Earnings Call Transcript
HSBC HOLDINGS PLC (HSBC)
Earnings Call Transcript - HSBC Q2 2021
Noel Quinn, CEO
Good morning in London, and good afternoon in Hong Kong. I've got Ewen with me today, and I'll hand over to him shortly to go through the detail of our Q2 performance. First, though, I'll start with a summary of the key highlights, our progress against our transformation plans, and in particular, what we're seeing with respect to growth. For the second quarter, a good operating performance, supported by a net release of expected credit losses delivered reported pretax profits of $5.1 billion, up $4 billion on last year's second quarter. We saw a return to profitability in all our regions in the first half, including good performances in both Europe and the U.S. Our UK business performed well with a record quarter for mortgages in Q2. We've generated good momentum behind our growth and transformation plans and made important decisions on exiting our mass market retail business in the U.S. and our retail business in France. Our RWA and cost reduction programs are both on track. Our Asia Wealth strategy is gaining traction with strong growth in Wealth balances. We're seeing promising signs of early growth in both lending volumes and fee income, particularly in Asia. And we retained a strong capital ratio of 15.6%, which enables us to declare an interim dividend of $0.07 per share for the first half of the year. The next 2 slides look at the growth we're starting to see, particularly in Asia. In Wealth and Personal Banking, we've already seen strong traction in our Asia Wealth business, with global Wealth balances up more than $250 billion or 18% in the last 12 months. This was driven chiefly by growth in assets under management rather than deposits. We've expanded our Asia Wealth franchise, recruiting around 600 new frontline colleagues and growing affluent and high-net-worth customers in Asia by 7%. While it's early days, we're seeing promising productivity data from our Pinnacle wealth planners in Mainland China with exciting momentum within the business. Because of that, we're accelerating the rollout of Pinnacle to 5 new cities in Mainland China and planning to hire 100 more wealth planners this year than we had originally planned. In Commercial Banking, pipeline growth is starting to translate into lending with $8 billion of loan volume growth since the start of the year. Our approved lending limits in Asia are up 100% on last year's second half and 70% on pre-pandemic levels. These include renewals, refinancing, and new facilities. There are also signs of a recovery in Asia trade with $6.7 billion of trade finance lending growth in the first half. In Global Banking and Markets, we've made good progress repositioning the franchise for growth. The proportion of RWAs allocated to Asia in GB&M is now 6 percentage points higher than the same point last year, with around 1/3 of non-Asia RWAs supporting revenue booked in Asia. Collaboration with other businesses is a big part of the GB&M growth story, with collaboration revenue up 6% against last year's first half. This was supported by investment in new digital market platforms, which are helping to support our Asia Wealth strategy. Slide 4 goes deeper on the lending growth we're starting to see. We've seen strong mortgage growth globally, with Hong Kong drawdowns up 56% year-on-year and a record quarter for UK mortgages. Card balances are starting to recover in Hong Kong and the UK and elsewhere, up around $1 billion quarter-on-quarter. In Commercial Banking, we're seeing improved lending limit growth translating into term lending with loans up 2% versus the first quarter. Trade balances are up 9% and we continue to capture market share in both Hong Kong and Singapore. We're also continuing to grow our lending pipeline in Hong Kong and Asia, which bodes well for future quarters. Moving to Slide 5. Both our U.S. and European businesses saw a rebound in profits and both are now well advanced in their transformations. The U.S. made around $0.5 billion of pretax profits, up from around $100 million in last year's first half. Risk-weighted assets in the U.S. are now 16% lower than at the same point last year and costs are down around $100 million year-on-year. We've announced the sale of our U.S. mass market retail business, which is an important milestone in the reshaping of our U.S. portfolio. And we've also now completed the migration of fixed income derivatives trading book from New York to London. In Europe, we delivered $1.4 billion of pretax profits after recording a loss in last year's first half. Compared with a year ago, we've reduced RWAs by 16% and costs by 3%, which includes a $149 million increase in variable pay. We've also signed a Memorandum of Understanding to sell our French retail business. Both our U.S. and European businesses are much better positioned to grow than at the start of the year. Slide 6 looks at our second pillar, digitize at scale. Our technology spending is now 18% higher than the same period in 2018 and 4% higher than last year's first half. This is making us a better and stronger bank, both operationally and in terms of the customer experience and providing material operating leverage as we grow the business. The proportion of payments that go straight through without manual intervention now stands at 96.7%. We're reducing account opening times. For example, including first direct, where it now takes 10 minutes to open an account instead of 10 days. And we've introduced e-signature for over 200 processes in Hong Kong, substantially reducing both processing time and the use of physical forms. We're launching and scaling new digital products. Our multi-currency global money account launched last year in the U.S. and is now live in both Singapore and the UAE. We've launched Kinetic in the UK, which already has more than 10,000 users and a 4.8 app store rating and we're simplifying and automating trade finance. By 2023, our digital trade transformation aims to reduce 60 bespoke systems down to just 5. Clients and counterparties can already agree the wording of guarantees digitally, which is then fulfilled seamlessly in our back office, significantly reducing both time and effort. In supply chain finance, we can now digitally onboard suppliers in 2 days rather than 8, helping clients to support their suppliers and increase the resilience of their supply chains. These are big innovations with a real-world impact for our customers. Slide 7 looks at energize for growth, our third pillar. Our move to hybrid working is now well underway with a 10% reduction in our global office footprint since the start of 2020. 3 of our global business CEOs are in the process of relocating to Asia, and we made a number of key leadership appointments in Asia in the first half of the year. We're aiming to build a more diverse business. We've signed up to the WEF's partnership for racial justice in business and the UN LGBTI standards of conduct for business. We've also increased the proportion of female leaders to more than 31%. But we've still much more to do. And we've hired more than 650 new graduates from 48 different countries, more than half of whom are female. Slide 8 looks at our final pillar, the transition to net 0. I was delighted and grateful that 99.7% of our shareholders backed our special resolution on climate change at our AGM in May. That was a strong endorsement of our climate strategy, which has, at its core, a commitment to support our customers on their transition to low carbon. We're continuing to provide strong support to our customers on their transition journeys, taking part in more sustainable financing in the first half of 2021 than in the whole of 2020. We're working closely with our own suppliers to help them improve their climate reporting so that we can become net 0 in our operations and supply chain by 2030. And we're building partnerships to unlock new climate solutions and make them investable, joining forces with WWF and the World Resources Institute to bring new projects and technologies into commercial scale. Overall, it's still relatively early in the life of our growth and transformation plans, but I'm pleased with our progress so far. Ewen will now take you through our results and update you on our targets.
Ewen Stevenson, CFO
Thanks, Noel, and good morning or afternoon, all. We had another solid quarter. Reported pretax profits of $5.1 billion, that's up almost fivefold on last year's second quarter with an annualized return on tangible equity of 9.4% for the first half. Adjusted revenues were down 10% on last year's second quarter, due largely to the impact of the current rate environment together with the comparison against a very strong global market second quarter last year. Importantly, we think we're now close to the trough in year-on-year revenues, with volume growth in our lending businesses and our Wealth franchises driving a recovery in the coming quarters. Expected credit losses were $284 million, a net release for the second quarter in a row of net releases. This reflects a continued improvement in the economic outlook for our central scenarios, less extreme downside scenarios given the progress in global vaccinations and exceptionally low stage 3 charges in both the first and second quarters. We still retain $2.4 billion of the stage 1 and 2 ECL reserve buildup we made in 2020. Operating expenses were up 4%. This was due to both higher performance-related pay accrual and higher technology spend. Despite this, we remain on track to deliver our target of broadly stable operating cost for the year, excluding the bank levy, subject to final decisions on the variable pay pool later in the year. Lending and deposit balances were up 2% and 1%, respectively, as lending growth spread for us beyond mortgages and retail banking and trade finance and commercial banking with increased confidence in higher loan growth in the second half of the year. Our core Tier 1 ratio was down nearly 30 basis points at 15.6% due primarily to our dividend accrual. Our tangible net asset value per share of $7.81 was up $0.03 on the first quarter, and we've declared an interim dividend of $0.07 per share for the first half of the year. We remain on track to deliver all of our medium-term targets, including rebuilding to a return on tangible equity of at least 10%. Turning to Slide 10, we're continuing to shift the balance of the group's focus towards Asia through capital reallocation and the buildup of capabilities and people. However, as other regions start to recover from COVID-19 lows, we're also seeing much improved earnings diversity with profitability in all regions during the half. Europe has gone from loss-making in last year's first half to generating 22% of group profits in the first half of this year. This included a strong contribution from our UK ring-fenced bank, which saw revenue growth of 12% in Wealth and Personal Banking and 7% in Commercial Banking. There are also good signs of recovery elsewhere, including the Middle East, the U.S., and Mexico. We're also now seeing more balanced profitability across our global businesses. Each business now generating roughly 1/3 of group profits in the first half, with a particularly strong recovery in Commercial Banking. Turning to Slide 11 and looking at the second quarter adjusted revenues across the 3 global businesses. In Wealth and Personal Banking, revenues were down 4% on a year ago. Wealth Management revenues grew by $187 million, due mainly to an increase in the value of new business written in insurance and mutual fund sales growth in Hong Kong. Personal Banking revenues fell by $161 million due to the impact of low interest rates on deposit margins. Commercial banking revenues were 4% lower, due mainly to the impact of low interest rates on global liquidity and cash management, but with good growth in trade balances in the quarter and early signs of growth across other commercial lending. In Global Banking and Markets, revenues were down 23%. This was largely due to slower customer activity and lower volatility in the fixed income markets as compared with a particularly strong global markets performance in the same period last year. On Slide 12, net interest income was $6.6 billion, down 5% against the second quarter of 2020 on a reported basis, but stable compared with the first quarter of 2021. On rates, the net interest margin was 120 basis points, down 1 basis point on the first quarter, primarily reflecting lower asset yields, which more than offset lower funding costs. On volumes, we saw a continued good loan growth in mortgages in Hong Kong and the UK and strong commercial applications that have started to translate into drawdowns. For the remainder of the year, we're seeing signs that net interest income has now stabilized, and we expect loan growth to support net interest income in the second half. On the next slide, noninterest income was $5.9 billion, down 11% against last year's second quarter due to the exceptionally strong global markets performance in the second quarter last year. However, we saw good fee income progression in all our businesses against last year's second quarter with strong performances in Wealth, Global Liquidity and Cash Management, and Capital Markets and Advisory. We expect customer activity and fee income to continue to strengthen as economic activity recovers, although the recovery path obviously remains uncertain as a result of COVID-19 variants. On the next slide, we reported a net release of $284 million of expected credit losses in the quarter compared with a $4.2 billion charge in the second quarter of 2020. The net release was across all global businesses. This reflected an improved economic outlook, together with stage 3 charges that remained very low in the quarter. Recognizing the risks that still exist from the pandemic, we're continuing to hold around $2.4 billion of our 2020 COVID-19 uplift to stage 1 and 2 ECL reserves. Based on the current economic outlook, we now expect the ECL charge for the full year to be materially lower than our medium-term through-the-cycle planning range of 30 to 40 basis points, with the potential even for a net release for full year 2021 and further stage 1 and 2 releases in the first half of 2022. Turning to Slide 15, second quarter adjusted operating costs were $297 million higher than the same period last year. This was driven by higher performance-related pay accrual of $367 million and a $204 million increase in technology investment. We made a further $484 million of cost program savings compared with the prior year, with an associated cost to achieve of $499 million. To date, our cost programs have achieved savings of $2 billion relative to our year-end 2022 target of $5 billion to $5.5 billion with cumulated cost to achieve spend of $2.7 billion. Despite higher second quarter costs, we continue to expect our 2021 adjusted operating costs, excluding the benefit from a reduced bank levy to be broadly in line with 2020. Turning to capital on Slide 16, our core Tier 1 ratio was 15.6%, down 27 basis points in the quarter. This reflected an increase in RWAs from lending growth, including a short-term increase of around $10 billion from IPO loans in Hong Kong together with a decrease in capital, including a $3.5 billion accrual for dividends. As signaled at the time of our first quarter results, we will include a deduction each quarter for dividend accruals. For the half year, that deduction was $0.17 based on 47.5% of our first half EPS of $0.36, which is the midpoint of our 40% to 55% target payout ratio. To reiterate my comments from last quarter, it shouldn't be read as a signal or a forecast of our 2021 dividend intentions. The dividend accrual is purely a formulaic calculation that will true up at the full year based on the results and outlook at the time. Reflecting the current improved economic outlook and improved operating environment in many of our markets, we now expect to move to our target payout range in 2021. We've retained the flexibility to adjust earnings per share for noncash significant items. And in 2022, we also intend to exclude the losses on the sale of our French retail banking operations. When thinking about the payout ratio for 2021, we'll attach a lower weight to unusually low ECL charges or credits as part of this year's earnings per share, together with a desire to see further progress from 2021 in dividends per share in 2022 and beyond. Excluding FX movements, risk-weighted assets rose by $13.5 billion in the second quarter driven by growth in Asia and the IPO loans we mentioned. We now expect low single-digit percentage growth in risk-weighted assets for the full year. On the next slide, due to changes in the underlying calculation methodology, we've updated our risk-weighted asset savings targets on a like-for-like basis from $100 billion to $110 billion. So far, we've made around $85 billion of transformation saves and remain fully on track to meet our target. On Slide 18, it's still early days in terms of our 2022 targets, but we've made good progress so far. We're on track to meet our cost and risk-weighted asset savings targets, and we remain confident that we're on track for a return on tangible equity at or above 10% over the medium term. The shift to higher return areas is underway, and we're starting to see results from the growth opportunities we've identified. As mentioned, we now intend to move to our target payout ratio in 2021. As a reminder, our dividend policy aims to deliver sustainable cash dividends while retaining the flexibility to invest and grow the business in the future, supplemented by additional shareholder distributions if appropriate. So in summary, this was another solid quarter for us, a near fivefold increase in pretax profits on the same period last year with good earnings diversity across the group and evidence of strong execution in all areas of strategy. While the results were materially flattered by a net release of ECLs, we can see early signs of a broadening recovery in lending with volume growth translating into revenue growth as our net interest margin stabilizes and growth in fee income across our businesses. Despite uncertainty on the pace of recovery from here, we remain on track with all of our medium-term targets. And with that, our ability to achieve cost of capital returns and to fund attractive growth. With that, Sharon, if we could please open up for questions.
Operator, Operator
Thank you, Mr. Stevenson. We will take our first question from Martin Leitgeb from Goldman Sachs. Please go ahead. Your line is open.
Martin Leitgeb, Analyst
Yes. Good morning, and thank you for the presentations and for taking my question. If I can just start with comments you made on the risk cost outlook, in particular as we head into 2022. Given the current economic outlook that we have a scenario that risk costs could also undershoot the 30 to 40 basis points kind of full year cycle range as we head into 2022, just considering the management overlay still in place. And related to that, I was just wondering in terms of how we should think of the scope for capital return? I know there are comments in the presentation about the potential for a step up in capital return. I think the dividend guidance is clear. How should we think about the scope for potential buyback? Is that becoming increasingly a possibility that as we also head in 2022? And is that a key instrument in terms of how we should think about getting the core Tier 1 ratio back to a level of 14% to 14.5%, which is the target range? Thank you.
Noel Quinn, CEO
Ewen, do you want to handle both of those?
Ewen Stevenson, CFO
Yes. Thanks, Martin. So on ECLs in 2022, I do think that we’re going to continue to – I talked about earlier of having $2.4 billion of stage 1 and stage 2 reserves that we built up from last year still in place. That’s around 60% of the reserve buildup we put in place last year. We do think that that will unwind or to the extent that that unwinds, it will unwind over probably the following 4 quarters. So there will be some benefit into the first half of 2022. I don’t think that we’ll begin to normalize on expected credit losses at this point until the second half of ‘22. On capital distributions, and I’ll give a slightly fuller answer given I’m sure that there will be several questions around this. Look, relative to the comments I made at the start of the year around our capital position and capital distributions, I think sitting today, we are in a stronger position relative to what we thought. We’ve seen a much improved credit outlook. It’s our second quarter of reserve releases and an expectation that we’re going to continue to see additional releases over the coming 4 quarters. We’ve also had much lower credit rating migration than what we thought, leading to lower risk-weighted asset growth relative to what we thought a few months ago. So our core Tier 1 ratio today is stronger than where we thought we’d be and the outlook is better. We know that we’ve got some known and unknowns in terms of capital headwinds. Software intangibles, which is around 25 basis points of benefit, we expect to get removed from the beginning of 2022. If you look in combination, I think there’s around about 10 basis points of aggregate hit from the sales of our French and U.S. retail banking franchises that will impact us into ‘22 and ‘23. And we’ve got various regulatory-driven uplifts of around about $40 billion uplift in risk-weighted assets over the next 18 months. But equally, we know that we’ve just accrued under our accrual policy $0.17 of dividend versus the $0.07 that we’ve just declared. And we’ve still got at least $25 billion of RWA reductions in our RWA rundown program. Yes, we are committed to paying a sustainable and healthy dividend while continuing to progressively normalize our core Tier 1 capital position over the next 18 months. Buybacks will be one way for us to think about normalizing and using our surplus capital, and we’ll continue to keep buybacks under review in the coming quarters. And I would note that that tonality is different from what we’ve said in previous quarters. As you recall, at full year, we said that we wouldn’t contemplate buybacks this year. We’re now saying that we’ll keep it under review.
Operator, Operator
Thank you. Your next question comes from the line of Raul Sinha from JPMorgan. Please go ahead. Your line is open.
Raul Sinha, Analyst
Hi. Good morning, everyone. I have a couple of questions. First, Ewen, could you elaborate on how HSBC defines surplus capital? I'm aware you're discussing potential growth opportunities returning after some time. You have a strong capital position, and while buybacks and write-backs are on the table, there’s potential for deploying that capital as well. It’s challenging for us to gauge how much might be considered structurally excess surplus capital. Any insights on this would be appreciated. Secondly, I wanted to revisit the topic of NII stabilization. I noticed some fluctuations, with the HBAP NIM down 3 basis points for the quarter and the same for the UK NIM. Several UK peers are anticipating further NIM pressure. What makes you confident that NII has stabilized? Is it because you're seeing an increase in card values, or do you expect loan growth to be NIM accretive? Are there any trends from Q2 indicating pressures that we should consider? Thank you.
Ewen Stevenson, CFO
Yes. So on the use of capital firstly, yes, obviously, we’ve got organic growth. I think we’re still sitting – sticking to our target of mid-single-digit loan growth over the next coming quarters into 2022, and I’ll come back to that in terms of where we’re seeing that growth. We also have been public about the fact that we are thinking about a number of small bolt-on acquisitions, which are almost exclusively centered on the Asian Wealth space. And I would use the word bolt-on quite carefully. We are not looking at anything material. But in aggregate, we are looking at 3 to 4 opportunities in the Wealth space across Asia at the moment. Yes, I think our distribution policy, as it relates to dividends, is very clear. The 40% to 55% payout range. As I said, for this year, I think you should expect us to be at the lower end of that range because of the unusual benefit that we all have had from ECLs this year. And then on top of that, buybacks on top of that. So I think you can sort of do the math and know what we’re solving for. The only thing that you won’t have on that is the bolt-on acquisitions. But if you think of 3 or 4 smaller bolt-on acquisitions of, say, $0.5 billion each will help in relation to that math. Net interest income stabilization. Yes, I think we are – we’ve seen HIBOR now broadly stabilize. If I look at the second quarter of this year, the average HIBOR – one-month HIBOR rate was 9 basis points. I think in Q3 so far, it’s been around 8 basis points. So we are troughing now. I think if you look at the underlying growth, we had about $16 billion of loan growth in the second quarter. You can take about $9 billion of that away for the Hong Kong IPO loans, you can add back $3 billion because we shifted the U.S. portfolio that we’re selling into held for sale. And there was probably up to $5 billion of GBM runoff, Global Banking and Markets runoff, in the loan portfolio, particularly in the non-ring-fenced bank. So we think we grew the underlying loan portfolio by about $10 billion to $15 billion, which is about 1% to 1.5% growth in the quarter, which is 4% to 6% growth for the full year, which is very much in that run rate that I talked about. Yes, you’re right that there may be some still some modest income pressure in the UK. But I think you saw this quarter in the UK, lending growth more than offset any decline in net interest margin, and we continue to remain confident about our ability to grow faster than peers in the UK, particularly in mortgages.
Raul Sinha, Analyst
Thanks very much for that.
Operator, Operator
Your next question comes from the line of Tom Rayner from Numis.
Tom Rayner, Analyst
I wanted to ask you more about the dividend policy. You've explained it pretty well, but if we project a significant increase in the consensus payout, which is set at 50% this year, it seems like you're anticipating earnings to peak due to the low impairment number, which would allow the payout ratio to decrease towards the lower end. As things stabilize, it looks like the payout would go back up. Is this essentially indicating that you have a progressive dividend policy? Do you still need this target payout range, and what purpose does it serve at this point? Should we just assume you're aiming to maintain a progressive dividend that you can increase annually? Additionally, I'd like to discuss the NII guidance. The fact that you're not specifically mentioning NIM suggests you might be expecting more pressure on it. Is that correct? Could you elaborate on that, especially in light of possibly slower growth in Asia? It seems like it might take longer for interest rates to return to normal than we expected a month or two ago. Could you provide insight on that as well?
Ewen Stevenson, CFO
Yes. First, regarding our dividend policy, we have established a payout range of 40% to 55%, but we do not officially state that we have a progressive dividend policy. While we are aware that the market prefers a progressive dividend, we ideally expect our dividends in 2022 to be higher than those in 2021. In the first half of this year, we accrued $0.17 compared to the $0.07 we declared. Our earnings per share for the first six months was $0.36, and we paid out $0.07, amounting to just under 20% of our earnings during that period. Therefore, we anticipate a larger payout in the second half of this year and expect that 2022 dividends will exceed those of 2021 without officially committing to a progressive dividend policy. Regarding net interest income, I don't foresee any aggregate net interest margin pressure moving forward, but I hesitate to predict the bottom for net interest margin as forecasting it is challenging. However, I believe that any relative pressure on net interest margin combined with stronger loan growth indicates we are approaching a phase of net interest income growth. By 2022, I am confident that we will observe net interest income growth, as I expect net interest margin to have stabilized by then. Concerning interest rates, compared to our position six months ago, where our outlook suggested that policy rate increases might not occur until late 2023 or into 2024, we are now more optimistic that we could see policy rate increases beginning around mid-2022, particularly led by the UK, with 2023 likely benefiting significantly from higher policy rates.
Noel Quinn, CEO
And Tom, if I could just add a couple of comments on the NIM. Generally, we’re seeing the volume growth, the new deal activity being transacted good NIMs, good margins. We’re not having to trade margin to get that volume growth. There is one area where there is a lot of activity, and that’s UK mortgages. But even there, the margins we’re generating on UK mortgages are above the back book margins. Albeit they’re slightly lower today than they would have been 3 or 6 months ago, but they’re still well above the back book margins. So we’re not seeing a trade-off on margin for new business relative to volume in any significant degree. And then on dividend policy, I just want to remind you, we put the dividend payout ratio at 40% to 55% because we wanted to get the balance right between distributing capital to generate a decent return for our investors, but also retaining sufficient capital to fund future growth and future opportunities. And now to the extent that those future growth opportunities are not there, either organically or inorganically, then we’ll consider buybacks or capital return. But if we do see growth, then we have the ability to fund that growth through retention of capital. And our previous policy probably didn’t get that balance right. We were too much into distribution and not enough into funding future growth.
Operator, Operator
Your next question comes from the line of Omar Keenan from Crédit Suisse.
Omar Keenan, Analyst
I have a question about the Asia Wealth Management strategy. Considering you're exploring some additional opportunities, where do you see potential geographic or product gaps in the HSBC Wealth Management offerings in Asia that you might want to address? Also, I would like to ask about the UK business and its mortgage growth, which is aiming to capture more market share. Have there been any discussions about possibly pursuing inorganic strategies in that area as well?
Noel Quinn, CEO
Thanks, Omar. I'll address that. First, regarding Wealth bolt-ons, we are focusing on pan-Asia. We see solid organic growth opportunities with our platform in Hong Kong, which will primarily emphasize organic growth there. We are also investing in China to expand our Wealth business, with plans to recruit 3,000 people over the medium term, of which we have already hired 600 in the first half of this year. Consequently, potential bolt-ons would most likely be in the rest of Asia. We are enhancing both product and distribution capabilities to boost our organic growth plans in that region. We are open to organic investments in the rest of Asia, but if we can find bolt-on acquisitions to expedite those plans, it would be advantageous. Currently, we are exploring 3 to 4 opportunities that combine product and distribution capabilities in fields like insurance, high-net-worth wealth management, and asset management. Those will be our main areas of focus. Regarding mortgage growth, Ewen can provide more details on that. For clarity, our share of mortgages in the UK is currently below our natural footprint share of customers there. We are working to realign our mortgage market share to better match our customer base in the UK banking market. While we are indeed taking market share from others, our goal is to restore our position to where we believe we should naturally be.
Ewen Stevenson, CFO
Yes. To add to what Noel said, our current account market share by value reflects a more affluent customer base, with about a 13% to 14% share of current accounts and a stock share of 7.4% in mortgages. We have consistently grown our flow share beyond our stock share, with an increase of approximately 8.5% to 8.6% in the quarter, which is about 100 basis points higher than our stock share. This growth is partly due to the establishment of our broker distribution, which accounts for around 70% of the market. Over the years, we have fully built out our broker distribution and possess a significant amount of excess liquidity in our UK business, which increased further during COVID. We find the returns on new business to be very attractive. Therefore, you should expect us to continue targeting higher growth in the mortgage market as we aim to capture more market share at the margins we are currently experiencing. Additionally, we believe there are substantial organic growth opportunities, so we do not see a need to invest inorganically in the UK mortgage market.
Operator, Operator
Your next question comes from the line of Aman Rakkar from Barclays.
Aman Rakkar, Analyst
Yes. Just one quick follow-up on mortgages, if I may. Just around your RoTE. I mean is there any chance that you could give us an indication of what kind of ROE you're booking on mortgages as you currently observe it now? And then just around GB&M, if I could ask around your expectations for the full year in that business. And I know FICC was down a decent chunk in Q2. I mean, how much of that do you think is down to normalizing markets versus restructuring? And do you think we can continue to expect any kind of revenue attrition from restructuring this year in that business?
Ewen Stevenson, CFO
Yes. When it comes to mortgages, we are experiencing returns on capital significantly higher than our cost of capital. This is partly due to the low risk weights in the UK mortgage market and our ample excess funding, making it a highly beneficial area for us. Regarding Global Banking and Markets, we previously indicated that we expect performance in 2021 to be lower than in 2020 but higher than in 2019, and this view remains unchanged. The entire market experienced a notably weak quarter in fixed income, primarily because of last year's strong performance. However, we believe certain aspects of the fixed income business, such as foreign exchange, will naturally bounce back as customer activity increases on both the commercial and retail fronts post-COVID. In equities, we had a strong quarter, surpassing our competitors, although it constitutes a smaller segment of our Global Banking and Markets business. In Capital Markets and Advisory, we are lagging behind some U.S. competitors and have opted out of SPAC financings, which have significantly contributed to the earnings of several rivals. Overall, when comparing with peers, we found nothing extraordinary aside from being in line with fixed income and outperforming in equities.
Aman Rakkar, Analyst
Can I ask a quick follow-up on the mortgages? There is expected to be significant regulatory risk-weighted asset inflation in the next 12 to 18 months. Do you have any insight on whether this might create a pricing floor at a system level? Or do you believe the system is already adjusting its pricing in anticipation of this RWA inflation?
Ewen Stevenson, CFO
Yes. I mean, well, we are certainly thinking about that RWA uplift. I think in aggregate, I think the 10% floor at the portfolio level adds about $3 billion of RWA uplift for us, which is not material in the overall context of our UK mortgage business. But inevitably, if RWA floors by or output floors by way down the track then pricing will adjust accordingly, I think.
Operator, Operator
Your next question comes from the line of Andrew Coombs, Citi.
Andrew Coombs, Analyst
I have two questions, one about costs and the other about Wealth. First, regarding costs, you mentioned the increase in variable pay this quarter, but your full-year cost guidance remains the same. Can you explain if this is just a timing issue with the variable pay or if the mix of costs in your full-year guidance has changed from your initial expectations? My second question is about Wealth. In terms of life insurance manufacturing and investment distribution, the revenue contribution from life insurance manufacturing this quarter has benefited significantly from market movements. If we exclude that, do you believe this represents a more normalized base level for the quarter? Additionally, while offshore sales are still pending, could you discuss whether the adjusted figures for investment distribution and life insurance manufacturing reflect a more typical quarter and provide a fair base for comparison?
Ewen Stevenson, CFO
Yes. Regarding costs for this year, there is a change in the mix amounting to a few hundred million. Not all of the increase in variable pay is due to timing issues; some is due to a higher accrual for variable pay than we expected. However, the mix shift indicates that we anticipated various line items to start returning to normalization from COVID in the second half, but we believe this will happen much slower than we initially thought. Overall, costs for running the bank, such as travel, printing, and office premises, are expected to be a few hundred million lower than we previously thought for this year, which balances out a slightly higher accrual for the variable pay pool. This is why we remain confident in maintaining our flat cost target. In terms of Wealth, we need to differentiate between the domestic Hong Kong business, which is doing better than in prior quarters, and the international business, especially the Mainland China business, which is still heavily affected by the border closure. We do not expect the border to reopen until the fourth quarter at the earliest. Therefore, I would not consider this quarter as a normalized quarter for insurance overall. It can be seen as normalized for the Hong Kong business but still abnormally low for the China business.
Andrew Coombs, Analyst
I have a quick follow-up regarding costs. If you're indicating that the travel and entertainment expenses have essentially been postponed, which serves as an offset, do you anticipate that these expenses will rebound in 2022? Should we expect that variable compensation might also improve slightly at that time?
Ewen Stevenson, CFO
No. I mean – look, I mean, I think I would describe it as sort of margin for error in ‘22 has tightened because of that pay pressure that we’re seeing relative to what we previously thought. You’re right that those COVID-related savings should get back to more normal levels or what we describe as more normal levels than ‘22 onwards. But remember also, I think embedded in that is it’s new normal versus old normal. For example, we’ve reduced our travel budget. If you looked in 2019, we were spending about $400 million a year. We have taken that down to a run rate of $200 million a year for planning purposes going forward from ‘22 onwards. We’ve talked about the big savings that we see in head office expenses getting out of 40% of our own real estate ex branches over the next few years, which will reduce that part of our cost structure by just over 20%. But you’re right that those numbers were already embedded into our full year ‘22 cost target. So the other thing, just – again, just for all of you, our cost target was based on constant FX. So what was $31 billion today is about $31.5 billion of cost for ‘22.
Operator, Operator
Your next question comes from the line of Guy Stebbings from BNP Paribas.
Guy Stebbings, Analyst
Just a couple of follow-ups. The first one was on margin. The mix has been diluted and then given the strength in secured. I just wondered when you think about your loan growth and the 1% to 1.5% quarterly underlying growth, and that's been consistent with your expectations going forward. Within that, we should be assuming it's still going to be tilted slightly more towards secured. We can then obviously keep an eye on rates and other factors to come to adjustment on NIM, but just helpful to think about how much of that loan growth just to flow through into NII growth. And then just going back to distributions and timing. Your 15.6% now RWA growth in the second half, it looks like you're guiding to $10 billion to $20 billion, so 20, 30 basis points of capital drag given, of course, should be much lower in the second half and this certainly suffice to be a upside. So it feels like capital shouldn't move an awful lot in the second half, even pro forma for the accrual. If that's broadly correct and you're stuck there with 100 to 150 basis points of headwind to the target coming into the year, can we take your comments around buybacks into the fiscal and sort of next 6 months depending on bolt-ons? Is that fair?
Noel Quinn, CEO
If I could just quickly take the business comment. We're not expecting a significant change in our mix between secured and unsecured. I think we see the portfolio having a similar balance to history. So we're not reweighting that portfolio mix. As you know, we tend to be more of a secured book than an unsecured book. We do have a credit card business. We do have unsecured lending. But in our Wealth business, we have a strong mortgage book. And in our Commercial Banking and Wholesale business, it tends to be secured. So we don't see a significant change. Do you want to take the second question, Ewen?
Ewen Stevenson, CFO
Yes. So I think – I’m not going to sort of comment on your math in terms of where our core Tier 1 ratio may be at the end of the year. But I think we would be slightly more cautious than you in saying that we expect it to be in line with where we currently are. The – partly, I think, because we are anticipating decent RWA growth in the second half of the year. But overall, in terms of – yes, the main comment in relation to buybacks is, I mean, if you recall at the full year results back in February, I said definitely no buybacks this year. We softened that language slightly at Q1. We’re softening it again now, and we will definitely keep it under review. And we’re not – we are no longer calling out that there’s an absolute ban on buybacks this year. So we’ll keep it under review.
Operator, Operator
We will now take our last question, and it comes from Manus Costello from Autonomous.
Manus Costello, Analyst
I wanted to just follow-up on the comments on insurance, please. You were talking about the offshore sales coming back, hopefully, from Q4 onwards. I mean previously, offshore insurance sales in Hong Kong made up about 40% of total sales for that business. Do you think we can get back to that kind of level quite quickly once the border reopened? And do you think there might be a catch-up of the lost business from the last couple of years coming through setting you up for a very strong 2022 if the border reopened? And secondly, and somewhat related, I wondered if you could give us any indication of how you think IFRS 17 will impact the business? Or if you can't indicate how it will impact the business, can you tell us when you will give us some indication of how it impacts the business?
Noel Quinn, CEO
I think on the insurance, I mean, it's very hard to predict life after COVID relative to life before COVID because there are so many things that are changing, but we would expect to rebound. But also, you've got to be cognizant of the fact we're investing in the Greater Bay area. We're investing in Pinnacle. We're investing in our insurance capabilities and Wealth Management capabilities onshore. So we believe we'll be well positioned, whether it comes back into Hong Kong or it stays in the Hong Kong Greater Bay Area, we will have the ability to serve both markets.
Ewen Stevenson, CFO
Yes. And then the question on IFRS 17, Manus. Look, we’re conscious of the fact that we owe the market an answer on this and some guidance around this. I think, certainly, in the next couple of quarters, no later than full year results, we’ll give a teach-in on what we think the impact of IFRS 17 is. But yes, broadly, as you know, reported earnings will be lower, materially lower than current reported earnings for the insurance business.
Operator, Operator
Thank you. I will now hand the call back to Noel Quinn for closing remarks.
Noel Quinn, CEO
Thank you. Thanks, Sharon. So to wrap up, a good operating performance, supported by a net release of expected credit losses, good earnings diversity, both by geography and by business. Good momentum behind our growth and transformation plans with good delivery in all 4 pillars of our strategy. Traction in our Asia Wealth strategy with strong growth in Wealth balances. Early growth in both lending volumes and fee income, particularly in Asia. And we're on track in both our RWA and cost reduction programs. And confidence in delivering a RoTE at or above 10% over the medium term. Thank you for joining today. If you have any further questions, do pick them off with Richard and the rest of the Investor Relations team. Thank you, and have a good summer.
Ewen Stevenson, CFO
Thanks, all.