Earnings Call Transcript - HSBC Q3 2020

Operator, Operator

This presentation and subsequent discussion may contain certain forward-looking statements with respect to the financial condition, results of operations, capital position, and business of the group. These forward-looking statements represent the group's expectations or beliefs concerning future events and involve known and unknown risks and uncertainty that could cause actual results, performance, or events to differ materially from those expressed or implied in such statements. Additional detailed information concerning important factors that could cause actual results to differ materially is available in our earnings release. Past performance cannot be relied on as a guide to future performance. This presentation contains non-GAAP financial information. Reconciliation of the difference between the non-GAAP financial measurements with the most directly comparable measures under GAAP is provided in the earnings release available at www.hsbc.com. The analyst and investor conference call for HSBC Holdings plc's earnings release for Q3 2020 will begin in five minutes. This presentation and subsequent discussion may contain certain forward-looking statements with respect to the financial condition, results of operations, capital position, and business of the group. These forward-looking statements represent the group's expectations or beliefs concerning future events and involve known and unknown risks and uncertainty that could cause actual results, performance, or events to differ materially from those expressed or implied in such statements. Additional detailed information concerning important factors that could cause actual results to differ materially is available in our earnings release. Past performance cannot be relied on as a guide to future performance. This presentation contains non-GAAP financial information. Reconciliation of the difference between the non-GAAP financial measurements with the most directly comparable measures under GAAP is provided in the earnings release available at www.hsbc.com. The analyst and investor conference call for HSBC Holdings plc's earnings release for Q3 2020 will begin in two minutes.

Noel Quinn, Group Chief Executive

Thank you, and good morning in London, good afternoon in Hong Kong, and thank you all for joining us. Let me start by saying that I'm pleased with our third-quarter performance and the way that our business and our people have continued to respond to a challenging environment. We're doing all we can to support our customers, communities, and colleagues through the ebb and flow of COVID restrictions and are committed to helping them manage the uncertainty that remains. As far as our business is concerned, we are more optimistic than when we last spoke in July. Economic forecasts are looking brighter, particularly in Asia. As you can see from our Q3 results, expected credit losses have now stabilized. And we've got a clear plan to accelerate growth and adapt the business to the ultra-low interest rate environment. Looking further ahead, we are also committed to helping our clients make the transition to a low-carbon economy. You'll have seen our announcement two weeks ago that we're aiming to align our financed emissions with the Paris Agreement goal to achieve net zero by 2050 or sooner. The COVID-19 pandemic has been a huge wake-up call for us all, and climate change has the potential to be much more drastic in its consequences and longevity. We're therefore stepping up support for our clients in a material way, as we work together to build a thriving low-carbon economy and focus every part of our business on helping achieve that goal. Turning to our third-quarter performance. These were promising results, set against the continuing economic impact of COVID-19 with significantly smaller expected credit losses, good strategic progress, a growing capital ratio, good customer retention, and an improved economic outlook. Our Asia businesses continue to show good resilience contributing $3.2 billion of reported pretax profit, and Global Markets grew adjusted revenue by 16% versus last year's third quarter. Our capital markets revenue is up 21% year-to-date on the back of strong collaboration across Commercial Banking and Global Banking and Markets, and our Global Markets revenues are up 31% year-to-date, largely in the areas we have targeted for continued investment. Our profitability was challenged by the impact of interest rate reductions earlier in the year on our deposit franchises across all our global businesses. As a result, reported pretax profits of $3.1 billion were down 36%, and adjusted profits were down 21% on last year's third quarter. ECLs of $785 million were down significantly on the previous two quarters and broadly stable versus the same period last year. We maintained a firm grip on costs, down 3% on last year's third quarter with an ambition to go further than previously promised. Deposits of $1.6 trillion were 12% higher than last year's third quarter. We strengthened our capital ratio further to 15.6%, and despite headwinds, we made good progress in reducing risk-weighted assets in low-returning areas and reducing our cost base in a sustainable way. The revenue impact of lower-for-longer interest rates is going to continue over the coming quarters as the impact of interest rate cuts unwinds through the P&L. In response, we're accelerating all areas of our strategy with a particular focus on boosting sustainable non-interest income and going further on costs. The three main levers for these are going to be; an acceleration and an increase in our investments in and across Asia; faster digitization through higher levels of technology investments; and the extensive restructuring of the businesses we talked about in February. Starting with Asia, as you can see from slide four, Asia is rebounding strongly, much more than the rest of the world. Given our ability to connect the world to Asia and support growth in the region, our Asian opportunity is growing, and we're stepping up investment to capture it. Previously just under half of our growth investment was aimed at Asia. Now a large majority of our future growth investment will go to growing our Asia wealth, wholesale, and sustainability franchises, as well as reinforcing our position in Hong Kong and extending our position across the Greater Bay Area and South Asia. In the last 12 months, Asia's share of group risk-weighted assets increased by three percentage points to 44%, and that number will keep growing as we reallocate additional capital to the region as a whole. Our recent investments have helped launch new initiatives aimed at supporting both our clients and business growth. These include VisionGo, a platform connecting SME service providers and customers in Hong Kong, which has onboarded more than 8,000 members since its launch in April; Pinnacle, supported by its new Fintech subsidiary, which is a first for a foreign financial institution in China; and in Southeast Asia, a new capability to onboard SMEs to multiple markets simultaneously, as well as a new multicurrency digital wallet for international SMEs piloted by our GLCM business in Singapore. Our Asian franchise saw more good growth in the quarter with higher deposits and stable lending, supported by strong credit quality. But we can go much further, and we're backing up our ambition with investment to match. Moving to slide six, we're making good progress in restructuring our U.S. and European businesses, achieving $41 billion of RWA sales largely through actions in Global Banking and Markets, and around $600 million of cost program savings so far this year. In the U.S., Michael Roberts and the team have already reduced RWAs by 8% year-on-year, adjusted costs by 7%, FTEs by 11%, and branches by more than 30%. I'm pleased with this progress so far, but given the current economic climate, we are looking at options to accelerate. We'll provide an update on this at our full year results in February.

Ewen Stevenson, CFO

Thanks, Noel, and good morning or afternoon all. Against the continuing economic impact of COVID-19, these were a decent set of results, which coupled with further good progress against our strategic objectives, additional strengthening in our core Tier 1 ratio, and tail risks in aggregate haven't diminished over recent months have Noel and me in a more optimistic mood than last time we spoke at our second quarter results. Post-tax profits of $2 billion, while down 46% versus the third quarter last year, were up materially on a weak second quarter. Adjusted revenues were down 10%, mainly reflecting the impact of interest rate reductions, which impacted all of our global businesses, and particularly our deposit franchises. Near-zero interest rates will be a persistent revenue shock to our business over the next few years. We're actively adjusting our business model to address this, building sources of non-interest income, implementing asset-side re-pricing where we can, adjusting the revenue model for certain product and customer segments, and materially reducing our cost structure through digitization and automation. ECLs were significantly lower than the second quarter at $785 million or 30 basis points of gross loans, with Stage 1 and Stage 2 allowances broadly unchanged. With ECLs at $7.6 billion for the first nine months, we're now guiding to the lower end of our previously announced $8 billion to $13 billion range for the full year. We're continuing to take action on costs. Our adjusted operating costs fell by 3% against the third quarter of last year and down 4% year-to-date. Our balance sheet metrics continue to improve. Our core Tier 1 ratio was up a further 60 basis points to 15.6% in the quarter. And customer deposits and lending were broadly stable from the second quarter with deposits up 12% or $164 billion year-on-year. On Slide 11, net interest income was $6.5 billion. That's down 6% against the second quarter. The net interest margin was 120 basis points, down 13 basis points, reflecting the continuing impact of near-zero interest rates with our Asian franchise in particular seeing material deposit spread compression. The U.K. ring-fenced bank NIM was stable, quarter-on-quarter, excluding significant items. As we look forward and assuming interest rates remain unchanged, we expect further modest net interest income headwinds in the fourth quarter with some quarter-on-quarter stabilization from there. Turning to Slide 13. Adjusted operating costs were 3% lower than the third quarter in 2019 and down 4% for the first nine months. This continues to reflect the impact of our cost reduction actions and lower spending on discretionary cost line items as a result of COVID-19. Relative to the plan we announced in February, we now plan to exceed our cost targets set for 2022, with gross cost savings exceeding our previously announced $4.5 billion in that year, while still sustaining investment in technology spending in areas of focus. On the next slide, ECLs were much lower than first-half trends, some $785 million or 30 basis points of gross loans. This reflects a more stable economic outlook and a significant reserve build in the first half, while overall ECL allowances remain broadly unchanged. The Stage 1 and Stage 2 P&L charge for the year-to-date is around $4.2 billion, of which just $300 million was incurred in the third quarter. The Stage 3 charge for the quarter was around $500 million, relating primarily to a small number of wholesale exposures across various sectors and a stable level of retail defaults. This was partially offset by $300 million of releases relating to pre-COVID-19 cases. The $785 million ECL charge, we believe is unusually low at this point in the economic cycle, benefiting from releases. So, I would discourage you from using this as a new baseline. While ECLs have started to stabilize, we do still expect them to remain higher than normalized levels over the coming quarters. With ECLs at $7.6 billion for the first nine months for 2020 as a whole, we now expect to be towards the lower end of the $8 billion to $13 billion range, although uncertainties remain around COVID-19 and Brexit in particular. On Slide 15, our core Tier one ratio at the end of the third quarter was 15.6%, up 60 basis points in the quarter. This was driven by RWA reductions on a constant currency basis, profit generation, and FX translation differences. Excluding FX movements, RWAs fell by $11.8 billion, primarily as a result of our risk-weighted asset reduction program. As previously signaled at the second quarter and relative to guidance we gave in February, we've made good progress this year in reducing portfolios of higher stress and enhancing capital levels at the holding company. As such, we now expect to be able to target a 14% to 14.5% core Tier one ratio, when we can begin to normalize our core Tier one position again. On slide 16, we're making good progress against our $100 billion gross reduction target of low-returning risk-weighted assets by the end of 2022. For the first nine months, we've achieved $41.5 billion and expect to have achieved approximately half of the $100 billion target by year-end. As a result, we now expect to exceed this target and to do so without exceeding our $1.2 billion spend target that we announced in February. So in summary, against the backdrop of COVID-19, this was a decent quarter for us, another resilient Asian performance and a decent quarter for fixed income, a more optimistic credit outlook, and further progress on cost reduction and core Tier one build. As we look out, without discounting the continuing high levels of uncertainty, we think the combination of tail risks has diminished relative to the last quarter, and therefore, we're now more confident on the outlook. We recognize that we still got a tough period ahead of us, given the very material impact of near-zero interest rates over the next few years, coupled with a gradual recovery in customer activity in some segments from COVID-19 lows. But we think the building blocks are now being put in place for a substantially enhanced return in the coming years, a changed revenue model that will be less reliant on deposit spreads, a normalization of credit costs from 2020 highs, lower operating costs using the benefits of digitalization and automation, and increased confidence in being able to operate the bank at reduced capital levels once the economic environment stabilizes.

Noel Quinn, Group Chief Executive

Noel and I are very focused on the path back to paying dividends. With a core Tier one ratio of 15.6% relative to a target of 14% to 14.5%, we're now accruing meaningful capital buffers. However, I would caution about getting ahead of yourselves on distributions. When we start, we'll start conservatively and look to build sustainably from there. With that, Sharon, if we could please open up for questions.

Operator, Operator

Thank you, Mr. Stevenson. Your first question comes from the line of Raul Sinha from JPMorgan. Please go ahead. Your line is open.

Raul Sinha, Analyst

Good morning, Ewen.

Ewen Stevenson, CFO

Good morning.

Raul Sinha, Analyst

A couple of questions from my side, I guess starting off, just on the NIM and NII trajectory. One, if you could talk a little bit about the HBAP NIM outlook. Obviously, you had quite a big fall in the quarter. And then related to that, if you could elaborate a little bit in terms of what you expect within your sort of timing assumptions for HIBOR. Are you expecting HIBOR to sort of stabilize around these levels? Or are you still thinking that we're going to converge towards U.S. dollar LIBOR, which is obviously some way below where HIBOR is? And the second one I guess, a little bit more broader in terms of the areas where you're tweaking your transformation program and you've obviously talked about that a little bit. I was particularly interested in Wealth Management and insurance in terms of what are the growth initiatives, you can focus on to make a meaningful contribution given where your plan was when you announced it and where we are today. You've obviously got a big test in terms of rate-sensitive revenue. So any sort of commentary on Wealth Management and insurance sort of material growth opportunities would be really helpful? Thank you.

Noel Quinn, Group Chief Executive

Okay. I'll take the second question, but I'll ask Ewen to answer the first part of the question, if that's okay.

Ewen Stevenson, CFO

Sure. On NIM, Raul, a few things. I mean, as you know, the HBAP book is relatively short-dated. So we did see a material contraction in HIBOR. I think it was down over 60 basis points quarter-on-quarter. And as a result, that translates very quickly within quarter into the net interest margin. As we look out, yes, being here for seven or eight quarters now trying to predict the path of HIBOR has always been difficult. But I think, yes, we do think that we've seen for the time being a bottoming that has been a bit higher so far in October. Again that will translate to a stabilization I think in Hong Kong and possibly a recovery. But if we translate all of that into an outlook for 2021 and at an aggregate level, I think, yes, we're broadly as we sit today comfortable with where consensus is or a range around consensus.

Noel Quinn, Group Chief Executive

Okay. And with respect to Wealth Management in Asia, we started our journey on that of more rapid expansion actually before we announced the results in February. We've been growing our market share in insurance in Hong Kong throughout 2019 and have continued that journey in 2020 and intend to continue to invest in that business. And we're seeing very good results from that activity. We've reclaimed a lot of market share in our insurance business in Hong Kong, and we'll continue to invest in that business. We're looking to expand our insurance proposition beyond Hong Kong into other markets, Singapore, India, and in China. With respect to the broader wealth agenda, we again started a program of expansion of our private bank in Asia, increasing the number of relationship managers we have on the ground, the product capability in Hong Kong. We want to take that further across into South Asia and into China. And then more recently, we've talked about the investment we've made in Pinnacle, which is a Wealth Management platform in China, which is a combination of around about an extra 2,000 to 3,000 salespeople based in China serving the Wealth Management needs of the China population. We expect to put those people on the ground over the next two to three years. But we're also building a technology platform to provide those salespeople with the product capability to serve the market as well. So we see that as an area of growth and further investment. It will be to protect Hong Kong and continue to take market share in Hong Kong, penetrate into China, and expand across South Asia.

Raul Sinha, Analyst

Given the amount of capital you've built, would you consider inorganic opportunities as well in this area?

Noel Quinn, Group Chief Executive

I think we always look at both organic and inorganic. You should always base the strategy on an organic plan first, which is what we're doing. But we're open-minded as to where the right opportunities for growth will come.

Operator, Operator

Thank you. We will now take our next question and the question comes from Martin Leitgeb from Goldman Sachs. Please go ahead. Your line is open.

Martin Leitgeb, Analyst

Yes, good morning. My first question is about capital progression moving forward. Given the impressive results showing a 15.6% or 15.4% return, excluding transitional impacts, and your comments about being conservative with dividends, should we anticipate that in the near to medium term, HSBC will exceed the 14% to 14.5% threshold? Or do you see opportunities to either invest more for growth or enhance returns as the economic outlook stabilizes? For my second question, could you provide details on the extent of the strategic reviews you are currently conducting? The strategy presented in February predates the pandemic; how comprehensive are these reviews regarding potential investments in lower-return areas and future growth opportunities for the group? Thank you.

Noel Quinn, Group Chief Executive

Okay. I'll take the second question. I'll ask Ewen to cover the first.

Ewen Stevenson, CFO

Yes. So, on capital and how we think about it, Martin, I guess, a few things. Firstly, yes, in terms of today's ratio just to put a couple of qualifiers around it. I mean, firstly, in Q4, as you know, yes, we would typically expect core Tier 1 ratio to fall in the fourth quarter for a couple of reasons. Firstly, yes, the earnings are obviously impacted in the fourth quarter by the U.K. bank levy by seasonally lower Global Markets and Wealth revenues. And we signalled, I think, as part of my comments earlier that we expect to have a higher CTA charge, cost to achieve, restructuring cost charge in the fourth quarter relative to what we saw the run rate in the first three quarters. And we also do still expect some RWA pressure coming from ratings migration, albeit, yes, we've been continuously surprised this year about, yes, the degree of ratings migration, which has been less than we might have anticipated. We also get in our ratio some benefit from COVID-19 regulatory relief currently. That's around 20 basis points. But, I think, the regulators are always going to back out of their numbers when they look at our capital ratios and think about excess that we've got. I think going into 2021, we're always going to want to have a buffer for contingency, given 2021 will continue to be relatively uncertain, as we sit today. Yes, I do think that if you went back to the start of the year and you think about what we're managing too in our capital base, it's really two things. One is the degree of stress that we're running as a bank. And we do think the restructuring plan that we've announced and the areas that it's targeting is going after some of the highest stress portfolios we have in the bank. So over the next few years, we think, the aggregate level of stress you'll see from us getting reported in the annual stress testing cycle will reduce. And secondly, as I think you're aware, we've been holding excess capital in some of our subsidiaries, for example, in the U.S. And as we continue to restructure, I think, we'll be able to get more of that capital back to the group. So, as a result, yes, we think that we can manage the bank in the medium term to 14% and 14.5%, but I think we should aspire to do better than that. But that aspiration, I think, has to be very much premised on the medium term, with us making serious inroads into reducing the gross level of stress that exists in the bank. I'm confident we can get there, but I wouldn't bake it into your numbers today.

Noel Quinn, Group Chief Executive

In response to the second part of your question, we understand that the lower interest rate environment significantly impacts our revenue, and recovering that lost revenue will be challenging. I also recognize that there isn't a single solution to bridge this gap. We will need a mix of growth in new investment areas, especially in fee income-generating activities like Wealth in Asia, which encompasses mass-affluent Private Banking, Asset Management, and Insurance; growth from our Transaction Banking business, including fee income from foreign exchange, trade, payments, and cash management; and expansion of our balance sheet, particularly in Asia, where I believe there is still medium-term growth potential for our assets. Additionally, we will be focusing on pricing strategies for both our asset book and our fee income. I think it's going to be a combination of those activities, coupled with a continued focus on prudent cost management, with an expectation, as Ewen said, to exceed our 2022 target of $31 billion. So it will be a combination of those things. And if I think back to the GFC, there was no one single solution to rebooting revenue post the GFC. It was a combination of things and we're going to be very much focused on those same activities this time around. Next question.

Martin Leitgeb, Analyst

Thank you very much.

Operator, Operator

Thank you. Your next question comes from the line of Manus Costello from Autonomous. Please go ahead. Your line is open.

Manus Costello, Analyst

Good morning, Manus.

Ewen Stevenson, CFO

Hi, Manus.

Manus Costello, Analyst

Hi, everybody. I just wanted to ask about the balance sheet and cash. Your cash position has grown again this quarter. You're up $130 billion since the end of last year. I just wondered what can you do to help manage that cash position to help boost the NIM or offset the pressure on the NIM? Or should we assume you're just going to run with structurally very high levels of cash and your liquidity management in the future?

Noel Quinn, Group Chief Executive

I appreciate your question, Manus. I'm a firm advocate for maintaining a robust and liquid balance sheet. I recognize that currently, this liquidity isn’t generating net interest margin. However, during a significant economic crisis, having a solid liquidity position is beneficial, and this has been a fundamental aspect of HSBC for many years. This strong position enables us to keep investing in the growth of our assets as the economy begins to recover, particularly as Asia appears to be navigating out of the COVID crisis more swiftly than other regions. I anticipate that growth prospects will return in Asia. So while this liquidity isn’t directly generating income, it has the potential to contribute positively to our asset side. It also reassures us in making investment decisions given our strong liquidity and capital position. Ewen, would you like to add anything?

Ewen Stevenson, CFO

Yes. No, I mean, I think managed customer behavior has been exactly what you would have expected it to be so far during the crisis, which both on the retail side and the corporate side a desire to retain liquidity at the moment given all of the uncertainty that exists. Yes, so over the last year, we've built deposits by, I think, it's 12% over $160 billion. Yes, that's not a natural year-on-year growth in our deposit base and reflects very much, I think, customer behavior. So, as people get more comfortable with the trajectory out of COVID-19, I think you'll begin to see that reverse.

Manus Costello, Analyst

So, it's more about your customers' behavior rather than any Treasury approach that you might take.

Ewen Stevenson, CFO

Yes.

Noel Quinn, Group Chief Executive

Correct.

Manus Costello, Analyst

Got it. Thank you.

Operator, Operator

Thank you. Your next question comes from the line of Aman Rakkar from Barclays. Please go ahead. Your line is open.

Aman Rakkar, Analyst

Good morning. I have a couple of questions, starting with NII. I appreciate your comments about next year's consensus. The implied Q4 exit level suggests an annualized number below $25 billion for next year. To align with the Street's expectations, it seems you'll need to achieve around 3% to 4% loan growth. Given that deleveraging is likely in the U.S. and Europe, what loan growth targets do you have in Asia to reach these numbers? I noticed that balances were reasonably strong in Q3. My second question is about ECL. Is the approximate $1 billion charge your best estimate for the underlying ECL in Q3? If so, does this suggest a number closer to $4 billion rather than the $6 billion consensus for next year? Does that figure seem accurate to you, or is there too much uncertainty at this point? I'll stop there. Thank you.

Ewen Stevenson, CFO

Firstly, regarding your NII calculations, we agree with the overall numbers. We expect low to mid single-digit loan growth next year, which supports my earlier comments on consensus and NII for the upcoming year. Your point about deleveraging in Europe and the U.S. is somewhat accurate, as much of it occurred in the second quarter. We are still restructuring and managing the RWA books, and not all of this relates to lending assets. We do anticipate that the economies in the U.K., Europe, and the U.S. will recover in 2021, and forecasts for GDP growth in Asia excluding Japan are projected to be above 5% for both 2021 and 2022, indicating that growth in Asia is likely to surpass that of the West. On expected credit losses, consensus estimates for 2022 are around $6.1 billion, but when we previously assessed loan loss provisioning pre-COVID, we discussed a range of 30 to 40 basis points, with the high end suggesting just over $4 billion. This appears slightly low at the moment, while $6 billion seems a bit high, indicating we might fall somewhere in between the two figures. However, there remains significant uncertainty regarding 2021. I also want to acknowledge that our estimates for ECLs are heavily influenced by Brexit. Our comments regarding estimates towards the lower end of the 8% to 13% range assume a trade agreement is reached. If no trade agreement occurs, we would need to revise our ECL estimates upward, potentially adding $0.5 billion to $1 billion in additional ECLs in the fourth quarter if an agreement is not finalized in the coming weeks.

Aman Rakkar, Analyst

Perfect. Thank you.

Operator, Operator

Thank you. Your next question comes from the line of Jason Napier, UBS. Please go ahead. Your line is open.

Jason Napier, Analyst

Good morning.

Ewen Stevenson, CFO

Hi, Jason.

Jason Napier, Analyst

Thank you for taking my question. Hi there. So the first one on loan losses, I'm afraid again. The performance of your loan book has been quite frankly stellar if you look at the stage data with only 6% of retail loans in Stage 2 even and a little over 1% in Stage 3. I wondered did you have any steps that you might be able to share on the extent of any distortion in that that your customers are seeing as a consequence of the support that's around furlough schemes and moratoria and so on? Or is that really just conversational in nature and really that your book is this strong at this stage of the downturn? And then the second question and I appreciate this is an extraordinarily sensitive area, the Hong Kong Autonomy Act. I wondered whether you could share what it is in your view that HSBC needs to do to avoid sanction under that act? It appears that there is some leeway around significant transactions as regards to the sanctioned individuals. What do you see as your responsibilities on that act please?

Noel Quinn, Group Chief Executive

Thank you, Jason. I want to share a few thoughts on the quality of our loan book before passing it over to Ewen for any additional comments, and then I will address the Hong Kong Autonomy Act. Firstly, regarding the nature of our loan book, we have a high-quality secured portfolio at the core of our consumer banking operations. While we do engage in some unsecured lending, the majority of our lending, especially in the U.K., is secured, which is a significant factor behind the strong performance of our retail book compared to other banks. The same holds true for Hong Kong. Additionally, as some government schemes and payment holidays have come to an end, we are observing better performance than anticipated with individuals returning to regular payment habits at a higher rate than we initially expected. Those are just some general observations. Ewen?

Ewen Stevenson, CFO

I'd like to add a couple more things on that. In terms of summary, we have a global portfolio of government support schemes. As we've seen some of them come to an end, particularly in retail, our experience so far has been marginally better than we had modeled. This is encouraging as our credit assumptions are holding up. Additionally, the government support for the corporate sector has provided time for restructuring and for companies to raise debt and equity. Six months ago, we were more concerned about downside risks than we are today, partly because this support has given businesses the time they need to restructure and prepare better.

Noel Quinn, Group Chief Executive

And on your second point, Jason, we're confident in our ability to navigate the increasingly complex regulatory environment. And we're committed to complying with the laws and regulations in every market we operate in. We fully acknowledge that there is a level of complexity there today given the geopolitics. But we're confident of our ability to navigate that situation. And I think that's what I'd say to you in regard to the second part of the question.

Jason Napier, Analyst

Thank you.

Operator, Operator

Thank you. Your next question comes from the line of Edward Firth, ABW. Please go ahead. Your line is open.

Edward Firth, Analyst

Good morning.

Noel Quinn, Group Chief Executive

Morning, Edward.

Edward Firth, Analyst

I have two questions. I'm particularly interested in the long-term outlook for net interest income rather than focusing solely on this year or next year. First, I've noticed from previous sensitivities you've shared that if we look out five years, the impact seems to be about double that of the one-year impact. Is that still how we should view it, or have you implemented measures that could lessen that effect so that the significant impact from interest rates is mainly around plus or minus 10 basis points? That's my first question. Secondly, one of HSBC's key advantages over the past century has been a loans-to-deposit ratio of approximately 70%. While it's slightly lower now, it has previously been higher. In the current environment, that implies that around 30% of deposits are either unprofitable or loss-making. Over the next few years, do you believe there are steps you can take to improve that ratio? Could we potentially see it rising to 80% or 90%, or would you prefer to maintain greater liquidity and keep the ratio where it currently stands? Apologies for the lengthy question.

Noel Quinn, Group Chief Executive

Let me take the second part. The AD ratio, yes, at the moment is showing a significant surplus. At different points in the economic cycle that moves around. And if you were to go back a couple of years, you started to see quite significant loan growth with slightly slower deposit growth, so you started to see the AD ratio narrow to a degree. As Ewen said earlier, we've had an influx of deposits as customers have borrowed less, spent less, and accumulated cash. So you could expect over time that AD ratio to change. But I think we've always as a bank had a history of having a strong liquidity position. So I don't see us really operating at a 90% AD ratio in the future even in great times because we operate in markets around the world that are inherently more volatile. And therefore we believe strongly in having a strong liquidity position to manage through that volatility in difficult times. So you get some movement in the AD ratio going forward, but I don't think you're going to get us operating at a level of 90% on a consistent basis or at any point given the inherent nature of our book of business.

Ewen Stevenson, CFO

Ed, your first question was about the NII sensitivity tables for the next five years. Yes, those tables assume a static balance sheet and no management actions. Therefore, you should consider that over a five-year period, we will have some ability to mitigate certain risks reflected in that interest rate sensitivity table.

Noel Quinn, Group Chief Executive

And just going back to that point I made if you were going to say, but it depends how you look at that surplus and is it earning money or not. You remember that high liquidity or low AD ratio is giving you access to an inherently higher-return market in Asia and the Middle East. So you don't necessarily deploy all the liquidity to get every last ounce of earnings out of it. But having that liquidity there allows you to access an inherently higher-return market in Asia and the Middle East, the emerging markets that gives you a higher level of compensation for the amount of lending that you are doing. So you earn it in a different way than full deployment into low-volatility low-return markets. You're getting the earnings in a different way from HSBC.

Edward Firth, Analyst

Okay. So it's not like it's a strategic priority for you to find assets to try and bulk up that balance sheet?

Noel Quinn, Group Chief Executive

I'd rather find growth, good sustainable revenue growth rather than just buying books of assets for the sake of buying books of assets to use up liquidity. Sustainable revenue growth is what we're motivated to do.

Ewen Stevenson, CFO

You would know that 20 years ago we tried something like that, and it didn't work out so well.

Edward Firth, Analyst

I just wanted to see if you want to do this time again.

Noel Quinn, Group Chief Executive

No.

Edward Firth, Analyst

Thanks so much.

Operator, Operator

Thank you. We will now take the next question from Tom Rayner from Numis. Please go ahead. Your line is open.

Tom Rayner, Analyst

Hi, I have a couple of broad strategic questions. With the restructuring plan you've discussed today, you're highlighting additional cost savings and RWA reductions. I'm curious about the potential effects this might have on future revenue growth and how important it is for HSBC to maintain an image of having growth potential, especially in higher-growth markets. You want the market to perceive you as a growth stock. How does this align with your efforts to find more cost savings and RWA reductions? Also, your comment regarding Household International is intriguing, as it suggests the challenges that can arise from acquiring underperforming assets. For my second question, it seems that your investments are increasingly focused on Asia. If this trend continues, could there be a point where the question of HSBC's domicile resurfaces? Has this already been discussed and decided, meaning we won’t revisit it anytime soon?

Noel Quinn, Group Chief Executive

Yes. Let me make a few comments on that. First of all, I don't believe that organizing for greater efficiency inherently prevents us from generating or pursuing growth. The cost reductions we are targeting are sensible and focused on reducing bureaucracy, simplifying processes, increasing automation, and enhancing customer experience. All these efforts align with a growth strategy. We have clearly stated that we will continue to invest in technology to further digitize the bank. This digitization will lead to a lower cost structure, an improved customer experience, and new growth opportunities as we access more market possibilities. Therefore, I don't think these goals are at odds with each other. We do not want to be solely focused on transformation for growth; we must also achieve actual growth. Given our presence as an Asian bank with an international footprint, that remains part of our strategy. And on domicile, we've said on many occasions we're not revisiting the domicile decision. We believe there's a power in being a global international bank with a strong focus on Asia, a strong focus on the Middle East, a strong business in the UK. We're an international bank bridging east and west and we're not revisiting the domicile decision.

Ewen Stevenson, CFO

Yes. Regarding RWA reduction, Tom, you can see from our data pack that we have a substantial amount of capital that is not generating adequate returns and is performing well below our cost of capital. I believe everyone on the call should appreciate that we are working to speed up the process of removing these assets from our balance sheet, allowing us to reclaim more capital. If we can invest this in growth, especially in Asia, we are eager to do so. If not, we will seek a way to return it to our shareholders.

Tom Rayner, Analyst

Okay. That's it. Thanks a lot.

Operator, Operator

Thank you. We will now take our last question from the line of Guy Stebbings, Exane BNP Paribas. Please go ahead. Your line is open.

Guy Stebbings, Analyst

Good morning. Good afternoon, everyone. Thanks for taking questions.

Ewen Stevenson, CFO

Good morning, Guy.

Guy Stebbings, Analyst

Good morning. I just want to come back firstly to capital. I'm specifically trying to size some of the headwinds coming in the fourth quarter. You've called out the typical seasonal impact from the levy and Global Markets being a bit lower plus the higher CTA to come. So perhaps earnings themselves might be a small headwind to capital plus it looks like you're guiding to around about 30 basis points headwind from RWA movement. So just taking that into consideration the CET1 position could drop maybe towards 15%. But I think, you previously guided to software intangible benefit of around about 20 basis points. So is it reasonable to think you should still be somewhere above 15% before any possible dividend announcement alongside full year results?

Ewen Stevenson, CFO

Yes, on buyback. The – yes, as you've said, we're certainly not averse to doing buybacks. I think you should assume what we want to do first is reestablish the dividend, set a sensible and sustainable dividend policy for 2021 and beyond. And then, to the extent that there is excess capital on top of that, think about buybacks as part of that. I would caution though that for 2021, in particular, there continues to be meaningful levels of uncertainty around the economic outlook for 2021. So, don't expect us to try to seek to rapidly normalize our capital structure during 2021 until we see genuine sustained and concrete recovery in the global economy and we're through COVID-19 in a very meaningful way.

Noel Quinn, Group Chief Executive

With respect to the U.S., I just want to reiterate Michael and the team in the U.S., together with Greg and Georges running Global Banking and Markets have really made very strong progress in the first nine months of this year. And I reiterate RWAs well down, adjusted costs down, FTEs down 11%, branches reduced by 30%. So they've made great progress. But they're also very cognizant of the fact that the circumstances are more challenging today than they were in February. And therefore, they're looking at ways to accelerate the road to improve returns. But I won't go into any more detail on that at the moment. We'll do that with our Q4 results. But I'm pleased with what they've achieved so far.

Joseph Dickerson, Analyst

Good morning. I have a couple of quick questions. Regarding the path to your target CET1 range, how are you considering buybacks in this context, especially in the near term, given the capital treatment of buybacks and your previous experience with them? Any insights would be appreciated. Also, as you aim to focus on more sustainable sources of non-interest income and reduce reliance on the deposit spread businesses, you mentioned reviewing the U.S. business. The last review, as already stated in this call, took place when rates were higher. Is everything on the table regarding the U.S. business, particularly the retail segment, which I believe has a loan-to-deposit ratio of 50% or lower? Thank you.

Ewen Stevenson, CFO

Noel Quinn, Group Chief Executive

Operator, Operator

That was our final question. I will now hand back for closing remarks.

Noel Quinn, Group Chief Executive

Thank you. Thank you, Sharon. And I just wanted to say thank you to all of you for dialing in today for your interest in HSBC and your questions. I'd summarize by saying that we are making good progress on our transformation agenda. We are investing in new growth opportunities particularly across Asia. I'm pleased that we were able to produce $3.1 billion of reported profits in Q3, and we were able to finish the quarter with a CET1 ratio of 15.6%. I look forward to speaking to you again at the full year results in February. Thank you.

Operator, Operator

Thank you, ladies and gentlemen. That concludes the call for HSBC Holdings plc earnings release for Q3 2020. You may now disconnect.