million of that so far, including a further 31 branch closures, and are executing plans to deliver the remainder of this year's target of $200 million. The business also continues to add a very healthy number of new clients through partners, with over 350,000 partnership clients added so far this year, a key contributor in driving growth in the number of mass retail clients. As we go into the second half of 2022, CPBB should see tailwinds for both interest rates and hopefully an improving wealth management outlook, which will help improve the cost income ratio further. China presents the group with one of the biggest strategic opportunities over the coming years. As Andy mentioned, China this year delivered its best ever first half income performance.
Our CCIB business made good progress in the first half of the year, and China network income grew strongly along a number of key corridors in ASEAN, up 36%, and South Asia, up 24%. We saw strong growth, particularly in Singapore, India, and Bangladesh. In addition, there was strong growth in both sustainable finance income and income from new economy clients. Unsurprisingly, our CPBB business in China has faced headwinds with large-scale COVID-19 lockdowns and weaker market sentiment impacting wealth management. Despite this, we continue to make great progress with our focus on digital partnerships with the launch of a number of new partnerships in the first six months of this year, including JD.com and WeBank. The long-term prospects from the structural shifts relating to China opening its financial and capital markets remain intact.
We believe we are in a unique position to capitalize on the significant opportunities from this opening and are investing $50 million this year in both onshore and offshore capabilities as part of the overall $300 million three year investment plan to further strengthen our position. Expense efficiency is core to enabling us to create positive operating leverage while creating capacity for us to continue investing into strategic initiatives. Here, as Andy mentioned, we have already delivered around $200 million of the $1.3 billion growth structural cost savings target. Moving on to our strategic priorities and network. At the start of 2021, we also set out four strategic priorities, continue to grow our network business, continue to grow our affluent business, return to growth in mass retail, and advance on all fronts of our sustainability agenda.
We're making good progress in every area. Given the changing economic environment, I'd like to drill down a bit on our network business. The group's unique and differentiated network continues to be a source of competitive advantage through which we facilitate investment, trade, and capital flows for our clients. Network income, that is income booked outside a client's headquarters country, is around 55% of CCIB income and is up strongly so far this year, with 14% year-on-year growth, with all our main trade corridors showing good growth. Network income is highly attractive for us. It produces higher returns for the group with an income return on risk-weighted assets of 7.2%, 120 basis points higher than the CCIB average.
Asia is the largest originator of network income, with $1.1 billion of income for the first six months of the year, which is up 14%. Intra-Asia corridors account for around three quarters of this. With growth of 10%, China is the largest single network market. Europe and Americas' network income of $1 billion was up 10%, with more than half of that into Asia, with particularly strong growth in the ASEAN and South Asia corridors, up 22%. Lastly, Africa and Middle East generate about $0.3 billion of network income for the group and is also an important corridor for Europe and Americas and Asia. While the overall network picture is a positive for the group, we are also taking action as we sharpen our focus on the most significant opportunities for growth while simplifying our business.
To that end, back in April, we announced that we are exiting the onshore operations in seven markets in the Africa and Middle East region and focusing solely on the CCIB segment in two additional markets. We will look to refocus resources into new markets like Saudi Arabia and Egypt, as well as ongoing investments into several of our larger markets in sub-Saharan Africa, building on the strong corporate, retail, and digital banking operations we have in those markets. Now turning to sustainability. We continue to see strong income momentum in our sustainable finance business, with income up 43% and asset growth of 11% year-on-year. Our pipeline continues to build, and we remain confident in delivering our $1 billion income ambition in the medium term.
The Russian-Ukraine war is creating some negative sentiments for sustainable finance, as companies and countries are having to switch supplies just to keep the lights on. Volatility and higher prices and core commodities will also impact supply chain issues at renewable companies. However, this is likely to accelerate the climate transition in the medium term, with energy independence now becoming a security issue. I'm very excited by the appointment of Marisa Drew as our Chief Sustainability Officer. Marisa is a highly experienced CSO, and she will lead the newly created CSO organization across sustainability strategy, client solutions, and our net zero program. We continue to implement our ambitious net zero pathway, including those enhancements we announced in March. We're also continuing to demonstrate our thought leadership with the release of our Just in Time report that investigated the cost and socioeconomic implications of a net zero carbon transition.
We know that emerging markets are most in need of capital and require almost $95 trillion to affect their transition. The funding needed is significant, and reaching net zero in our markets will therefore be no mean feat. We remain optimistic in our ability to play a pivotal role in supporting this just and sustainable transition. Lastly, I want to drill down a bit into our ventures segment. We built a diverse portfolio of 20+ investments and over 30 ventures across six high conviction themes, providing optionality for our future and a key catalyst for change in our broader organization. We're making meaningful progress across a number of areas. We now have around 1.2 million customers across the various ventures, including over 350,000 customers in Mox, our Hong Kong virtual bank, up 100,000 in the second quarter alone.
The total value of customer assets across the various platforms is now almost $2.5 billion, with transaction flows of around $8 billion in the first six months of this year. Our recently announced partnership with SBI Holdings will help us accelerate growth of Solv, the B2B digital marketplace for micro, small, and medium enterprises. We also have in the pipeline some exciting new ventures that are close to launch. Trust Bank, our second separately licensed digital bank in Asia, in partnership with NTUC, is in extensive user testing and plans to go live in the next couple of months. Our plug-and-play banking-as-a-service solution, Nexus, now has regulatory approval for launch in Indonesia, which is planned imminently, and we're looking at expanding this to a second market. More to come on that later this year.
As you can see, since its creation, Ventures has come a long way with very promising future potential. To sum up what Andy and I have just covered, we delivered a strong financial performance in the first half. We're making very encouraging early progress against the five strategic actions we laid out in February. Looking forward, while recession risks are rising in the West, we're seeing the early stages of a post-pandemic recovery in many of the markets in which we operate, underpinning our prospects for growth. We have the right strategy, business model, and ambition to deliver our 2024 targets. The management team and I remain focused on delivering these targets while we create exceptional long-term value for the group. With that, I'll hand over to our operator so Andy and I can take your questions.
Thank you. We will now begin the question- and- answer session. If you wish to ask a question via audio, please press star one and one on your telephone keypad and wait for your name to be announced. Alternatively, please use the question box available on your webcast page to submit your questions. Once again, star one and one if you would like to ask a question via the telephone. We will now take our first question. Please stand by. Your first question comes from Joseph Dickerson from Jefferies. Please go ahead. Your line is open.
Hi, good morning. Congrats on a very good set of results. I just have a couple of quick questions on the margin. One, in terms of the current quarter, could you just discuss the headwinds from Treasury effects, because that was quite a tailwind last quarter? I was a little surprised you didn't push somewhat higher on the guide for this year, given we've got the one-month and three month HIBOR up about 50 basis points since the end of Q2. Is this partially explained by the prime rate cap? Thanks. Andy, why don't you take that one?
Okay. Joseph, thanks very much for your question. We've seen another pickup in the NIM in the second quarter compared with the first quarter. We've reaffirmed that the 140 number for the full year we think feels good. In fact, if anything, we've slightly upgraded that because I'd said previously approaching 140, now probably semantics a little bit, but around 140. We feel direction of travel there is good. We have included in the slides a sort of move of the NIM between first and second quarters. You can see in there that there's a basis point or so compression from hedging, but there's underlying growth that is moving strongly, obviously in a favorable direction.
For next year, we've said 1.60 still feels a good number for us. We've got the flow through of what's already happened and obviously some of our book reprices at periods of time, not immediately, but over a period. I think direction of travel there is good. The HIBOR-prime cap effect in Hong Kong, we factored into that. There are caps on some of the mortgages, so that does provide a ceiling on some elements of the book. But that is factored into those numbers, and as I say, around 1.40 this year, 1.60 next year. I think that's the track we're on now. Back to the operator.
Thank you.
Thanks very much.
Thank you. We will now take our next question. Please stand by. Your next question comes from the line of Omar Keenan from Credit Suisse. Please go ahead. Your line is open.
Good morning, everybody. Thank you very much for taking the questions. I was hoping you could give us a bit of an update on the progress around the efficiency measures on the capital ratio, which have been very strong. Just wondered if you could give us an update as to how much optimization and efficiency might still be yet to be delivered upon and whether, you know, the total targets that were set out could be exceeded. Just related to that, whether you could summarize the movements in RWAs going forward towards the end of the year. Thank you.
Great. Thanks, Omar. I'll take it the first time. I'm sure Andy will add some color. Bottom line, things are very much on track. In the first half, $7 billion reduction in RWAs, very much on track in terms of the improvement in the return on risk-weighted assets. That obviously has a number of moving pieces. As we break it down, the business is demonstrating very strong discipline in terms of our management of risk-weighted assets across the board, but in particular in the CCIB area. That's coming through in the numbers. Well on track to hit our $22 billion optimization target over the three year period. The return on risk-weighted assets has seen a big jump.
Now obviously that's also contributed to by the strong income results. As Andy mentioned, that begins with very strong financial markets results in Q1, continued strong in Q2, but obviously off that torrid pace from early in the year. Also strong income growth across the rest of the business. That it was much more balanced in the second quarter, which of course is encouraging. When we look forward, we look at the deal pipelines, we look at the expectation for ongoing customer activity in financial markets, associated with what we expect to be an ongoing volatile environment.
We see the opportunity to continue to drive both the RWA optimization, but also the associated income growth that will improve that return on risk-weighted assets. Andy.
The RWAs have moved around a lot over the course of the year. We've had regulatory changes, we've had the efficiency drive, we've had the asset growth, we've had a mix changes, etc., and the FX obviously has played into it as well. What we've said is if you take the start of the year and adjust for FX, we'd expect to be roughly that sort of level at the end of the year. That would imply probably 3% growth in the second half of the year. That will be net of efficiency gains. Obviously assuming some client growth may be a little bit ahead of that, offset by some of the efficiency gains, and in that sort of zone is where we'd expect to be at the end of the year.
Operator, can you take the next question, please?
That's wonderful.
Thank you. Your next question comes from the line of Tom Rayner from Numis. Please go ahead. Your line is open.
Yes, thanks. Good morning, everyone. Two questions, please. First on credit quality. I see you've reiterated, I think, your medium-term guidance on the ECL charge, but sort of got used to, I think, seeing very benign trends on sort of all the indicators as well. I noticed the early alerts have sort of gone up now two quarters in a row. I just wondered if there's anything going on there that we should be concerned about. Just a second question on the RWA optimization. I don't know if you want that now as well.
Yeah. Why don't you go ahead, Tom? We'll take them both and then.
Yeah, just, I mean, I know you've said that you're comfortable with the $22 billion over three years. I mean, you know, the sort of quarterly progress this year, I think it was $6 billion in Q1 and then only $1 billion in Q2. I just wondered why that's stalled in the second quarter quite the way it has. Thanks.
Good. I'll take a quick stab, and again, I'm sure Andy will have color. The credit outlook is pretty good, right? The quality of the portfolio is strong. We've weathered some storms. We continue to be very well provided, well covered in terms of our provisions, and we continue to have small but meaningful overlays both around the tail end of the COVID pandemic. Let's hope it's the tail end. Also around China real estate. The early alerts I think reflect the fact that the markets in which we operate are under stress and will come under more stress.
That stress obviously from slowdown in growth in the West, as a stress from higher cost of living, higher commodity prices, and now higher interest rates associated with the strong dollar. We've obviously seen that stress manifest in Sri Lanka in a very acute way. Other markets in which we operate are under pressure as well. I think we've taken a very prudent approach in terms of identifying the potential problems that could come down the road, and that's what the early alert portfolio is. I would say against that backdrop, we've weathered the early stages of this storm very well, and we have every reason to think that we'll continue to.
The guidance back to what we would consider to be a more normal, through the cycle credit cost range, is the basis on which we're planning. It's the basis on which we plan for the investments that we make and the returns that we expect to achieve. We think that's prudent, cautious, and we think that's stood us in pretty good stead so far. I'll turn over to Andy for any comments on either of the two questions. Obviously particularly focusing on the RWA question.
Yeah. Okay. I mean, just to supplement that maybe on the credit. If you look not just at the early alerts, but the three that we have in our bucket, we are $11 billion or so. We've been a little bit below that the last couple of quarters, just fractionally above it now. I wouldn't see anything significant in there. I mean, obviously there is a little bit more pressure in some countries at the moment, and hence the slight increase I think is consistent with that. Our credit impairment charge going through the P&L has been very low. We said over a period of time it will normalize. I think it's all pretty consistent with that. It's a modest change at the edges rather than anything more substantial.
In terms of the RWA efficiencies, they're not gonna come in a purely linear way. There are some of those that are relatively easier to do. There are some of those that will take a bit more time to actually work through. We remain completely committed to getting the overall number out on a three year basis. I think on a quarter by quarter, you'd expect that number to move around a little bit, but nothing ominous there. Back to the operator.
Thank you, guys.
Thank you. We will now take our next question. Please stand by. Your next question comes from the line of Fahed Kunwar from Redburn. Please go ahead. Your line is open.
Hi, both. Thanks for taking my questions. Just a couple. The first one, just going back to NIM. Thanks for the 160 bps guide in 2023, but I think 160 was kind of where you were pre-COVID when U.S. rates were kind of more like the low 2s. We're looking at U.S. rates being kind of reasonably above 3%. Is there anything that's changed in the balance sheet structure that would mean that your margin shouldn't be materially higher than that, given the U.S. rate environment? It doesn't look like the hedge is really a big enough offset. So is there anything else going on in the balance sheet that would result in your NIM relative to where the U.S. rates are going being lower than where they were pre-COVID? That's my first question.
My second question is just thanks for the comments on wealth seeing early signs of recovery. A couple of wealth management peers in Asia Pac have been a bit more constructive, seeing Asian clients deleveraging and taking a bit more risk. What do you see on the outlook for wealth management given the kind of zero COVID policy in China? Are you also seeing signs of much more risk-taking and better revenue momentum? Thank you.
Good. Thanks, Fahed. Andy, why don't you take the NIM question and any comments you want on the wealth side? I can come back in on either.
Yeah. You're quite right. The NIM immediately pre-COVID was about the 1.60% level. 2023 being back at that level will be very equivalent to where we were immediately pre-COVID. I think the balance sheet has moved a little bit in that period. You know, it'll be a total three year period. There is some product mix change. Obviously in our forward forecast as well, you know, we are second guessing what we think will happen over a period of time. Overall, I don't think there's anything at all ominous in there. I think getting back to 1.60% is more putting ourselves back on a sort of long-term average interest rate basis where you'd expect this business to be operating.
Clearly the profitability of the business will be, you know, higher by quite a notch as a consequence of that. Wealth management side, look, you know, sentiment has been against investment just recently. The first quarter in particular, to some extent the second quarter, there were lockdowns in our biggest wealth market of Hong Kong. That obviously doesn't help sort of face-to-face sales, etc. Our view is that over a period of time, particularly lockdown is now fading, sentiment will be what it will be. Typically after a period of sentiment of things do rebound, the question really is when will that happen? I think we've taken a reasonably cautious view of that, but I'd hope at some point in time we would see actually sentiment change coming.
Remember, the wealth management business for us over a multi-year period, the CAGR on our income there has been very, very strong. 8%-10% over a multi-year period. It has had periods when it's been lower. It's had periods when it's been higher. Overall, our confidence in that business remains absolutely unchanged through this. It's just a tougher period just at this point in time.
Yeah. I think I'd be even more direct. When we look over, you know, 10 or 15 years, there's leading indicators, and then there's the outcome. The outcome is income, and the income is highly dependent on market sentiment in any given quarter. And whether it's in this quarter, apart from the Hong Kong related and China related COVID lockdowns, which of course has a direct impact in terms of our ability to connect with customers, equity markets were very weak, in particular, early in the period, Chinese equity markets, and the tech sector, which had been a higher proportion of our wealth management activity than the broader market.
Like earlier market disruptions that we've seen that come from time- to- time, we have had a meaningful drop in income that typically stabilizes at a period. Perhaps we're in that stabilization period right now. We get a gradual return generating this 8%-10% compound growth that Andy's talked about consistently. The leading indicators are very encouraging for us in terms of new clients, in terms of the customer satisfaction that we get from those new clients, the amount of money that they're moving into their accounts. We see that in terms of good CASA growth and time deposit growth as customers are getting ready to invest with Standard Chartered by moving their money into our accounts.
It's a leading indicator because they're not yet putting that money to work in the riskier markets, which of course generate higher wealth management income for us. The other comment I would make is that while the bank insurance distribution has been very disrupted by the COVID-19-related lockdowns, the underlying performance there continues to be very strong as well. We're happy. Satisfied, I guess would be the better word to say it, with our current performance given the context, but quite optimistic about the outlook in the wealth space. Can we go back to the operator?
Andy, just one follow-up.
Sorry.
Thank you.
Carry on, Fahed.
Thank you.
Okay.
I will.
Fahed, you got to go back in the queue.
Sorry. I will go to the next question. Please stand by. Your next question comes from the line of Robin Down from HSBC. Please go ahead. Your line is open.
Good morning. Just one quick question for me. Obviously, we tend to focus on the kind of margin numbers, but obviously the average interest-earning asset figure is also kind of important for the guidance. If I look at your sort of average balance sheet data on page 170, it looks like you're running down interbank lending and also customer lending. I don't know if you can give us a kind of sense for what you're seeing in terms of customer loan demand at the moment and where you might expect to see those average interest-earning assets going in the second half and perhaps if you've got a crystal ball into 2023. Thanks.
Andy?
Yeah, let me pick that up, Robin. There's been, again, quite a lot of movement in the average interest earning assets over the course of the year. We've had underlying growth from customer demand. We've had foreign exchange. We have had the consequence of the RWA efficiency metrics. You put all of that together, we probably had underlying, about 2% growth, in the six months year to date. That I think is a sort of fair indicator of what's happening under the surface of it. As we look forward to the balance of the year, I think we've got a number of factors in play here. One is markets like Hong Kong, which clearly had a more difficult first half, hopefully picking up a little bit more momentum.
Secondly, quite a lot of our markets are still in the coming out of COVID phase, which, you know, I think still gives some opportunity for growth in that space. FX will obviously play a role as we go forwards over the coming months. I think we are still sort of sitting here saying, actually, with the way that the economies in which we operate, remember, those are largely not the Western ones, playing out, that actually there is reason to still be, you know, quietly confident about the growth that's there. There's obviously a lot of talk about recession in the Western market. That's probably, you know, for us, a slightly lesser issue, certainly as we talk about the balance of this year. We'll all have to see where that goes next year.
At the moment, I'd say the engine there is still running okay, and we'll continue to push hard on that over the balance of this year.
Operator, can we pick up the next question?
Thank you. We will now take the next question. Please stand by. Your next question comes from the line of Alastair Ryan, Bank of America. Please go ahead. Your line is open.
Thank you. Good morning. Two related questions, please. Back to the net interest margin guidance. If I go to the year-end 2021 results, you gave us $1.3 billion for 100 basis points +30%-40%, over time. Given the 3% move in rates since then, that would mechanically from the 1.19 start, give you a number of about 1.9%. Now I appreciate, things change, but 1.6%-1.9% is a really big gap. The question in short is the 1.6% a low guidance or is something really meaningfully different to what you thought at the beginning of the year? The second question is on the current savings accounts book.
That's down 7%, slide 41. Down 7% year to date, which is quite a meaningful reversal of what's been a very strong trend. Is there anything in there? Or just currencies? Thank you.
Andy?
Yeah. Alastair, let me pick the first point up. I know we give it as our guidance, the sensitivity analysis, the 1.3, but it's an incredibly difficult number, I think, to work from. You know, it is an assumption of simultaneous change in FX rates across all markets at the same time. It is a full year effect, and obviously the big ramp up we've seen has been a midyear effect this year. We have then got FX that comes into play, and we have got, as you observe in your question, the fact that after the first year, it is a first year number. We then get more assets at rollovers, etc., that need repricing. It is genuinely really difficult to do that sort of correlation.
I think that I would place personally more store on what we've said on the 140 and the 160, because that takes account of difference in timing of rate changes across the many, many markets in which we operate. It takes account of when during the current year, particularly, those rates started to move. It takes account of the very latest view that we've got on betas, etc. I would say that the 140, 160 is sort of the real life number, whereas the 1.3 number, you know, is based on a particular set of assumptions. On the savings, listen, I think what we've seen in the first part of this year is a slight movement, not surprisingly, between our sort of current account savings account and the term deposits.
Obviously as rates increase, any sort of gap between what you can get in a current account and what you can get on a time deposit, more people will start to look at that. I think by memory, the mix between the current accounts and the term deposits in our consumer business has changed by two percentage points, I think it is, on a year to date basis. Probably we'll see that continue over the balance of the year. You know, time deposit's fractionally more expensive for us, but overall it's very good quality deposits. I sort of look at the two as a collective. I'm very happy with the overall liquidity position at the moment. It's not at all troublesome.
Maybe just at a big picture level, as we reflect on the guidance that we gave in the beginning of the year, we obviously made assumptions market by market about the pass through rates or the beta, deposit beta. We made assumptions about the migration from current accounts, savings accounts into time deposits. That was the basis of our $1.3 billion guidance. As we see how things have played out so far, it's basically perfectly in line with our guidance. The market behaviors are exactly what we expected. We're obviously not done with the rate hike cycle. But the behaviors are the same. The behaviors are in line.
As you pointed out when you asked the question, Alastair, the FX impact on the current account, savings account, in time deposit numbers is material. When you normalize for the currency effect or take a constant currency view, it's more or less flat when we get to the savings account. It is largely down to the FX. But the really important point is that overall, we were guiding to 160 basis points in NIM, and that's something that we're very happy to stand by as we sit here today. Operator, I think we can go to the next question.
Thank you. I will take the next question for you now. Please stand by. Your next question comes from the line of Nick Lord from Morgan Stanley. Please go ahead, your line is open.
Thank you very much. Thank you for taking my questions. Two questions actually. The first is just referring to slide 33, which is your China commercial real estate breakdown, $3.7 billion. I just wonder if you could remind us in terms of sort of split about between state, let's say, their enterprises between private enterprises. Also the stuff that's booked out of Hong Kong, is that sort of directly exposed on sort of mainland China sort of property or is it sort of Hong Kong exposures of mainland developers? Just want to make sure that you sort of captured in there sort of any exposures outside of China of mainland developers.
I'm just trying to get a feel for what's in and what's not in that 3.7%. Then the second question is, as HIBOR, one-month HIBOR starts to move up, which I assume it will do over the next few months, to sort of close some of the gap with one-month LIBOR, you're gonna have to begin to sort of think about what you do with prime rates in terms of your mortgage spreads. I just wonder if you could give us, sort of a view on what you might think will happen to mortgage pricing in Hong Kong and what you've sort of incorporated in that margin forecast for mortgage pricing in Hong Kong.
Yeah. Okay. Thanks, Nick. Slide 33 that you referred to, as you say, $3.7 billion of commercial real estate relating to China. That's slightly down on where we were previously. We've given various data points on that slide. I mean, I would say overall we've been pretty thoughtful about which exposures we've taken on over a period of time. Generally speaking, we've been with the high quality developers. Roughly, I think 3/4 of that exposure is investment grade. Proportion of it that is projects under construction in China is, I think, less than 1%. You know, it's a well-constructed portfolio, not without its issues.
You know, we have said that a big part of the credit impairment charge we took in the first half, I mean, looked at one way, most of the group's charge overall, did relate to the China commercial real estate area. We also show a split on that chart of how much of the exposure is booked in China, how much of it is booked in Hong Kong. That depends a lot on where the clients are based, etc. On HIBOR, we are clearly, as we always do, monitoring the position. We want to grow the mortgage book there. We want to grow the business there. We want to make sure we're competitive on pricing. We'll continue to monitor our pricing on that front, and we'll see how things develop over the coming quarters.
We have made assumptions on that income, obviously, to our NIM forecast for the group as a whole, which I referred to earlier on. That is embedded within that.
Operator, I think. Next question.
Okay.
Thank you. We will now take our next question. Please stand by. Your next question comes from Perlie Mong from KBW. Please go ahead. Your line is open.
Hello, good morning. Thanks for taking my question. Just, can I go back to the prime rate in Hong Kong? What are the considerations when you think about moving the prime rate? Because historically, it's not a rate that moves too much. Just wondering what are the considerations or put other way, are there any non-commercial reasons that you would have to consider, in your sort of position to think about whether to move prime or not? And then how much of a deposit in Hong Kong are prime linked? If prime goes up on the lending side, would some of the benefit be offset by a higher deposit rate over and above what you would expect from obviously, interest rates going higher generally? That's the first one.
The second one, the NIM guidance for next year, 1.60%. I mean, there are already some noises from Fed last week that, you know, the rate of rate hikes might be slower next year, etc. If we see that happening, would you still stand by the 1.60% or sort of just what sort of assumptions are in that number? Thank you.
You sort of that, Andy?
Yes. Let me see if I can have a go at that. Prime rate, I mean, I think as with any rate setting, we will take a view as to what the market is doing, we'll take a view as to what, you know, customers are doing, and if we think it is appropriate, we will make change there. The prime rate has not historically changed very much at all. You know, don't hold your breath, but nonetheless, we'll keep it under review. Proportion of deposits that are prime linked, I think by memory, it's just over half or something of that order. In terms of the NIM guidance, listen, we can only give a view based upon our sort of best expectation of what may happen.
It may well be clearly that our estimates prove to be, you know, inaccurate, but we think as a sort of middle course, $160 is around where we will be. The other factor clearly going into not the NIM necessarily, but the NII, is then just what does the recessionary talk do? Is there an offset from some of the NIM increase that we'll see at the moment, recessionary talk more western than eastern, but you know, we'll see over a period of time whether that continues to be the case. A reasonable estimate at the moment, I think would be that $160 area is where we should be in 2023.
Maybe just to state the obvious, I think it's implicit in your question. If rates do move in such a way that it caused the banks in the market, including ourselves, to increase the prime rate, there would be a partially hedged outcome in terms of the prime rate of mortgages versus the prime linkage on the deposits. Net, it would probably be a modest negative, but that's the expectation or probabilities is priced into the $160.
Thank you. We will now take our next question. Please stand by. Your next question comes from the line of Aman Rakkar from Barclays. Please go ahead. Your line is open.
Good morning, Bill. Good morning, Andy. One question on capital. Your CET1 ratio, 13.9%, it's at the top end of your target range. I appreciate RWAs are going to drift higher in H2, but you're likely to be pretty capital generative, I'd imagine. I'm just trying to work out why perhaps you didn't look to announce a bigger share buyback than the $500 million that you've announced in Q2. Particularly given the last buyback you did, $750 million. I think you executed that well within the quarter. I think it took you about two months. You're likely to execute this actually in fairly short order. Is there any reason why you've not announced something higher? And should we expect that perhaps you could announce another buyback with Q3 results or is this a half yearly thing? Thanks.
Yeah, that's great. Aman, thanks a lot for the question. We said that we're going to operate dynamically within the range, and we are. We've also said that we want to generate enough excess capital to return in excess of $5 billion to shareholders over a three year period. We're, you know, at $1.4 billion or so as we sit here today. We are very well on track to deliver that. It feels like we're on the right track. We want to be well capitalized as we go into a period of uncertainty. We are. We were very comfortable with our asset quality and our provision level. We're comfortable with the earnings momentum that we've got. We want to have a strong capital position, and we do.
We think that there will be opportunities both internally to invest, but obviously also externally. We want to be prepared for things that come along. We're operating dynamically in the range exactly as we said we would. We've got a good, healthy return to shareholders and 500 felt like the right ground to hit at this point. I'll turn to Andy. I'm sure you've got some more thoughts on this.
Well, probably not many more thoughts, actually. This is a balance. We want some capability to grow the business further. We want to make sure we're protected on the downside if the recessionary concerns become any bigger. Our sense is at this point in time to be on a pro forma 13.7 feels fine. Will we review it in future? Absolutely. Are we still committed to the $5 billion overall in the three years? Absolutely. Indeed, look at the buybacks plus the interim dividend we've declared today, $1.35 billion on its own. The share price where it is today makes it pretty attractive to be doing the buybacks as well.
I think, you know, it seems a sensible place to be and, over a period of time, as we have done before, obviously we'll review it, but $5 billion over the three years remains the objective.
Consider an additional buyback at Q3.
We'll review it on a regular basis. You know, historic pattern has been more like one, doing it half yearly, but there is no absolute reason why that has to be the case. We'll review it at various points in time if there's anything more that we can do, you know, as we have shown, I think. Do not worry, we are very prepared to do buybacks.
Operator, can we take the next question?
Thank you. We will now take the final phone question. Please stand by. The question comes from the line of James Irvine from Société Générale. Please go ahead. Your line is open.
Hi, good morning. I just had one question on the rate sensitivity slide 29 of the deck. I mean, it's come down, the overall sensitivity has come down for the reasons you've laid out. Now we see that the other currency block is pretty much, I think, half of the overall sensitivity. I'm just wondering if there's any more color you can give us maybe on that block. If there's, you know, one or two oversized currencies in there, or perhaps just, you know, a geographic flavor of where that sensitivity is coming from. Thanks.
Yeah. Thanks, James. You know, as I said earlier, I think this slide is based upon a set of assumptions, but the real world will be different to that set of assumptions, so one just needs to be a bit thoughtful about it. The key difference in aggregate, I'll come on to your question specifically, is clearly we are, I don't know, 1.5 percentage points further up the curve than we were when we did the previous guidance, and therefore the next 100 basis points is very different to the 100 basis points that was the next one last time round. Factors that come into that are the prime cap on the Hong Kong mortgages, etc., things we've talked about. That, that's why the numbers come down, but it is off a very different start point.
The start point itself is higher and therefore the increment is lower. The mix between currencies, I guess in part that is because some of the non-U.S. dollar currencies have actually increased rates later than the U.S. dollar movements, and therefore we've got more of that still to come, and that is the largest part of why that block is moving less than some of the other blocks on that chart.
Operator if there.
What are the largest, say two or three currencies in there?
There's a whole mixture. I think on the slide we've split it out into the five different currency blocks, I think it is. We've not sub-split the smaller one out there, but you know the markets which we're in, you can see the broad split of activity. It's quite a variety.
Fine. Okay. Thank you.
Okay. Operator, if there are no more calls online, do we have any? Or on the phone, do we have any questions online?
Yes, we've got three questions online. First one is from Manus Costello at Autonomous. You referenced the risks from a strong dollar and high inflation. Which of your markets most concern you with regards to these risks, and what are you doing to mitigate it?
The best mitigation obviously is prevention. We've, I think, done a quite good job over the last several years in making sure that we don't have significant concentrations. I think we demonstrated that in the real world with the challenges in Sri Lanka, where we absorbed the necessary provisions and increases in risk-weighted assets into what was nevertheless a very strong first quarter. As we look across the characteristics of markets that are under pressure, they tend to be smaller and more open economies that are subject to the economic impact of higher U.S. dollar rates and a stronger U.S. dollar, so higher external debt balances. Yeah, I think there's.
If we refer back to some of the work that the IMF has done in terms of identifying some of the hotspots, it's probably correlated with some of our own concerns. There's no good news obviously in periods of financial stress. We do feel quite comfortable that we're prepared for the adverse outcomes in a number of markets that we face. We don't welcome any of them. We sit very close to our central bank and sovereign clients. In many cases we're the ratings advisor for these countries across Sub-Saharan Africa, South Asia, ASEAN, where we clearly are seeing some pressure.
That leaves us in some position to help influence outcomes. It also certainly puts us in a very good position to understand what we can be doing, both to help our clients and the communities in which we operate, but also to protect ourselves, which is what we've been doing. I won't get into much more detail in terms of specific names. Broadly, I think we're as well positioned as we can be. We see the stresses. We think it's gonna be manageable. I think the IMF has been very proactive, and countries that have sought IMF help relatively early on have navigated well so far.
Others that typically, for domestic political reasons, and Sri Lanka would be the most obvious case, that only brought the IMF in late, have fared less well. We're optimistic on balance that we can work through this period of stress. Thanks for the question, Manus.
Thanks, Bill. Next question from Rob Noble at DB. There is a decline in market interest rates in 2024 in the U.S. Given this shape, should we expect NIM in 2024 below the 160 basis points average, or does the rate rise movement build through 2023? The second part to the question, is 10% ROTCE in 2024 possible with the expected dip in U.S. rates?
2024 is still some way out, and I think, you know, high level, probably two sort of effects. One is if, as you say, the rates start to drop a little bit in that period, obviously that would be a bit lower. On the other hand, we do have a lot of our book that reprices beyond the first year, and therefore, there is a sort of undercurrent that actually flows through into subsequent years. I'm not gonna put a number on 2024. I know you didn't ask for one, but I won't put one on there. I don't think we should be seeing, you know, a significant dip in that period, unless obviously U.S. rates fundamentally change in the other direction. Consistent with that, I do think 2024 for the 10% ROTCE is absolutely achievable.
It is what we are setting our stall out to achieve. The rates will be one part of how we get there. Let's not forget that the underlying growth with our customers is still good. I think particularly for those who's based in the Western world, where we read a lot of the press about the gloom and doom and the recession, you know, in the markets we're operating in, actually there is more positivity. Markets are coming out of COVID. You know, maybe there will be some undercurrent from recession over a period of time, but I suspect it may be a little bit later. Overall, 2024 for the 10% ROTCE, we feel very, very strongly about.
Thank you, Andy. Last question for the day from Guy Stebbings at Exane. It's interesting to hear that you're already seeing some signs of negative deposit mix shift into time deposits at this early stage in the rate cycle. Could you elaborate on what you've seen to date and what you assume within your NIM guidance for deposit mix shifts as we move further up the curve?
Andy will take the question, but it's not surprising to us at all. It's exactly what we expected. The profile of the mix shift varies a bit from market to market, but it's broadly exactly what we had factored into our $1.3 billion of interest rate sensitivity guidance back in February. No big surprise. I would underscore that while of course free current accounts are preferable to time deposits where we pay some interest rates, these are still attractive deposits for us. In aggregate, we're growing. That reflects as much as anything the strong customer position that we've got, the underlying strength of our cash management business. It's coming both on the retail and the corporate side.
We're not surprised by the evolution, and we're happy with the progress of the underlying business. Andy?
No, I mean, to repeat what I said earlier, we are seeing a small movement to time deposits, I think to maybe 3% actually, so far in the year to date. I'd expect that we would see another few percentage points over the balance of the year because obviously rate's still rising. But as I say, for us overall, there's a balance here. You know, it may be marginally more expensive, not a lot more, but actually it's sticky, it's good quality, it stays there from a regulatory treatment. It's very, very good funding for us. So yes, a little bit of mix change. Not a worry. Factored into the NIM thinking and factored into NIM thinking indeed for next year as well.
Good. So we'll wrap it up here. I'd like to offer huge thanks to all of you for taking the time on a sunny Friday morning in London, if that's where you happen to be, and what we know is a very busy day for all of you, ahead of what I hope will be a relaxing weekend and, for those getting a break, a really nice bit of break over the summer. Thanks again, and look forward to seeing you next time.