HSBC Holdings plc (NYSE:HSBC) Q3 2023 Earnings Call Transcript

HSBC Holdings plc (NYSE:HSBC) Q3 2023 Earnings Call Transcript October 30, 2023

Operator: Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference Call for HSBC Holdings plc's Q3 2023 Results. For your information, this conference is being recorded. At this time, I'll hand the call over to Georges Elhedery, Group Chief Financial Officer.

Georges Elhedery: Thank you, operator, and hello, everyone. Thank you for joining us on our third quarter results call today. I will lead today's presentation and Noel will join me for the Q&A session. Allow me first to begin by saying a few words on recent events in the Middle East. We have all been shocked by the devastating terrorist attack on Israel on 7th of October and saddened by the growing humanitarian crisis in Gaza. The loss of innocent life and suffering is heartbreaking. We continue to offer assistance to our impacted colleagues and clients. Just to be clear, we're not changing our strategy in Israel or the Middle East. Turning to our results now. As always, our purpose ambition, values and strategy have been helping us drive the results that I am going to talk about today.

Some highlights to begin with. First of all, the year-to-date performance clearly demonstrates that we have had three consecutive strong quarters reflecting the successful execution of our strategy. Year-to-date reported profit before tax was $29.4 billion, which is an increase of $17.4 billion on the same period last year, supported by higher interest rates and enabled by our strong balance sheet and the non-recurrence of notable items. We have delivered an annualized return on tangible equity of 17.1%, excluding strategic transactions. For the avoidance of doubt, these transactions are the reversal earlier this year of the impairment relating to the planned sale of our retail banking operations in France and the gain on acquisition from SVB UK.

We've announced another share buyback of up to $3 billion, bringing total buybacks announced this year up to $7 billion. And we've announced three quarterly dividends which totaled $0.30 per share. We have also exhibited good growth across our businesses. Wholesale transaction banking revenue was up 50% year-to-date, primarily due to higher rates and reflecting the strength of our deposit franchise. Wealth had another good quarter. Wealth balances were up by 12% compared to the same quarter of last year. And we're also very pleased that we attracted $34 billion of net new invested assets in the quarter, bringing the rolling 12-month total of $277 billion, which is a strong performance and testament to our strategy. The planned acquisition of Citi’s wealth business in mainland China will also help accelerate our growth plans for this business.

In our two home markets of Hong Kong and the UK, we are also seeing good growth areas. In Hong Kong, insurance new business CSN was up 40% year-on-year. And our mortgage books in Asia and the UK grew by a total of $11 billion compared to the third quarter of last year. Let me now move on to the third quarter numbers. Revenue was $16.2 billion, which was up $4.6 billion or 40% on last year's third quarter on a constant currency basis. This was driven firstly by group net interest income of $9.2 billion, which was up by $1.3 billion on the same period last year. And secondly, non-NII was $6.9 billion up by $3.3 billion, primarily due to first the non-recurrence of a $2.5 billion impairment in last year's third quarter relating to the planned sale of our retail banking operations in France.

Second, $1.6 billion higher revenue offset into non-NII from the central costs of funding GBM trading activity; and three, offset by $0.6 billion of treasury disposal losses taken for structural hedging and risk management purposes for our balance sheet. Banking NII of $11.5 billion was up $2.8 billion on last year's third quarter, and broadly stable on the second quarter. Expected credit losses of $1.1 billion were broadly stable on the same period last year, and included a $0.5 billion charge in relation to our mainland China commercial real estate portfolio booked in Hong Kong. Costs were up 1% in the quarter as lower restructuring costs were offset by higher technology spend, a higher performance-related pay accrual and costs from HSBC innovation banking.

Lending balances and deposits were both broadly stable. And our CET1 ratio was 14.9%, an increase of 20 basis points on the second quarter. Finally, we announced a third consecutive quarter of strong capital returns with a quarterly dividend of $0.10 per share and a further share buyback of up to $3 billion, which we expect to complete before the full year results in February. The next slide shows that our global businesses all performed well. Wealth and Personal Banking had a strong quarter with revenues up by 71% or by 7%, excluding the impairment taken in last year's third quarter relating to the sale of our retail banking operations in France. Within this, Wealth was up by 6% as our ongoing investment in that business continued to gain traction, and Personal Banking also had another good quarter up by 21% due mainly to higher rates.

Across Commercial Banking and Global Banking and Markets, global payment services had revenues of more than $4.3 billion, which was an increase of 56% on the third quarter of 2022. And in our trade business, lending balances were up 3% in the quarter, mainly in Asia, reversing the declining trend from previous quarters. Global Banking and Markets also performed well, up by 2%. This included a resilient performance in foreign exchange compared to a strong third quarter last year and the good performance in securities financing and debt markets. On this next slide, reported net interest income was $9.2 billion, which was broadly stable on the second quarter. Banking NII was $11.5 billion, up $2.8 billion on last year's third quarter and stable on the second quarter of this year.

As a reminder, banking NII in the second quarter was favorably impacted by a $0.4 billion year-to-date catch up due to methodology changes, approximately half of which was attributable to the first quarter. Adjusting for this, banking NII was slightly up in this third quarter on the like-for-like basis. The net interest margin remained broadly stable at 170 basis points. We are not updating our 2023 NII guidance and are also not expecting consensus to change. Next, constant currency non-NII of $6.9 billion was up $3.3 billion on last year's third quarter, primarily due to, number one, a $2.3 billion favorable movement in notable items and foreign exchange as last year's third quarter included the $2.5 billion impairment relating to the planned sale of our retail banking operations in France.

And this year's third quarter included a $0.6 billion of treasury disposal losses. Number two, a $1.6 billion increase in the revenue offset into non-NII from the central costs of funding GBM trading activity. And number three, a $0.3 billion decrease in other which includes lower market treasury income. We continue to reposition our treasury portfolio as part of our balance sheet structural hedging and risk management initiatives. In the third quarter, this resulted in $0.6 billion of treasury disposal losses. These losses do not have a material impact on CET1 capital or TNAV as they have already been taken through reserves last year, although they will have a modest benefit to our CET1 ratio this year. The disposal proceeds are reinvested into higher yielding or higher duration assets.

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Disposal losses are forecast to be more than recovered through NII with the majority over the next five years. Further restructuring of the treasury portfolio leading to a loss of around $0.4 billion is expected in the fourth quarter, which will also be reported as a notable item and have modest CET1 upside. Turning now to credit. Our third quarter ECL charge was $1.1 billion, which was stable on the same period last year. It includes a $0.5 billion charge related to our mainland China commercial real estate exposure booked in Hong Kong, following a $0.4 billion charge in the same quarter last year. The remaining wholesale charge was $0.3 billion. The $0.2 billion personal lending charge included modest UK releases, although we retain overlays to address the current risks in the economic outlook.

Stage 3 balances of $19 billion were down $1 billion on the second quarter and account for 2% of total loans. We continue to expect the 2023 ECL charge of around 40 basis points of average gross customer lending, including held for sale balances. Focusing now on our mainland China commercial real estate portfolio, our principal area of focus remains the portfolio booked in Hong Kong. As you can see, our total exposure stands at $7.5 billion, which is down by $0.5 billion from the half here, primarily due to write offs. In February this year, we communicated the management assessed plausible downside scenario of around $1 billion. The deterioration in the third quarter means that we crystallized around $500 million of provisions into the P&L that were part of this plausible downside.

We're encouraged by recent policy measures, which will help the sector but need time to take effect. So the plausible downside scenario does now look more realistic for full year 2023. Our exposures rated strong, good and satisfactory were broadly stable on the third quarter last year. Around half of these exposures is lending to state owned enterprises. The other half is primarily lending to privately owned enterprises that are not residential property developers. This is reflected in the minimal ECL allowance in this part of the portfolio. And if I now turn to the table at the bottom of the slide against unsecured credit impaired exposures, we already have now 73% coverage ratio. And against unsecured substandard exposures, we have a coverage ratio of just under 10%.

This is clearly an area that we will continue to monitor closely. But to reiterate, we continue to expect the 2023 ECL charge of around 40 basis points of average plus customer lending, including held for sale balances. Next on costs, reported costs for the first nine months of 2023 were down 2% on last year, primarily due to lower restructuring costs. Our cost efficiency ratio for the same period was 44%, improved from 66% last year. On a constant currency basis, costs went up by 1% on last year's third quarter as the lower restructuring costs were offset by increased technology and operations spend, a higher performance related pay accrual and the acquisition and investment costs from HSBC Innovation Banking, which were not included in our original plans.

On our cost target basis, we now expect our 2023 costs to be around 4% higher than 2022. This is around 1% or $300 million more than previously guided due to higher technology and operation spending, which we believe is appropriate given the importance of digitization to the group and the strong financial performance of the business. In addition to this, we are contemplating an increase in performance-related pay in the fourth quarter depending on the outturn of our performance and ongoing execution of our strategy in the fourth quarter. This would represent a further increase of around 1%. We have provided the full reconciliation from reported cost to our target basis cost on Slide 15 of the deck. And to reiterate, tight cost discipline remains my priority and a priority across the whole group.

The next slide shows our strong capital position. Our CET1 ratio was 14.9%, which was up 20 basis points on the second quarter. A few things to draw your attention to. Number one, the dividend accrued year-to-date is $9.6 billion or $0.49 per share while we have announced dividends of $5.9 billion or $0.30 per share. Number two, we have announced a further share buyback of up to $3 billion, which is expected to have a circa 40 basis point impact on our CET1 ratio in the fourth quarter. We are aiming to complete it before the full year results in February. Number three, we also expect to reclassify our retail banking operations in France as held for sale in the fourth quarter ahead of completion of the planned sale on January 1, 2024, which would have a further impact on the CET1 ratio of around 30 basis points.

Finally, the planned sale of our Canada banking business also remains on track to complete in the first quarter of 2024. And as a reminder, profits from our Canada banking business accrued to the buyer and are not included in our dividend calculations for the year. We estimate the gain on sale will be around $5.5 billion, which we will recognize through a combination of earnings from Canada and the remaining gain on sale at completion. Upon completion of the transaction, it remains our intention to consider a special dividend of $0.21 per share as a priority use of the proceeds and as previously announced. So in summary, this was another strong quarter. We delivered a good profit performance and an annualized return on tangible equity of 17.1%, excluding strategic transactions, reflecting the successful execution of our strategy.

Transaction banking and wealth both performed well and continued investment will help accelerate the growth of our wealth business. We continue to expect the 2023 ECL charge of around 40 basis points of average gross customer lending. We remain committed to tight cost discipline. And we have a strong capital position and have increased return to shareholders by way of dividends and share buybacks. And with that, operator, can we please open it up for questions? Thank you.

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