Earnings Call Transcript - HSBC Q3 2024

Operator, Operator

Welcome, ladies and gentlemen, to the Analyst and Investor Webinar on the 3Q 2024 Results for HSBC Holdings plc. For your information, this webinar is being recorded. I will now hand over to Georges Elhedery, Group Chief Executive.

Georges Elhedery, Group Chief Executive

Thank you, Luis. Hello, everyone. Thank you for joining today. I'm here with Jon Bingham, our Group Financial Controller, who is acting as Interim Group Chief Financial Officer. We delivered another good quarter, which shows that our strategy is working, and we have a strong platform for growth. I am committed to building on that. Before Jon takes you through the third quarter numbers, I'd like to make a few comments. We made several announcements last week. First, Pam Kaur will take over as Group Chief Financial Officer with effect from 1st of January. Pam is an exceptional leader who joined HSBC in 2013 as Group Head of Audit and is currently our Group Chief Risk and Compliance Officer. With almost 40 years' experience in the financial sector, she brings a global perspective to the strategic challenges and opportunities we face today. I look forward to partnering with her for the next stage of the bank's growth and development. I would also like to thank Jon for his outstanding support during the interim period. Second, we announced a reorganization to simplify and streamline the group. We are currently organized around three businesses in five regions. From the 1st of January, we will operate through four businesses: Hong Kong and the UK, serving personal banking and commercial banking customers in our two home markets; Corporate & Institutional Banking; and International Wealth and Premier Banking. We will also streamline our geographic governance structures, reducing them from five regions to two, further enhancing our ability to serve our customers' needs throughout our global network. Our current group Executive Committee of 18 members will be replaced by a new group operating committee with 12 members. The analysis we've done so far demonstrates that the reorganization will result in net cost savings with a relatively short payback period on any upfront costs. We will share these details with you at our full year results in February as part of a wider business update. And third, turning to the external environment, I welcome the clarity provided by the UK government on its prudential rules. The PRA's second near-final policy statement and rules on the implementation of Basel 3.1 bring an end to years of uncertainty and will help the banking sector support growth in the UK. Similarly, I am encouraged by the recent policy measures in Mainland China and in Hong Kong. I'm confident that the monetary stimulus announced last month and potential further fiscal and other measures will help to stabilize key sectors and strengthen Mainland China's economy. Meanwhile, Hong Kong's easing of macroprudential constraints is proportionate and timely, and we expect these measures to have a positive impact on the Hong Kong economy. With that, Jon will take you through the Q3 numbers.

Jon Bingham, Interim Group Chief Financial Officer

Thanks, Georges. In summary, we had another good quarter. Profit before tax of $8.5 billion was up $0.9 billion or 11% on the third quarter of last year on a constant currency basis. This brings our annualized return on tangible equity for the first nine months of the year to 19.3% or 16.7%, excluding notable items. Revenue of $17 billion was up $1.1 billion on last year's third quarter and up $0.3 billion on the second quarter this year, underlying the good momentum within the business. We've announced today a further $4.8 billion of distributions consisting of a third interim dividend of $0.10 per share and a new share buyback of up to $3 billion. We intend to complete this buyback during the four-month period before our full year results announcement in February. Last week, we also completed the share buyback announcement at the half year results in July. We've now repurchased 9% of our share count since the start of last year. As you can see on the next slide, strategic transactions, principally the disposal of Canada in the first quarter, were a small impact on the year-on-year revenue and profit growth. Excluding the impact of these transactions, profit before tax, excluding notable items, was up 13% on the third quarter of last year. Revenue of $17 billion was up $1.1 billion in the third quarter of last year, driven by a $1.6 billion increase in fee and other income. This included a $0.7 billion increase in wholesale transaction banking and wealth. The remaining $1 billion increase primarily reflected strong performance in equities and global debt markets with Global Banking and Markets, and adverse items in the third quarter of last year that did not repeat, including $0.3 billion of treasury disposal losses and other notable items. Banking NII of $10.6 billion was down $0.3 billion on the second quarter on a reported FX basis, primarily due to a loss arising from the early redemption of legacy securities. Excluding this, the banking NII run rate was stable on the previous quarter. Our 2024 banking NII guidance is unchanged at around $43 billion. Our guidance includes the impact of the $0.3 billion early redemption loss taken this quarter. It also assumes a $1 billion contribution from Argentina this year, which is what we reported in 2023. Argentina has contributed $1.2 billion to banking NII in the year-to-date, but volatility created by hyperinflation accounting makes that number very difficult to forecast from quarter to quarter. Accordingly, I would encourage you to think of our guidance as being around $42 billion, excluding Argentina. Turning to fee and other income, wholesale transaction banking was up 7% on last year's third quarter. The key driver was global foreign exchange, which grew 12%, benefiting from increased client activity. Higher volumes also contributed to growth in both Global Trade Solutions and Global Payment Solutions. Wealth was up 32% on the third quarter last year; it was our third consecutive quarter of double-digit growth in wealth as our continued investments in this business and the importance of Hong Kong as a global wealth hub have enabled us to capitalize on a favorable operating environment. There was double-digit growth in all wealth products, but life insurance was the biggest driver. About half of the growth in life insurance was from the non-repetition of a charge we took in Q3 last year; excluding that, life insurance still grew well into double digits, mainly because a higher CSM balance drove an increase in CSM release. The CSM balance is a store of value; all else remaining equal, growth in the balance means growth in future earnings, and our CSM balances continue to grow. In the first three quarters of this year, we've generated more than $2 billion of new business CSM. This has driven our CSM balance to $13.2 billion, a 22% increase since last year's third quarter, creating a foundation for future revenue growth. Hong Kong continued to benefit from inflows of international customers. There were 243,000 new-to-bank customers in the third quarter versus an average of just over 170,000 per quarter in the first half. Net new invested assets were $26 billion in the quarter, $11 billion of which were in Asia. On credit, you'll recall that our second quarter had a lower ECL charge due to recoveries and other items. The third quarter ECL charge was $1 billion or 40 basis points of average loans. The wholesale ECL charge was $0.6 billion, driven by $0.4 billion in Hong Kong, of which $0.1 billion related to Hong Kong Commercial real estate, whilst the personal charge was $0.4 billion. This brings our annualized ECL charge to 28 basis points of average loans for the year-to-date, which is broadly in line with our 30 to 40 basis point guidance for the full year. Next, on costs. Costs were up 6% in the first nine months of the year on a target basis, which was 1% lower than for the first half. As we explained in the previous quarter, the phasing of performance-related pay and the additional levies from the end of last year will give us a tailwind heading into the fourth quarter. We're on track to meet our target of around 5% cost growth for 2024 on a target basis and remain committed to cost discipline. On Lending and Deposits, loan balances were stable in the third quarter. Deposits were up 1% driven by a $16 billion increase in Hong Kong WPB. This reflected short-term flows between invested assets and deposits and are cautionary against annualizing that number. Term deposits were 39% of total Hong Kong deposits, unchanged since the second quarter. Next, our CET1 ratio was 15.2%, up 20 basis points in the second quarter, a strong organic capital generation was partly offset by distributions. CET1 grew $3.1 billion during the quarter on a constant currency basis. This growth included $2.9 billion of other movements, mainly gains in the market value of securities classified as held to collect and sell, which are fair value through other comprehensive income. RWAs grew by $14 billion on a constant currency basis, mainly due to broader balance sheet growth. Finally, I'd like to point out a number of upcoming events, which will help you with your modeling. First, we expect the buyback we announced today to have an impact of around 0.4 percentage points on our CET1 ratio in the fourth quarter. It remains our intention to return excess capital to shareholders through a rolling series of share buybacks. Secondly, we expect to complete the sale of HSBC Argentina in the fourth quarter. As a reminder, around $5.1 billion of historical foreign exchange translation and other reserve losses will be recycled to the income statement on completion. This has already been recognized in capital, and there will be no incremental impact on CET1, TNAV or distributions. These losses will also be excluded from our dividend calculation. We expect the completion of the sale to reduce RWAs by around $8 billion, equivalent to around 0.1 percentage points of CET1. Third, we intend to begin to actively market our $8 billion legacy French home loan portfolio during the fourth quarter. We expect to reclassify this portfolio as held to collect and sell in the first quarter next year, leading to a recognition of an estimated $1 billion pretax loss, equivalent to around 0.1 percentage points of CET1. Finally, the PRA recently published near-final rules on Basel III.1, and these are incrementally better than we previously expected. We continue to expect them to have an immaterial impact on our CET1 ratio upon implementation. To conclude, our guidance remains unchanged, namely a mid-teens return on tangible equity, excluding notable items for 2024 and 2025, banking NII of around $43 billion in 2024, ECL for the full year within our normal medium-term planning range of 30 to 40 basis points, cost growth of around 5% for 2024 on a target basis, and mid-single-digit loan growth over the medium term. With that, Louise, can we hand over to Q&A.

Operator, Operator

Thank you, Jon. Our first question today comes from Andrew Coombs at Citigroup. Please mute your line.

Andrew Coombs, Analyst

Good morning, and good afternoon to those in Hong Kong. Two questions, please. One, firstly, just on the reorganization strategy, a very simple question. Given the new structure, where does that lead Mexico? So any thoughts on Mexico would be appreciated. And secondly, on the financials themselves on that non-NII strength. Where fees and other income were up first 2% year-on-year. And you've highlighted you've now had 3 consecutive quarters of double-digit growth. And previously, if I go back to your Investor Day in 2023, you talked about high single-digit growth for Asian wealth; specifically, you're clearly running well ahead of that and consistently running well ahead of that. So to what extent do you think we can extrapolate that double-digit growth into future quarters in next year?

Georges Elhedery, Group Chief Executive

Thank you, Andrew. I'm going to take your first question about Mexico, and Jon will address the second one. So we have a good market position in Mexico. We have a good performance in Mexico. Our wholesale business in Mexico is in particular strength in our global network of connectivity. It's very strongly connected with our North American business. It's equally very strongly connected with our Asia Pacific business and therefore is a key strategic and anchor stone for our customers. Our retail business in Mexico will form part of the International Wealth and Personal Bank now all our personal banking businesses outside the UK and our two home markets will be part of the International Wealth and Personal Banking and Premier Banking business which will be focused on growing the affluent segment in the market and creating a strategic differentiation for us in the market where we operate in the personal banking space outside the home market. Jon will take the second question.

Jon Bingham, Interim Group Chief Financial Officer

Andrew, as you know, we've been investing in our wealth capabilities for some time. Wealth was up 32% year-on-year in the third quarter and 20% year-on-year for the nine months. That growth was particularly driven in Asia where we see a favorable operating environment, but we’re seeing broad-based growth across the main segments. That’s supported by strong customer growth and growth in net new invested assets. So we have guided previously to high single-digit growth. I think it's fair that we may well outperform that in the short term.

Georges Elhedery, Group Chief Executive

Thank you, Andrew.

Operator, Operator

Thank you. Our next question comes from Aman Rakkar at Barclays. Please accept the prompt to unmute your line.

Aman Rakkar, Analyst

Good morning and good afternoon, and thank you for the presentation and the questions. I have a question regarding restructuring and another on net interest income. I'm trying to gauge the extent of your ambitions regarding restructuring. It appears that your efforts are primarily aimed at achieving net cost savings. You're currently performing well in terms of revenues, especially in fee-based businesses, which likely present opportunities for exceeding market expectations in the near term. However, I believe the outlook is uncertain, given that many factors are beyond your control. What level of ambition do you have concerning costs and risk-weighted assets as you work to enhance the medium-term return on tangible equity? For my second question about net interest income, I'm assuming the guidance for banking NII is accurate, and excluding Argentina, it seems to suggest an annualized run rate of approximately $41.5 billion in the fourth quarter as a base for 2025. While this might seem like a less critical question, I'm curious if you can share any insights on banking net interest income consensus for 2025. I've seen projections around $41 billion, so I'm not expecting much reduction from the $41.5 billion. If you're unable to provide a specific figure, I would appreciate any thoughts on the key factors influencing this. Thank you very much.

Georges Elhedery, Group Chief Executive

Thank you, Aman, for the two questions. Again, I'm going to address your first question on the reorganization, and Jon can take us through the NII elements. So Aman, the primary reason for the reorganization is to create a simpler, more dynamic, more agile, leaner bank. It's really to allow us to empower our frontline staff and make it faster to make decisions and ultimately serve our customers better. That's the primary reason. Now, as a result of a simpler, leaner, more efficient bank, there will be cost savings. The cost takeout will be essentially in the form of severance or related costs. It will be affecting senior roles; the reduction of the number of senior roles will drive this. We will be giving you those details about the figures about the upfront costs as well as the benefits realization in the full year results in February. What I can say is, number one, the benefits will exceed the upfront costs, and the payback is going to happen in a short timeframe thereafter. And then the second point to share with you is that we remain fully committed to cost discipline. I've been sharing this in my days as Group CFO. I carry on this mission of being fully committed to cost discipline, and this is now embedded in the firm, as you have seen from our Q3 results. For 2024, we remain on track to deliver on our cost target. We are committed to it, and we're confident we will be able to achieve it. Jon?

Jon Bingham, Interim Group Chief Financial Officer

So on banking, thanks for the question, Aman. If I might be giving you a slightly longer answer to this. So if we start on 2024, we've reintegrated our guidance on 2024 of banking NII of around 43 billion. But I encourage you to think about that as 42 billion ex-Argentina. In total, we've printed 31.6 billion for the nine months to date. And we think the Q3 run rate of 10.6 billion is a pretty clean run rate for you to think about modeling 2025. We don't provide guidance at this stage on 2025 banking NII guidance. But if you take that clean run rate of the 10.6 billion, which I agree is about 42 billion, we'll have disposed of Argentina. So therefore, we then think of the building blocks for you to model this along four factors. Firstly, rates, the reduction in rates implied in markets will be clearly a headwind. The cuts during the third quarter, given the timing, had a relatively modest impact on the third quarter's results, but we'd encourage you to use our banking NII sensitivity against market implied rates to generate that component. We then have the structural hedge that will provide a tailwind. We've got the reinvestment of maturing positions that will enable us to reinvest at higher rates. We've signaled that for 2025, we've got 115 billion maturing at an average yield of about 2.9%. So think about those maturing and being replaced at something along the lines of five-year bond rates. We've then got volume growth; while volume growth has been relatively subdued in 2024, we do hope that with interest rates coming off and economic activity picking up, that we will see more loan growth. We continue to guide to mid-single digits in the medium to long-term. The timing of getting there will be unpredictable. And then lastly, we keep an eye on time deposit migration. That has been relatively stable, particularly in Hong Kong, at 39% over the last couple of quarters. But the impact of that as rates come off will be variable. It depends on competitive pressures and customer behavior. So all of those factors is how we have thought about it to model it and included that within our mid-teens royalty guidance for 2025. Thanks, Aman.

Georges Elhedery, Group Chief Executive

Thank you.

Aman Rakkar, Analyst

Could I just one follow-up and thanks very much for that really detailed answer. In relation to the mid-teens ROTE aspiration next year, does that include or exclude any potential upfront costs as part of any restructuring?

Georges Elhedery, Group Chief Executive

So the mid-teen ROTE guidance is excluding notable items. We will come back to you in February with full details of the benefits and costs of the reorganization.

Aman Rakkar, Analyst

Thank you so much.

Georges Elhedery, Group Chief Executive

Thank you, Aman.

Operator, Operator

Our next question today comes from James Invine at Redburn. Please accept the prompt to unmute your line.

Unidentified Analyst, Analyst

Hi, good morning and good evening to both. I have two questions. First, regarding the wealth business, the revenue numbers were impressive, but I’m curious about the slight disconnect with the net new invested asset number in Asia. While it was positive, it wasn't as high as I expected considering the strong revenue. Secondly, could you share your thoughts on the outlook for corporate loan growth in Asia? It seems that loan growth is generally steady across the region. In the second quarter, we observed slight changes in both Hong Kong and outside of it. A few months ago, things looked more optimistic for Hong Kong, especially with the recent announcements from China. What is the outlook for loan volumes in Asia going forward?

Georges Elhedery, Group Chief Executive

Thank you, James. I will provide some insights on your two questions, and then I'll invite Jon to elaborate further on both topics. First, our Wealth business has shown double-digit returns this quarter, marking the third consecutive quarter of similar results. As you know, our Wealth business is derived from four segments, one of which, customer trading activities, has performed particularly well. This is evident in both the private bank and our invested assets, with performance bolstering further following recent measures in China. Regarding corporate loan growth in Asia, we are very optimistic about the policy changes that have occurred in both Mainland China and Hong Kong. We believe these measures, along with the anticipated decline in interest rates, will support future growth, especially in our Hong Kong portfolio. Outside of Hong Kong, Southeast Asia and South Asia continue to show strong loan growth, despite being different in size compared to our Hong Kong operations. Jon?

Jon Bingham, Interim Group Chief Financial Officer

So just to amplify your comments on wealth. So we're seeing good growth in wealth. We see the net new invested assets. We're very pleased with that. In Asia, they've grown by $11 billion in the quarter and $49 billion over the nine months. You will see some movements as we grow our wealth franchise. We also had $16 billion of deposits, which Georges talked about. We'll see also deposits increase, they will ultimately feed into the wealth share of wallets that we've gone. So continue to be encouraged on corporate loan growth; nothing more to add than Georges comments. Thanks.

Georges Elhedery, Group Chief Executive

Thank you, James.

Operator, Operator

Our next question today comes from Kunpeng Ma at China Securities. Please accept the prompt to unmute your line.

Kunpeng Ma, Analyst

Hi, good morning, Georges and Jon. This is Kunpeng from China Securities. Thank you for taking my question. I have one question regarding transaction banking. We've noticed a slight recovery in transaction banking income during the third quarter, which seems to be influenced by FX volatilities. Looking ahead, with potential rate cuts, we might continue to see FX volatilities. Could you provide some insight into the future outlook for transaction banking income, specifically regarding both net interest income and non-interest income? I would appreciate it. Thank you.

Georges Elhedery, Group Chief Executive

Thank you, Kunpeng. I'll ask Jon to comment on this area where, as you've heard us saying, is an area of strategic differentiation for us for our wholesale customers and where we keep investing and do expect continued growth in this space given our investments and our leadership in this space. Jon?

Jon Bingham, Interim Group Chief Financial Officer

Yes. So we've been pleased by the growth in wholesale transaction banking in the quarter, up 7%. As you say, an element of that is client-driven activity around FX and rate volatility. But within that, we continue to invest in Global Trade Solutions and Global Payments. And Global Trade Solutions, we continue to grow our market share in both Hong Kong and the U.K. And so as that market comes back, there is the opportunity for us to that be a platform for our growth. Similarly, you can see us continue to invest in Global Payment Solutions, and we see a very optimistic path for the payment markets going forward.

Kunpeng Ma, Analyst

Thank you.

Georges Elhedery, Group Chief Executive

Thank you, Kunpeng.

Operator, Operator

Thank you. Our next question today comes from Amit Goel, Mediobanca. Please accept the prompt to unmute your line.

Amit Goel, Analyst

Hi. Thank you. Two questions for me. One, just coming back on the simplification program. Just curious, I guess, in the past, the group hasn't opted to combine Commercial Banking GBM. So just curious what's kind of seen as different now, which makes this more feasible and easier to execute with less maybe revenue attrition or consideration? And then secondly, just on the ECL charges, those were a little bit higher than what I anticipated. It looks like a bit of that's from Hong Kong wholesale and in the U.K. ring-fenced bank. So just can you kind of provide on that? And how you're thinking about the kind of 40 bps in the context of the guidance into next year?

Georges Elhedery, Group Chief Executive

Thank you, Amit. Let me address your first question, and Jon can address the ECL charges question. So the primary reason for this reorganization is to simplify the bank, as we share. But we've been on a multiyear journey to simplify the activities we do in the bank. We've been exiting activities that were non-strategic. We've been reshaping our portfolio; we've exited markets or activities currently, we're on track to complete the sale of our Argentina business and our Armenia business and announced two additional exits in September, including South Africa as well as the Private Bank in Germany. Now that equity was addressing the what in terms of what we do as a strategy. The reorganization we have announced last week is basically addressing the how we execute our strategy is not changing the what, it's changing the how. And the reason we could effectively execute how we change our strategy as in being simpler, more agile is because of the work we have done over the past few years in simplifying what we do. So it is the right time now to address how we execute our strategy because we've simplified what we're doing. We've clarified what our core strategic areas for us, where we have competitive strength and where we have leadership and opportunities to grow. So the timing, therefore, is a natural kind of conclusion of the various activities that we have been taking through the transformation over the last five years. I want to say that outside the UK and Hong Kong, where we're merging all our commercial banking activities with Global Banking and Market activities to form the Corporate and Institutional Bank. It will comprise our core products, including our balance sheet-related products, credit and lending and deposits, our transaction banking products, as well as our other products such as Investment Banking or Markets. And this should give our customers a more seamless way to deal with HSBC across all this product spectrum that we offer them. Jon?

Jon Bingham, Interim Group Chief Financial Officer

So thanks, Amit. I'll give you a bit more color on the ECL charge. There's a $1 billion charge in third quarter, which is 40 basis points of average loans. That's actually a more normal charge because Q2 benefited from releases and recoveries. If you then dissect the third quarter charge, there's three things within there. So firstly, the UK, which is a $0.2 billion charge, again, that benefited from the releases in the second quarter. It's a more normal charge; there's nothing more going on in there. Hong Kong, in total, we incurred a $0.5 billion charge. As you said, that was mainly a $0.4 billion charge in wholesale, which included $0.1 billion of Mainland China CRE and $0.1 billion of Hong Kong CRE. The rest of it was across a number of sectors, again, nothing of particular note. And then relative to the third quarter last year, we did have an increase in our Mexico retail charge. So that went up to a $0.2 billion charge. That's actually been relatively normal through the quarters of 2024, but relative to third quarter 2023 is a little higher. So, we're confident, as we see this that we will be in our 30 to 40 basis points planning range over the medium-term and certainly that for 2024.

Georges Elhedery, Group Chief Executive

Thank you, Amit.

Operator, Operator

Our next question today comes from Gurpreet Singh Sahi from Goldman Sachs. Please accept the prompt to unmute your line.

Gurpreet Singh Sahi, Analyst

Thank you for taking my question, and congratulations on a good set of numbers. I have two and mostly follow-ups. First is on wealth, and then we'll move to Hong Kong CRE. On wealth, can I check with the so-called policy rescue in China, only a month old and for this reporting quarter, maybe only a week? So have we seen like from August as we transitioned into September, good wealth management income traction better than what we are reporting in the third quarter, and then in October, that continued, maybe even accelerated? So some color there would be helpful. And then on Hong Kong, CRE specifically, not talking about Hong Kong in general, can we get numbers on the NPL ratio within the overall global CRE book and also the Hong Kong CRE book? As at the half year, we were 9% Stage 3 loans in both. Thank you very much.

Georges Elhedery, Group Chief Executive

Thank you, Gurpreet. Let me just briefly address wealth, and ask Jon to complement it and address your Hong Kong CRE question. So there are two trends in wealth. There is the underlying trend, which is a continued growth in our wealth business, which has been there quarter-after-quarter. It's a result of both our increased investment in the space, it's a result of us winning market share given our brand and franchise. It's also a result of the underlying market growing. As you've seen, Hong Kong is now expected to become the largest private wealth hub in the world by the end of the decade. So that is definitely a trend and we’re privileged with our position in Hong Kong to be able to benefit from it and benefit our customers from it. That is the first component, which is an underlying continued investment and growth trend. You add to that, obviously, the additional activity we've seen following the measures that have been taken in China. This has created additional activity, which has been, as you said, for the week or so in the third quarter. We do see this activity continuing and obviously normalizing. But we do see these measures that have been taken to be supportive measures certainly of the economy at large, but in particular, supportive measures of the financial markets and the revival of some of the financial market sluggishness that we've seen in both in Mainland China and Hong Kong over the last few quarters. Jon?

Jon Bingham, Interim Group Chief Financial Officer

So if I pick up your second point on Hong Kong CRE, it's actually a very similar picture to that we described in the second quarter. So a few customers continue to face cash flow pressures; some of that is rates resultant, and as rates come off, we would hope that begins to abate some of those cash flow pressures. If you look at the Asia wholesale Stage 3, they were up $1.1 billion in the quarter. Some of that relates to Hong Kong CRE. That also drove a modest amount of additional RWAs. The ECLs on that have referred to the fact that there was a $100 million charge on ECL. That was both across Stage 1 and Stage 2. The Stage 3 ratio is slightly up quarter-on-quarter. But we continue to see good collateral across that portfolio, and so we don't see this as a material ECL driver going forward. Our focus is really on supporting our customers through this period as there's pressures we should see start to reduce as rates recede.

Georges Elhedery, Group Chief Executive

Yes. And as we said, Gurpreet, we are confident about the outlook of the Hong Kong economy at large and the Hong Kong commercial real estate sector in particular partly because of the rate receding as Jon was just mentioning, but also partly due to the policy measures and the countercyclical measures that have been taken this month to support the sector. We see these as having positive developments for the outlook of the market. Thank you very much, Gurpreet.

Operator, Operator

Our next question today comes from Jeremy Hugh at CICC. Please accept the prompt to unmute your line.

Jeremy Hugh, Analyst

Good morning, Georges. Good morning, Jon. My first question is on the structural hedge. I think, Georges, you mentioned that $25 billion is a good run rate for you, for how you to build up the structural hedge in the second half, but in Q3, that increased by $27 billion, and maybe most of that comes from FX impact. So do you still stick to $25 billion run rate, or would you like to accelerate it? And the second question is on; I would like to hear your thoughts on what area HSBC can further make investments because it feels like over the years, our strategy always emphasized that the bank had to make excellent cost discipline, and we did it. And we made some investments, but mostly small ones. So if we look forward, do you see any opportunities that may help us to further drive growth and take market share? Or do you think it's better to stay cautious as we are still facing some top-line pressures? Thank you.

Georges Elhedery, Group Chief Executive

Thank you, Jeremy. Let me answer your second question about investments, and then Jon can handle your question regarding our structural hedge. First, as you mentioned, cost discipline is something I've brought with me from my time as CFO to my current role as CEO. It is ingrained in our organization, and we will continue to uphold this principle. You can expect us to focus on spending wisely and in the right areas. In terms of strategy, we recently reorganized to align ourselves with our key strategic pillars. This adjustment brings clarity and simplifies our execution of the strategy. We have two home markets where we hold a significant market position along with strong growth opportunities and a competitive advantage. In our Corporate and Institutional Banking sector, we offer exceptional global connectivity and transaction banking services that stand out in the industry and meet our customers' needs remarkably well. Our positioning is highly appreciated by our clients. Additionally, we focus on Wealth and Premier Banking, targeting affluent clients for their investment needs, particularly in Asia and the Middle East. Any chance to speed up our strategy—whether through organic or inorganic means—is an opportunity we will pursue. All these areas show tremendous growth potential, and we possess a true competitive edge. We will invest continuously in them through both organic growth and external opportunities if they arise. Importantly, we do have the capital required to meet our needs, support dividend distributions, promote organic growth, and take advantage of potential inorganic opportunities that can help us accelerate our strategy and capture more market share.

Jon Bingham, Interim Group Chief Financial Officer

Jeremy, if I pick up your question on structural hedge, as you rightly say, we have increased our structural hedge during the period from $504 billion at the 30th of June to $531 billion at the 30th of September, but that was mostly FX driven. The duration of that remains 2.8 years. We would continue to expect to increase our structural hedge, but that will depend on market conditions that we have. And I would say that the big increases of our structural hedge are probably behind us, so further increases from here will only have a modest impact on our banking NII sensitivity. Thanks, Jeremy.

Georges Elhedery, Group Chief Executive

Thank you, Jeremy.

Operator, Operator

Our next question comes from Katherine Lei at JPMorgan. Please accept the prompts to meet your line.

Katherine Lei, Analyst

Hi, thanks, George and Jon. I have two questions. First, regarding net interest income (NII), it seems that the headline NII slightly missed expectations. However, when looking at the banking NII, there are moderate peaks, and the banking net interest margin appears to be stable, even though it averaged a decline of about 50 basis points in Q3. Can you explain what is maintaining that stable net interest margin? Is it related to liabilities management? John mentioned deposit migration, but could you provide some specific numbers, like the ratio in Hong Kong and how it has been trending? This is my first question. My second question relates to risk-weighted asset (RWA) migration. I noticed that there was a $2 billion addition to CET1 capital due to movements in research. Could you provide more detail on that? Should we expect similar movements in the upcoming quarters? Additionally, I have a follow-up question about the losses from legacy securities. Even though management has categorized these as notable items and indicated they are one-off, can you confirm if they truly are one-off? Do we anticipate redeeming other securities or perpetual bonds in the future? For example, do we have additional perpetual bonds that we might consider redeeming when the opportunity arises? Thank you.

Georges Elhedery, Group Chief Executive

Thank you, Katherine. I'm going to let Jon answer the three questions, but allow me one month of legacy securities. We have said that we will look at our legacy securities continuously, but we will take action that are accretive or neutral. We will not take action on legacy securities that are detrimental to our investors and our shareholders. In this case, we've taken action on legacy security that has more than a 10% coupon, that could be naturally and easily replaced with much lower rates. And therefore, there is a positive impact on a net present value basis of the actions we've taken. And these actions, we will always look at where there is value in it. Jon?

Jon Bingham, Interim Group Chief Financial Officer

Thank you, Katherine, for your questions. Regarding the net interest margin, we've provided details on Page 17 of the slide deck. The margin has decreased from 162 to 146 due to three factors. First, the loss from the early redemption of legacy securities; second, some volatility in Argentina; and lastly, we've allocated more funding to the trading book, which impacts net interest income but also benefits non-net interest income. We prefer to view this through the banking NII perspective, where our clean run rate, excluding Argentina and notable items, has remained relatively stable from period to period. This reflects the modest impact of the Q3 rate cuts. You also asked about deposit migration, which has stayed stable at 39% for Hong Kong deposits. Moving on to your CET1 question, particularly regarding changes in other adjustments for CET1 capital, this relates to the fair value movements of securities classified as fair value through OCI. We've realized a gain from these, benefiting our capital position. I believe George has addressed most questions regarding legacy securities, but we are not indicating any plans for further redemptions at this time. Thank you, Katherine.

Georges Elhedery, Group Chief Executive

Thank you, Katherine.

Operator, Operator

Our final question today comes from Edward Firth at KBW. Please accept the prompt to unmute your line.

Edward Firth, Analyst

Yeah. Good morning, everybody, and thanks for taking the questions. I just had two questions. One just a clarification. Just to be clear, the $1.1 billion increase in Stage 3 loans in Hong Kong. Is that all CRE? That's just to be clear on that? That was the first question. The second one is we've obviously got a US election coming up in the next couple of weeks. And I just wondered if you could give us some thoughts from your perspective in terms of the possible sort of risks and opportunities that you see that could come out of that, I guess, with the two realistic options. And I guess just related to that, there was a lot of press comment that your organization was driven by splitting up Asian, and I guess the UK or developed markets businesses. Is that actually right? Or is that just sort of idle speculation from journalists? Great. Thanks so much.

Georges Elhedery, Group Chief Executive

Thank you, Ed. Let me address your second and third questions, and Jon can handle the Stage 3 question. This matter is for the US electorate to decide on their President, and I won't speculate on the outcomes of November 5th. What’s important for us is serving our customers. We have been doing this while navigating a changing landscape of global regulations. We meet their needs, especially those related to cross-border transactions, where we have a unique capability. We comply with all regulations and will assist our customers in doing the same regarding their financial needs. Any new regulations that may arise from a new administration will be followed, and we will support our customers in complying with them. Our expertise in supporting cross-border needs remains a distinct advantage for us. Our customer base is diverse and global, and we will continue to support them in this regard. Regarding the reorganization, there is no intention or preparation, as some have speculated, to split the Asia business; that is absolutely not the case. This simplification of the bank involves reducing our governance from five regions to two, which will help accelerate the development of what is showing great potential as a trade corridor between the Middle East and Asia. We have seen significant growth in this corridor over the past few years, and our customers in both regions are eager for trade and investment opportunities. We are uniquely positioned to assist them. This reorganization will also facilitate the development of that corridor. In our western markets, we have effectively become a wholesale bank; we have divested our retail banking operations in France, mass retail activities in the US, and sold our banks in Canada and Greece. We are currently selling our bank in Argentina. Consequently, we will primarily have a corporate and institutional banking business, which will also simplify our governance in that region. These are the reasons for the reorganization we announced last week. Jon?

Jon Bingham, Interim Group Chief Financial Officer

On your CRE question, Ed, so of the 1.1 billion increase in Asia wholesale Stage 3s, most of that was Hong Kong CRE. The picture is very similar to how we described it at the second quarter. We could see more migrations into Stage 3 until interest rates begin to ease the cash flow pressures in those businesses. But given the collateral levels that we have against that portfolio, we don't see this as a major driver of ECL risk going forward. We are focused on supporting our customers through this transition period. Thanks, Ed.

Georges Elhedery, Group Chief Executive

Thank you very much, Ed.

Operator, Operator

That ends today's Q&A. So I will now hand back to George for closing remarks. Thank you.

Georges Elhedery, Group Chief Executive

Thank you, Louise, and thank you, everyone, for your questions today. To recap, we delivered another good quarter, which shows that our strategy is working. We have reconfirmed all of our guidance, including a mid-teens return on tangible equity for 2024 and for 2025, excluding notable items. And I'm committed to building on this, which our organization will enable us to do by simplifying and streamlining the group. We will share more details at our full year results in February, as part of a wider business update. Neil and the team are available to answer any questions, and I look forward to speaking with you again very soon. Please enjoy the rest of the day, wherever you are, and thank you again.

Operator, Operator

Thank you, ladies and gentlemen, for joining today's webinar. You may now disconnect your lines.