Earnings Call Transcript - HSBC Q4 2022

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference Call for HSBC Holdings plc's Annual Results for 2022. For your information, this conference is being recorded. At this time, I will hand the call over to your host, Mr. Noel Quinn, Group Chief Executive.

Noel Quinn, Group Chief Executive

Good morning to everyone in the room in London today, and great to see you all again, and good afternoon to those watching from Hong Kong and around the world. Before George takes you through the Q4 numbers, I'll start with a summary of our strategic progress. When we started our transformation 3 years ago, we also revisited our core purpose and values. Opening up a world of opportunity is the reason HSBC exists. We are making it a reality for our customers. Our results today are evidence of that. And I'm pleased that our performance also demonstrates that our people are living and breathing our values, particularly the fourth value, which is get it done. I will demonstrate during the discussion today that we have achieved a lot over the last 3 years and that we are committed to doing even more. I want to start by telling you the 3 elements I'm going to cover in the presentation today. Transformation was the first phase of our strategy execution. Three years ago, the fair criticism of HSBC was that unprofitable or subscale businesses and clients were dragging down good profitability from our international proposition and from the profits generated in Hong Kong and the U.K. I'm pleased to say we've addressed this. Our international connectivity is now underpinned by good broad-based profit generation around the world. Delivery in 2022 is all about the good set of results we've just announced. I will come to the details later but I'm pleased adjusted profits before tax were up 17%. We're firmly on track to achieve our returns target for 2023 onwards. And we expect to have substantial distribution capacity for higher dividends, more buybacks and potentially a special dividend in early 2024. But there's also so much more we can achieve. So the final element of the presentation is growth and returns. It's all about how we will further improve performance going forward. As we've transformed, we've built a strong platform for the future that will enable us to meet our customers' needs. And I expect wealth, payments and FX, fee income, technology investment and climate finance to provide new value creation opportunities in the years to come. So taking these 3 messages in turn. Starting with transformation. Three years ago, we set out to tackle a series of fundamental problems: loss-making businesses, unprofitable products and clients, inefficient capital and costs. Our transformation journey has 6 components, which I will run through in more detail on the following slides. Our international connectivity remains our biggest differentiator, and we've grown and protected many of our market-leading international businesses during the 3 years. But we've done that while repositioning unprofitable and nonstrategic businesses, particularly in the U.S. and Europe. That's resulted in a client proposition that is now built on international connectivity underpinned by a broad base of geographic profit penetration. All of this has been supported by strong cost discipline, which has enabled us to drive a step change in our technology investment. We've also removed the dilutive scrip dividend and introduced a new sustainable dividend policy, which is delivering attractive ongoing returns for shareholders, and enabling us to invest in the business. So crucially, we've created a strong platform for improved growth and returns with new opportunities for value creation. Our focus now is to capitalize on these opportunities. Taking each of these in turn. In terms of international connectivity, our greatest strength remains our ability to connect the world's major trading and investment blocks. We are the world's #1 trade bank, top 3 for FX and a leading payments company. Last year, we processed more than $600 trillion of payments globally. International is also core to our value proposition. Around 45% of our Wholesale client business is done cross-border. And in Wealth and Personal Banking, we now have 6 million international customers, which is up 7% on last year. This is significant because our international customers generate around twice the average revenue as our domestic customers. Our international connectivity is also translating into higher revenue and market share. Since 2019, we've grown Global Payment Solutions revenue by 6% CAGR, trade revenue by 5% CAGR and revenue from global foreign exchange has increased by 12% CAGR. Overall, Transaction Banking revenue was up by 7% CAGR over the last 3 years. We also see an opportunity to create even more value by continuing to grow these product lines over the coming years. The next slide drills down into how we reshaped our portfolio. Across the group, we reduced risk-weighted assets by a cumulative $128 billion, well in excess of our target of $110 billion. We made key strategic decisions to sell our U.S. mass market retail bank, our Retail Banking operations in France and our Banking business in Canada. We've also announced exits from Russia and Greece, with other potential smaller exits being considered. We've reallocated more of our capital to Asia. And by Asia, I mean the whole of Asia. We want to build strong wealth businesses in Mainland China, India and Singapore, alongside strong business we already have in Hong Kong. We accelerated this process through bolt-on acquisitions and investments in the last 12 months. We've completed the integration of AXA, Singapore and L&T Investment Management in India. And in Mainland China as well as continuing the organic build-out of Pinnacle, we had 7 main license approvals since 2020. These enabled us to take full ownership of HSBC Life China and increased our majority stake in HSBC Shanghai to 90%. As I said earlier, we now have an international connectivity underpinned by good broad-based profit generation as this slide demonstrates. This is the single biggest change compared to 3 years ago. I won't go through all the numbers on this slide, but I will mention a few. The total amounts of adjusted profit contributed by Asia, excluding Hong Kong and Mainland China, was more than $4 billion in 2022, an increase of 23% compared to 2019. Mainland China, excluding associate income from BoCom, contributed around $1 billion of profit last year in a challenging year. And India contributed a further $900 million of adjusted profit. Outside Asia, the Middle East generated $1.8 billion of adjusted profits last year. HSBC delivered $5 billion of adjusted profits. And we've got leaner, more profitable businesses in Continental Europe and the U.S. Continental Europe generated adjusted profits of over $2 billion and the U.S. adjusted profits of over $1 billion. Both of those businesses are close to loss-making or loss-making 3 years ago. Mexico is another high returning business. It delivered a return on tangible equity of 18% and what's noteworthy is that 60% of new-to-bank retail customers last year were acquired through corporate client relationships by the provision of employee banking services and payroll services, demonstrating the value of our connected model in the country. The next slide focuses on the tight cost discipline we've demonstrated, and we will maintain. The reduction of our global corporate real estate branch network and operations headcount has all delivered material savings and we expect to achieve further efficiencies in the years to come. But the most important point on this slide is that we've used these cost savings to increase investment in technology. We're allocating 18% in operations costs and 18% in technology investment. This is spending in the right place to build the business of the future and it has enabled us to fundamentally change the way we operate. Our formal cost reduction program, or what we refer to as the 3-year cost reduction program, has now ended. But we still expect more than $1 billion of cost saves to flow through into 2023 from that program. There will be no easing up at all in our cost discipline. But I think it's appropriate that we will also continue to identify opportunities to create efficiencies going forward that will deliver sustainable cost savings in future years. With any associated costs from those programs reported through the cost line, not treated below the line as significant items. Whilst we have transformed, we have also invested in areas that we expect to deliver strong growth and returns in the future. A strong balance sheet has always been a defining characteristic of HSBC, and we've continued to grow the deposit book and assets over the past 3 years. This is benefiting our performance now that rates have increased. Developing our wealth business has also been a strategic priority. Our investments over the past 3 years are gaining traction, reflected in revenues of over $9 billion in 2022, excluding market impacts, which is a 9% CAGR compared to 2020. It is also reflected by increased insurance market share in Hong Kong. The next slide sets out the impact of the step change we made in technology investment. The faster services, reduced friction and more competitive products that this investment has enabled have been critical to improving the customer experience. With our digital propositions, our aim is to build once and deploy globally. Our upgraded mobile banking app is available in 24 markets and has around 13 million active customers. HSBC Kinetic, our award-winning business banking app in the U.K., now has around 53,000 new clients. In addition, we are launching new products like HSBC Orion, which is our proprietary tokenization bond issuance platform using blockchain. The first public bond was priced on it last month. Turning now to delivery in 2022, I'm pleased with our '22 performance. As you know, from Q3, the reported numbers include a $2.4 billion impairment for the planned disposal of our French retail business. Adjusted revenue was up 18% on the back of a strong net interest income performance, and adjusted profits were up 17%. We delivered a good cost outcome in a high inflation environment by containing adjusted cost growth to around 1%. Expected credit losses were a $3.6 billion charge. The dividend was $0.32 per share. The CET1 ratio was 14.2%, and we achieved a reported ROTE of 9.9% or 11.6% once you strip out significant items. So we're firmly on track to deliver returns of 12% plus from 2023 onwards. I'm now going to quickly run through our 4 strategic pillars. Starting with focus on our strengths. Our market-leading Commercial Banking franchise had a very good year. Adjusted revenue was up almost 30% on last year. There was further good growth in trade, and Global Payment Solutions benefited from higher interest rates. It was encouraging to see fee income grow by 8%. There was strong adjusted revenue growth across all regions. In Wealth and Personal Banking, revenue was up 16% overall. Personal Banking had a particularly strong year, and lending balances were up 3% despite subdued economic conditions in Hong Kong. Wealth was also up, excluding market impacts. One of the best signs that our wealth strategy has gained traction is net new invested assets of $80 billion in 2022, an increase of 25% compared to 2021. This is highly promising for future revenue generation. There was also continued growth in the value of new business in our Asia insurance franchise despite adverse market conditions. Global Banking and Markets also performed very well in 2022. Markets and Security Services was up 14%, due mainly to rate rises and a standout foreign exchange performance. Banking was up 17%, also mainly due to higher rates. In a challenging year for investment banking globally, this good performance underlines the resilience of our model. Collaboration revenues from cross-selling Global Banking and Markets products to customers in Commercial Banking and Wealth and Personal Banking were up 6%. There was strong growth in client business booked in the East but originated in Europe and the Americas, up around 30% on the previous year. This again underlines the geographic diversification of our revenues and that our greatest strength is connecting the world's major economic blocks. The next slide is on digitization at scale, our second pillar. It illustrates the outcomes of our increasing investment in technology. Within Retail and Wholesale, penetration levels increased materially. More than 75% of Commercial Banking customers are now digitally active. Almost half of retail customers are now mobile active. We also believe we can grow these numbers further. The next slide covers energizing for growth and how we're changing the culture of HSBC. Taking out unnecessary layers of management has helped increase our speed and agility. In our last staff survey, the percentage of colleagues who say that work processes allow them to work efficiently is 6 percentage points above the sector benchmark. Confidence within the organization has also increased. 77% of our colleagues told us that they are confident about our future, which is 7 percentage points above the sector benchmark and an increase of 3 percentage points since 2021. We made further progress against our diversity commitments with increases in the representation of female leaders and leaders of black heritage. 36% of our key leadership roles are now located in Asia. And if I reflect on the leadership of our Asian business 5 years ago versus today, I see much more Asian heritage talent and a strong pipeline of talent coming through that we continue to develop. At the same time, we know we have more to do in all these areas. The next slide looks at our final pillar and the leading role that we play in the transition to net zero. The amount of sustainable financing and investment provided and facilitated in 2022 was up slightly, despite the market for green, social, sustainable and sustainability-linked bonds being substantially down. The cumulative total amount since the start of 2020 is now $211 billion. We've set new targets for on-balance sheet finance emissions for 6 high emitting sectors. We recognize that methodologies and data for measuring emissions will continue to evolve, and our own disclosures will, therefore, continue to evolve as well. We continue to reduce emissions across our own operations and supply chain, which were down more than 58% since 2019. Finally, my third message is about growth and returns. We are firmly on track to deliver returns of at least 12% in 2023. But there's also so much more we can achieve, and we can deliver higher growth and returns as we move out of transformation and into value creation. We plan to grow our core businesses, which are built on our international connectivity and the strong broad-based growth we have now spanning every region. The investment we've made in new sources of value creation, such as wealth, payments and FX fee income, technology and sustainability will all increase and diversify our revenue. And we won't be relinquishing our grip on cost because it enables us to spend in areas that create value. Our improved profitability and sustainable dividend policy will give us substantial distribution capacity. With a 50% dividend payout ratio established for 2023 and 2024, a return to quarterly dividends starting in Q1, the consideration of buybacks brought forward to the Q1 results, and on top of this, the consideration of a special dividend of $0.21 to be paid in early 2024, subject to the completion of the Canada transaction and necessary approvals. So our current strategy remains the best way to improve returns for our shareholders. And now I'll hand over to Georges.

Georges Elhedery, CFO

Thank you, Noel, and hello, everyone. Thank you for joining in person and via webcast today. I am glad to see many familiar faces, and I'm looking forward to meeting those of you I haven't had the opportunity to meet yet. Before I get into the Q4 numbers and given this is the first time I'm in front of you in this job, I'd like to share a few thoughts about my approach. You may know I've already spent 18 years with this firm running various businesses, including as CEO of the Middle East, most recently, Co-CEO of Global Banking and Markets. What you may not know is that I spend most of this time creating efficiencies to achieve the purpose of investing in growth. I oversaw the sales of nonstrategic businesses in the Middle East, which allowed us to focus our investments into Saudi Arabia and the United Arab Emirates. When I led GB&M with Greg, I drove the rationalization of our product line and booking structure to focus on areas where we had competitive advantage and could best serve our clients. As a result, we materially reduced RWAs and costs and repurposed those savings to invest in technology for the future of the business. Therefore, I believe that growth cannot be achieved without a clear focus on our strength; therefore, purposeful transformation and the elimination of areas of marginal impact are paramount. Equally, and as importantly, clinical delivery and keeping a tight grip on spending are key to unlocking the potential to invest. So as I approach this next phase, I want to emphasize my 3 focus areas. One, continue to support our business in delivering growth and returns, underpinned by improving customer service and attracting and retaining talent. Two, continue to generate the further efficiencies required to support the investment I just spoke about. And three, the guiding principle that supports all of this will be absolute cost and capital discipline. I'll turn now to the Q4 numbers. Reported profits before tax were at $5.2 billion, up 95% on last year's fourth quarter. Adjusted profits before tax were at $6.8 billion, up 92%. Adjusted revenues were up 38%, driven mainly by net interest income growth of 53% and higher non-net interest income. We booked an expected credit loss charge of $1.4 billion in the quarter. Adjusted costs were up 2% due to higher technology spend and higher performance-related pay. Compared to the previous quarter, lending and deposits were both down; however, this was largely due to our banking operations in Canada being reclassified as held for sale. If you exclude this, lending was down 2%, mainly due to subdued conditions in Hong Kong, but deposits went up. For the full year, the dividend is at $0.32 per share with a second interim dividend of $0.23 per share. Also, after strong capital generation and lower currency adjusted RWAs, our CET1 ratio was at 14.2%, an increase of 80 basis points on the third quarter. Our effective tax rate for 2022 was at 5%. This includes credits from the recognition of deferred tax assets primarily in the U.K. as well as other deferred tax assets and uncertain tax position reassessments. If you exclude these credits, the effective tax rate for 2022 was 19.2%, and we expect our normalized effective tax rate for 2023 to be around 20%. This slide now shows another strong adjusted revenue performance with overall growth of 38% compared to the fourth quarter of 2021, driven mostly by recent trade levels.

Noel Quinn, Group Chief Executive

In the U.K., we continue to guide to a full year 2023 net interest income of at least $36 billion on an IFRS 4 basis. Let me unpack this a little bit. Our guidance, therefore, is unchanged to what we indicated at quarter 3. We do view this as conservative guidance given current FX rate tailwinds and the strong fourth-quarter performance. So this is why we're emphasizing at least $36 billion; that is very important. There are a number of factors we need to be aware of, which are driving us to be conservative in our approach. The first one is the potential lag effect of customer migration to time deposits. The second one is the competitive pressures we may face in deposit pricing. The third one is the impact of foreign exchange and the future rates outlook. We do not consensus, and we're not seeking to change it. We will be updating you on this NII performance throughout the year, starting at the Q1 results when we will also incorporate the impact of IFRS 17 and our guidance. We retained a cautious outlook on loan growth in the short term, but we continue to expect mid-single-digit percentage annual loan growth in the medium to long term. Historically, our earnings have been very sensitive to short-term interest rate movements, and we have started to address this lately with additional structural hedging positions given the current rate levels. We will also update you, I will certainly update you later in the year on the progress towards this net interest income stabilization or mitigation.

Georges Elhedery, CFO

Turning to credit. Our fourth-quarter ECL charge was $1.4 billion, which includes $0.6 billion for our Mainland China corporate real estate exposure. If you exclude this portfolio, the ECL charge was $0.8 billion, or around 30 basis points of loans with limited signs of credit deterioration. So main indicators are still holding up. Given macroeconomic headwinds, we expect an ECL charge of around 40 basis points for the full year 2023. Our ECL charge as a percentage of average loans includes loan balances held for sale from the planned sales of Canada and France retail. Therefore, when you exclude them, you need to add another 4 to 5 basis points on top of that number. I do get a lot of questions on Mainland China exposure, specifically the Mainland China corporate real estate exposure. In the spirit of transparency and having done significant work on the dynamics of this portfolio, let me zoom in and walk you through that project. First, our principal area of focus remains the portfolio booked in Hong Kong. The onshore portfolio is performing, and the security is intact. The exposure booked in Hong Kong reduced by around 20% in the second half of the year from $11.7 billion at Q2 to $9.4 billion, primarily due to repayments. In Q4, we did see some further deterioration in that sector. So we looked at the portfolio again and decided to increase the share of substandard and credit-impaired exposures to around 60% of that portfolio. That's up from around 35% in Q2. By doing so, we increased our provisions accordingly. Against the remaining $4.9 billion, we are holding $1.7 billion of provision, indicating a coverage ratio of circa 35%. Within this, our coverage ratio against the unsecured credit-impaired exposure is around 50% to 55%. We also run a number of downside scenarios, and I have included some of that analysis in the deck, which we can discuss in Q&A, if you wish to. To be clear, we did not need to factor those downside scenarios into the 31st of December number. Since then, our view of the sector has become more positive following more accommodative policy stance that we've been seeing. We are currently comfortable with our coverage level, but we will continue to monitor the situation very closely.

Richard O'Connor, Moderator

Thank you, operator, and good morning, everyone. As per normal, for these live events, we'll take a few questions from the floor to start with, and then we'll go to the telephones and then back to the floor. As ever, please give your name and institution. Those in the auditorium, please wait for the mics to come around and please stick to a maximum of 2 questions per person. If you've got more than that, we'll try and come around again towards the end of the Q&A session. With that, I'll start with Omar then Martin.

Omar Keenan, Analyst

It's Omar Keenan from Credit Suisse. I had questions on net interest income, please. I was wondering if you could talk us through how the rate sensitivity, the published rate sensitivities have changed versus what was published at the interim results. Significant changes might be impacted by the NII stabilization program that you talked about.

Noel Quinn, Group Chief Executive

Thanks, Omar. Let me just give a couple of quick comments on NII. First, our guidance is unchanged quarter-to-quarter. I think it's important to keep it pretty consistent. I want to emphasize what George said; it's at least 36%. We do not think the consensus is higher than 36%. The consensus currently is around 37%. Georges said earlier, we're not looking to move consensus. We are comfortable with where consensus is. There are 3 factors that will play out over the next few weeks and months: deposit migration, competitive pressures, and foreign exchange. That will determine exactly what we mean by at least, but we'll update on that each quarter. But I reiterate, we're not looking to change consensus from its current level in the market.

Georges Elhedery, CFO

Thanks, Omar. For the downside, the 100 basis points shift in NII sensitivity we're reporting now is $4 billion. Previously, you may recall it was $6 billion. The reduction is mainly due to 2 factors: two-thirds of it is due to the rate level changing, as higher rates compress the 0 downside challenge, and one-third is due to the additional structural hedging we've started putting on. We expect that one-third proportion to increase as we go forward. For the upside, the number is $3.5 billion at 100 basis points up. I would caution that this number is somewhat theoretical; we are assuming 50% betas and no balance sheet change, so no deposit migration, etc. The real upside for higher rates will be lower than this, but we know that we need to factor in natural deposit migration and probably higher betas than 50% at the next juncture of rate increases.

Martin Leitgeb, Analyst

Yes. Martin Leitgeb from Goldman Sachs. I have a question on NII and one on growth. In terms of net interest margin, could you give us a feel on how you expect the shape of net interest margins for core businesses to progress? Should we expect a broad picture of stability from here? Would you expect the impact of deposit migration to be front-end loaded into '23? Also, regarding growth, you have a higher profitability outlook for 2023, including capital position and some of the proceeds earmarked for growth, so what growth opportunities are you most excited about?

Noel Quinn, Group Chief Executive

Let me deal with the second one first, and then Georges can come back and add any flavor on deposit migration. With the economic uncertainty that exists around the world at the moment, I think it is wise to be cautious on expecting too much underlying growth, particularly in the demand for term lending from corporates. I think they're in a cautionary mode at the moment. So that's why we're saying we're not expecting significant growth in term lending demand in the near term. However, I still think there's growth potential in working capital, finance, and trade. A lot will depend on global GDP. We're saying to be cautious while also seeing there will be growth potential beyond that. Notably, there's strong business performance in the Middle East, along with good growth in India. Hong Kong is rebounding, not yet fully translating into demand for term lending from corporates, but we're seeing early signs of wealth activity increasing as economic activity opens.

Richard O'Connor, Moderator

Thank you very much for all your questions and your time to close with a few comments. We've completed the first phase of our transformation. Our international connectivity remains our greatest strength, and it's now underpinned by good broad-based profit generation. You can see it in the strong delivery in 2022. We're on track to deliver our returns target. But there's so much more we can do. We're well positioned to further improve growth and returns, and we expect to have substantial distribution capacity for dividends, buybacks and a potential special dividend in early 2024. Thank you for being with us.