Earnings Call Transcript - HSBC Q2 2025

Operator, Operator

Welcome, ladies and gentlemen, to the analyst and investor webinar on the 2025 Interim Results for HSBC Holdings plc. For your information, this webinar is being recorded. I will now hand over to Georges Elhedery, Group CEO.

Georges Elhedery, Group CEO

Welcome to today's call. I'm joined by Pam. Before Pam takes you through the second quarter numbers, I will cover three items: our first half performance, the external environment, and the progress we're making against the targets we set out. Turning to our performance. The momentum we saw in the first quarter continued into the second quarter. Our half year performance was strong. Excluding notable items, revenue in the first half grew 6% to $35.4 billion. Profit before tax was 5% higher at $18.9 billion. On the same basis, annualized return on tangible equity was 18.2%, up 1.2% year-on-year. Our four businesses sustained momentum in their earnings. In our Hong Kong home market business, we attracted 100,000 new-to-bank customers every month this year on average, reflecting strong customer growth and solid deposit inflows. In our U.K. home market business, our loan book grew by $6 billion over the quarter on a constant currency basis. We were particularly encouraged by signs of recovery in lending growth in commercial banking, with loans growing by $3.5 billion on the same basis. We grew fees and other income in both Wealth and Wholesale transaction banking. For the second quarter, we announced a $0.10 dividend per share alongside a share buyback of up to $3 billion. This brings total shareholder distributions in respect of the half year to $9.5 billion. Turning to the external environment. We entered this period of uncertainty from a position of strength. In this complex environment, customers are looking for a trusted financial partner. Our differentiated strengths are clear. First, our hallmark financial strength underpinned by a strong balance sheet and high-quality credit portfolio has helped us deepen our customer relationships and grow deposits by $83 billion from the same period last year. This is after adding back balances held-for-sale. Our $1.7 trillion deposit base drives the lion's share of our banking NII. Despite HIBOR headwinds, other tailwinds have allowed us to reiterate our full year banking NII guidance of around $42 billion. In Hong Kong Commercial real estate, while some short-term challenges remain, we are confident in the overall credit quality of the book. Second, our long-standing experience of facilitating financial flows globally, and our international network, especially across the world's fastest-growing trade and investment routes. We delivered 5% growth in wholesale transaction banking fee and other income in the second quarter. Our trade fees and other income grew by 4%, reflecting our leading position across fast-growing intra-regional trade corridors as well as our continued investments in the services trade sector. We have 5,000 trade specialists in more than 50 markets operating on both sides of trade flows. They bring significant expertise and real-time insight to our customers. And third, we are seeing continued momentum in our Wealth business. We are ideally placed to capture the increasing number of affluent and high net worth customers in the fastest-growing wealth markets in Asia and the Middle East, where we are investing at scale. Turning next to the progress we are making against our organizational simplification targets. As set out in February, this initiative is meant to make the group simple and more agile. Cost efficiency is one of the benefits. We are on track to deliver the circa $1.5 billion of simplification savings by the end of 2026. To remind you, these are primarily through the deduplication of roles and will have no meaningful impact on the revenue. The savings will be taken straight to the bottom line, $0.4 billion of which will be in the P&L in 2025, revised upwards from $0.3 billion. And the full $1.5 billion will be fully realized in 2027. Pam will go into more details. Turning to the progress we're making in our exit of non-strategic activities. We are progressing at pace. We have rigorously reviewed our portfolio against our strategic priorities. Since the first quarter results, we have announced the sale of our business in Uruguay, U.K. life insurance subsidiary, German custody business and German fund administration business, our stake in Grupo Galicia, and our French portfolio of home and other loans retained following the disposal of our retail operations in France. While Asia is at the heart of our growth strategy, we want to provide clarity on our footprint in Asia. Earlier this year, we commenced a targeted strategic review of our detailed business in four markets in Asia. Three of these reviews, Australia, Indonesia and Sri Lanka are ongoing, no decisions have been made yet. The fourth in Bangladesh has completed and we will start to wind down the retail business there in the second half of this year. To be clear, our CIB business, our Corporate and Institutional Banking business, is unaffected by these reviews, and all four markets remain critical to our international network for CIB customers. Costs released from the exits of our non-strategic activities will be invested in our priority growth areas. These are areas where we have clear competitive advantage and can generate accretive returns. Let's turn to them now. We are investing with intent. In our home markets, we said we would expand the number of wealth centers and enhance our wealth capabilities. In Hong Kong, which is set to become the world's leading cross-border Wealth hub, we have opened one new state-of-the-art wealth center with two more openings in the coming months. In the U.K., we have opened our first wealth center in London and reduced the threshold for wealth investments. We have also relaunched our premier Wealth brand targeting mass affluent customers. In the U.K. also, our improved coverage model for SME banking is bringing our relationship managers closer to customers. This is reflected in our Trustpilot score, which has improved to a 4-star ranking. In CIB, we launched HSBC TradePay for import duties, a targeted financing solution for our U.S. customers, which simplifies the payment of import duties while helping them optimize working capital. We have also launched HSBC Tokenised Deposit Services in Hong Kong and Singapore with the U.K. and Luxembourg expected to launch in September and the U.S., UAE and other markets in 2026. This next-generation programmable cross-border payments moves money in real-time, always on, way across our network. There is a step towards our ambition of delivering global instant cross-border payments. We have also enhanced our payment tracking solution, which now provides a global view of payment status improving our client experience. We have opened 13 dedicated wealth centers including in Mainland China, Singapore and Malaysia. We have also refreshed our premier banking proposition, which we launched in the UAE, India, Malaysia, and the U.S. in the second half of this year. In the UAE, which is home to more than 200 nationalities, we have simplified our onboarding process for certain customers to open a bank account before they relocate into the UAE. Each of these will drive customer acquisition, deepen wealth penetration, grow our share of mandates and enable us to capture greater share of corridor flows. Finally, we are modernizing the bank through AI, GenAI, and Automation. We are improving our technology productivity with coding assistance. Today, more than 20,000 engineers are 15% more efficient in coding because of our new tools. GenAI is being used across five CIB markets to bring process efficiency to our credit analysis write-ups. We're also focused on improving customer service through AI-supported mobile apps and strengthened contact center capabilities. The key message is we have continued ramping up investments in these areas. Further momentum will build as our exits complete, releasing investment capacity to redeploy into our priority growth areas in line with our disciplined cost and capital allocation framework. In summary, we enter this uncertain macroeconomic environment from a position of distinctive strength, underpinned by our hallmark financial strength, our global connectivity, and our expertise. We remain well positioned to support our customers as their trusted financial partner. We have strong momentum in our business and are well positioned for growth. We're investing for growth, and we are delivering growth. And we are executing our strategy with discipline and at pace. The positive progress we're making gives us confidence in our ability to deliver our targets. We reaffirm our mid-teens return on tangible equity guidance, excluding notable items for each of 2025, '26, and '27. Let me now hand over to Pam. Thank you.

Manveen Kaur, CFO

Thank you, George. Thank you, everyone, for joining. At full year, I said we would focus on three things: discipline in the way we prioritize and maintain strong cost control while ensuring investment rigor for growth; performance in the way we gear our financial strategy towards achieving our mid-teens returns target; delivery in the way we enhance operating leverage and support our customers. The second quarter numbers show discipline, performance, and delivery across the bank. Let's turn to the details. First, the income statement. I'll be excluding notable items of $2.8 billion this quarter from my performance commentary. Of the $2.8 billion, $2.1 billion are related to Bank of Communications. $1.1 billion of this results from its share issuance, which diluted our interest to 16%. It is booked in other operating income as flagged in the first quarter. The balance, a $1 billion impairment is booked in associates. A separate $0.7 billion relates to restructuring and other charges, which are in the cost line. Slide 22 sets these figures out. Annualized return on tangible equity, ROTE, was 17.7% in the second quarter. Revenue grew 5% year-on-year to $17.7 billion. This was driven by fee and other income. Profit before tax was $9.2 billion stable year-on-year. We have revised our full year ECL guidance to around 40 basis points from 30 to 40 basis points. The increase in the second quarter ECL partly relates to Hong Kong Commercial Real Estate, which I will discuss further. We remain on track to achieve our target of around 3% cost growth in 2025 compared to 2024 on a target basis. Looking at capital and distributions. Our CET1 capital ratio was 14.6%. We have announced a second interim dividend of $0.10 per share alongside a new share buyback of up to $3 billion. We have now reduced our share count by 13% since the first quarter of 2023. As always, a decision on future share buybacks will be made on a quarterly basis and depends on organic capital generation and the capital needs of the business. The 50% dividend payout is at the top of our capital use hierarchy. Then we look to grow the business, where we see significant opportunities over time. We then absorb other capital demands that emerge; the buyback is the flexible residual means of capital distribution. Let's now turn to our business segment performance. Our four businesses performed strongly with revenue growing in each. Each one is making mid-teens RoTE or better. In Hong Kong, we attracted a further 300,000 new-to-bank customers in the second quarter, representing 600,000 for the first half. We also grew deposits by 9% over the last 12 months on a constant currency basis. In our U.K. business, our loan book grew by 4% year-on-year on the same basis with mortgages and commercial lending standing out. Since we relaunched our U.K. Premier proposition earlier this year, we have seen our average weekly customer acquisition more than doubled. In IWPB, fee and other income grew 21% year-on-year. Across our Wealth businesses, fee and other income grew in the second quarter by 22%. Across these Wealth businesses, we attracted net new invested assets of $22 billion in the quarter with $11 billion booked in Asia. For the last 12 months, net new invested assets was $75 billion. In wholesale transaction banking, we grew fee and other income by 5%, and on a constant currency basis year-on-year, given market volatility. Moving to the group revenue story. Revenue grew 5% year-on-year to $17.7 billion. This was driven by fee and other income, which I'll discuss further in a moment. On banking NII. Banking NII remained broadly stable on the first quarter, reflecting lower interest rates, partly offset by the repricing of the structural hedge. Our structural hedge, now $578 billion has reduced the sensitivity of our revenues to interest rate cuts. Regarding HIBOR. As a reminder, under the linked exchange rate system, the Hong Kong dollar is maintained within a trading band via the HKMA's commitment to buy or sell Hong Kong dollars when the exchange rate hits either the strong side or weak side of the band. During the second quarter, we saw market-driven interventions after the Hong Kong dollar appreciated to the strong side, which added liquidity to the market and led to a notable drop in HIBOR rates. Forward market indicators suggest that the 1-month HIBOR is expected to rise gradually back above 2% during the third quarter. We remain confident in the prospects for our business and in the outlook for Hong Kong. Slide 24 in the appendix sets out more details around Hong Kong dollar sensitivity. We still expect banking NII of around $42 billion in 2025. Within this, lower HIBOR is a headwind, a weaker dollar is a tailwind. There are many other moving parts. Moving to fee and other income. As I mentioned, wholesale transaction banking grew 5% year-on-year. This reflects how closely we have been working with our customers to adapt to a changing operating environment. We are pleased this translated into strong revenue. Growth was driven by a strong FX performance, up 7%, capturing elevated client activity due to market volatility and geopolitical events. Global Trade Solutions increased 4% and driven by guarantees as we supported customers to build out infrastructure and expand production facilities. Securities Services was up 3%, due to higher asset balances as a result of improved valuations and new customer mandates, particularly in Asia and the Middle East. Global Payment Solutions increased 1%, including higher volumes in cross-border and real-time payments. In Wealth, fee and other income increased 22% year-on-year with growth across all products. This represents our sixth consecutive quarter of double-digit fee growth as the strong momentum from the first quarter continued in the second quarter. We also benefited from higher customer activity levels in Asia, particularly in Hong Kong, where the stronger stock market drove greater customer activity. The investments we are making in our Wealth business are translating into results. $22 billion of net new invested assets, $11 billion of which were in Asia, a $13.5 billion CSM balance, a new record. Wealth invested assets are now $1.4 trillion, up 12% year-on-year. Our $75 billion of net new invested assets over the last 12 months show that while an element of our second quarter performance was transactional, there are many positive drivers of our business. On credit, our second quarter ECL charge was $1.1 billion. This includes some corporate impairments in the U.K. and U.S., Mexico retail and an ECL charge for Hong Kong commercial real estate. A part of this quarter's Hong Kong ECL reflects commercial real estate, model updates and adjustments. The balance reflects what is still a weak commercial real estate market. Office rents are still declining somewhat. Office and Retail values are softening. Slide 25 in the appendix provides more detail on the portfolio. Challenges are concentrated in the secured portfolio, particularly with Retail and Office property collateral. Credit migration in the first half was predominantly in this book. We are now guiding to a group ECL charge of around 40 basis points for the full year 2025. This new guidance includes our updated outlook on Hong Kong commercial real estate. On costs. We are taking a disciplined approach to cost management and are on track to achieve our target of around 3% cost growth in 2025 compared to 2024 on a target basis. We are also on track to deliver $0.4 billion of simplification savings into the P&L in 2025. This is an improvement compared to our previous expectation of $0.3 billion. Overall, in the first half, we have taken actions that deliver $0.7 billion of future cost savings. In 2025, we expect to have taken actions that will result in savings of $1 billion. In 2027, the full $1.5 billion of cost savings will be in the P&L. As George highlighted, we are also making positive progress in our reallocation efforts. We have announced seven exits since the first quarter. As we exit non-strategic activities, we will be accelerating investment into our four businesses. George set out earlier the progress we are already making. On loans and deposits. The loan book was broadly stable with growth in the U.K. Deposits, a structural source of strength for us were up 5% or $83 billion over the last 12 months. Adjusting for the balances we have reclassified to held-for-sale, notably relating to our custody business in Germany in the second quarter. When combined with the $75 billion of net new invested assets over the same period, these show potential drivers of future income. Turning to capital. Our CET1 ratio was 14.6%. Overall, we have delivered a good capital number this quarter even with the capital consumption. We have accrued $0.39 of dividends per share in the first half against the $0.20 per share announced year-to-date. We expect the $3 billion buyback we announced today to have an impact of around 0.4 percentage points. In summary, our second quarter results show disciplined performance and delivery. Discipline in the way we are applying strong cost control. We are on track to achieve our target of around 3% cost growth in 2025 compared to 2024 on a target basis. Our simplification savings are ahead of our previous expectation. We are also progressing at pace with our exit of non-strategic activities and are redeploying into priority growth areas. Performance in our earnings, each of our four businesses is growing revenue and each one is making mid-teens RoTE or better. Delivery. These second quarter results show the way in which we are supporting our customers. Our 5% revenue growth and 17.7% RoTE show we are delivering against the targets we set out to you. Louis, can we go to Q&A, please?

Operator, Operator

Our first question today comes from Benjamin Toms at RBC.

Benjamin Toms, Analyst

The first one is on your banking NII guidance of $42 billion. You've also provided some useful guidance on 1-month HIBOR sensitivity at 1%. Can you just give some more color on the assumption that you've made within your banking NII guidance in relation to the time it will take HIBOR to return to normalized levels? And then secondly, on the cost of risk, the guidance range is 30 to 40 basis points, and you've been at the top end of that range now for a couple of years. Is it a sensible assumption really to think that you'll remain in the top half of this range for at least FY '26?

Georges Elhedery, Group CEO

Benjamin, thank you very much for your question. I'm going to ask Pam to address both your Banking NII and your ECL guidance.

Manveen Kaur, CFO

Thank you, Benjamin. The $42 billion guidance includes market expectations of HIBOR, implied above 2% in the third quarter. So we already said that HIBOR at a 1% impacts us by $100 million per month. So if you look overall, our HIBOR expectations as well as the impact of the $100 million, all these are included when we look at our overall confidence in the BNI guidance for the year. The BNI guidance is not just based on the forward curves. As we know, in Q2, a very low HIBOR impacted us for around 6 to 7 weeks. We have given more detail of it in the appendix. But a couple of things have moved around. The time deposits are now 4 points lower, and you look at those factors. And as we look for the rest of the year, there will be some upside and downside, obviously, also in terms of the timing of when the HIBOR shifts happen, as well as the dollar depreciation, how long it continues. In Q2, it was a tailwind for us. In terms of ECLs. So from an ECL perspective, we only give you the '25 number. It's faire to say that we have always, in the last few years, stayed between the 30 to 40 basis points, sometimes a bit to the upper end. So we're not giving any guidance beyond 2025 at this stage.

Georges Elhedery, Group CEO

Ben, thank you very much for the question.

Operator, Operator

Our next question today comes from Kian Abouhossein at JPMorgan.

Kian Abouhossein, Analyst

Two questions. The first one is related to tariffs. You gave a guidance of 5% impact on revenues. And I just wanted to see how we should think about that going forward as you don't see anything in the numbers today. And the second question is related to Stage 1 and Stage 2 movements. So clearly, your Stage 2 has deteriorated. You discussed PDs, which have been adjusted. And I'm just trying to understand a little bit more detail around your movements, in particular in the corporate and commercial bank in terms of potential realized losses, but also model adjustments versus environment.

Georges Elhedery, Group CEO

Thank you for your question, Kian. I will address your inquiry about tariffs and then ask Pam to discuss the scenarios along with your Stage 1 and Stage 2 questions. Regarding tariffs, it's important to note that they have always been a part of global trade, although recent changes in U.S. policy have created more uncertainty. However, we are encouraged by the increasing number of agreements being reached, which should ideally provide more certainty for the future. Notably, our trade fees and other income have increased by 4% as seen in our Q2 results. This growth can be attributed to several factors. Firstly, we are well-positioned in some of the fastest-growing trade corridors around the world, especially between Asia and the Middle East, where trade is expanding at a much higher rate than in more traditional corridors. We have a strong leadership position in these intra-Asia and Asia-Middle East routes. Secondly, we have continued to invest in our services trade sector, allowing us to capture faster growth in this area compared to the goods trade sector, which is another strength for HSBC. Moreover, in terms of U.S. imports, our unique offerings like TradePay have provided significant support to U.S. importers, helping them manage working capital and meet their tariff obligations. All these elements combined with the expertise of over 5,000 trade specialists across more than 50 markets demonstrate the resilience of our business amidst uncertainty. This is a time where we can differentiate ourselves, continue to gain market share, strengthen customer relationships, and attract new clients. Now, regarding the scenarios, I would like Pam to walk you through those. However, please keep in mind that some of these scenarios involve extreme market movements, such as interest rates at 1%, which could significantly impact our business beyond just trade effects. Pam?

Manveen Kaur, CFO

Yes. Thank you, George. So firstly, in terms of our scenarios, we continue to update them on a quarterly basis. I just want to reiterate, we are still comfortable that the impact on revenue that we highlighted in the first quarter of low single digit from tariffs is still the same. When you look at scenarios more broadly and you look at the lower interest rates, then whether you're a trade bank or not, it would affect us like any other bank if interest rates go well below 2% in the 1% territory. So that's the kind of broader piece in terms of the downside scenarios. I also want to share with you that when we look at our customers and our portfolio so far, the customers impacted by tariffs from a credit perspective, they're holding well. We are seeing no early warning signs or triggers of either lower deposits or additional drawdowns. Now coming on to the ECLs in terms of the model update. So the model update was looking at really PDs and looking at them in a more calibrated way across our portfolio. And in Hong Kong, it increased the allowance number going to Stage 2, as we have already disclosed. But on the other hand, in the U.K., it was a release. Some models, when the calibration happens, some markets go up, some down. So I just wanted to share that with you overall. And the vast majority of the model changes was actually due to PD migration. And then you can imagine how it varies from market to market.

Georges Elhedery, Group CEO

Kunpeng, thank you very much. I'm going to take your second question first and give you some outlook on the Hong Kong CRE. Pam can then give you additional details on ECL and can address your first question about BoCom. I'll make one comment on BoCom. So with Hong Kong CRE, firstly, Kunpeng, as you may expect, we know this market very well. We've been in Hong Kong for 160 years involved in this sector. And we're comfortable with the position in this market. That's very important to call out. Specifically, as regards residential development, this has stabilized. This has stabilized mostly because of policy support measures that have been taken as well as because of robust rental market more recently. But when we look wider in the CRE space, specifically around the office CRE space in Hong Kong, we're still struggling because of some oversupply in this space. Now we are encouraged by some additional government action taken to restrict land sales and office CRE, and this should work its way into the medium term by restricting supply and supporting, if you want, the recovery of pricing in this space, but there will be some short-term pressure. Now of the exposure we have in Hong Kong CRE, we basically called out less than 5% of it, around $1.5 billion of that exposure, where we continue to look with focus and attention. That $1.5 billion is to the weak lenders that are either substandard or credit impaired where the loan to valuation of the collateral is above 70%. Now against this $1.5 billion, we have $0.5 billion ECL. So it gives you a quantum of what is a worst-case scenario in the space, it can be. And that is the segment we're looking at. Across the wider spectrum on Hong Kong CRE, what I can say is our mission, obviously, to continue to support our customers as they work through some of the short-term challenges they're going through. But that in the medium to long-term, we remain confident in the supply-demand dynamic in Hong Kong and the appeal of the Hong Kong real estate at large, and therefore, remain constructive and optimistic about the medium to long term. On the comment I want to make on BoCom is purely coincidental. There is no correlation whatsoever between an accounting process related to the VIU process versus any other information. But remember, the BoCom impairments have no CET1 impact. They have no CET1 ratio impact. They have, therefore, also no distribution impact in terms of dividend or share buyback. So I really encourage you to look at it as a pure accounting but no actual economic impact to the bank. Pam?

Manveen Kaur, CFO

Thank you. I'll take the question on Hong Kong CRE first and then on BoCom. So in Hong Kong CRE, our book is down $1 billion to $32 billion, and it's mainly because of repayments done at the unsecured end of the book, where the exposure is mainly to very strong diverse conglomerates, which are nearly 95% rated strong or good and have had very little impairment. That's 42% of our limits. So the increase that we have seen in the impaired book, you're right, it's $600 million is largely to the secured side of the portfolio. And the ECL Stage 2 allowance increase is entirely due to model. So out of that, the charge we've taken of $400 million, the quarter, $100 million is due to the modeling charges. As George has said, the area we are most focused on is the substandard and the credit-impaired side of the book, where the exposure is $1.4 billion. There is already an existing ECL charge of $500 million. So you can see further down what it means from an outlook perspective. Overall, when we have refreshed our ECL guidance, we obviously stress it with upside, downside, and some fairly stringent requirements, and we continuously monitor our book, and we think that overall guidance that we have given in terms of around 40 basis points captures the entirety of the risk in the Hong Kong CRE book as we look at it now. So on BoCom, and as George said, of course, we don't link impairment timing to anything else. It's a retained quarterly accounting process. Again, we use our models. It's a value-in-use model. It is very sensitive to input factors. So even a small shift in basis points can make it move up or down. And when we make an impairment, it's because the fair value from the model is below the carrying value. We have already given you details on the model sensitivity to the various inputs in our annual report, and nothing has changed in that process. Just to reiterate, we don't expect any impact on CET1 from any further impairments. We also have no impact of this on our distribution or dividend policy. And the model will do what the model does. Every quarter, we look at it and make changes accordingly.

Georges Elhedery, Group CEO

Kunpeng, thank you very much.

Operator, Operator

Our next question today comes from Aman Rakkar at Barclays.

Aman Rakkar, Analyst

I have a couple of questions, please. One is about net interest income and the other about costs. Regarding net interest income, your guidance is around $42 billion for the year, and since you're annualizing at about $43 billion for the first half, does this suggest a significant decrease in net interest income for the second half? I just want to clarify if this is the case. There are many factors to consider, but it indicates a run rate for net interest income in the second half, which could influence '26. Is there a level of conservatism in that $42 billion? Is there too much uncertainty surrounding HIBOR? The second part of my first question is, can you explain the actions you are taking to offset this HIBOR decline? I'm particularly thinking about deposit pass-throughs. My second question is about costs. I'm curious about how aggressively you are pushing the organization to achieve cost savings because it seems you are initiating significant changes across the firm. I hope you can achieve more cost savings over time. George, I am very interested in your thoughts on whether you are operating at maximum capacity in terms of your current efforts. Also, for modeling purposes, I anticipate that costs should remain flat next year. It appears that consensus may not reflect this, but considering a 3.5% inflation rate on costs and the $1.1 billion of gross savings, it suggests costs should be flat next year. If you could also comment on that, it would be great.

Georges Elhedery, Group CEO

Thank you for your questions, Aman. I'll start by addressing your cost question since you highlighted it. Then I’ll share comments on Banking NII, with Pam providing more details on the factors influencing our Banking NII. First, maintaining cost discipline consistently quarter after quarter and year after year is a commitment we uphold. We are confident in our ability to meet our commitments, and we are progressing well on all cost-related items, whether it's our underlying costs or savings. This aspect remains unchanged. Currently, the cost reduction we are focusing on relates to organizational simplification. Our aim is to make the organization more straightforward and agile, while also achieving cost savings through the elimination of duplicate roles, with minimal impact on our revenue-generating capabilities. This process is moving quickly, and we have recently increased our projected savings for this year, targeting a total of $1.5 billion to contribute to our bottom line, which we expect to achieve by the end of 2026. Additionally, we are exiting non-strategic activities, having announced seven exits since our Q1 results, which will collectively amount to about $1.5 billion in cost reductions. Approximately one-third of these initiatives have been announced, and another third is currently in progress. Once these savings are realized, we plan to reinvest them into our core revenue growth areas, focusing on strategic positions where we have a competitive edge and can generate strong returns. We have other strategies for managing costs as well. We continuously work on our operating leverage, emphasizing efficiency and productivity improvements, including initiatives using GenAI, automation, and modernizing our capabilities. These improvements will play a vital role in managing our costs. While I'm not discussing 2026 specifically, the simplification efforts we expect to undertake will contribute to our overall performance. Regarding Banking NII, I want to mention that we are still growing our deposit base and maintaining high liquidity to support loan growth when our customers begin investing again. Over the past year, we have seen a growth of $83 billion in our deposits, a 5% increase, and our deposits significantly drive our Banking NII, making them a crucial factor in our growth potential in terms of volume. Pam?

Manveen Kaur, CFO

Thank you. So Aman, just a quick comment on cost. The cost discipline will very much continue, not just into '26, but further on as well. And we also said earlier, we will continue to invest in ways of increasing our productivity, and that will be something which will be a priority for us. And that's something we can control. And we have shown you a good track record in the first few quarters, and we continue to focus on that. Now coming down to banking NII, you're right, around $42 billion. You may deem it to be conservative. If you just do the simple arithmetic in terms of what the run rate takes us to. And this quarter, and we had, obviously, the headwind from HIBOR, but it was offset to some extent by a weaker U.S. dollar. So the timing of how long the U.S. dollar depreciation continues and on HIBOR also is important. We are assuming that there will be a sharp normalization of HIBOR within this quarter to around the 2% mark. Obviously, any delay, even this delay of July month costs $100 million at a 1% HIBOR. What we will have as a benefit still coming in the rest of the year is the structural hedge, which is a tailwind. We've got a reinvestment of $55 billion in the second half at 2.8%. We have to reinvest. And if there's an improvement of 2% on that in terms of the reinvestment rates as they stand. So that obviously is a tailwind. Now the balance sheet growth has been a real positive, and it's mainly driven by deposits. Our Hong Kong time deposit migration in lower interest rate was sort of 4 points into Q2, but obviously, this can move up or down. Now in terms of levers to offset the HIBOR pressures, the Hong Kong time deposits were repriced. We also saw some balance sheet growth happening, because part of the weakness of the HIBOR was because of the strong Southbound connect inflows into Hong Kong, and that immediately gave us the benefit into our deposit line. We have been also active in markets treasury. The benefit of that goes into fee and other income. So all in all, there are a number of areas which we can pull levers to be very confident on our around $42 billion guidance for Banking NII. But as always, we will be conservative, realistic, and if we outperform, we outperform.

Georges Elhedery, Group CEO

Okay. Aman, thank you very much for your question.

Operator, Operator

Our next question today comes from Kendra Yan at CICC.

Jiahui Yan, Analyst

I have two questions. The first is about the non-interest income. I think that HSBC delivered quite strong non-interest income in both quarter 1 and quarter 2, primarily driven by the Wealth Management, FX and the capital markets-related business. So I wonder how you see the sustainability of this momentum going forward? And the second question is about the stablecoin. Because there are several countries and areas have introduced stablecoin-related regulations. How does HSBC view the cryptocurrency, this area? Have you like, have some initiate in this area or we will maintain a cautious approach in this area? That's my two questions.

Georges Elhedery, Group CEO

Thank you very much, Kendra. Let me start with the stablecoin question, and then I'll give you some of my comments on non-NII Wealth effects, et cetera, and Pam can elaborate further on that part of the question. Okay. So on digitized means of payment, we have launched Tokenised Deposit Service for our wholesale customers. It's live in Hong Kong, Singapore. It will be live in September in the U.K. and in the Eurozone. And then, early in 2026, it will be live in a number of other countries, including the U.S., the UAE, and others. This will allow our wholesale customers and is already allowing our wholesale customers to do cross-border transactions between their suppliers or the other kind of counterparties on a real-time and always-on basis. So that service is live and is developing, and we continue investing in it. It's programmable, and it basically leverages the blockchain technology. So we're very pleased with this development. Now beyond what we already offer in terms of Tokenised Deposits, we are watching very closely the regulatory developments around stablecoin; very encouraged about Hong Kong indeed issuing regulation there. Obviously, the U.S. with the Genius bill is publishing regulation there. So what we will monitor, one is that the regulation addresses all our regulatory-related concerns such as financial crime, prudential and other risks. We will also monitor the issuers of stablecoin and their compliance with this regulation. And then, subject to those, we will evaluate all potential banking services we can do with them or customers involved with these issuers. So that we expect to move at pace. With regard to other crypto, at this stage, we have no appetite to involve in other kinds of algorithmic or other non-pegged cryptocurrencies. As an asset class, we still do not have risk appetite to be involved in that space. Okay. Now with regard to our non-NII, there are a few comments I want to make and I'll hand over to Pam. It's a very important area for us. It's a very important investment area for us. Let me talk about, first, transaction banking, we have a leadership position. We're a top 2 player in global transaction banking and payments and FX and trade with the TradeBank for 7 or 8 consecutive years, the largest trade bank. It's an area of unique strength, unique expertise. It's an area of continued investment both in digital capabilities and customer servicing. And we continue to see this area as resiliently growing and as demonstrated, 5% growth in Q2, of which 4% growth within trade itself, that resilient underlying growth is due to the fact that we continue deepening customer relationships, gaining market share and acquiring new customers through all our expertise and our investment. The second one I want to talk to is Wealth. Six consecutive quarters of double-digit growth. Our target there is to grow in the medium term at double-digit rates, but that could be volatile from a quarter-to-quarter, right, based on market conditions. But this is also an area of active investment with intent. Our footprint, our brand, our heritage in Asia and the Middle East, in particular, give us unique strength to be able to accelerate this growth and continue gaining market share and benefiting from the underlying growth in the market. And we've demonstrated a number of initiatives that we've already rolled out, be it in wealth centers, relationship managers, or technology capabilities, digital capabilities we've been rolling out to our customers. And last but not least, capital markets and advisory, our debt and equity trading, all of whom have benefited also from our focused investment and our capabilities to be more meaningful and relevant for our customers and deliver growth as we did also in Q2. Pam?

Manveen Kaur, CFO

Thank you, George. So we have been focusing on growing our fee and other income. As George has said, it's been a focus area, and we've seen strong performance. Now albeit in the last two quarters, there has been the tailwind of market conditions. And it's hard to predict when these sort of transactional tailwinds will fade away. But nevertheless, if you look at the various spots that build up to this fee and other income, FX was up 7%, a very strong position in FX. There's a baseline that will always be a growth engine. Investment distribution was up 24%. Private banking was up 12%. And there are also other annuity revenues, which are like our net new invested assets, which are up $75 billion over the last 4 quarters, so not really helped just by tailwinds, and also the insurance CSM balance is at record levels, and that will just strip into the P&L over time. So that's also like an annuity. Now there's just one or two items, which I would call one-offs or specifically volatile beyond the sort of transactional tailwinds. One is the Argentina hyperinflation which was the $200 million impact in Q2 of '24, obviously, was not a repeat in Q2 of '25, but with Argentina gone and that, sort of, is not going to be, again, coming into the comparison. And the other was a $100 million related to markets treasury activity, and that will be volatile, a little change from quarter-to-quarter. So overall, very comfortable with the core of the growth with some moves from quarter-to-quarter.

Georges Elhedery, Group CEO

Kendra, thank you very much for your questions.

Operator, Operator

Our next question today comes from Joseph Dickerson at Jefferies.

Joseph Dickerson, Analyst

Just a simple follow-up on the Hong Kong CRE, which I think you've done a pretty good job of addressing. I guess what drove the timing of this charge? Because the, some of the dynamics that you point out in the interim report, you could have easily argued were there in Q4. So I guess what drove the timing of today versus Q4? And then is there any way to gauge what you think the appropriate coverage level is? Because clearly, I think you also had about 20 bps of credit risk migration in last year's CET1 from this. So, I'm just trying to walk through the moving parts to dimension any further charges?

Georges Elhedery, Group CEO

Thank you, Joe, for the question. I'm going to make a couple of comments, but ask Pam to address your question. The first one is to reiterate the fact that we are comfortable with our position in Hong Kong CRE. We've explained the area of specific focus and we've captured the outlook for 2025 in our revised ECL target. Pam, you may want to elaborate on that one?

Manveen Kaur, CFO

Yes, thank you for the question. To clarify, part of the charge we mentioned is due to model changes, which occur periodically and contribute $100 million. Each quarter, we review our valuations, including at year-end, as this is an ongoing process. While we observe orderly valuations, distressed valuations can also affect our performing book. We have begun to factor these distressed valuations into our ECL charge for year-end by assigning some probability to them. Our performing book is still ongoing in terms of these valuations, and we analyze it during our credit processes. Generally, our loan-to-value ratios (LTVs) have stayed strong, with those exceeding 70% being a minor part of the book. While we focus on this aspect, we continuously evaluate the rest of the portfolio. The main challenge lies in the oversupply of office space, which varies by location and the quality of buildings, including whether they have been recently refurbished. We take such factors into account when assessing valuation shifts to see if there is any significant variation based on property type and usage. Additionally, overall market liquidity in terms of actual transactions has been relatively low.

Operator, Operator

Our next question today comes from Gurpreet Singh Sahi from Goldman Sachs.

Gurpreet Sahi, Analyst

I have two questions, please. First, regarding foreign exchange. It's great to see strong growth in non-banking net interest income. However, you mentioned strong growth in FX. With the unusual currency volatility we experienced this quarter, did that not lead to above-normal FX growth, and do you consider 7% to be above normal? What was the feedback from our clients? Were they adjusting their portfolios or hedging more during the quarter in response to FX? Also, it's worth noting that quarter-on-quarter, FX is down. For my second question about loan growth, we see some improvement in the U.K. market. But in the Hong Kong and China region, with the recent interest rate cuts, are we observing a rebound in client demand for loans? What is the outlook for that?

Georges Elhedery, Group CEO

Gurpreet, thank you for your two questions. I'll take the first question and make a comment on loan growth while Pam can explain a little bit the outlook in the various segments of the world. So yes, FX has benefited from increased customer activity due to higher volatility. This is something that is difficult to forecast. But what is important to note is that it remains one of our core capabilities in transaction banking, and we remain one of the top players, I would say, top 2 global players in the space. And therefore, we do have a leadership market share in this space and capture client activity. It's difficult to forecast what kind of volatility we may see going forward in foreign exchange, but we will continue being one of the main counterparties to support our customers' hedging activities. So on loan growth, I was actually particularly encouraged with the U.K. commercial banking corporate loan growth. It's early to call it a trend, $3.5 billion growth, but it is definitely a green shoot in the space where it has been subdued for many quarters now. So we have seen the U.K. credit book remained very resilient through the last few years, but we haven't seen it grow. And hopefully, with more clarity about the U.K. and the tariffs related to the U.K., we can see more investments taken through. The additional comment I would like to make about the U.K. specifically, and then hand over to Pam, is that we're very encouraged by the U.K. having also moved at pace in their trade negotiations with trade agreements now concluded with the U.S., with the EU, since Brexit, and then more recently, with India, which is a historic trade deal where we have a very vibrant business corridor going on between the U.K. and India. And we're frankly very, very excited about supporting our customers along this corridor kind of realize the benefits in their businesses. Pam?

Manveen Kaur, CFO

Thank you, Gurpreet, for the question. Regarding foreign exchange, there is a transactional aspect, but we are actively engaging with our customers and effectively capturing flows. Consequently, we are increasing our investment in this sector to promote medium-term growth, enabling us to better support our customers. In Q1, we observed loan growth in Asia, excluding Hong Kong and China, which has remained stable, although in Q2, certain tariff news led to slower decision-making. In the U.K., our growth has been strong, focusing on various sectors, particularly in infrastructure. We maintain the same level of engagement with our customers globally. From a growth standpoint, as interest rates decline, we must also consider macroeconomic uncertainty, which causes delays in capital expenditure decisions. However, we are noticing some early engagement in working capital, as businesses explore adjustments to their models. It's also important to highlight that our net interest income is benefiting significantly from our deposit base, which has increased by about $83 billion year-on-year, remaining a key contributor. Additionally, from an FX standpoint, strong flows into Hong Kong, influenced by low HIBOR, should also be considered in our overall outlook.

Georges Elhedery, Group CEO

Very good, Gurpreet. Thank you very much for your question.

Operator, Operator

Our last question today comes from Katherine Lei at JPMorgan.

Katherine Lei, Analyst

I have three questions. The first two are for Pam. The first question is about the outstanding portion of the threshold deduction related to BoCom. If there is further impairment on BoCom, what amount would impact your CET1 ratios, share buyback, and EPS? The second question relates to the $0.6 billion in restructuring-related costs. What portion of this amount is part of the notable items, specifically, which part does not affect EPS and which part may have an impact on EPS? The last question is for George regarding the Tokenised Deposit. Is this only for HSBC clients, or is it also available for the clients of HSBC's clients? Can clients use this Tokenised Deposit to transact crypto assets, like trading digital currency or other cryptocurrencies?

Georges Elhedery, Group CEO

Thank you, Katherine. So let me then answer your third question. I'll ask Pam to address the first two. So today, this is available to HSBC's clients and any white-listed clients' clients or clients' counterparties. But ultimately, they need to go through the HSBC standards for know your client, financial crime checks, among other checks. So the capabilities will be extended, but will be expanded to who, in a way, where we remain very comfortable with the KYC considerations to be able to onboard them as clients or future clients. We are looking, obviously, on stablecoin developments. We believe it is still early to understand how some of these stablecoin issuers are able to KYC the wider client base. Some of them are. But obviously, the regulations are going to dictate for those who will be effectively white-listed what these requirements are, and we will evaluate accordingly over the next few weeks and months as this is developed. Your first question is related to BoCom. And your second question is related to the restructuring-related costs and whether they will be treated as notable or materially notable. Pam will address both, but let me say one thing about BoCom is we have ample room for any potential future impairments, whether they happen or not before this even comes near affecting CET1 or CET1 ratio or our distribution capabilities. Pam can talk through that.

Manveen Kaur, CFO

Yes. Thank you, Katherine. So we have $14 billion of threshold deductions, Slide 33 of the deck. And on Slide 28, we give you more details on BoCom, including the market value in the footnote, which is the $13 billion. So as George says, even if there was an impairment to market value, it will have no material impact on CET1. And in terms of restructuring costs, they are a notable item, but they're not a material notable item for the dividend.

Georges Elhedery, Group CEO

Well, thank you, everyone. I really want to take this opportunity to thank you for your questions. Alistair and the Investor Relations teams are available for any follow-up questions. Meanwhile, Pam and I look forward to speaking with you again soon. Please enjoy the rest of the day. Thank you very much.

Operator, Operator

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