Earnings Call Transcript
HSBC HOLDINGS PLC (HSBC)
Earnings Call Transcript - HSBC Q2 2024
Operator, Operator
Welcome, ladies and gentlemen to the Analyst and Investor Webinar on the 2024 Interim Results for HSBC Holdings plc. For your information, this webinar is being recorded. We are now ready to start the webinar. So I will hand over to Noel Quinn, Group Chief Executive.
Noel Quinn, Group Chief Executive
Good morning to everyone in London, and good afternoon to those joining from Hong Kong. Today is my last results announcement before Georges takes over in September. I'm delighted to be handing the stewardship of the bank over to him. Georges is an exceptional leader who understands what makes HSBC special. I'd like to thank my colleagues around the world for everything they've done over the last five years. And I wish Georges every success for the future. I have always been immensely proud of the heritage of this bank and the strategic role it plays in the world. But when I took this job on five years ago, we didn't have the financial performance to match our standing. My aim was to change that. I believe we've done so and created a strong platform for future growth. This was evidenced by the record profit performance last year and by the strong first half performance this year; revenue of $37.3 billion was up 1%. Profit before tax of $21.6 billion was stable on the same period last year. This performance enabled continued strong capital generation. Our return on tangible equity was 17%, excluding notable items. We've announced $4.8 billion of further capital distributions today. This takes the total capital we have distributed by way of dividends and buybacks in respect of the last 18 months to $34.4 billion. Finally, we've updated our guidance to reflect our increased confidence about the future. We're providing new guidance of a mid-teens return on tangible equity in 2025. In addition to the 2024 guidance we already had. We're upgrading our 2024 banking NII guidance from at least $41 billion to around $43 billion. We're revising our 2024 ECL guidance to be back within our normal medium-term planning range of 30 to 40 basis points. And we're reconfirming our 2024 cost guidance of around 5% growth on a target basis. That's despite growth of 7% in the first half, which, as Georges will explain, is mainly due to timing differences compared to last year. The benefits of our strategy execution over the last five years are evidenced in our performance. Before getting into detail on the further progress made over the last six months, please allow me to share some reflections on our five-year journey. When we set out, there were two key strategies to delivering higher returns. The first thing we had to do was to reshape our portfolio. Building on the work of my predecessors who initiated important structural changes, we've continued to exit businesses and client portfolios that were non-strategic, subscale, and unprofitable. First, via organic portfolio reductions, which delivered RWA savings of around $128 billion. And then via inorganic means through disposals. The second and very important strategy, which we commenced at the same time was to build alternative sources of revenue growth. Within this, we've invested to grow fee income, particularly in areas where we have significant strengths such as wholesale transaction banking and wealth. We've also continued to invest in our differentiated international propositions. And we've significantly lowered our sensitivity to interest rates from approximately $7 billion of banking NII for a 100 basis points down shock in interest rates at 30th of June 2022 to around $3.4 billion at the end of 2023 and now down to around $2.7 billion today. All of this had to be underpinned by a culture of cost discipline, which we have instilled across the group. These savings enabled us to invest in the areas I've spoken about. And this transformation has helped to improve our financial performance. As you know, we delivered a record profit in 2023 and a mid-teens return on tangible equity in 2023 and in the first half of 2024. It has been over 15 years since the group was generating returns at current levels. And we now expect to sustain it this year and in 2025. The other tangible measure of success is capital distributions to our shareholders. I'm really pleased that we delivered around $54 billion by way of dividends and buybacks to our shareholders over the last five years, including the distributions announced today. And I'm especially pleased to have paid the special dividend of $0.21 per share earlier this year following the sale of HSBC Canada. I see this payment not just as a financial return, but as a return for the loyalty that our shareholders have shown us over the recent years. Let me now summarize the further progress evidenced in the first half. First, wealth has been a key component of revenue diversification strategy. It delivered two very good quarters, growing revenue by 12% in total. In Transaction Banking, fee and other income in Global Payment Solutions grew by 4%, and in Global Trade Solutions by 1% in a very difficult environment for trade. Revenue for HSBC Innovation Banking was up 4% quarter-on-quarter as our new global proposition continues to gain traction. Second, our scale markets in Hong Kong and the U.K. enabled us to grow profits each year as we captured new opportunities in both the corporate and retail businesses. As you can see, we also have positive growth in other markets, including India, which was up 4% in the first half and Singapore, which was up 2%. Third, we continue to grow multi-jurisdictional client revenue in both wholesale and retail. Fourth, we saw good growth in both customer lending and deposits in the second quarter despite what is still a relatively sluggish environment. Finally, we've continued to grow the size and duration of the structural hedge to reduce our sensitivity to interest rate movements. Georges has new disclosures on the expected benefits in his section. All of this progress underlines why we expect to deliver a mid-teens return on tangible equity this year and in 2025 as well. Let me get into some more detail. The steps we've taken to change our retail business model and our continued investment in people and digitization have made wealth a key driver of revenue growth. Wealth revenue was up 12% in the first half to $4.3 billion. And that growth is broad-based. As you can see in the boxes on the right side of the slide, wealth fee and other income was up 14%. Private Banking revenue was up 16%. We attracted $32 billion of net new invested assets. Our new business insurance CSM was up 77%. Moving to the next topic. Transaction Banking revenue was stable in the first half. There was good growth in payments, which was up 3%. This included growth in fee and other income of 4%. This is a result of the investment we made to grow and digitize that business, which helped to improve our ranking from a top four bank in 2022 to number two today. Foreign exchange was down 8% compared to a strong performance last year when there was very high volatility. And while trade was slightly down in the half, the pace of decline slowed to the point that it was broadly flat in the second quarter. But we still grew our trade volumes despite global trade volumes remaining subdued. And we also increased our market share in trade in Hong Kong to more than 26%. On the next topic, our businesses in Hong Kong and the U.K. both continue to perform well in the first half. Profit before tax in Hong Kong was up 1% on a constant currency basis, while the Hong Kong corporate loan market remains subdued; it was resilient in the second quarter. It's too early to call it a trend, but deposits and investment activity increased, which underlines that the right differential works in both directions. We attracted 345,000 new to bank customers in the half as we continue to capitalize on significant inflows into Hong Kong from customers seeking opportunities for investment. Profit before tax in the U.K. business grew by 11%, excluding the gain on SVB U.K. last year. Customer lending was also up 2%, but our U.K. business is differentiated by its connectivity with the rest of the group. In the first half, we grew the number of U.K. international customers by 8% to 2.7 million customers. We have a strong international franchise. We evidenced this through our multi-jurisdictional revenue disclosures in February. And in the first half, we grew wholesale multi-jurisdictional client revenue by 4% to $9.7 billion. And as I said earlier, this isn't just a wholesale story. We're doing more with our international retail and wealth customers as well. We now have 7 million international wealth and personal banking customers with revenue from these customers up 6% to $5.4 billion. So these are the levers that have put us on track to deliver a mid-teens return on tangible equity this year and why we expect to deliver a mid-teens return on tangible equity in 2025. With that, I'll hand over to Georges. Thank you.
Georges Elhedery, Group Chief Financial Officer
Thank you, Noel, and hello, everyone. Before I get to the Q2 numbers, I'd like to comment briefly on the recent announcement. I'm deeply honored by the trust placed in me to lead this great institution into the future. Many of you may have questions about the future strategy and direction of the group. Although I don't take over as Group Chief Executive until the 2nd of September from Noel, I'm ready to share a few high-level thoughts. Under Noel's leadership, we have delivered financial performance and built a strong platform for growth. The strategy of the group is working, and I'm committed to building on this. The shape of the group is broadly where we wanted to be with the bulk of our capital and other resources deployed in our four scale activities that's Hong Kong, the U.K. Our international wholesale bank underpinned by our leading transaction banking capabilities and our wealth proposition, particularly in Asia. This puts us in a very strong position. In each of these activities, we have scale and sustainable competitive advantages, and our strengths are aligned to the needs of our customers. They account for the vast majority of the economic profit we generate today and present some of our most exciting opportunities to grow over the next five to ten years. And together, they are capable of delivering above cost of capital returns sustainably through the cycle. We've made good progress and we are now in a position to accelerate the pace of execution of the strategy with focus and intensity to continue to grow revenue on a sustainable trajectory, to improve operating leverage, while maintaining strong cost discipline and prudent risk management and to continue to improve client service and experience. You'll also have seen that we have announced this morning that Jon Bingham has been appointed Interim Group CFO from the 2nd of September. Jon is currently our Financial Controller, and has outstanding technical accounting and regulatory knowledge and expertise. A process to identify the next permanent group CFO is underway, and I will update you further in due course. Now though, turning to Q2. In summary, profit before tax of $8.9 billion was up $0.4 billion on the second quarter of 2023 on a constant currency basis. In terms of the drivers, the banking NII run rate was stable on the first quarter. There was another strong wealth performance, while wholesale transaction banking was stable in last year's second quarter. Despite cost growth of 7% in the first half on a target basis, we remain on track to meet our 2024 guidance of around 5% cost growth, and there was growth in both loans and deposits in the quarter. On the next slide, so HSBC Canada contributed around $0.5 billion of revenue and around $0.2 billion of profit before tax in the quarter before the sale completed in March. To make like-for-like comparisons easier, these contributions and some other impacts have been excluded from some of the commentary. So excluding notable items and the impact of strategic transactions, profit before tax was up 7% to $9.1 billion. Revenue of $16.5 billion was up $0.3 billion on the second quarter of last year. Excluding notable items and the impact of strategic transactions, revenue was up $0.8 billion or 5% on the second quarter of last year. Banking NII of $10.9 billion was down $0.4 billion on the first quarter on a reported FX basis, primarily because of a $0.3 billion reduction from the Canada sale. Excluding this, the banking NII run rate was stable. We're now in a position to upgrade our 2024 banking NII guidance to around $43 billion. This assumes a $1 billion contribution from Argentina, which was its reported NII in 2023, although we note that it remains volatile and difficult to predict. We're also providing new details to help you understand the expected benefits from the structural hedge. Around $55 billion of assets are due to mature in the second half of 2024 with an average yield of 2.8%, and around $105 billion of assets will mature in 2025 with an average yield of 2.8% as well. Turning to fee and other income. Wholesale transaction banking was stable on the second quarter of last year or up 2% excluding the impact of strategic transactions. Within this, Global Payment Solutions had another good quarter, up 2% as the security services, which was up 3%. Foreign exchange delivered broadly stable revenue compared to a strong quarter last year. And wealth had another very good quarter, underlying that our investment is continuing to drive improved results. Wealth fee and other income was up by 13% compared to last year's second quarter. Private Banking was a standout performer mainly driven by increased customer activity in brokerage and trading in Asia. But growth in wealth remained broad-based. Customer growth and improved wealth penetration primarily in Asia helped drive growth in investment distribution. Invested assets were up 2% to $1.3 trillion, including $6 billion of net new invested assets in the quarter. And our insurance new business CSM was $0.6 billion, up $0.2 billion on the second quarter of last year. On credit, expected credit losses were $0.3 billion in the quarter, equivalent to 15 basis points of average loans. This included $0.4 billion of recoveries and other items mentioned on the slide. Excluding these, ECLs were broadly in line with our normal medium-term planning range of 30 to 40 basis points. Stage 3 balances were 2.4% of customer loans, up $1.4 billion compared to the first quarter. This was driven by Hong Kong commercial real estate book, but there was a limited impact on ECL charge because of the high level of collateralization. We are revising our 2024 ECL guidance to our normal medium-term planning range of 30 to 40 basis points of average loans. Next, costs grew by 7% in the first half on a target basis, but we remain on track to meet our guidance of 2024 cost growth of around 5%. 2 percentage points of cost growth in the first half came from higher performance-related pay accrual and levies. As we explained at the first quarter, we have phased the accrual of our performance-related pay more evenly this year than last year. We do not expect the total amount of performance-related pay for 2024 to be materially different from 2023. So the accrual in the second half is expected to be lower year-on-year. In addition, the second half of last year included $0.3 billion of levies that we do not expect to repeat this year. We are, therefore, reconfirming our guidance of around 5% cost growth for 2024 on a target basis and we remain committed to cost discipline. On lending and deposits, there was positive loan growth in the quarter in both the U.K. and Asia, whilst Hong Kong was broadly stable. Overall, we are promising signs in the first half. Deposits were up 2% with the majority of this in Hong Kong. There was also growth in the U.K., Europe, and the U.S. and the rest of Asia, but it also included the benefits of seasonality in commercial banking and a large one-off in Global Banking and Markets. So I would encourage you not to annualize the 2% figure. Next, our CET1 ratio was 15%, down 20 basis points on the first quarter as strong organic capital generation was offset by distributions in the form of dividends and share buybacks. We have announced a new share buyback of up to $3 billion, which we expect to complete within three months and to have an impact of around 0.4 percentage points on our CET1 ratio in the third quarter. Finally, to recap, our strong first half performance and our confidence about the bank's position enable us to provide new guidance of a mid-teens return on tangible equity, excluding notable items for 2025, in addition to our existing mid-teens guidance for 2024. Upgrade our 2024 banking NII guidance from at least $41 billion to around $43 billion, revise our 2024 ECL guidance to within our normal medium-term planning range of 30 to 40 basis points, and we confirm our guidance for '24 cost growth of around 5% on a target basis and mid-single digit loan growth over the medium term. With that, Louis, can we please go to Q&A. Thank you.
Operator, Operator
Thank you, Georges. Our first question today comes from Andrew Coombs at Citigroup. Please unmute your line.
Andrew Coombs, Analyst
Good morning. Thank you both for your comments. A couple of questions from my side, one big picture, one into the numbers. First, a big picture question. Noel, you highlighted all the things you can be out of journal and any, but perhaps with the benefit of hindsight be interested in any thoughts you have or anything you might have done differently? And then linked to that as well, George, I think you're on the tape this morning talking about accelerating the existing execution. So any tangible examples you can provide on that would be helpful as well. And then in terms of the numbers question, thank you for the additional disclosure around structural hedge. I think you talked about $55 billion maturing in the second half at a 2.8% yield. Is it fair to assume the new positions that you're putting on are probably about 1% higher than that, given where the forward curve is? So prior to any of debt from adding to the existing structural hedge notional. It's about $0.5 billion of NII uplift. Is that fair?
Noel Quinn, Group Chief Executive
Thank you for your questions, Andrew. I'll address the first one. I have no regrets. Performing this role is truly a privilege. You never really finish with an organization like this, and that’s why Georges is right to mention it. There’s always more to be done; there are continuous improvements to seek, investments to make for revenue growth, enhancements in customer experience, and upgrades to systems and processes. The idea of finishing shouldn't exist. Instead, there should always be a focus on continuous improvement and ambition. I have no regrets about the past five years; we’ve accomplished a lot, and I appreciate my colleagues for their contributions. However, it’s important not to be complacent or think the job is done. Running a large organization like ours, with so many opportunities for further improvement, is an ongoing task. Now, I’ll hand it over to Georges for the next two questions.
Georges Elhedery, Group Chief Financial Officer
Thanks, Noel. Yes, Andrew, I wanted to echo Noel's thoughts while expanding on them. We've highlighted several key areas of our strategy, including Hong Kong, the U.K., and the international wholesale bank, which are supported by our leading transaction banking capabilities and wealth management. All these areas have shown strong momentum over the past few years, and particularly in the first half of this year, we feel optimistic about this trend. We believe we can keep investing in these areas and have sufficient capital to facilitate additional growth. The focus now is on maintaining the pace of executing this strategy, which has already yielded results. Regarding your question about the structural hedge, we anticipate $55 billion will mature in the second half at an average yield of 2.8%. If we consider reinvestment happening at around 3.8%, with a 1% increase, that approximates to $500 million. However, since these maturities occur throughout the half, we need to average the figure, leading to an assumption that half of that amount will benefit us in 2024 from the hedging investments. Additionally, keep in mind that we are increasing the structural hedge, depending on market conditions. We've accomplished about $25 billion in the first half, which should be a fair estimate for the second half as well. This would present a mild headwind since we are moving from higher short-term rates to lower long-term rates due to the curve's inversion. All these factors need to be considered when assessing the impact on the 2024 banking net interest income.
Operator, Operator
Thank you, Georges. Our next question today comes from Amit Goel at Mediobanca. Please accept the prompt to unmute your line.
Amit Goel, Analyst
Hi, thank you for taking my questions. So I have three. Firstly, I was a bit surprised to get the 2025 profitability target, which does seem to be a little bit above consensus. So I think consensus is about 14%. So I guess a bit of variation on mid-teens, but if that's kind of 15%, 16%, 17%. Just curious where you see a bit more upside. Is that mainly on the revenues or can you see a bit more cost control? And then linked to that, Georges, I think in your comments as well, you talked about growing revenues on a sustainable basis. So just curious, again, how you're thinking about that potentially with some NII headwinds? And then lastly, Noel, I think you used the term sluggish or subdued a few times when talking about the environment. Just curious when you think that will potentially turn and we can see a more constructive environment for some of those markets? Thank you.
Noel Quinn, Group Chief Executive
Sounds good, Amit. I'll ask Georges to answer the first one, I think is probably best on the mid-teens and the definition of mid-teens and then also maybe sustainable revenue. And then I'll cover the third.
Georges Elhedery, Group Chief Financial Officer
Thank you, Amit. To discuss the consensus for 2025, if we factor in the loss from the sale in Argentina, which we anticipate concluding by year-end, it's logical to expect that the effect of the foreign exchange loss of $5 billion, which does not affect capital or distribution, will likely be felt in 2024. Adjusting the consensus for 2025, we estimate it to be around 14%. Our definition of mid-teens is generally in the range of 14% to 16%. Regarding sustainable revenue growth, there are three key indicators to consider. First, we’ve stabilized banking net interest income (NII), partly due to reduced sensitivity. Two years ago, we projected a $7 billion impact on banking NII from a 100 basis point drop in interest rates, which has since decreased to $2.7 billion due to structural hedging and balance sheet improvements. The second point about banking NII is that although we've experienced slow loan growth in the U.K. and Hong Kong, we've seen signs of stabilization. While it’s too early to confirm a trend, we remain optimistic, especially as we anticipate a support for loan growth if rates decrease in these historically sluggish areas. Conversely, our loan growth in South and Southeast Asia, particularly in the mortgage sector, has been robust. We have sufficient capital to support this loan growth. The third aspect is the non-banking NII, which includes fees and other income from wholesale transaction banking and wealth management. We are seeing solid momentum in these sectors, backed by our investments, and we believe this growth trend is sustainable. These three components will be critical in supporting our earnings as we move forward.
Noel Quinn, Group Chief Executive
Amit, to elaborate further on the subdued nature of the corporate loan market, it's not surprising it’s currently quiet. Given the higher interest rate environment, many corporations are hesitant to borrow at current rates, especially since they have significant cash reserves and don’t feel the need to take on debt. This is a favorable situation for them. However, as interest rates decrease, I anticipate a rise in borrowing activity. As Georges mentioned, we are beginning to observe early signs of this emergence. It’s still too soon to call it a definitive trend, but I was encouraged to see that the decline in the corporate lending book in Hong Kong during the first quarter has slowed significantly. Throughout 2023, the lending declined but plateaued in the second quarter, while elsewhere in Asia, we experienced growth in both the first and second quarters. The first quarter marked our first net growth in corporate lending, which continued in the second quarter. I see these as positive early indicators, especially as interest rates drop. Additionally, it’s important to note the strength of the deposit and investment market in Hong Kong, which has benefited our wealth businesses. Net new invested assets reached approximately $34 billion in the first half of this year. As interest rates decline, capital tends to flow into invested assets, and we see this happening prominently in Hong Kong, where the rate differentials are favorably impacting the investment market while simultaneously suppressing loan demand.
Amit Goel, Analyst
Thank you.
Noel Quinn, Group Chief Executive
Thank you.
Operator, Operator
Thank you very much, Noel. Our next question today comes from Joseph Dickerson at Jefferies. Please accept the prompt to unmute your line.
Joseph Dickerson, Analyst
Hi, thank you for taking my question. I have a couple of quick points. Regarding the ROTE guidance, in the first half of the year, you achieved an underlying figure of 17%, despite experiencing some credit challenges, which were generally manageable. Considering factors like cash moving into invested assets, which should yield a higher ROE, your wealth and personal banking ROEs are around 31% now, and you're achieving about a 22% ROE in the UK. What do you think might prevent you from maintaining that level in 2025 and 2026, especially in light of potential rate cuts? It seems there's significant flexibility in your business model. While I understand the need for caution, is it mainly the interest rates or a lack of activity that could hold you back? Additionally, I have a follow-up question...
Noel Quinn, Group Chief Executive
I believe it's a valid observation, but I don't think we're being conservative just for the sake of it. It feels premature to predict a significant return to volume growth in the corporate loan market. We all anticipate that rates will eventually decrease and assets will shift from cash to investments. However, it's still early in this cycle, and there's considerable uncertainty remaining. Our guidance of mid-teens, which falls between 14% and 16%, seems reasonable for now. Over the past few years, our focus has been on delivering results each quarter, allowing each quarter to serve as a foundation for the future. I think it's wiser to provide sensible and achievable guidance and continue demonstrating progress quarter by quarter. We're not inclined to be overly optimistic, especially when uncertainties still persist. Georges, do you have anything to add?
Georges Elhedery, Group Chief Financial Officer
Yes. No, nothing, Noel. You covered it. I mean just one parameter also just to add is just remember to remove the impact of Argentina with the expected sale taking place at the end of this year in your 2025 assessments.
Operator, Operator
Thank you. Our next question today comes from Raul Sinha at JPMorgan. Please accept the prompt to unmute your line.
Raul Sinha, Analyst
Hi, good morning.
Georges Elhedery, Group Chief Financial Officer
Good morning.
Raul Sinha, Analyst
Thank you for answering my questions. I wanted to discuss your comments regarding the hedge. I have two questions. First, I'm trying to understand how the size of the hedge is changing in the U.K. compared to other regions. I understood that structural hedging in the U.K. is quite mature, so I didn’t expect it to grow significantly. Most low-yielding refinancings seem to be coming from the U.K., whereas in the rest of the world, your structural hedging appears to be more recent. Therefore, it may have the potential to increase, but perhaps the refinancing yield is higher. Is that understanding correct? The second question is about the Hong Kong commercial real estate book and some of the disclosures we have accessed. There's a total exposure of $36 billion, with 40% being unsecured. Could you provide more details on the unsecured portion of the Hong Kong CRE? You mentioned it is of very good quality, but how do you plan to manage the risks associated with the unsecured nature of this CRE book? Thank you.
Noel Quinn, Group Chief Executive
Thank you. Georges, do you want to pick up both of those?
Georges Elhedery, Group Chief Financial Officer
Sure, Noel. Raul, regarding the hedge size, we haven't specified the currency or balance sheet split. However, you should assume that the Sterling portion is one of the largest components of the hedge. The U.K. has a well-established Sterling component, but we still have previous hedges maturing at lower yields, which we can reinvest into higher yields. This remains a factor in the stability of the U.K. bank's net interest margin, which we anticipate will continue to be stable, supported by structural hedge reinvestment. When looking globally, we see a mixed scenario. We are reinvesting all structural hedges at higher yields, which benefits our banking net interest income. Yet, some new hedges we are undertaking are facing challenges due to inverted rates, creating a partial headwind. Despite this, managing our banking net interest income sensitivity justifies these actions. It's also important to note that our exposure to the Hong Kong dollar remains largely under hedged due to a lack of long-term investment instruments for effective hedging. Concerning the Hong Kong commercial real estate question, 40% of the $36 billion exposure is unsecured and typically consists of large conglomerates with diversified revenue streams, including non-real estate activities. Currently, 90% of that book is rated strong or good, and there is no exposure classified as impaired. We are confident in this book and will continue to support our customers throughout this cycle.
Operator, Operator
Thank you, Georges. We will take our next question today from Jeremy Hugh at CICC. Please accept the prompt to unmute your line.
Jeremy Hugh, Analyst
Hi, can you hear me?
Noel Quinn, Group Chief Executive
Yes.
Jeremy Hugh, Analyst
Okay, good morning, Noel. Good morning, Georges. My first question is on the noninterest income. If my math is correct. My calculation shows that our adjusted noninterest income is $5.8 billion this quarter compared to $5.3 billion a year ago. And we had $200 million gross NOLs, transaction banking is relatively stable. So since GBM contributed a lot this quarter. So I understand that this business seasonality and is volatile. But do you expect that momentum to continue going forward? Or do you think in the second half of last year is relatively a weak comparison? Yes. The second question is a broader one. Because I realize now you speak less about focusing Asia these days than you used to and emphasizing more on the global network. Yes, sometimes in some way, they do intersect, but I'm wondering do you still focus on exploring some bolt-on opportunities in Asia and lost business in the future and do you have a capital distribution hierarchy or preference among dividend, buyback and growth. Thank you.
Noel Quinn, Group Chief Executive
Okay. Georges, do you want to take the first one? I'll give a few comments on the second one and you take the third one on capital distribution.
Georges Elhedery, Group Chief Financial Officer
Very good. Thanks, Noel. Jeremy, so without giving specific comments on the quarter-by-quarter specifics in the development of our fees and other income component, the growth that you've observed during the year in Q2 were mainly driven from two areas. The first one is wealth, which is obviously a very strategic area where we continue to invest and exhibited growth. The other one was from markets, in particular, from some of the equity business in markets. This is coming on the basis of two components: one, a subdued Q2 last year. So there was a base effect which benefited the outlook for Q2 this year. And then the second one is the fact that we've seen more activity and more vigorousness than if you want the Asian stock markets, in particular, the Hong Kong stock market. And we're encouraged by this. And if the trend continues, this will bode well for additional activity in this space. Let me jump to the third question, and I'll hand over to Noel to conclude on the second one. Capital distribution hierarchy. First, we've committed to a 50% dividend payout ratio for this year, which means half our earnings will be earmarked for foreseeable dividend. Part of it will be distributed through our interim dividends. The rest will be netted out at the end of the year. After that, we obviously will use capital to support the organic growth of our business. Loan growth, as we said earlier, started to pick up in certain areas. We are encouraged but we have ample capital to support the loan growth, the appetite we have. We look at bolt-on acquisitions or areas that are dead on strategy, both supportive of acceleration of the strategy that will be part of utilization of excess capital and any excess beyond that we will distribute back to shareholders to a rolling series of share buybacks. If you look at our CET1 ratio today at 15% and you look at our capital accretion that we remain capital generative in the business based on the guidance we've given for this year and next year. We're confident we will have capacity to deliver on the three, and I will say the buybacks will continue looking at it on a quarter-by-quarter basis with the ambition to have a rolling series of share buybacks.
Noel Quinn, Group Chief Executive
Thanks, Jeremy. And on your second question, is it an Asia strategy? Is there an international strategy? I think they're interchangeable. Well, I don't think they're mutually exclusive because if you look at what we do at the core of what we've done for 158 years or more is we've connected entrepreneurs and businesses who want to trade with the world. That's what we've done from day one of HSBC being founded. So we're essentially about helping businesses and individuals trade internationally, invest internationally. Now why are they one and the same? Well, a huge amount of the entrepreneurs that we have as clients are based in Asia, they're based in the Middle East, they're based in the East, and they trade with the West and the West trades with the East. And Asia and the Middle East, the high-growth markets. So I don't think it's an either or. I think for us, it's very simple that we are internationally driven. And Asia is a hugely connected international part of the world and will remain so going forward. The nature of trade will change as it has done for 158 years. So I think we use the words Asia and international is and probably interchangeably, and sometimes it gets people confused. We're investing where there is growth and where we have differentiation. There is growth, there is international connectivity. There is differentiation in Asia. There is in the Middle East. And we have the same here in the U.K. or fundamentally at the core, we're an international bank.
Operator, Operator
Thank you, Noel.
Noel Quinn, Group Chief Executive
Thank you.
Operator, Operator
Our next question today comes from Aman Rakkar at Barclays. Please unmute your line.
Aman Rakkar, Analyst
Good morning. Noel, I just wanted to start off and congratulate you on your excellent tenure at HSBC. I just wanted to wish you the very best going forward or whatever it is you decide to do. And yes, Georges, on a similar thing, just to extend my congratulations around your appointment as CEO. I had two questions, please, both on net interest income. So a point of clarification. I guess your banking NII guide this year of circa $43 billion, that face value does imply a material step-off in net interest income in H2. I just wanted to check, I mean you're guiding for Argentina being $1 billion this year, and I think it was the best part of $900 million in H1. So is it literally just Argentina dropping out of net interest income in H2 is driving that? And what would really, really help is the kind of momentum of NII in H2 and the extent to which that carries over into '25. I'm not necessarily looking for an updated guide here. But if I just take again your banking NII disclosure at face value, it's implying a kind of $42 billion annualized run rate in H2 ex-Argentina. What do you think the puts and takes are on that if we were to kind of look a bit further afield beyond this year? And then the second question was, if I could just get you to update your thoughts around deposit pass-throughs, you're obviously noting you've hedged more of your balance sheet now. And what is actually pass-throughs where to be, say, 10% lower than what you're modeling in your updated banking NII sensitivity, that would be really helpful. Thank you very much.
Noel Quinn, Group Chief Executive
Georges, do you want to take that?
Georges Elhedery, Group Chief Financial Officer
Yes, thank you, Noel. Aman, I appreciate your question. Regarding your first inquiry, we expect banking net interest income for this year to be around $43 billion, which we feel confident about since we are already seven months into the year and the rate outlook has stabilized compared to previous months. For Argentina, we have incorporated an expectation of about $1 billion into that $43 billion estimate, acknowledging the inherent volatility of this figure. Historically, Argentina contributed $1 billion to our banking net interest income in 2023, and we are using that for our planning this year. Looking towards the second half of the year, there are several factors that will impact banking net interest income. First, we are basing our projections on mid-July rate curves, which indicate one to two rate cuts across major currencies in the latter half. Second, we anticipate benefits from $55 billion in maturing assets yielding 2.8%, which will be reinvested at likely higher rates. However, this will be somewhat offset by additional structural hedging we might pursue with an inverted curve, with a reasonable expectation of $25 billion in additional hedging depending on market conditions. In terms of balance sheet growth, we continue to see strong performance in South and Southeast Asia, with positive trends in U.K. and Hong Kong mortgage books. Recently, we noticed stability in the Hong Kong wholesale book, which has previously been declining, suggesting some positive developments ahead that should be supported by rate reductions and growth in this segment. Lastly, regarding deposit migration, particularly in Hong Kong, we observed very low migration rates in the first half of the year at 0% and 1%, averaging 1% across the half. This is a significant improvement compared to a 12% migration rate for the full year 2023, indicating a more favorable trend moving forward. As for the full year 2025, while we are not providing guidance on banking net interest income, please consider the following: exclude Argentina’s contribution which we estimate to be $1 billion due to the planned sale by year-end, and account for a one-quarter contribution from Canada of $0.3 billion. Additionally, $105 billion of existing structural hedge assets with an average yield of 2.8% will mature in 2025, which could yield tailwinds as we reinvest them at higher rates. Finally, keep in mind our sensitivity estimate of $2.7 billion across all currencies for a 100 basis point decrease in interest rates, alongside your own assumptions for balance sheet growth. We believe that lower rates will enhance the growth of the balance sheet into 2025, all of which contributes to our mid-teen guidance for return on tangible equity for that year.
Aman Rakkar, Analyst
So thank you very much. Color is excellent. Just around pass-throughs. I think earlier this year, you talked about 10% lower beats is adding something like $600 million.
Georges Elhedery, Group Chief Financial Officer
Okay, so the banking NII sensitivity to 10% change in pass-through rates is around $600 million. It remains around $600 million. And this is based on an assumption of around $600 billion of IPCAs. So we can work out the math if you want offline. That number is broadly stable. We're still working on an assumption of a 50% pass-through in our banking NII sensitivity. Second, if you look at the cumulative pass-throughs, we're broadly around 50% from the start of the rate hikes in late 2022, all the way to now broadly around 50%. The earlier part was much lower than 50%. The latter part was much higher than 50%. It is difficult to predict how pass-throughs will work out on the rate cut scenario, and this is why I think 50% remains a good estimate of what it could look like, noting that we don't have recent history of that. I would point you to one thing to be mindful of is in the U.K. and a number of other geographies, we will have to provide customer notice of at least 60 days before we pass through rate cuts. So there will be a delay in pass-throughs on the way down, and that's a 60 to 90 day on average, for instance, in the U.K. Thank you, Aman.
Aman Rakkar, Analyst
Thank you so much.
Operator, Operator
Thank you, Georges. Our next question today will come from Ed Firth at KBW. Please accept the prompt to unmute your line.
Edward Firth, Analyst
Hi, good morning everyone. I want to echo Aman's comments and express my gratitude, especially considering the challenging times for HSBC. There were moments when I would have thought mid-teens returns were unrealistic, so thank you for that. It benefits us all. I have two questions. First, regarding performance-related pay, I noticed it will be flat this year. Could you share the total amount for that? I suspect it may need to increase, especially given the revenue performance. My second question is about the Wealth and Private Banking business results. I find it notable that Q2 performance, which has typically been seasonal, has held steady this time. Should we view this as a new baseline moving forward into the second half? Was there something specific in Q2 that contributed to this stronger performance? Thank you.
Noel Quinn, Group Chief Executive
Thank you for your comments. Regarding your point on Wealth, I want to share a personal view. Typically, we expect Q1 to be the peak seasonal period, with a decline in Q2 and beyond. However, Q2 exceeded our expectations in terms of seasonality, showcasing strong performance. While we tend to be cautious and advise against drawing conclusions from just one or two quarters, I agree that Q2 demonstrated impressive results, surpassing normal seasonal expectations. The team feels optimistic, as they have observed positive lead indicators. Over the past couple of years, we have brought in over $250 billion of net new invested assets. We need to consider how cash might transition to invested assets as interest rates decrease, making it challenging to predict a clear trend. It's important to evaluate our performance on a quarterly basis, but the leading indicators are promising. We have made significant investments in the business in anticipation of lower interest rates and to capitalize on those opportunities. We have enhanced our product offerings to encourage clients to choose us for their investment needs rather than turning to other banks. Additionally, we have improved our distribution in different markets, such as Mainland China, Singapore, India, and globally. This positions us well, although it is still early to determine a trend. Your observation regarding Q2 is valid, and it's encouraging to report that. As for performance-related pay and costs, I'll let Georges address that, but we are fully committed to maintaining the 5%.
Georges Elhedery, Group Chief Financial Officer
We paid $3.8 billion in performance-related pay for the full year 2023, as stated in our annual reports. However, we under accrued this amount in the first quarter of 2023 and adjusted it in the fourth quarter to reach the total. For full-year 2024, we anticipate accruing a similar amount as in 2023, with any decisions regarding performance-related pay being made in January by the Remuneration Committee once the full-year performance is complete. We are aiming for a more even accrual this year, which will result in a higher accrual in the first half and a lower accrual in the second half compared to previous years. This approach is included in our cost guidance, which aims to limit cost growth to roughly 5%. We are fully committed to achieving this 5% cost growth and are confident we can meet this target.
Operator, Operator
Thank you, Georges. Our next question today comes from Katherine Lei at JPMorgan. Please accept the prompt to unmute your line.
Katherine Lei, Analyst
Hi, good morning. Thanks for answering my questions. I have one question, actually two, both related to capital. On the capital side, we saw there is $6.4 billion of addition to RWA. May I know like what is that related to? I think in the note is that something related to modeling. So I would like to know like what kind of assumption changes leads to this $6.4 billion? And is that one-off? Or should we see this ongoing, I would say, additions to the RWA. So this is number one. Number two, we noticed some deterioration on asset quality on Hong Kong CRE book; actually according to the disclosures, the deterioration seems quite significant as well. Can you explain to us what is the impact on capital because we understand that there is a limited impact on ECL charges but mainly reflected on capital. So what is the drag on capital? And then also like going forward, whether it's your view on Hong Kong CRE, in particular, for the loans which are already Stage 2E categories. Are you expecting that there will be recovery of loans through disposal of the collaterals? Or are you expecting the borrowers will eventually make up for the loans? Thank you.
Noel Quinn, Group Chief Executive
Okay. Thanks, Katherine. Georges, do you want to pick up those points?
Georges Elhedery, Group Chief Financial Officer
Sure. We indicated a $6.4 billion increase in risk-weighted assets due to a modeling adjustment. Specifically, we've revised the probability of default models for banks across the globe to incorporate insights from the March 2023 crisis and government support during bank resolutions, particularly in the U.S. and Switzerland. These insights have been integrated into our modeling, leading to the increase in risk-weighted assets. As for the bank model regarding probability of default, we believe we have completed this revision. We continuously review our models generally, and the next significant update will be with Basel 3.1 when it becomes effective in various regions we operate in. We haven't quantified the impact yet and do not expect it to be significant, pending final rules in several jurisdictions. Regarding the Hong Kong commercial real estate, we've previously discussed that 40% is unsecured, and we're comfortable with that. Your question likely pertains to the remaining 60%, which is the secured portion of our $36 billion exposure. Of this, approximately $3.2 billion is deemed credit impaired. Some of our customers are currently facing short-term cash flow challenges, partly due to high interest rates. However, our balance sheet is robust, and our collateralization levels are strong. For the impaired $3.2 billion portfolio, the average collateralization stands at 55% loan to value, which mitigates the expected credit loss impact from the Stage 3 designation. In terms of capital, some impacts may reflect in risk-weighted assets depending on the lending models used, and we observed a minor effect last quarter. Some impacts will also appear in excess expected loss affecting our CET1, but these values are largely immaterial, supported by our strong collateralization levels. Looking ahead, our credit-impaired customers remain current, and we anticipate that the challenges they face will lessen as interest rates decrease and economic activity in Hong Kong improves. Overall, we're optimistic about the medium- to long-term outlook for the sector and confident in a rebound of the Hong Kong economy, with expectations for easing pressure in the sector over time.
Operator, Operator
Thank you, George. We have time for one last question today, and that comes from Gurpreet Singh Sahi from Goldman Sachs. Please accept the prompt to unmute your line.
Gurpreet Singh Sahi, Analyst
Thank you. Can you guys hear me?
Noel Quinn, Group Chief Executive
Yes, yes, very good.
Gurpreet Singh Sahi, Analyst
Okay, good morning. Noel, first of all, and Georges, congratulations to you, Noel, on your new role wherever you decide to be.
Noel Quinn, Group Chief Executive
Thank you.
Gurpreet Singh Sahi, Analyst
Thank you for the helpful disclosures on the hedge. I have two questions that are related to falling rates and management's perspective on them. First, regarding wealth income, it seems like we are in an unusual cycle where wealth income and AUM growth rates are elevated due to high interest rates. When these rates decrease, do we have any historical data indicating how wealth income might be affected, or will we not see much benefit in terms of income? I've noticed that many investments from Mainland China are shifting to Hong Kong, which is the first part of my question. The second question concerns lending growth; we have set targets for mid-single-digit growth. However, to accurately model banking net interest income, we need to consider average interest-earning assets. Given that we have significant liquidity on the balance sheet, if rates decrease and depositors feel less motivated, could we experience weaker overall deposit growth? If so, this might mean that average interest-earning assets may not grow as expected, and we should reconsider our models for mid-single-digit growth in these assets. Thank you.
Noel Quinn, Group Chief Executive
Okay. I think Georges will pick up both of those.
Georges Elhedery, Group Chief Financial Officer
Thank you, Noel. Gurpreet, to clarify, our reporting for fees and other income includes fees earned on assets under management and insurance, particularly related to new business. The transition of customers from deposits to assets under management is significant. We are observing deposits convert into new invested assets as they move into our wealth services. Over time, as interest rates decline and deposit earnings decrease, customers may increasingly shift their funds into assets under management, which will allow us to serve them within the fee structure. While we anticipate a rise in wealth activities as deposits become less lucrative, this observation is based on broader trends rather than direct correlations. Additionally, we are experiencing structural growth in wealth, especially in Asia, where we expect the market to expand at high single-digit or even double-digit rates over the next five years. We are also gaining market share due to our increased investments in this area. Regarding your second point, it's important to note that our banking net interest income relies heavily on deposit growth, which underpins our average interest-earning assets. This quarter, we saw a 2% increase in deposits, but I advise against annualizing this figure due to seasonal factors and one-time events. Our deposit franchise is robust; we maintain a strong balance sheet and a compelling proposition in both wholesale and retail banking. We are consistently capturing deposits, having won global payment solutions mandates and attracting retail customers. For instance, our Hong Kong business added 345,000 new customers this year, and we acquired 1 million new customers in the U.K. in 2023. Therefore, we are confident in our ability to sustain growth in deposits through our appealing franchise.
Noel Quinn, Group Chief Executive
I think I'd reinforce that and add another comment. The trick for us in the past, we were very good as a retail bank. We were very good as a corporate bank. But when customers, whether they were retail customers or corporate customers wanting to invest in alternative asset classes other than cash, they tended to go to other banks because our product range and our distribution wasn't strong enough. We deliberately set out to invest in our products and distribution capability for wealth so that cash, if it did move, it moved within the bank, not outside the bank. One of the byproduct benefits is if you've got a good wealth proposition, you also attract the cash. You keep the cash in the bank as well. They go hand-in-hand. And so I think look, I think we're in a very different position today in offering wealth propositions to clients. And what we've done is deliberately try to diversify the revenue stream so it's less dependent on purely corporate banking and retail banking. And there is a continuum from retail and corporate banking into banking the individuals and the entrepreneurs in their personal capacity and doing their wealth management in their personal capacity. And that's, I think, the exciting trend for the future. And I think that's why we believe that we're well positioned to deliver mid-teens ROTE next year because we have that diversity and that continuum of offering. So I just want to say that's not a by chance strategy. That was a very deliberate strategy to keep both the cash in the bank and the invested assets in the bank.
Operator, Operator
Thank you. That ends today's Q&A. So I will now hand back to Noel for closing remarks.
Noel Quinn, Group Chief Executive
Well, thank you, Louise, and thank you, everyone, for joining us today. Before we close, I'd like to thank you for your questions and for all the discussions we've had over the last five years. I've always enjoyed representing my colleagues when we announce our results, and I'm really pleased that the strong first half numbers announced today demonstrate the improved financial performance that our strategy execution is driven. It's been over 15 years since the group has generated returns at the current levels, and our new guidance underlines that we expect to be able to sustain it through this year and in 2025. I wish Georges, the team, and all of you the very best and enjoy the rest of the day. Thank you.
Operator, Operator
Thank you, ladies and gentlemen for joining today's webinar. You may now disconnect your lines.