Earnings Call Transcript - HSBC Q4 2020

Noel Quinn, CEO

Good morning to everybody in London, and good afternoon to everybody in Hong Kong. We have two objectives today. The first is to take you through our Q4 and full year results for 2020. And the second is to update you on progress against the changed agenda we shared with you last February and the additional actions we are taking to deliver returns above the cost of capital. I'll start with a few reflections on the year just gone. Ewen will then take you through our full year and fourth quarter results. Then myself, Peter Wong, Nuno Matos and John Hinshaw will share key details of our future plan. Ewen will then return to cover the financial implications of that plan. Let me start with 2020. First and most importantly, our people provided amazing support to our customers and the communities we serve throughout the world. We provided more than $52 billion of wholesale lending support through government schemes and moratoria; more than $26 billion of additional relief for personal customers; and more than $1.9 trillion of loan, debt and equity support for our wholesale customers. However, the numbers don't do justice to the efforts and energies that went into delivering them. My colleagues acted with great purpose on a global scale. They broke down silos. They innovated, and they delivered repeatedly in the toughest of circumstances. They were customer-centric in the truest sense of the term. And our customer scores in the U.K., Hong Kong, the U.S., the Middle East and Mexico bear these out. Second, the economic impact of COVID-19 hit our profitability, but we still delivered $12.1 billion of adjusted pretax profits and $8.8 billion of reported profit before tax. We also finished the year with a strong capital base of 15.9% and increased our liquidity by around $170 billion. This proves two things: This is an incredibly strong and resilient business, particularly in Asia which delivered $13 billion of adjusted profit before tax, but also that opportunity exists even in a difficult year. We increased mortgage lending in the U.K. and Hong Kong, we grew our share of trade in Asia despite the fall in volumes. We grew our wealth balances in our target markets. And we made $1 billion of PBT in our India business, which will be hugely important in the years to come. Third, it was incredibly important to us to resume dividend payments, and we have declared a dividend of $0.15 per share. We are also resetting our dividend policy in the future to strike a balance between providing good income and supporting future growth. In future, we're aiming to deliver sustainable cash dividends while transitioning towards a payout ratio of 40% to 55% from 2022. We're no longer going to offer a scrip dividend, and we'll consider share buybacks beyond the near term where no immediate opportunity for capital redeployment exists. This is a measured policy that gives us the flexibility to invest and grow the business in the future. Clearly, 2020 fundamentally challenged many businesses, so we also embarked on a major exercise to refresh our core purpose as an organization. We consulted widely on this over a number of months, speaking to thousands of colleagues and customers, looking deeply into our history but also assessing the world of the future; and we kept coming back to the same themes. HSBC has always focused on helping customers pursue the opportunities around them whether as individuals, families or businesses. Our renewed purpose, opening up a world of opportunity, both captures this aim and sets a challenge. Opportunity never stands still. It changes and evolves with the world around us. It is our job to keep adapting with it and to find and capture opportunities with the same spirit of entrepreneurialism and innovation that I feel represents HSBC at its very best. We also saw in 2020 the power of an organization that can respond positively and at pace to radical change on a global scale. Hence, you will see a new behavior within our value statements. We get it done. It's deliberately expressed in uncomplicated language. We can talk about what we want to achieve forever, but execution is everything. Last February, I promised we'd deliver our plans with pace and conviction, which is exactly what we've done. We've taken more than $1 billion of costs out of the business and expect to exceed our $4.5 billion cost-saving target ahead of schedule. And despite the pause in our redundancy program following the COVID-19 outbreak, we've reduced our FTE and contractor head count by around 11,000. In achieving those head counts and cost savings, we created a combined wholesale banking back-office function serving both Commercial Banking and global banking. We merged Wealth and Personal Banking. We reduced our senior management population by 17%. We appointed new people to just under 50% of the top 200 senior positions. We reduced our U.S. branch footprint by more than 30% and cut our U.S. adjusted cost base by 8%. We reduced FTEs in our European non-ring-fenced bank by 6%. And we achieved $52 billion of gross RWA savings in 2020, taking us more than halfway towards our 3-year gross risk-weighted asset reduction target in just a single year. However, given the impacts of low interest rates and COVID, we no longer expect to reach our targeted level of returns by 2022. That said, we recognized the fundamental shifts in our environment in 2020 and reacted to them quickly. The plans we are announcing today will build on this work and enable us to target a return on tangible equity at or above 10% over the medium term. And that's with the assumption that base interest rates remain at today's ultra-low levels. Ewen will now take you through our results.

Ewen Stevenson, CFO

Thank you, Noel. Good morning or afternoon, everyone. I want to share some highlights from our full year 2020 results. The combined effects of COVID-19 and extremely low interest rates had a significant impact on our profit before tax, which dropped 34% from the previous year to $8.8 billion. However, our Asian operations performed well, contributing $13 billion in adjusted pretax profits. This figure includes $1 billion in pretax profits from our Indian operations for the second consecutive year and further market share growth in our trading business in the region. We managed to control our operating costs effectively, which fell by $1.1 billion or 3%, surpassing the targets we set last year. We saw exceptional growth in our deposit business, increasing by $173 billion over the year, or about 12%. Our core capital strengthened, reflected in our core Tier 1 ratio rising by 120 basis points to 15.9%. Moving into 2021, the interest rate environment remains the biggest challenge for our returns outlook. Consequently, we are adjusting our revenue mix towards noninterest income, increasing our capital allocation, workforce, and investments in Asia, and embarking on a multiyear technology initiative to significantly enhance productivity. In the fourth quarter, we reported pretax profits of $1.4 billion. Our adjusted revenues fell 14% compared to the same quarter last year, largely due to the continued effects of low interest rates. Expected credit losses amounted to 44 basis points, or $1.2 billion for the quarter, compared to 26 basis points or just under $700 million in the same quarter last year. Total expected credit losses for the entire year reached $8.8 billion, at the lower end of our projected range of $8 billion to $13 billion. While operating costs rose by 1% quarter over quarter without the bank levy, this increase was mainly due to a decision to boost the variable pay pool accrual, which had decreased by 17% year over year. Tangible net asset value per share rose by $0.20 in the quarter to $7.75. For 2021, please consider that the weakening of the U.S. dollar at the end of 2020 will have a significant effect on both costs and revenues. Adjusting our 2020 results for average January exchange rates, it would have increased revenues by $1.6 billion and operating costs by $1.1 billion. Looking at fourth quarter adjusted revenues across our three global businesses, in Wealth and Personal Banking, revenues fell 18% year over year, with Retail Banking revenues dropping by nearly $1 billion primarily due to falling interest rates affecting deposit margins. Wealth Management revenues decreased by $91 million because of lower insurance sales and the impact of low interest rates on private banking deposits. Commercial Banking revenues were down 15% mainly due to diminished margins in global liquidity and cash management. In Global Banking and Markets, revenues decreased by 7%, despite a solid quarter for Global Markets, which posted a 13% increase in revenues while maintaining stable value at risk. Net interest income was $6.6 billion, up 3% compared to the third quarter. The net interest margin was 122 basis points, a 2 basis point increase from the third quarter, reflecting improved liability margins, especially in the U.S. and Europe. Looking ahead, we anticipate a slow start for net interest income due to lower short-term HIBOR rates and fewer days this quarter, but we expect stabilization in net interest margin and growth in lending volumes to gradually support net interest income throughout the year. Regarding fee income, we observed greater stability in the fourth quarter, particularly in Commercial Banking and Global Banking and Markets, although Wealth and Personal Banking experienced a slight decline in fees due to reduced insurance sales and lower unsecured lending volumes. Other noninterest income fell by $800 million because of lower interest earned on trading book securities, decreased value of new insurance business, and lower credit and funding valuation adjustments in Global Banking and Markets. For 2021, we anticipate a recovery in customer activity and fee income as economic activities pick up. We've started the year positively in Hong Kong, but the emergence of new COVID-19 variants may slow down this recovery, particularly in consumer credit. We also expect trading activity in Global Markets to be lower than last year. In terms of expected credit losses, we reported $1.2 billion or 44 basis points of gross loans in the quarter. Compared to the third quarter, this reflects higher stage 3 charges and the benefit the third quarter had from additional releases. The total P&L charge for stage 1 and 2 for 2020 was about $4.5 billion, including around $300 million from the fourth quarter. Our stage 1 and stage 2 provision balances now stand at $7.9 billion, an increase of $3.9 billion in 2020. While we remain cautious about the credit outlook for 2021, we expect the expected credit loss charge this year to be lower than in 2020, maintaining our guidance from the third quarter at around 40 to 60 basis points. By 2022, we aim for expected credit losses to decrease significantly from the 81 basis point charge in 2020, possibly even reaching the lower end of our normalized range of 30 to 40 basis points. In the fourth quarter, adjusted operating costs without the bank levy were $780 million above the third quarter, driven by targeted investments in technology and marketing, alongside our decision to boost the variable pay pool. For the full year, operating costs decreased by $1.1 billion or 3%. This figure includes several offsets: the variable pay pool fell by over $500 million, and COVID-19-related costs like travel, entertainment, and marketing declined by about $600 million. Our combined cost programs over 2019 and 2020 resulted in $1.4 billion in savings during the year. However, this was offset by increased technology investments of $377 million or 7% over 2019 levels. For 2021, we foresee the bank levy dropping to approximately $300 million, which is about $500 million lower than in 2020. For operating costs without the bank levy, we aim to keep them relatively flat after accounting for the impact of dollar weakness, with significant cost savings from our ongoing restructuring efforts balanced against a rise in certain costs following COVID-19 lows, as well as planned increased investments for growth. In the first year of our three-year program, we achieved $52 billion in gross risk-weighted asset savings, putting us more than halfway to our $100 billion gross reduction target for low-returning risk-weighted assets, which included a $10 billion reduction in the fourth quarter. We expect to save an additional $30 billion in gross risk-weighted assets throughout 2021. Our core Tier 1 ratio at the end of the fourth quarter was 15.9%, which reflects a 30 basis point increase over the quarter, supported by RWA reductions on a constant currency basis, profit generation, foreign exchange translation effects, and a 21-basis-point benefit from software intangibles. We anticipate a reversal of these software intangibles from our core Tier 1 over the next 12 to 18 months. Adjusting for foreign exchange movements, risk-weighted assets decreased by $20 billion in the fourth quarter due mainly to reduced lending balances. The planned interim dividend of $0.15 in 2020 resulted in a 40 basis point deduction from our core Tier 1 ratio at the year's end. With that, I will hand it back to Noel.

Noel Quinn, CEO

Thanks, Ewen. Last February, we announced actions to position HSBC for the future, and we remain dedicated to those plans. However, there were three significant changes in 2020 that we need to incorporate into our future strategies. First, the interest rate environment shifted significantly, resulting in a loss of approximately $5.3 billion in net interest income, equivalent to over 2 percentage points of return on tangible equity, and we do not anticipate a quick recovery in rates. In response, we have accelerated our transition towards noninterest income and have increased our cost-cutting measures to offset the lost revenue. Second, the move to digital was expedited due to the impact of lockdowns, resulting in a marked increase in our customers' digital engagement. We were already heavily investing in digital and technology, but we fast-tracked the digitization of our operations. Third, the COVID-19 pandemic has highlighted the vulnerability of the global economy to external shocks, renewing focus on environmental issues. Fortunately, we had already begun working on the next phase of our sustainability journey and announced an ambitious new climate plan in October of last year. The low-carbon transition is a transformative trend and a significant commercial opportunity for a bank like ours. These three trends and the proactive measures we've taken will form the foundation for what you'll hear in the coming presentation. We have a strategy that we believe can achieve at least a 10% return on tangible equity in the medium term, moving significant capital from low-return to higher-return markets, particularly in Asia, where we have demonstrated robust growth and profitability. Additionally, we plan to invest in technology to enhance our operational efficiency. Our approach is designed to generate returns that exceed the cost of capital while enabling sustainable dividends and future growth. Our strategy is built on four key pillars, which I will outline now. The first pillar is focusing on our strengths to drive growth. We intend to concentrate on areas where we can excel rather than trying to serve all markets. In Wealth and Personal Banking, we will continue investing in our core markets in the U.K. and Hong Kong, with a renewed emphasis on wealth management in Asia. We plan to invest over $3.5 billion in this area over the next five years to achieve several goals: servicing high-net-worth and ultra-high-net-worth clients in Asia, enhancing our insurance and asset management capabilities across the region, and providing more opportunities for our existing clients in Commercial Banking and Global Banking and Markets. In Commercial Banking, our aim is to maintain a strong, global stance as a leader in cross-border trade and mid-market corporates. We will invest around $2 billion to enhance customer acquisition, improve our digital leadership in key markets, and bolster three critical product platforms: global liquidity and cash management, global trade and receivables finance, and foreign exchange. Global Banking and Markets will retain its global client servicing capability while focusing investments in markets that differentiate us, with an emphasis on Asia, including leadership. We plan to invest approximately $800 million in this segment to establish better digital market platforms, enhance access and execution for wholesale clients, and expand our investment banking presence in Asia. Regarding our U.S. and European businesses, we will allocate resources primarily to our international corporate and institutional franchise in the U.S. We'll maintain connections for our U.S. wholesale clients with our international network to drive growth in other regions and uphold our strengths in U.S. dollar clearing, trade, and foreign exchange. In retail banking, our priority is to create an international wealth platform that links our Wealth and Personal Banking clients to U.S. opportunities while exploring options for our U.S. Retail Banking franchise. In Europe, we continue to focus on connecting wholesale clients through our network and strengthening our wealth business in global booking centers. We are assessing our Retail Banking operations in France and are in discussions about a potential sale, though no final decision has been made. Our second pillar revolves around our digital agenda, which we view as pivotal for both revenue growth and cost efficiency. Last year, we invested around $5.5 billion in digital initiatives, which has been crucial for our engagement and operational success during COVID-19. To sustain this momentum, we aim to grow our investment by 7% to 10% annually from 2019 to 2022 while simultaneously reducing our operational costs by 4% to 5%. We expect to save an additional $1 billion in operating costs beyond what we previously announced, targeting savings of $5 billion to $5.5 billion through strategic cost initiatives. Our expenditure to achieve these savings is projected to be around $7 billion, with significant savings anticipated in 2021. The third pillar is focused on optimizing our organizational culture and capabilities for growth. We aim to create a dynamic and inclusive environment by empowering new talent within our leadership. We've already refreshed our senior management team significantly, and we continue to emphasize diversity and inclusion, fostering a culture that promotes diverse perspectives. Furthermore, we are committed to enhancing our skill sets in digital, analytics, and sustainability, utilizing both external talent and internal training through our HSBC University. The fourth pillar addresses our major opportunity in transitioning to net zero. As a leader in sustainability, we have ambitious goals to reduce emissions across our operations and supply chain. We plan to set a clear, science-based path to achieve net zero financed emissions by 2050 or earlier and will seek investor approval for resolutions aligning with these goals at our upcoming AGM. In summary, we are executing three pivotal shifts: toward Asia, wealth management, and fee-based income. We will continue expanding our global wholesale banking capabilities while maximizing our potential to serve mid-market corporates worldwide, which are the highest-growth opportunities. We project reallocating a significant portion of our tangible equity to these priority areas. This investment strategy, combined with advancements in technology, aims to boost revenue growth significantly. This is an ambitious yet actionable plan, and we are committed to executing it with determination. Now, I will hand over to Peter to discuss our opportunities in Asia, Nuno for insights on our wealth pivot, and John regarding the technology integral to our vision.

Peter Wong, CFO

Thank you, Noel. I want to start by saying I'm very excited about Asia's growth, and HSBC is uniquely positioned to capitalize on the opportunities. Economically, Asia is outperforming the rest of the world. It contributed 71% of global growth in 2019 and is expected to account for almost half of global GDP by 2025. The key story in Asia is rapid wealth creation. By 2030, two-thirds of the world's middle class will be in Asia, up from just over 50% today, driving strong growth in consumer spending. This will promote trade. PwC forecasts the trade flows in Asia will grow 25% faster than the rest of the world over the next five years. For HSBC, the opportunities lie not just in helping sustainable growth, supporting trade and managing the wealth within the region but also in using our unique global footprint to connect the rest of the world to Asia; and vice versa. We are already a leader in Asia. We operate in 19 markets across the region, covering 98% of Asia's GDP. For the majority of our markets, our history goes back 140 to 150 years. Therefore, we know the customers, their cultures. We know the regulators, and we know the business flows. And when it comes to global connectivity, our international competitors lack our footprint and deep connection to Asia, and our Asian competitors lack our international network. Within Asia, Hong Kong, mainland China, Southeast Asia and India will drive our growth. These markets will benefit from an expected doubling of asset under management in Asia to USD 30 trillion over the next five years. To expand our businesses, we will continue to strengthen our position in Hong Kong, our market-leading digital products in particular; and leverage our strengths to capitalize on the opportunities in the Greater Bay Area, a region with a population of 73 million and GDP of USD 1.7 trillion. We will hire more than 3,000 wealth managers in China, where we expect the middle class population to double from the current 300 million to 600 million by 2028. In Singapore, in our Wealth and Personal Banking business, we will increase resources to build on the momentum created last year, double-digit AUM growth across Premier and Jade; and establish a regional wealth management hub for ASEAN and South Asia. Our Global Banking and Markets and Commercial Banking businesses will capitalize on the more than 4,200 multinational corporations that have regional headquarters in Singapore. We already bank some 750 of these. And we will build on this progress by scaling up our coverage teams and product capabilities, including cash, liquidity, risk management, to increase our market share in this space. In India, we will build on our long-standing national and international relationships to accelerate the growth momentum we have already established. Wholesale banking revenue grew by over 20% per annum in the last two years. And we also aim to leverage our unrivaled network to win a larger share of the 18 million nonresident Indian wealth management business across the world. So how are we going to do this? We will invest an additional $6 billion in the region over the next five years, with half of it in South and Southeast Asia. The investment is mainly in new talent for our Wealth Management and wholesale banking business and improving our technology. Externally, we will enhance our digital capabilities across all markets to deliver a tailored end-to-end customer experience enabling our 14 million clients who use our network to move or invest their capital globally and seamlessly. Internally, we will invest in areas including data and analytics powered by artificial intelligence and machine learning to anticipate the needs of our customers more effectively; and capture a greater share of wallet across retail, commercial and global banking. And we will continue to maximize the revenue-generating potential of our global footprint and product range. Already 55% of our global revenue is driven by cross-border businesses. In the last 12 months, we have won awards for best global trade finance bank, best digital bank and best regional private bank, among many others. We will continue to invest to capitalize on the huge and growing opportunities in Asia's wealth market and work towards becoming Asia's leading international wholesale bank. Overall, these actions will increase market share and boost our revenue streams, which will generate double-digit PBT growth in Asia over the medium to long term, allowing the region to continue to deliver significant contributions to HSBC Group dividends. This is an exciting time to be in Asia and really an exciting time to be in HSBC. And with that, I'll hand over to Nuno. Thank you.

Nuno Matos, Wealth and Personal Banking CEO

Thank you, Peter. Last year, we created Wealth and Personal Banking. And we brought together our mass affluent, asset management, insurance and private banking businesses into one integrated business, allowing for a significant acceleration of our wealth strategy. Last year, this business generated close to $8 billion in highly accretive wealth revenues, with more than 50% being fee revenue. Our wealth expansion is well underway. We've made the necessary structural changes. The plans are well defined. We have bold but achievable ambitions; and we are in full execution mode, particularly in Asia but also in our global wealth hubs. And that's what I would like to talk about today. We believe that wealth management is one of the most compelling opportunities for growth in financial services today. The affluent and high-net-worth population expansion, low rates for longer and the capital-light profile of this business makes it very attractive. And while the opportunity is global, Asia is undoubtedly the fastest-growing region for wealth assets. In this context, HSBC is perfectly placed to capture this opportunity. We have a compelling starting point with 4 million customers and $1.6 trillion of wealth balances, making us a leading international wealth manager. The lion's share is in Asia, accounting for more than 65% of our wealth revenues. We are the second largest wealth manager in Asia, leveraging the strength of our brand which is built on a 155-year heritage of serving customers and the full capabilities of a universal bank. Last year, we grew our global wealth balances by more than $160 billion at double-digit growth. Second, as the wealth opportunity becomes truly global, our international network gives us the ability to deliver transactional banking and wealth management services in the most relevant markets to our international-oriented affluent and high-net-worth customers. We have a strong presence in the world's top 8 cross-border wealth hubs. And third, we have unique access to our prospect customers through our leading CMB and GBM businesses and very extensive client base. In 2020, more than 60% of net new money from asset management and private banking came from our wholesale relationships. So over the next 3 to 5 years, we will invest more than $3.5 billion to leverage these advantages and accelerate the development of our wealth business, particularly in Asia. Our investments will be focused on two areas: firstly, developing new products, technology and platforms to deliver a leading client experience. We will build digitally enabled financial planning platforms across the client continuum; and scale up our insurance, health and wellness platforms. We will integrate our wealth management capabilities with a mobile-first approach and create a single core banking platform for private banking across Asia and EMEA. We will differentiate our asset management business with a focus on high-value, higher-margin products. And we will deliver high-conviction products in areas like alternatives, ESG and equities. We will deliver bespoke wealth products for our Jade and private banking customers in partnership with Global Banking and Markets. And we will grow and deepen ultra-high-net-worth clients through a dedicated client coverage model focusing on Asia and the Middle East and on products which make best use of the group's capabilities. In parallel, two-thirds of our investments will aim to significantly expand our distribution capabilities. These efforts will focus on hiring more than 5,000 customer-facing wealth planners equipped with remote video capabilities, particularly for our flagship Pinnacle expansion in mainland China and high-net-worth coverage in Singapore; on significantly growing our private banking reach on mainland China to 10 cities and more than doubling our Jade customer base in mainland China and Singapore; and finally, in expanding our asset management footprint in emerging Asia, particularly India and Malaysia. These investments will enable us to grow our AUMs in Asia faster than the market; and grow revenues by more than 10% CAGR, significantly increasing the contribution of wealth to our total WPB revenues. We have strong credentials to deliver on this ambition. Our leadership position in Hong Kong is well known, having delivered strong growth over the last five years and consolidating our #1 wealth market share. Our U.K. integrated digital wealth capabilities are now very credible with recent rollouts of FlexInvest, Well+ and Benefits+. Today, more than 60% of our customers' equity trading in Hong Kong is now done in mobile. We will be leveraging these capabilities to differentiate our wealth proposition in the rest of Asia. In mainland China, we are the largest foreign bank. And despite the challenge of the pandemic, we have launched Pinnacle in 4 cities and obtained the first-ever foreign fintech license in mainland China. Our hiring plans are well underway. In six months, we have approximately 200 wealth planners; and we will scale up to 3,000 by 2025. And by the way, we are also exceeding our financial targets. Our rollout of leading advice-led private banking in mainland China will also benefit from our private bank in Hong Kong which was recently voted #1 for the sixth consecutive year. And in asset management, we will aim to take a majority stake in Jintrust following changes in regulation, and we will execute to become a top 10 international asset management in mainland China. Finally, our global footprint is unique and particularly important in the wealth space, as our client needs increasingly are global, with material expansion in many wealth corridors. We will invest in our booking centers in Singapore, Switzerland, the U.K., Channel Islands and U.S. at key wealth hubs. In India, we will target to be the #1 foreign bank for NRIs. And having already leading market share among the overseas Chinese diaspora, as agents, well, expands cross-border, we are well positioned to grow with it. I have great confidence in the prospects of our wealth business. The combination of our unique competitive position, our integrated business structure and our investment in people and platforms will deliver solid growth. With our global and Asian position, WPB is well placed and organized to accelerate our wealth growth and deliver at pace; and I look forward to updating you on our progress. I will now hand over to John.

John Hinshaw, Technology Leadership

Thanks, Nuno. I want to expand upon what you've heard today and describe how technology will be a differentiator for the group. Our focus is to shift away from costs across the bank that aren't adding value to customers and to make investments that drive revenue growth and a better customer experience, but first, let me explain digital business services. You probably knew it as HOST in the past, which stood for HSBC Operations, Services and Technology. It's my view that this was a fragmented approach to our task at hand, which is digitizing our business end to end. Thus, we are digital. We're focused on improving our business results. And we're a services-based organization, digital business services. The first slide explains our approach. You probably won't be surprised that we've spent more on technology, especially given increased customer demand due to COVID, but more importantly than the amount we're spending is that we're developing technology in a fundamentally different way. Our approach to building technology platforms has shifted from building bespoke local solutions to leveraging our scale. We will build once and deploy globally. We're also laser-focused on reducing the bank's costs by digitizing end-to-end processes and eliminating manual work. To do this, we're dissolving the boundaries between the front, middle and back offices so work is processed with limited or ideally no manual touch points. In 2020, for example, we processed 7.6 billion payments as a bank, and they were worth $563 trillion. And we increased our no-touch rate on those transactions to 96%, but we can do even better. Our aim is to get above 99% no-touch rate in the next several years. And to get those last few percentage points, we're going to need to digitize the most complex payment processes. Reducing the number of people involved in manual work means they can be redeployed into revenue-generating roles and savings can be reinvested back into technology, creating a virtuous circle of digitization that unlocks customer growth. We're also doubling down on our partnerships with big tech firms like Google and Apple, Amazon, Microsoft and Alibaba; as well as many small fintech firms across the globe. For example, we believe HSBC is one of Google Cloud's largest and most engaged financial services clients. And we're working with them on intelligence-led financial crime detection, which will ultimately help protect our revenues. The next slide contains three examples of how we're using our scale to improve the customer experience and drive revenue growth. We've invested over $1 billion in the last few years in our Mobile X platform, which is now a bank in your pocket. And it standardizes our core digital platform across all key markets, but one of the most interesting things about this new platform is the way it's driving personalized interactions. We marketed it extensively in Hong Kong last year and saw record credit card spending, as customers like the improved experience. We've also received app store ratings in many markets that are 4.7 or higher, which is up significantly from prior ratings. We now have 3 million Hong Kong digital customers, which represent 40% of the population. And over 95% of all retail transactions in Hong Kong are done digitally. Our Global Money Account platform is a great example of how we're taking something developed in one country, in this case the U.S., and deploying it elsewhere. The internationally mobile population requires access to funds in different countries and currencies. I'm personally a great example of that having just recently moved from the U.S. to the U.K. And our product does just that: It enables instant global transfers with our multicurrency card using real-time FX rates. Built on a common platform, it's now being rolled out worldwide. It went live in the U.S. in August, with planned launches this year in the U.K. for expats, in the Middle East, in Singapore. And shortly, the rest of the world will follow. And then finally, Kinetic, which is a cloud-based mobile app for our corporate customers that we rolled out in the U.K. And we're using the insights gained so far to see how we can apply the capabilities in Asia and other parts of the world. Finally, let's get into more details on the opportunities to drive operational efficiencies. Clearly, COVID has transformed the way we've all worked over the past year, and we now have an opportunity to create a lower sustained cost base in both corporate real estate and reduce business travel. We've analyzed our worldwide real estate footprint and anticipate a reduction in the order of 40% over the next several years while also ensuring our remaining real estate has a lower environmental footprint on the journey to having our operations at net zero by 2030. There are also opportunities to further reduce our workforce performing non-customer-facing functions. Overall, our workforce numbers are down 11,000 year-on-year despite the fact that we paused redundancies last year while we assessed the impacts of the pandemic on our customers and our people, but over the next few years, through digitizations, we expect the finance function to be reduced by about one-third. And we will change the nature of the work the finance teams perform. We'll do this by migrating our analytics and reporting capability to an agile cloud platform. Our technology headcount will be optimized to focus on agile development, and we will re-skill our colleagues with the technology skills needed for the future. There's also an opportunity to materially shrink the number of manual processes, which will result in less need for the vast operations function in our bank today which currently spans 74,000 resources. Many of these resources will be re-skilled for higher-value customer-engaged opportunities, including data and analytics skills that are in high demand. Our commitment throughout HSBC is to attract and retain the best and brightest and most diverse colleagues for our journey ahead. Few, if any, other organizations in the world can offer the same breadth of opportunities that HSBC does to apply cutting-edge technology to solve real-life problems and improve people's lives. We're doubling down on creating a diverse and inclusive workforce. I have an entirely new senior management team that is half promoted from within, half recruited externally and has three-quarters female executives. We will continue to do more to improve gender balance and diversity across the broader team. Thanks for listening. Let me hand back over to Ewen now.

Ewen Stevenson, CFO

Thanks, John. On Slide 40. Our refreshed plan seeks to build returns that are at or above the cost of capital and to do so in an environment where rates broadly stay at today's levels, providing leveraged upside of higher rates return in the coming years. In order to do this, there are broadly three buckets of return upside: firstly, things that we just expect to happen irrespective of management intervention. In this bucket, I'd put two things, the normalization of ECL charges that I talked about earlier and the lowering of the bank levy from this year onwards. Together, these should add around 300 basis points of RoTE over the next few years. Secondly are the actions we talked about across revenues, costs and capital. Together, we think these plans can drive an incremental 400 basis points of return on tangible equity over the coming years. On revenues, a few things that contribute to this; firstly, the achievement of a better mix of higher-returning lending relationships. This was a core part of what we announced in February last year, the shifting of capital from certain lower-returning Western clients to the East. We made very good progress on the shift out of the West in 2020 with material gross risk-weighted asset reductions in our U.S. and non-ring-fenced bank franchises, but COVID-19 did slow the reallocation of capital to the East relative to what we expected to do last year. However, as Peter has just set out, we continue to be massive bulls on the high-growth and return potential across our Asian franchises. Over the medium term, we have an ambition to have Asia represent around 50% of our tangible equity. That's up from 42% today, with much of the remaining 50% of our capital linked to Asia. And secondly on revenues is our planned growth in noninterest income. You've heard from Peter and Nuno our raised aspirations in this respect. We see significant growth opportunities in both Asia wealth and Asia wholesale. And we're committing further material capital, people, technology and investment resources to underpin this. On operating costs, you've heard today an increased ambition from us. We've raised our 2022 cost reduction target by a further $1 billion, but more importantly we've got growing confidence in a multi-year cost opportunity beyond this and an aspiration to keep costs broadly flat while continuing to achieve healthy revenue growth and jaws. John just talked about this, using technology to transform the whole of our organization, lower front-office distribution costs through increased digital delivery and higher relationship manager productivity, lower commercial real estate costs as we return to work in a very different way, and using technology to transform the operations and functional support model, delivering much better customer and control outcomes at a dramatically lower cost. And on capital, we've got a whole bunch of initiatives underway, stripping back the capital allocation to our U.S. and non-ring-fenced bank franchises, including trapped capital currently sitting in the U.S.; improving the optimization of capital across various subsidiaries elsewhere; and investing in our stress-testing capabilities to drive down the aggregate level of stress across the group. That's why we're now guiding to a 14% to 14.5% core Tier 1 ratio rather than the previous 14% to 15%. And the last building block for our return on tangible equity is an improved rate environment. To be clear: We're not baking this into our base plans. We want to have a business that can generate cost-of-equity returns assuming this rate environment, but I would note that a 100 basis point parallel shift upwards in rates would improve our returns by around 300 basis points within two years. So on Slide 41 and to conclude before handing back to Noel. We're resetting our operating cost target for 2022 to $1 billion lower than previously guided; and post 2022, an ambition to keep costs broadly stable while achieving material revenue growth. Our gross risk-weighted asset target by the end of '22 remains unchanged, at least $100 billion, but with over $50 billion achieved in 2020 and a further $30 billion targeted in 2021, with high confidence in delivery. A core Tier 1 ratio of 14% or more, with confidence in being able to manage to a 14% to 14.5% range over the medium term. A new dividend policy, all cash going forward, with no scrip alternative; a dividend of $0.15 for 2020 and then transitioning in 2021 towards a payout ratio of 40% to 55% from 2022 onwards. This allows for a powerful combination of both sustainable growth and sustainable dividends. Where we have excess capital in any given year, we will look to buybacks to augment dividends, but please don't model buybacks into your 2021 numbers. And a return on tangible equity of at least 10% over the medium term, a return that can be delivered in the current rate environment, with material leveraged upside if rates improve; and a return that can be delivered with a set of actions that sit firmly as self-help measures within this management team's control. And with that, thanks. And over to Noel to conclude.

Noel Quinn, CEO

Thanks, Ewen. So to wrap up. We will significantly increase the group's capital and resource allocation to faster-growing higher-return markets. We will capitalize on the opportunity offered by our network and our franchise to drive growth from fee-generating products in wealth and platform businesses in wholesale banking. We will leverage technology to transform our cost position, offering significantly higher operating leverage and freeing up resources for investment. And we expect all this to deliver returns above the cost of capital while driving revenue growth principally from Asia. Through our new dividend policy, we aim to deliver both sustainable dividends and sustainable growth. And as a final comment: In 2020, we executed against our promises, and in 2021, we will do the same. We will get it done. With that, we'd be happy to take your questions.

Operator, Operator

Thanks, Noel. And good morning, good afternoon, everybody. We've got a combination of questions, mainly audio questions from telephone lines but also some written questions from the video webcast. We'll start off with four or five from the audio line, so over to Sharon, the operator, please.

Martin Leitgeb, Analyst

The first question is about capital. I'm trying to understand the factors influencing capital progression because we have a strong capital result this quarter at 15.9%. The guidance on capital headwinds, including Basel III and software intangibles, suggests an excess capital range of about $10 billion to $15 billion beyond your 14% to 14.5% target. I'm trying to reconcile this with your mid-single digits asset growth targets, your five-year investment plan, and the dividend payout guidance that doesn’t include 2021. Is it appropriate to have significant capital headroom that could facilitate faster growth, whether through organic or inorganic means? Or is there something I’m overlooking regarding potential headwinds? The second question pertains to rate sensitivity. Thank you for the information on Slide 69 about a parallel shift in the yield curve. Can you help quantify the impacts resulting from the recent steepening of the yield curve we've observed over the past weeks and months in both U.S. dollars and sterling? Are the effects of this steepening practically negligible, particularly in Hong Kong, or is there a more significant impact expected?

Ewen Stevenson, CFO

I will start with the first question, Martin. We finished the year with just over $850 billion in risk-weighted assets and expect loan growth in the mid-single digits over the next few years. This year, growth is likely to be back-end weighted as economies recover from COVID. We are facing around $10 billion in regulatory pressures this year and a total of about $40 to $50 billion through 2022 and 2023, including the Basel impact. We have a program to reduce risk-weighted assets with about $50 billion remaining, which largely offsets the $30 billion this year and another $20 billion next year. Additionally, we experienced significant credit rating migration in 2020, approximately $30 billion, but we expect that to be much lower in 2021 depending on economic recovery, with some of it reversing in 2022 and beyond. Overall, we anticipate growth in risk-weighted assets. In terms of distributions, we expect to exceed a payout ratio of 40% to 55% in 2021, then gradually move within that range thereafter. There will be no buybacks this year, but we may consider them if we have excess capital in 2022 and beyond, as they are a valid means of capital management. Regarding rate sensitivity, the steepening yield curve for the U.S. dollar provides some support, but not much. We are more sensitive to the shorter end of the curve.

Adrian Cighi, Analyst

I have two questions, 1 follow-up on capital and 1 on net interest income. On capital, just to understand: You've very helpfully outlined the risk-weighted asset bridge, but is there in your capital target any sort of part of that surplus capital, as it were, earmarked for potential opportunities? And could you maybe outline how much you're thinking and over what period of time? And then on net interest income, you've had a NIM contribution of 5 basis points from the liability side. Can you give us any insights how much of that is sort of recurring and how much more you could do from either changing liability mix or repricing going forward? And then on loan volumes, you've sort of shown a decline on a quarter-on-quarter basis from the development despite a weaker U.S. dollar. You expect mid-single digit going forward. Sort of where do you expect this to come from?

Ewen Stevenson, CFO

We are not specifically allocating any amount to inorganic growth right now, but within our dividend policy of a 40% to 55% payout ratio, we are allowing some leeway for small acquisitions. I want to clarify that we won't be pursuing significant mergers or acquisitions in the near future. However, if opportunities arise that can enhance our strategic objectives in areas we've discussed, we will certainly consider them. Regarding net interest income, Q4 saw the repayment of the Ant IPO in Hong Kong, which significantly affected lending volumes, compounded by a typical decline in corporate borrowings at year-end. Therefore, I wouldn't place too much emphasis on Q4's performance. For this year, we anticipate some positive asset growth, likely skewed towards the second half of the year. Recent news from the U.K. has been encouraging, and vaccination programs have begun in Hong Kong. We see substantial growth potential in Asia as we emerge from COVID, and in the U.K., the mortgage market remains a strong opportunity, where we held around a 10% market share last year. On the liability and asset side, there are opportunities for repricing. The weakness of the dollar is expected to contribute about $800 million to noninterest income this year. However, we will face challenges from the lower interest rates of the past year, and we are currently experiencing very low HIBOR levels, which we are particularly sensitive to.

Noel Quinn, CEO

Adrian, I'd also add on loan volumes. I think what we saw towards the end of last year, particularly in Asia, was a lot of customers, wholesale customers, positioning themselves with facilities available to fund future growth but not yet drawing down on those facilities. So I think they're ready with their balance sheets to take advantage of an upturn. And they're waiting to see that upturn come as we start to see the world come out of the COVID crisis, hopefully, on the back of the vaccination program, but there was certainly a lot of activity towards the end of last year on getting ready for that upturn.

Tom Rayner, Analyst

A couple, please. First one, on the impairment guidance for 2022 either at the bottom end or below the 30 to 40 basis point range. Can I ask if you're factoring in anything significant in terms of releases from the stage 1 and 2 reserves or whether that sort of 2022 number is going to be representative of the sort of through-the-cycle rate? And then a second question, please, just on sort of distributions. You mentioned obviously share buybacks are a possibility but in the medium term. I noticed that, the medium term, you define as 3 to 4 years, so just wondering whether you're effectively ruling out buybacks for both this year and next year or whether that's reading too much into the terminology. And I'm assuming that, over and above the maximum dividend payout, it'll be the 14% to 14.5% target range on equity Tier 1 that sort of calibrates your maximum distribution potential.

Ewen Stevenson, CFO

Yes, thanks, Tom, for picking me up on the use of the term medium. So I'll be more careful going forward, but no, we've only ruled out buybacks in 2021. So I wasn't intending to also put a block on us participating in buybacks in 2022. On impairment guidance, we've talked in the past about a normalized range of 30 to 40 basis points through the cycle. We were obviously, well, more than double the top end of that in 2020. Included in that was a very significant buildup of stage 1 and stage 2. If you backed that out, we were running in probably the low 40s in 2020, yes. And as we think about '22, there may well be some reserve releases in that guidance, but I do think, if the world is recovering out of COVID, we should be able to operate at or below 30 basis points for '22 onwards for a few years until the cycle turns again.

Operator, Operator

Okay, operator, back to the audio lines for 2, 3 questions, please.

Aman Rakkar, Analyst

So just a couple, please. Can I just confirm quickly on the cost targets that you've given in 2022? Does it include anything for French retail and the North American retail business that's currently under review? Or should we be looking to kind of adjust those targets incrementally for anything that may or may not get announced?

Noel Quinn, CEO

That's not included within our cost targets. Any actions on those two areas will be incremental. Plus there'd be a loss of revenue as well, so you need to take both of those into account.

Aman Rakkar, Analyst

Can you provide insights on cost management? How are you planning to handle costs, particularly if revenue doesn’t meet expectations? Should we be considering cost-income ratios, and how flexible can you be with costs if revenue falls short?

Noel Quinn, CEO

I'll give you a couple of comments first and then I'll ask Ewen to go into more detail, but we're targeting an absolute cost number in the medium term. And on a constant currency basis, that is now $30 billion. And when we talked a year ago, we talked about $31 billion in 2022. We're now talking $30 billion on a constant currency basis in the medium term, but that is also having taken into account our willingness to invest, so that $30 billion is post-investment. And clearly, we're investing in the business because we see growth opportunities and we believe that it's right for the bank to invest in those growth opportunities. Now clearly that's a dynamic we have to keep under watch as to how much growth is starting to return into the economy and how much growth we should be investing in, but that target absolute number we've given you is on the assumption of growth and on the assumption of investing in growth and in total around about $6 billion over the next five years in Asia. But Ewen, do you want to add any more?

Ewen Stevenson, CFO

Yes, I believe we've managed our costs quite successfully over the past few years. In 2018, we increased our cost base by approximately 5.5%. However, last year, we decreased it by 3%, resulting in an overall change of 8.5 percentage points in our cost run rate. As Noel mentioned, our primary goal is to achieve significantly higher returns, which requires effective cost management. John previously noted an increasing internal confidence in realizing substantial productivity gains from our investment in technology, leading to a beneficial cycle. The more we enhance productivity, the greater our capacity to invest. Additionally, we have shown flexibility in response to declining growth and revenue projections by adjusting our cost plans accordingly. We believe we have a good growth outlook ahead, and we are confident that our cost plans align well with our expected revenue trajectory. However, if circumstances shift, we will adapt our cost strategy.