Hsbc Holdings PLC (HBCYF) Q2 2026 Earnings Call Transcript

welcome to the analyst and investor presentation for hsbc holding plc's 2026 interim results this webinar is being recorded i will now hand over to georgiel hedery group ceo welcome all to today's call i'm joined by pam who will take you through the second quarter performance in detail in a moment i'll cover three items one our second quarter highlights and the first half performance 2. The progress we're making on strategy execution and 3. Our targets for 2026, 2027 and 2028. Let's turn straight to performance. My comments here will exclude notable items and the comparisons will be year-on-year on a constant currency basis. Momentum accelerated into the second quarter. We We grew revenues by 7% to US$19 billion. We generated profit before tax of US$10.3 billion, up 13% year-on-year. And we delivered an annualized return on tangible equity for the quarter of 19.5%. We grew our deposit franchise by US$46 billion and grew our loans by US$20 billion. Next the half-year performance highlights. we grew both group revenues and group profits before tax by 6% with an annualized return on tangible equity of 19.1% year-on-year we grew our deposit franchise by 129 billion US dollars or 8% including health for sale balances our Our deposit base stands at 1.8 trillion US dollars. We grew loans 55 billion US dollars or 6% year-on-year on the same basis. We see improved demand in Hong Kong and consistent strong growth in the UK. We grew fee and other income in wholesale transaction banking by 4%. As the world's trade bank, this shows the central role we are playing and the growing market share we are taking as our customers adapt to new patterns of trade. In wealth, we grew fee and other income by 18%, delivering particularly good growth in our market-leading Asia franchise. We are distributing to our shareholders with another 10 cent quarterly interim dividend per share, 20 cents for the first half. and we are restarting share buybacks with the up to 1 billion US dollar we announced today three quarters after pausing them following the announcement of the Hang Seng Bank privatization we continue to progress at pace and with discipline with our strategy execution each of our four businesses is growing Each generated an annualized return on tangible equity in excess of 17%. And each is building on a strong foundation for future growth. Our four leading and highly connected businesses bring scale benefits to our unique growth proposition. We continue to focus on three clear strategic priorities and we are moving at pace with each. 1. Be simple and agile 2. Drive customer centricity and 3. Deliver focused, sustainable growth First, to strategic priority number one To unlock HSBC's full potential we have been re-engineering to become simple and agile To do this, we have focused on five areas First, organizational structure That's done we're now focused on embedding greater business collaboration. Second, leadership. That's also done. We're now focused on embedding a common enterprise leadership culture to drive a bank-wide high-performance culture. Third, organizational simplification saves. We are today revising upwards our total target savings to 2 billion US dollars. We originally set out to deliver 1.5 billion US dollars of annualized saves. We have now exceeded this target, reaching 1.7 billion US dollars of actioned saves. We have achieved this with associated restructuring costs of 1.4 billion US dollars, lower than originally expected. We are now planning to use the full US$1.8 billion of restructuring costs, as per our initial commitment, to increase total organizational simplification saves to US$2 billion to be actioned before the end of the year. The additional saves will provide capacity to support further business growth. Fourth, cost reallocation from non-strategic or low-returning businesses. We have now announced 15 business or market exits since 2025. Most recently, the sale of our Singapore insurance business, the exit of our Australia retail business, and the sale of our retail banking business in Egypt. These disposals provide investment capacity to drive franchise growth in our areas of strategic focus. This is where we have a leadership position and can deliver better returns. Clearly, completion of announced disposals and related actions remains subject to relevant regulatory and other approvals. In 2026, we plan to have reallocated 0.3 billion US dollars of this 1.5 billion US dollars. Fifth, streamlining and upgrading our operating model. This is where we are simplifying the bank at scale. It will be a multi-year journey comprised of two sets of initiative. The first one, One, demise of non-strategic infrastructure, and the second one, process re-engineering. In the first half, we demised another 20% of the total non-strategic application reduction plan we set to deliver between 2025 and 2028. We have now demised a total of circa 50% of the apps we plan to demise by 2028. On process re-engineering, we continue to work on around 50 processes and procedures to achieve substantial simplification. This is where we are putting our AI to work to simplify, strengthen and accelerate the bank, empower our colleagues and personalize our service to customers. We are investing in the talent, training and technology to deliver it. Now to strategic priorities number two and three. I will talk to these through the lens of our four connected franchises. For each of these franchises you will clearly see one our leadership position in those areas of strategic focus, two the growth delivered in the half-year and three the strong client recognition. Our Hong Kong home market is a dynamic economy, a top three global financial center and a thriving trade gateway. It is the super connector between the Chinese mainland and the world, and has just become the world's leading cross-border wealth hub. Our deposit base is almost twice the size of the second largest pier. The privatization of Hang Seng Bank represents a unique opportunity in the growing market. It enables us to scale capabilities and drive growth across both banks. We can already see the benefits, both financial and operational. For instance, Hang Seng Bank nearly doubled its new customer acquisition quarter-on-quarter to around 60,000 customers after adopting HSBC's digital onboarding capabilities. In the first half, we grew our wealth balances in Hong Kong by 10% year-on-year, reaching US$0.5 trillion. We continue to attract high volumes of new-to-bank customers, 640,000 personal banking customers and 24,000 business banking customers. We continue investing to strengthen our market share. Next, the UK. Taking our full footprint in the UK, we are the UK's leading international bank. We delivered strong lending growth of 10 billion US dollars in commercial banking an increase of 10% and 10 billion US dollars in mortgages an increase of 5% we continued to grow deposits and we grew our customer base year-on-year with active premier customers up 7% new to bank customers in business banking were up 48% the UK is a key contributor to global loan growth and we are pleased to be supporting the UK's growth as the UK's leading international bank. Next, our wealth franchise. We are Asia's number one wealth manager with 1.1 trillion US dollars of wealth balances. This deeply rooted full-service franchise is performing strongly. Revenue generated globally from wealth relationships account for around a quarter of our group revenues. In the first half, we generated global net new money of 64 billion US dollars. In Asia, we generated net new money of 57 billion US dollars, representing 32% growth year on year. We saw continued momentum in wealth, fee and other income growth for the half year, increasing 18 percent to 5.5 billion US dollars. Our unique position in wealth management across the kind continuum from premier affluent to private banking combined with an acceleration of our investments will help us capture an even bigger share of the structural growth opportunity. Next our corporate and institutional banking franchise. We generate 85% of our client revenue from multi-jurisdictional clients and within this cross-border client revenue has increased 15% year-on-year. We are a leading globally connected wholesale transaction bank. 65% of cross-border client revenue or client revenue booked outside the clients home market is from clients headquartered in the UK, Europe and the Americas. This proportion is stable year-on-year and shows the importance of these regions to our overall network and the resilience of these flows. Chinese mainland clients contribute 10% of this multi jurisdictional client revenue, with 75% of those revenues booked cross-border. As more Chinese businesses go global, we expect the structural, secular trend to continue over the medium term and become a key growth driver for CIB. Clients increase their deposits with us by 16% year-on-year. this growth is broadly geographically spread demonstrating the value of this franchise which is built on deep client trust in our balance sheet the power of our network and our capabilities and expertise we grew wholesale transaction banking fee another income by 4% with trade up 7% reflecting resilient client trade flows. CIB is performing well and its first half annualized roti was over 18%. Finally, let's turn to our targets. Our first half performance demonstrates continued progress against our targets. It gives us the confidence to reiterate each of them, including growing our revenues year-on-year rising to 5% by 2028 and delivering 17% or better return on tangible equity for each of the three years. We are creating a simple, agile, growing bank built to generate high returns. A bank capable of achieving more. We are executing our strategy with discipline, precision and pace. We are investing for growth and we are confident we can navigate uncertainty from a position of strength. We have begun this next phase with a clear strategy, performing businesses, focused investment and an international network that remains difficult to replicate. We are creating the capacity to continue investing for growth including in talent, technology and AI. HSBC is becoming the bank we set out to build and we are now putting more of its strength to work. By doing so we will unlock more of HSBC's full potential. Let me now hand over to Pam. Thank you.

Thank you George. Thank you everyone for joining. As George said I will focus on the second quarter performance. My comments will exclude notable items which adversely impacted profits by not point two billion US dollars this quarter. These are set out on slide 30. The comparisons I will make will be year-on-year on a constant currency basis. Let's turn straight to the highlights. We can see the momentum building across the bank. Revenue grew 7% to $19 billion. Growth accelerated from the first quarter. This was driven by banking NII from both deposits and loans, strong growth in wealth fee and other income, and stronger wholesale transaction banking. Each of our revenue drivers was stronger than in the first quarter. Profits before tax rose 13% to 10.3 billion U.S. dollars. Annualized return on tangible equity for the quarter was 19.5%, giving us 19.1% for the first half. Our CET1 grew to 14.1%, up 10 basis points on the first quarter, after supporting 20 billion U.S. dollars of loan growth. We are pleased to reinstate buybacks with up to 1 billion U.S. dollars announced today. We continue to target a dividend payout ratio for 2026 of 50% of earnings per ordinary share, excluding material notable items and related impacts turning to our business segment performance all four of our businesses grew revenues each delivered annualized return on tangible equity of more than our group target of at least 17% excluding notable items in fact they are all above 18% return on tangible equity. This broad-based performance shows our strategy is working. Let's now turn to Banking NII. Banking NII increased 0.8 billion US dollars year-on-year to 11.6 billion US dollars. quarter-on-quarter growth was not 0.4 billion US dollars, including not 0.1 billion US dollars in prior quarter one-off items. This reflects really good deposit and loan growth. We are upgrading our full year banking NII guidance to at least 46 billion US dollars. This reflects growing both sides of the balance sheet and the continued favorable interest rate outlook. Next, wholesale transaction banking on trade business delivered this quarter with balances up 29% year-on-year trade is at the heart of HSBC and we are seeing the trust our customers place in us to help them navigate and invest for wholesale transaction banking as a whole we grew fee and other income 7% year-on-year, up from 2% year-on-year in the first quarter. Our income streams accelerated in the second quarter. Security services grew 16% as we win new mandates and grow volumes. trade grew 7% payments grew 6% driven by growth in volumes across most regions and FX returned to growth up 5% driven by robust client activity let's now turn to wealth. We grew fee and other income by 21% to 2.8 billion US dollars. Growth was driven by all four income streams. Investment distribution up 26% on higher mutual fund and structured product sales. Insurance up 21% from an already strong base on higher CSM release, as shown on slide 35. Private banking up 22% on increased client trading activities and recurring fees. And asset management up 7% on continued AUM growth slide 33 shows net new money in the second quarter was 25 billion US dollars of which 22 billion US dollars came from Asia. And you will see on slide 31 that there has been no slowdown in our Hong Kong new to bank non-resident customer acquisition in recent months. This slide also shows that while While new-to-bank customers initially bring relatively low balances, these grow significantly as the relationship matures. Next, to credit, our second quarter ECL charge was US$1.1 billion, equivalent to an annualized charge of 41 basis points as a percentage of loans and advances. We reiterate our full-year 26 credit guidance of around 45 basis points. This quarter includes additional Stage 3 charges of which US$0.2 billion relates to Hong Kong commercial real estate. Slide 39, which you have seen before, sets out our exposures. Hong Kong residential prices have firmed. The prime market for office has improved, but we still see some areas of pressure in office and retail. Outside of Hong Kong, we have seen small pockets of mid-market credit pressure in the UK and across Asia. There is no clear pattern, but we are watching it closely in the light of elevated energy prices and interest rates. Let's now turn to costs. Cost growth this quarter is 1% year-on-year. Our disciplined approach to cost management keeps us on track to achieve 1% cost growth in 2026 compared to 2025 on a target basis. You see on the left, the 5% inflation, investment and other is offset by 3% of simplification savings in the first half as a whole. Should strong business performance continue, we may consider additional performance-related pay, which would increase 2026 costs modestly. As George said, we have revised upwards our targeted organizational simplification saves to 2 billion US dollars. Slide 27 shows our simplification saves progress since the program started and its updated trajectory. What I will add is that should strong business growth continue, we will accelerate initiatives to support future growth, which would increase 2027 costs. This reflects the confidence we have in the opportunities ahead of us. The costs will be partially offset by the benefits of the higher organizational simplification saves I just mentioned, which we will action by the end of this year. As George said, we have now announced 15 business or market exits since 2025. slide 28 sets out our progress clearly next to customer deposits and loans our deposit franchise increased by 46 billion US dollars in the quarter this elevated growth to eight percent year-on-year CIB deposits increased 42 billion US dollars in the quarter. We saw momentum in GPS, new security services mandates, and large corporate inflows in Hong Kong. I will highlight that about half of the CIB deposit growth in the quarter was large and short term. These balances come and go. Our Our Hong Kong business grew deposits by US$9 billion and the UK by US$3 billion, reflecting commercial and retail inflows. You see a US$7 billion outflow. In IWPB, there is a move of balances to help for sale and we saw private bank deposits flow into investments at quarter one we gave you the split between instant access and fixed-term deposits today on slide 38 we are giving you an additional disclosure of the split between retail and wholesale deposits this shows the strength and breadth of our deposit base in particular the wholesale instant access deposits that are a source of franchise strength turning to loans growth was 20 billion US dollars in the quarter in the UK we delivered another quarter of good growth. This was in both commercial lending and mortgages. We see good momentum in our domestic portfolio and are pleased to help drive UK growth. Hong Kong continued to demonstrate encouraging momentum as the economy grows. CIB was led by that trade momentum I've previously discussed, that is in Hong Kong, across Asia, and in the UK. And in IWPB, it primarily reflects private bank lending in Singapore and Hong Kong. Now, turning to capital. Our 100 basis points of capital generation from regulatory profits is up both quarter on quarter and year on year. This quarter, franchise balance sheet growth across the bank consumed 30 basis points of capital. This supports future income. We accrued 50 basis points in dividends, and our 14.1% endpoint enables us to announce an up to 1 billion US dollar buyback. I will emphasize that buyback decisions will be taken quarterly, subject to our normal buyback considerations. Finally, Targets and Guidance. We reiterate the targets we set out at the full year. Revenue rising to 5% year-on-year growth by 2028, excluding notable items. Return on tangible equity of 17% or better, excluding notable items each year. Dividends, 50% of earnings per share, excluding material notable items and related impacts. These targets are how we run the bank. We are always pleased to exceed them in any given year should circumstances be supportive. Second guidance. Today we are updating our banking NII to at least 46 billion US dollars and we are raising our targeted organizational simplification saves to 2 billion US dollars to be actioned this year. To conclude, the intent with which we are executing our strategy is reflected in the strong growth and momentum in the second quarter. It shows discipline, performance, and delivery. Discipline in the way we are applying strong cost control and investing to deliver focused, sustainable growth. We are on track to achieve our target of around 1% cost growth in 2026 compared to 2025 on a target basis. And we are reallocating costs from non-strategic or low-returning businesses towards growth opportunities while upgrading our operating model. Performance in our earnings. All four of our businesses grew revenues and each delivered annualized return on tangible equity in excess of group target of at least 17 percent excluding notable items and delivery our second quarter results show momentum in creating a simple more agile growing HSBC with that we are happy to take your questions thank you Pam as a reminder if you would like to ask a question today please use the raise hand function in zoom when you are invited to ask your

question, please accept the prompt to unmute your line. If you find your question has been answered, you may remove yourself from the queue by lowering your hand. Our first question today comes from Guy Stebbings at BNP Paribas. Please accept the prompt to unmute your line.

Hi, morning there. Hopefully you can hear me okay. So a couple of questions really around growth. It does sound like part of the message today is that there's more opportunities out they deploy capital into the business so you know it's more of a priority perhaps over buybacks from here so uh two questions sort of falling off that um what sort of metrics are you looking at when when making that decision presumably there's a demand point here but also a spread point so perhaps you could talk about you know where you're seeing good opportunities on on both the volume and spreads right now and attach that when it comes to capital generated from upcoming sales should we again think about the priority being deployment back into the business rather than buybacks. And then on net interest income, it's been a good Q2 print. You've got hedge support in the second half. And then again, there's this more upbeat message on volume dynamics. So I'm struggling a little bit with the guidance for the second half of the year for respecting that to work through. What is it that means that we don't see growth in the second half versus that Q2 run rate? Thank you.

Okay. Thank you, Guy, for your two questions. I'm going to take your first question on growth and ask Pam to comment on the Bank NII for the second half of the year so so first with the focus of our business on these areas where we are a market leader where we can drive underlying growth and where we can generate high returns we are seeing now growth across all those areas of focus across all four businesses we're also actually driving those from a position of material I mean, we are the leading Asia wealth manager. We are the world's trade bank. We serve Hong Kong across two iconic brands, and we, of course, have a very important role in the UK as a home market as the UK's leading international bank. So therefore, it does become very important that we continue supporting these leadership positions with the underlying structural growth opportunities in order to continue taking market share and serve our clients with these strengths. Now with regards loans specifically, one thing to reassure you about is that we will only grow at the right returns and within our risk appetite. That is paramount in the way we drive our growth. And that means meeting our targets or exceeding our targets. We're very pleased to see growth in the UK. commercial has grown 10% with 10 billion additional 10 billion US dollars additional loans but we're also very pleased to see finally Hong Kong resume long growth after many quarters of contraction or or if you know flat so this is very encouraging for the future and then lastly guy on on that again our priority the high your priority in the way we use our capital generation 100 basis points first is to deliver the 50 basis points accrual for our dividend that's to meet our 50% dividend payout ratio on our earnings adjusted for material notable items the second priority use of our capital is to support business organic growth this is how we can generate the highest value for our shareholders when we do it of course within risk appetite and at the right returns and then the leftover excess capital preferred mechanism to distributed is through share buybacks and we're very pleased this quarter to announce a 1 billion share buyback after posing it for three quarters rebuilding capital from the hang singh bank privatization thank you guy so you're absolutely right the banking nii environment is benign um and our own update on the guidance of at least 46 billion dollars reflects a good

outlook for a balance sheet, both from a deposit and a loan side, which had an uptick in the second quarter, and a supportive rate environment, which will give us a modest benefit for the rest of the year. We also have the benefit coming from the reinvestment of our 50 billion of maturing structural hedge assets, which are currently yielding 2.8% in the second half of the year. But as always, in any guidance, we take into account a range of plausible outcomes when setting out the guidance. So there's a certain buffer in it, and that includes consideration of volatility, particularly in hyper. You've seen some of that recently, as well as FX rates. And as you can imagine, if sterling is weaker, that has an impact for us on our dollar-based banking, NII. So all in all, really comfortable with the guidance update, and I would just stress on at least $46 billion. And of course, mathematically, you're quite right with the run rate. You could pretty much get to a larger number.

Thank you, Guy. Our next question today comes from Kian Abusain at JPMorgan. Please accept the prompt to unmute your line. You may still be on mute. Please accept the prompt to unmute yourself. Okay, we'll move on to our next question. and that comes from Alastair Waugh at Autonomous. Please accept the prompt to a mutual line.

Morning, George. Morning, Pam. Congratulations on the result. Two questions on costs, if I may. First, quite simple, if you could just give a little bit more colour on where the additional simplification saves are coming from, what's changed there? And then a second question, just looking a bit further out, really, you've talked about the revenue and the medium term moving up towards 5% growth. we've got a little bit more nuance today on on variable cost and there are jaws built into consensus two three years out i just wonder if you could talk about the potential trend for reported cost growth and just bearing in mind that moving up to five percent on the revenue side in the next couple of years okay thank you alice alice i'm going to take your first question around the additional saves and just give you some high level on the variable costs which then Pam can can talk to in a you know with with more with more color so first the addition saved so we're very pleased to

have upgraded our simplification saves from one and a half billion to two billion to be delivered and to be actioned before the end of this year and delivered in full in 2027 and we're doing so with the same initially committed 1.8 billion dollars of cost to achieve a one-time cost to achieve so we're pleased with this upgrade we have seen strong progress on our cost delivery part of it refers to areas of cost where we had a little bit more uncertainty you know at the inception of this program and we felt more authority now a year and a half into it so you can argue this is a you know kind of a year and a half ago, some conservatism in our approach, which we are comfortable to deliver. Some of it has been delivered because we managed, through attrition, some of the headcount adjustments that may have been required as opposed to using severance. And then some of it has been additional identified opportunities that we decided to bring in the program and accelerate given that we haven't used the 1.8 billion envelope. So this is really how we're driving it. Remember, this is only one area where we're delivering simplification saves. The other area is by making these business exit decisions, 15 of which have been announced so far, with about $1.1 billion of associated costs, which would be saved from these businesses and reinvested, redeployed in our areas of strategic strength, where we expect to generate better revenues and better returns than the businesses we're exiting. Look, on variable costs, the common I would make is this is a decision we will make at the end of the year, but we recognize that the momentum in our business and the performance have been strong in the first half, specifically in the second quarter. And therefore, if we do continue to see this momentum in the business carry on in the second half, we would certainly consider to recognize the contribution of our colleagues towards it in the variable pay which all in all will have a modest impact on our overall cost but our commitment to cost discipline our commitment to meet our cost target from the bank 1% on the cost basis and our confidence in being able to meet it or not changing yeah thank you Alistair so firstly we are very disciplined on run the bank costs and that is how we are now targeting 2

billion on simplification saves and we have delivered 1% year-on-year in the second quarter and we continue to guide on around 1% cost growth for the full year 26 now just in terms of variable pay as a context it was 3.9 billion dollars last year which is 11 to 12 percent of our group costs so any increase which we will consider provided revenue growth momentum continues and And that's a decision, as George said, at the end of the year, will only have a modest change in total costs for the year. In terms of 2027, you've seen our revenues are growing. We printed a growth number, 6% Q1, 7% in Q2. And our investments to date, which are very focused, are working. Now, this gives us strong confidence to bring forward our planned investments. So we may, therefore, add to investment growth in 2027. Now, just as a background, inflation and investment increased costs by around 5% in the first half of 26, before simplification saves. So we expect in the next year that we will offset any additional investment with simplification saves. And that will be a partial offset, including the offset that will come from the additional 0.3 billion dollars on simplification saves that we announced today, which is on slide 26. In addition, as George said, we have good momentum on our divestments. So the 1.8 billion dollars of cost reallocations over the next several years will create incremental investment capacity it was 300 million 26 higher than 25 we expect that to be slightly higher in 27. so all in all this is not about not having discipline in run the bank costs but this is about making a clear distinction while maintaining discipline on run the bank costs to be able to invest for future growth given the revenue strong trajectory of growth we're seeing so far this year Great.

Thank you, Alistair.

Thank you. We will take our next question from Andrew Coombs at Citi. Please accept the prompt to unmute your line.

Good morning. Just two follow-ups, please. Coming back to the costs, there are obviously a lot of moving parts. You are talking about accelerating the investment spend next year. At the same time, you've slightly increased the simplification saves and then on slide 29 you've got a whole host of divestments that are obviously going to drop away on both the revenue line and the cost line so just a very simple question i guess can i ask you to comment on current consensus which is for three percent cost growth to 35.4 billion next year and then the second question related to that is that you've talked about accelerating investment spend but there's no change in your revenue growth targets so what is the payback on this incremental investment

and what's the time frame thank you um andrew thank you for the for the question um let me i'd like to give you some broad comments on on on cost and revenue growth and i'll let them time give you more details the so we're we're we're pleased to be moving at pace in our simplification the you know the the increase of our simplification saves to 2 billion the speed of decisioning in our business exits three of which we announced over the last 10 10 days or so 15 of which we announced since 2025 are giving us capacity to accelerate investments in our businesses. Also remember our businesses are leading businesses in the areas where we chose to compete. Now we are leading in the services we offer our clients, we're bank of choice for many of those. Therefore these investments are expected to drive higher revenues and higher returns than than any of the businesses we're disposing, broadly speaking. What I would like to say, though, about also one addition about your revenue growth. I mean, again, the targets we've given you of revenue growth year and year rising to 5% are foundational, our baseline targets we shared in February, we're reiterating now. These are targets for which we run the bank, or we're running the bank for the next three years under a range of different scenarios. Of course, if we see opportunities to accelerate and if we see supporting market conditions, as we have seen in the first half of this year, you should expect us to be able to beat those targets, including starting in 2026. But we're not changing the foundational baseline targets for how we run the bank across a range of scenarios.

Yeah. Thank you, Andrew. So, firstly, we are not commenting on consensus or giving a cost guidance for 2027. But let me just unbundle a few things. As George said, that targets are the baseline to which we manage the bank. We continue to work hard, as we have done this year, to exceed our targets, and we see no change in doing that. If there are good market opportunities, the right hurdle rate, and within our risk appetite. So if the outperformance continues, or even if we just take the outperformance for the first half on revenues, the starting point for next year will be higher. So therefore, please consider any targets, which we are not changing, we're just halfway through the year at the moment, will be based on a higher baseline. And then in terms of the overall spend, I've already said that we look at the overall investment opportunities and this year the increase through investment inflation was five percent we said we would accelerate some you know investments as we go into next year so that number would be a bit higher but we do have obviously partly offsetting that and the operator word is partly offsetting that the additional benefits we are getting both in terms of the increased simplification costs, which is 300 million, which goes into next year, as well as an addition of the redeployment of costs coming from our divestments. But again, it's very focused spend in areas where we have competitive strategic advantage, when we have revenue growth, as well as some very strong cost discipline. So in terms of our overall revenue costs storyline, nothing should change from here.

Thank you, Andrew.

Our next question today comes from Melissa Kuang at Goldman Sachs. Please accept the prompt to unmute your line.

Thank you. Thank you for taking my question. Just a couple of questions, just back on the NII. just wondering on the highball moves that we have seen which is slightly towards the end of the second half second half of the second quarter and if we look at the sensitivities that you have put in your hong kong dollar sensitivity have fallen by about half since the first quarter just can you give some color on what hedges have you taken and what have you done there and in terms of when we look at this third quarter NII, will we see any benefits from the high ball going in there? And also maybe, you know, talk a little bit about the deposit side. Is there any deposit competition and what's going on there that perhaps made you a bit less aggressive in terms of upgrading your NII guidance? Then the second question is on wealth. So your net new money appears to remain broadly on track and at the run rate. Can we just maybe give a little bit of understanding in terms of the AUM outside Asia has a decline quarter on quarter, maybe some colour there. And also if any of the recent China cross-border rules, is there anything new, anything we should understand about? And also in terms of behaviour, your client behavior. Is there any changes?

Thank you. Thank you very much, Melissa. Melissa, I'm going to ask Pam to take two questions, but I'd like first to make some comments on net new money and deposits. The first one is very strong net new money quarter, both globally and in Asia. Of course, Asia is the leading, the number one wealth manager in Asia. Asian net new money is very important. They're broad based. Hong Kong remains a very important center for us, with about half a trillion of wealth balances and 10 percent growth of wealth balances on a year-on-year basis. And in Asia, in total, we manage about 1.1 trillion of wealth balances. With regards to the cross-border rules, just to make some comments on this, what's important to note is you should expect us to be operating at the highest standards of rules and regulation. You should expect us to have all the robust, up-to-date procedures for client onboarding. And we actually welcome some of these clarifications that have come in May and June, specifically the State Council Decree 837, which is intended to provide the clearer guidelines for these outbound investments. First, our belief is that these clarifications are not meant to discourage or restrict cross-border. They're meant to provide guidelines on how to conform with the rules. And second, when we look at our client onboarding in May, in June, and so far in July we have seen account opening not affected by these additional onboarding declarations and therefore remain confident in the medium to long term outlook for Hong Kong to be the leading cross-border wealth hub for the planet but also a very important wealth hub for for the mainland. Pam?

Yeah, thank you Melissa. So firstly in terms of the Hong Kong hedge in the first half of 26 we have increased our hong kong hedge we have looked at new products we've had some new fixed rate customer lending so that has helped and that has again reduced our sensitivity as you can see uh to any rate moves and of course you know hyper has moved today down to 2.62 has been under pressure last few weeks we saw that a few months ago as well and just to reiterate when we give our guidance we look at this short-term volatility in highball and as one of the factors to consider in our plausible scenarios so very comfortable with the overall guidance and the direction of travel we have and we've been working for a while in terms of looking at ways to increase our hong kong dollar hedge and that's working very well now and now i just want to add in terms of the net new money i would just say you know 25 billion is still a strong number for the quarter and it's broadly aligned with our recent um quarterly run rates eight to nine percent annualized um so really nothing more to to add on that thank you melissa perfect thank you melissa our next question today comes from amit ghul at media banker please accept the prompt to a mutual

line hi thank you um sorry i just wanted to follow up apologies to ask on it again but just just on the cost piece um just to make sure i understand it correctly in terms of the incremental or the acceleration in uh spend um so is that in terms of the accelerated spend is is that um more than uh the kind of 500 million incremental um simplification savings uh or around the same amount um and then um how are you thinking about the the payoff from that in terms of will that be um kind of benefiting 2028 uh earnings or or is this more kind of 2029 to 2030 So really just trying to understand that a little bit better would be helpful.

Thank you very much, Ahmed. I'm going to ask Pam to comment on this, but let me just say on the headline, Ahmed, we are fully committed to cost discipline.

We recognize we have fantastic growth opportunities and we are creating capacity to be able to invest in those growth opportunities so that is what we're you know we're managing as you look forward but the cost discipline remain remain steadfast okay thank you Amit so firstly the payoffs of the investment we do sometimes comes very quickly actually intra-year and I'll draw your attention to some of the additional acceleration on investment we did in our security services business last year which pretty much gave us payoffs and new mandates both last year and into this year. So the payoffs don't have to wait for one or two years. These are very quick payoffs. And because they are in areas where we already have plans, we have already invested, and it's just accelerating as opposed to some de novo new areas. So that's the first point. Now, in terms of costs, as I said, that the simplification savings, to be very clear, will partly offset the accelerated costs. So you can expect some shift on that cost space. However, it'll be very much determined based upon where we see the revenue projections and where we see accelerated growth opportunities. And one thing we are crystal clear about, run the bank cost discipline will not change. And any investment will have to stand in terms of the hurdle rates we have for returns. And that's a competitive process when we look at a range of opportunities and then we make the choice, whether it's with regard to simplification savings being redeployed or indeed redeployment of costs coming from divestments.

Perfect.

Thank you very much, Ahmed.

And sorry, and just to follow up, so when we talk about acceleration, does that mean that the following year, so 2028, we would expect to see a drop down in that investment spend or do we just see that continuing beyond 27?

So, Amit, we're not giving guidance actually for 27 or 28, but the reason we're saying acceleration is these are investments along our strategic priorities that have been very much earmarked, flagged. We know of them. We know the benefits they can provide. These are not, as Pam said, new initiatives we're coming up with because we have revenue So, this is really what we mean is bringing forward some of this investment plan to bring forward the growth opportunities that come with it and allow us to gain market share even faster, exactly along those strategic priorities we called out, for which we are generating the right returns. Thank you, Amit.

Our next question today comes from Kunpeng Ma at China Securities. Please accept the prompt to a mutual line.

Thank you. Good morning, George. Good morning, Peng. It's Kunpeng, China Securities. I have two questions. The first is on the financing demand of the corporate clients. You know, we can see the loan demand is returning. And also, we can also see many of those financing demands are on capital markets. So can we have some outlook on the future trend of the financing demand of the corporate clients? How can HSBC handle those demands, especially for those on capital markets? Yeah. The second is on Hang Seng Bank. I remember George just mentioned that some cases of the synergies like new customer acquisition. So can we have more color on this kind of synergies and what kind of synergies can we expect in the future between the two banks? Thank you.

Thank you, Kompeng. I think, Kompeng, I can take both questions here. So first, we're pleased to see corporate demand, financing demand continue. Actually, we're seeing it now continue in the UK, and that's a continuation of a trend we've seen in quarter one, aligned to the ambition of the UK to drive growth. And we're, as the UK's leading international bank, we're very pleased to be supporting this both domestically, but also by bringing international investors into the UK but we are also very pleased to see that Hong Kong loans has picked up after many quarters of slowdown or or or or contraction so this is a very encouraging development for Hong Kong and we do certainly hope that this is a trend you know and our outlook remains very positive on this and then you you called it out very elegantly as well. Capital markets have played a very important role, in particular in Hong Kong, where we've seen practically 50% growth in financing through capital markets, including debt capital markets and IPOs. And we're, you know, superbly well positioned to play a very important role with customers as a leading debt financing house, but also as a materially growing IPO financing housing house with now 40 live IPOs that we have in Hong Kong, the substantial increase from previous years, and 70 IPOs across Asia. So certainly a very encouraging trend which we hope to see continue. With regards Hang Seng Bank, so we called out, if you recall, $500 million of reported synergies. These are UK audit standards of reported synergies, and an additional $400 million of related benefits, which are broadly taking the total overall synergies and related items to $900 million, which we are hoping to achieve in full over the next three years, about three years. We're more than 80 percent now live in execution on the various execution work streams of these synergies, therefore have a high level of confidence in our ability to drive those synergies. We have seen some substantial benefits. I called out earlier 60,000 new-to-bank customers by gaining the synergies of HSBC's digital onboarding. That's double what Hang Seng Bank was able to onboard in Quota 1, 30,000. This is a clear demonstration of benefits of these synergies. We've also made multiple senior leadership announcements, in particular in areas of infrastructure, back office, technology, manufacturing, where now we have a single leadership in Hong Kong across HSBC and Hang Seng to drive alignment and synergies. But I would say, remember, we are net investor in talent and in technology in Hong Kong. Therefore, we do expect that if there are roles, and there will be roles, impacted by driving these synergies, that the individuals have all the retraining and reskilling opportunities to be able to take on jobs in those areas where we're investing. Thank you very much, Kumpeng.

Thank you so much, George. Our next question today comes from Catherine Lei at JP Morgan. Please accept the prompt to unmute your line.

Hello, can you hear me?

We can hear you, yes. Hello?

Okay, yeah, thank you. Okay, I have three questions. The first question is on ECL charges, is on asset quality, right? So if we look at the Hong Kong CRE, it does seem like the asset quality trend has stabilised. Do you expect this trend to change or to further improve in the upcoming quarters? And also that we see seems like there is no notable overlay related to the Middle East situations that's been taken this quarter. How should we look at the situations with some escalations of the conflict again in the third quarter? should we be saying that the key portions of the overlay have been taken. And going forward, it will be driven by, like, say, stage three loans. So this is on the asset quality side. On the second side, I just want to follow up on the cross-border one, on China's cross-border regulations. Is the regulators consulting industry players, including HSBC, when they are drafting the details of the individual ODI regulations? Have you been communicating and talking to the regulators on potential directions of where that regulation is trending to and etc.? Okay, I will just be with these two questions first. Thank you.

Thank you, Catherine. I'll take your second question, and Pam can comment on the asset quality. So, you would expect Teth Casfain to be in a constant engagement with regulators both in Hong Kong and in the mainland at all levels and engaging with them specifically with regards to these and any other regulation. So this is a matter of just business as usual, I would say. And remember, we always operate at the highest standards of rules and regulations everywhere we operate, specifically for client onboarding, cross-border rules where we have robust procedures.

Thank you, Catherine. So from an ECL perspective, yes, Hong Kong, very encouraging signs. The top up on the ECL line was just over $150 million for the quarter. Hong Kong residential is recovering very well, very stabilized. Now, house price index was up 18% year on year, and the volumes are also up 36% in the first half year on year. now in terms of retail on the retail sales we've seen 13 consecutive growth months growing at 11 year on year this year and this is because of increased tourist activity and also effect of positive growth in wealth and offices um in terms of the the prime areas you know it's it's in a good space because the overall vacancy rates are um gradually declining to around 16 percent but in central they have continued to fall even more vacancy rates down to 10 percent and rents are up six percent year to date now having said that where we see some stress continuing is in pockets like in east kowloon where vacancy rates remain elevated at 20 percent and rents have further slipped by four percent and that's in the office space and also some in the non-core retail space. So all in all, no new impairments and the real impact in the ECL charge this quarter comes from the top-ups due to valuation declines in the existing impaired portfolio. And I expect that, you know, we'll of course watch it very closely and notwithstanding any sort of, you know, idiosyncratic kind of a situation. We do believe this is stabilising very well indeed now from a middle east perspective just want to remind you the 300 million reserve that we built in q1 still holds we have not released that reserve that's in line with the policy we'd like to see full to clear quarters of stability and and before we release any of our reserves so that is continuing we have looked at small pockets of overlays how we shift and change them at an individual name level or indeed sector and geography level. And the Middle East actual experience we see on the ground has been really quite benign, and the ECLs for our Middle East exposures in the Middle East has been very small, much lower than even a 100 million number. Overall, of course, what we are very mindful is that pockets of increase in defaults globally particularly in mid-market, where exposures are small, small exposures can also add up. And that's, you know, contributed to some of the ECL charge for this quarter. And lastly, we are not, we have now also taken out the very specific scenario we had created for the Middle East, because that's now all factored in the downside scenario in terms of the overall economic factors and foreign economic guidance.

Thank you very much, Catherine. we will take our next question today from ed firth at kbw please accept the prompt to unmute your line good morning everybody uh thanks so much for taking these questions i've just got two and they're actually really strategic questions rather than detail so probably more for george um but the first one is if i look at your current strategic direction and compare you with what looks like it'll be the second biggest bank in the uk um you're every sort of week or so you know we see a regular announcement of you closing parts of your business or selling off parts of your business and yet in contrast they are apparently have an un what's the words an enormous appetite to opening new markets everywhere in the world so you're selling australia they're opening australia you're selling egypt etc and i'm just trying to understand the sort of logic and how far that goes because it just seems to me that a country like egypt is what 120 million people i mean surely hsbc can add value there over time with your expertise with your banking and your skills and i'm just wondering sort of how far you you want to take this sort of focusing strategy so and try to understand the differences i guess between the two so that that's my first question and then the second question your shares are now really a very valuable currency um and i wonder is that something you think about when you look at transactions and opportunities are particularly inorganic opportunities around for you and if it is where should we think about where you might be interested and where you feel you could add i think you've talked about wealth management in the past but other other things that perhaps um if you wanted to use those shares rather than to buy them back but to use them as a currency where where might we be thinking about opportunities okay um ed thank you very much um so first maybe on the on the strategic direction yeah we're very pleased to be leading bank in the UK if you combine our activities across the ring fence bank the non ring fence bank and we're very pleased to be growing in the UK domestically but also

on the cross-border basis and and we are the leading international bank in the UK that's also a very important role we play for the UK if you if you look at the strategic direction as a whole what what we're doing is we're focusing the business in those areas where we have market leadership where we can drive fundamental structural growth and where we can drive good returns good returns for our shareholders so we want to be very meaningful to our clients we want to have a structural growth opportunity and we want to drive good returns for our shareholders and we want to be able to compete and grow our leadership and market share in these areas we called out four of those and they aligned with our four businesses the UK where we you know the UK's leading International Bank Hong Kong where we serve the market through two iconic banks and command twice more deposits than the second of you know second pier and you know in our driving growth across a number of areas you know in an underlying growing economy given its international role and the role to the mainland as a super connector and then the wealth management business in particular with Asia with booking capabilities also beyond Asia such as Switzerland Channel Islands the US but where we are a leading wealth manager in Asia by wealth balances with 1.1 trillion and finally in corporate institution banking where we are the world's trade back and we're leading in trade we're leaking we're leading in in global payments we're in Asia leading in security services etc And we're certainly leading in terms of the strength of our deposit franchise. So for us, these are the areas we want to make sure we put all our investment, our capital and our capabilities because we're driving great structural growth, we're winning market share, we're driving the good returns, etc. Therefore the rest, we have to make compromises and the rest where we don't think we are having a leadership position or we can drive the same level of growth are better in somebody else's hands who can invest in them and you know we can use those you know those costs to reallocate in those areas we can drive better revenues more long-term sustainable growth and better return for shareholders you called out Egypt specifically we are very supportive of Egypt wholesale business Egypt is a major network market many of our vast majority of our international clients have operations in Egypt and it's very important for us to support them in this basis we don't have this commanding market share and leadership role in retail and that's the trade-off we have made on your second question thank you for you know for your description of our shares as a valuable currency of course we're very pleased with the share performance but but you know as a management team we're only focusing on you know on the business performance and The share price is a matter for our shareholders to opine on. What is important, though, to say is, yes, we will use our share firepower inorganically, but we will use it with a high bar. So first, we have used it with the privatization of Hang Seng, demonstrating that we will use it for the right opportunities, and we had to pause our share buybacks for three quarters. We're very pleased to have resumed them now. But second, the high bar remains there, and the high bar basically are criteria I set out in February 2025, and we're living by those criteria. Without going in the detail of these criteria, any acquisition should be accretive to a share buyback, should be fully aligned to strategy, should be enhancing our scale or capabilities, and should be easy to integrate and not distracting us from delivering organic growth. If and when we find these opportunities, we will look at them. Thank you very much, Ed, for the question.

Thank you, Georges. We have time for one last question today, which we'll take from Joe Dickerson at Jefferies. Please accept the prompt. John, mute your line.

Hi, thank you, gentlemen, for taking my question, gentlemen and ladies. Just on the corporate growth, both in deposits and loans that you're seeing in Asia Pacific, could you comment on both sides of the balance sheet, the nature of the industries that you're seeing? Is this broad-based? Is it around certain industries? And on the deposit side, is this liquidity, corporate liquidity? And are there any particular industries that stand out? many things.

Joe, let me take a stab at your question. I'll ask Pam to add any comments she may have. First, on the deposits, in the wholesale spaces and in the corporate space, we are a deposit bank by choice for transactional deposits. We have one of the highest share of Casa deposits for transactional operating purposes, and these are the deposits that we cherish. We do not chase deposits with, you know, with interest rates. These deposits are testament first to the trust of the clients in our balance sheet. They are also testament to the breadth of our network where they can use our deposit capabilities, the deposit taking capabilities across a whole range of geographies where they operate. And they're also a testament of our capabilities and expertise for all services around deposits, including cross-border payments and other services we provide on deposit so and you've seen this grow in CIB by 16% year-on-year we've seen all those this grow in the UK and and in Hong Kong and in in terms of loans the overarching message I would say is we are more broad-based compared to some of the activity you've seen in the US which is quite focused on a few sectors relating to AI we are not a domestic player in the US and therefore we're not you know you should expect us not to be you know highly present in these markets as domestic players our

US business is really an inbound and outbound business where we support American clients across their businesses internationally and international clients for businesses in the US not so much participating domestically in the US just a couple of things to add just so firstly on deposits the trend really has continued quarter on quarter it's very broad based it's hong kong it's uk it's very strong on um the retail side as well as on iwpb but but cib you know you do have some short term as i called out in the script um deposits coming in so these those come and go but overall a very solid trend it comes from um also security services gps strong performance Now, in terms of loans, I do want to call out that trade has been a significant driver for CIB. It's been up 6 billion, and for Hong Kong, it's up 4 billion. And specifically, we've seen more demand coming in technology and institutional sectors. So that's kind of a strong growth we're seeing. But more importantly, in Hong Kong, we're not seeing so much of those early repayments on some of the Hong Kong commercial real estate, because that's sort of stabilized. so the gross growth in Hong Kong lending comes straight to the bottom line as a net growth there's no sort of repayments taking that off and the UK market growth from loans has continued and that's pretty much driven by across the board large corporates small and medium as well but also from a sector perspective we've gone far beyond just the typical you know high street or real real estate based lending so our sectoral expertise has helped in that excellent thank you George Pam that brings us to the end of today's call

thank you everyone for joining you may now disconnect