Earnings Call Transcript
HSBC HOLDINGS PLC (HSBC)
Earnings Call Transcript - HSBC Q1 2023
Operator, Operator
Good morning, ladies and gentlemen, and welcome to the investor and analyst conference call for HSBC Holdings plc's Q1 2023 results. For your information, this conference is being recorded. At this time, I will hand the call over to Mr. Richard O'Connor, Group Head of Investor Relations.
Richard O'Connor, Group Head of Investor Relations
Good morning, good afternoon, everyone. Before I hand over to Noel, I want to give a quick reminder of the changes that have taken effect this quarter. Numbers in the presentation today are on an IFRS 17 basis, and thank you to all those who attended in March. Our focus is now on reported numbers, but we will call out and specify notable items. Our global businesses are still the primary basis of our reporting, but we have moved to legal entity rather than geographic regions as our secondary reporting line. Consensus hasn't yet fully caught up with all these changes, but now we've made them, we believe they will give you more clarity, transparency, and ultimately benefit your modeling going forward. Noel, over to you.
Noel Quinn, CEO
Thanks, Richard, and good morning in London, good afternoon in Hong Kong, and thank you for joining our first quarter results call. Georges is going to lead the presentation, but I'd like to make some opening comments. We've announced a strong set of Q1 results. We delivered a strong profit performance, which was spread across all our major geographies. All three global businesses performed well and cost discipline remained tight. In the first quarter, excluding the gain on SVB U.K. and the part reversal of the impairments on the potential sale of our French retail bank, we delivered an annualized return on tangible equity of 19.3%, so our strategy is working. I'm also confident about the future for two main reasons: First, we have built a good platform for growth. We have a strong balance sheet, broad-based geographic profit generation, a good combination of net interest income and non-net interest income, and a tight grip on costs. This growth potential was evidenced in the inflow of new invested assets of $22 billion in the quarter with a cumulative $93 billion over the last 12 months, which shows that our wealth strategy is continuing to gain traction. And you have my commitment that we will continue to drive strong performance for the rest of the year while maintaining cost discipline and investing in growth. The second reason I'm confident is the diversity and connectivity of our geographical footprint, where we have access to markets that are exhibiting good growth and return potential. I've seen firsthand the strong economic recoveries underway in Hong Kong and Mainland China. I've also visited the Middle East recently, where I saw a strong economy that is well placed to continue to grow. And the U.K. economy is also showing good resilience, and our HSBC U.K. business is performing well. Investing in growth is critical, and we saw an opportunity to do that by acquiring SVB U.K. For 158 years, HSBC has banked the entrepreneurs who have created today's industrial base. With the SVB U.K. acquisition, we have access to more of the entrepreneurs in the technology and life sciences sectors who will create the businesses of tomorrow. We believe they are a natural fit for HSBC and that we're well and uniquely placed to take them global. You will have seen the recent hires that we've taken on in the U.S. in that regard, and we're going to continue to invest to grow this part of the business on a global basis. We announced that the sale of our French retail bank has become less certain due to significant interest rate rises in France and the related fair value treatment impacting the capital position of the purchaser. We still believe it's right to sell the business, but we also have to keep our shareholders' interest in mind when negotiating revised terms. We are working with the buyer to try and find a solution for the uncertainty on deal terms and timing, which has led us to reverse the impairment. Finally, we made two important announcements today. The first was the resumption of quarterly dividends with an interim dividend of $0.10 per share, which is the same level as the last time we paid a first quarterly dividend before COVID. The second was that good, continued capital generation enabled us to announce the share buyback of up to $2 billion. Our AGM on Friday will be an important milestone. As you know, resolutions have been tabled by shareholders on the strategy and structure of the bank as well as to fix the dividends. The Board has recommended that shareholders vote against Resolution 17 and 18. I believe our first quarter results reinforce our recommendations and demonstrate that our current strategy is the fastest and safest way to improve returns. I'll now hand over to Georges to take you through the numbers.
Georges Elhedery, CFO
Thank you, Noel, and a warm welcome to all of you. Thank you for being with us on this call today. Let me begin with the first quarter highlights. Profit before tax was $12.9 billion, up $9 billion in the first quarter of 2022 on a constant currency basis. This was driven by an $8.6 billion increase in revenue, which includes $2.1 billion from the reversal of the impairment relating to the potential sale of our retail banking operations and a $1.5 billion provisional gain on the acquisition of SVB U.K. Credit performance was benign, with expected credit losses of $0.4 billion. Costs were up 2% in the first quarter against our 2023 target of limiting cost growth to approximately 3% on a constant currency basis, excluding notable items and hyperinflation. Our annualized return on tangible equity was 27.4%, or 19.3%, excluding the gain on SVB U.K. and the part reversal of the impairment on the potential sale of our French retail bank. And as Noel said, we're providing strong capital returns in the form of the first quarter dividend since 2019 of $0.10 per share and a share buyback of up to $2 billion, which we expect to start after the AGM and complete in around three months. Going into more detail, net interest income of $9 billion was up $2.9 billion, or 47%, in the first quarter of 2022 and was stable on the fourth quarter on an IFRS 17 basis. Non-net interest income of $11.2 billion was up $5.7 billion, driven by strong performances in Markets & Security Services. Lending balances increased by $32 billion in the quarter on a constant currency basis. This was made up of $25 billion from the reclassification of balances associated with our retail banking operations in France and $7.3 billion from SVB U.K. Deposits also increased in the quarter due to the same factors. If we excluded these items, lending and deposits were both stable. The tax charge of $1.9 billion included a credit of $0.4 billion. And the CET1 ratio was 14.7%, which was an increase of 50 basis points on the fourth quarter and included a 30 basis point gain related to the part reversal of the France impairment and the SVB U.K. acquisition. As Noel said, all of our global businesses performed well. This slide gives you the evidence for that. Wealth and Personal Banking had a strong quarter with revenues up 82%. Within this, Wealth was up 13%, driven by the economic resurgence in Asia and increasing traction from the investment we've made in digitization and in people. Personal Banking also had another good quarter, up 64%, benefiting from our strong deposit franchise. Across both Commercial Banking and Global Banking and Markets, the Global Payment Services had revenues of $4 billion, which was an increase of 176% on the first quarter of 2022. Global Banking and Markets also performed well overall. Markets & Securities Services revenue, in particular, was up 12%, with a strong performance in foreign exchange. Reported net interest income was $9 billion, which included $1.4 billion of interest expense due to the funding costs booked in Corporate Center for trading. This was offset by $1.4 billion of non-net interest income reported in Corporate Center. On a reported basis, the net interest margin was up by 50 basis points on the first quarter of last year and up by 1 basis point on the fourth quarter. For the avoidance of doubt, our net interest income guidance is unchanged from our 2022 full year results. On an IFRS 17 basis, we expect to achieve net interest income of at least $34 billion in 2023, which is equivalent to at least $36 billion of net interest income on an IFRS 4 basis, which was what we told you in February. Our current view is that the things we told you about net interest income at our 2022 full year results remain unchanged. Non-net interest income of $11.2 billion was up substantially by $5.7 billion, which was a combination of $3.6 billion of notable items in the first quarter, Global Banking and Markets trading income increase of $0.4 billion, and a $1.3 billion increase in corporate center income for funding Global Banking and Markets trading activity. Fees were broadly stable compared to the first quarter of 2022, with a good payment fee performance, partially offset by lower wealth fees. However, net new invested assets in the quarter were $22 billion and $93 billion for the last 12 months, which bodes well for future growth. I called out the global business revenue highlights earlier, and there is a detailed non-net interest income breakdown on Slide 17. Our credit performance in the quarter was benign with a $0.4 billion charge for expected credit losses, which was $0.2 billion lower than the first quarter last year. This reflected a favorable shift in the probability of economic downside scenarios as well as low Stage 3 losses. China CRE was also benign with a small charge relating to technical adjustments to two customers. We saw no China CRE default in the quarter for the first time since the fourth quarter of 2021, though there were limited repayments. We are encouraged by the first quarter, but there are still downside risks. So our 2023 guidance remains unchanged at around basis points of average gross customer lending, including held-for-sale balances. We will review this at our interim results. On a constant currency basis and excluding notable items, costs were up by 2% in the first quarter once we also exclude the impact of retranslating prior year costs in hyperinflationary economies at constant currency. As you can see, most of the spend was on technology. We remain committed to limiting cost growth to approximately 3% in 2023 on that basis. As I shared at the year-end, one of my top priorities is cost discipline. Equally, I also shared that a number of my top priorities is to support our businesses to deliver growth and returns. The acquisition of SVB U.K. was an opportunity to do that. This is expected to result in incremental cost growth of around 1% to group operating expenses, the majority of which is the acquired cost base of SVB U.K., together with some additional investment in the U.K. and other geographies. This will be in addition to our 2023 target of limiting cost growth to around 3%. Finally, at year-end, we also flagged $300 million of expected severance costs this year. A large portion of the severance costs are expected to be incurred in the second quarter, with the cost benefits starting to come through in the second half of this year. Moving on, we usually include information on customer deposits in the appendix, but we have moved it up to the presentation this time because we appreciate the current interest. Overall, customer deposits are stable year-on-year and quarter-on-quarter. Of the $1.6 trillion of deposits we hold, half are invested in high-quality liquid assets, which gives you a sense of our strong liquidity position. This is a historic feature of the way that HSBC manages its balance sheet, and it has not changed. Around 40% of our high-quality liquid assets are held in cash or cash equivalents. And there are only around $1.4 billion of unrealized losses in our held-to-collect portfolio, which is down from around $1.9 billion at the end of 2022. Three main points on capital. One, our CET1 ratio was 14.7%, up 50 basis points on the previous quarter, 25 basis points of which was from the reclassification of our French retail business. Pending the outcome of negotiations for our French retail bank, there would be a commensurate reduction to CET1 in the event that the deal closes. Number two, as you know, our business in Canada remains classified as held for sale and we now expect the transaction to complete in the first quarter of 2024 as we work with the purchaser to ensure a smooth transition. We continue to expect to pay the potential special dividend of $0.21 per share in the first half of 2024. And as previously indicated, we expect almost all excess capital from the Canada transaction accruing into CET1 to be returned to shareholders, primarily through a series of share buybacks in '24 and '25 that would be incremental to any existing buyback program at that time. Number three, share buybacks remain an active part of our capital management plans. We will update you on our assumptions for share buybacks in 2023 and beyond at our interim results. So in summary, this was a strong quarter with a strong profit performance. Net interest income was stable. Strict cost discipline was maintained, which I told you would remain a key focus area for myself and the management team. Our credit performance was benign amid a more positive economic outlook. We are starting to see the impact of a strong economic rebound in Hong Kong and Mainland China, and our wealth strategy is gaining traction. I am pleased to report strong capital returns with a quarterly dividend of $0.10 per share and a share buyback of up to $2 billion, which we expect to start after the AGM and complete in around three months. As Noel said, we are clearly on track to meet our returns target for 2023 onwards, and this upward trajectory would give us substantial distribution capacity including, of course, the potential proceeds from the Canada transaction. With that, operator, can we please open it up for questions. Thank you.
Operator, Operator
Our first question today comes from Joseph Dickerson with Jefferies.
Joseph Dickerson, Analyst
Congrats on a good set of numbers in what wasn't the easiest environment in Q1. Just a quick question on the buyback. You've been very precise in discussing that you would expect to complete the buyback over 3 months. Is this something now we can expect to be a regular quarterly event given the strong capital generation not to mention Canada completing early next year? Or is it going to be slightly more erratic?
Noel Quinn, CEO
Thank you for your question. I'll ask Georges to answer that. Thank you.
Georges Elhedery, CFO
Thank you, Joe. Yes, indeed, so first, we are hoping to achieve $2 billion in the next 3 months. In the past, we've managed to achieve between $1 billion and $1.5 billion in the quarter. Obviously, we have five months to complete this program. We are hoping to complete it in 3 months. Going forward, we're certainly considering a rolling series of buybacks in '23, '24, '25. Those will be supported by organic capital generation as well as the Canada sale proceeds in '24. And Joe, it remains our intention to return excess capital, including the Canada proceeds if the conditions justify.
Richard O'Connor, Group Head of Investor Relations
Next question please.
Operator, Operator
Our next question today comes from Raul Sinha with JPMorgan.
Raul Sinha, Analyst
Maybe just to follow up on that capital return question firstly and then I put another on asset quality. When we look at your headline capital ratio, obviously, it is very strong and quite a significant pickup over the last couple of quarters in particular. I guess there are a few adjusting items in there, should we kind of exclude the French disposal, let's say, reversal from the headline ratio? And I guess if you exclude the share buyback, we kind of get back in your range towards the lower end. So I guess the question is how much RWA growth you anticipate the business to require over the next sort of 12 months and linking to your loan growth outlook, I was just wondering if you could give us some color on RWA growth expectations there. And that hopefully gives us a good idea of how much buybacks we can expect. The second one, again, related to how much capital you might be able to generate in the remaining part of the year. your guidance on asset quality still implies quite a significant tick up in provisions given your very strong performance in Q1. So I guess the question really is, are you guiding us to something specific in terms of the 40 basis point provision charge? Or is that just an element of conservatism built in to your guidance there?
Noel Quinn, CEO
Georges, do you want to take both of those? I can always add something to the asset quality later, but you take both first.
Georges Elhedery, CFO
Thank you, Raul. Regarding your first question, I believe it's wise to adjust for the French part reversal of the impairment. If we do finalize a transaction, there is a possibility that a corresponding capital reduction will occur. Just to remind you, our capital target operating range is 14% to 14.5%, and we expect this to be slightly reviewed lower in the medium to long term. As we make our capital return or share buyback projections, we examine our medium-term capital outlook relative to that range. This careful approach is what allows us to announce the share buyback and consider further buybacks in the future. Concerning RWA growth, which corresponds with loan growth, it has been modest in the first quarter and may continue to be subdued for another quarter. We could see some improvement, especially with the rebound in Hong Kong and China. However, we haven’t provided loan growth guidance for the year due to economic conditions. We remain committed to mid-single-digit growth in loans for the medium term, which you can also apply to RWA growth and our share buyback. Moving to your next question about asset quality, I would align with your latter comment, Raul. We are incorporating some conservatism and believe that the full-year guidance we’ve maintained since February leans towards conservative. Some positive factors include the situation in the UK and the potential recession serving as a tailwind. Additionally, the recovery in Hong Kong and Mainland China, following the reopening of borders and resuming trade, is favorable. The Chinese real estate sector has shown positive signs from both an economic perspective and policy measures, but we want to stay cautious. There are several refinancings happening in Q3, particularly in the China commercial real estate sector, and we will also monitor the UK SME sector, especially those heavily dependent on discretionary consumer spending, before we reassess our guidance. We plan to revisit this guidance at the mid-year point.
Noel Quinn, CEO
Just one additional comment from me, please. You'll notice on the capital schedule, I can't remember what slide it was, but there's a capital walk on CET1. In there, you'll see that we've accrued dividends at 50% of the profit generation in Q1. If you do the math on that, the accrual on dividends is higher than the $0.10 that you've got in the Q1 declared interim dividend. So we're accruing capital distribution at a higher rate than the payment of the $0.10. That's just factored into our CET1 ratio as well.
Richard O'Connor, Group Head of Investor Relations
Next question please.
Operator, Operator
And the next question today comes from Manus Costello with Autonomous.
Manus Costello, Analyst
A couple, please. On that slide, you were talking about, all about the RWA walk. I noticed that the risk-weighted assets from Silicon Valley just short of $10 million, which seems quite high relative to the loans that you've taken on. I wondered if you could share with us what the nature of those assets is and give us some indication about asset quality within the Silicon Valley Bank acquisition from what you've seen so far. And then secondly, with the thought to the structure of the group, you've obviously showed some willingness to make some acquisitions recently and indeed do some disposals where possible. I just wondered if there will be any interest in further moves. In particular, I'm wondering if there would be anything around some of your businesses, such as insurance manufacturing, which you might think about going forward?
Noel Quinn, CEO
Thank you. Thanks, Manus. Regarding the asset quality of everything we've observed since acquiring the business about 6 or 7 weeks ago, it's been a busy quarter. Our observations support the positive view we had during due diligence. The portfolio is of good quality, and we haven't encountered any unpleasant surprises. We did perform some mark-to-market adjustments upon acquisition, but we anticipated that during our due diligence. Georges can provide additional details on this. Overall, the asset quality of the SVB portfolio aligns with our expectations. The team has effectively built the business over the past 14 years, establishing strong client relationships and a solid portfolio with promising business development opportunities. Consequently, we've decided to invest in adding more personnel in key global markets with robust technology and life science sectors to expand that business model beyond the U.K. We're committed to this initiative as well. So, there have been no unexpected developments. As for other potential acquisitions or M&A activities, the insurance business is a crucial element of our wealth proposition. We have a highly profitable insurance business in Hong Kong that combines manufacturing and distribution. The team has significantly enhanced our product lineup in Hong Kong over the last few years, restoring our market-leading position, and we fully access the value chain. Historically, we've struggled to gain full acknowledgment of that value as a bank shareholder in an insurance manufacturing context. However, the economics of that business are strong, and we hold a market-leading position. Like any business, we continually review our strategy. If we identify a better opportunity, we will pursue it, but currently, we are satisfied with the performance of our insurance business. Georges, is there anything else you'd like to add?
Georges Elhedery, CFO
Maybe just getting some of the math. So we acquired a loan book that is just shy of GBP 6 billion. That's about $8 billion. We've acquired $10 billion of RWA. So if you consider those loans and some of the additional RWAs on treasury books, operation risk, et cetera. You kind of land on these numbers, and Manus, we also acquired $1.5 billion of capital after the fair value adjustment. So you're talking about effectively a 15% CET1 ratio business that we acquired. So we think it is where it should be.
Operator, Operator
And our next question comes from Omar Keenan with Credit Suisse.
Omar Keenan, Analyst
I just had a quick question on rate sensitivity. And if I look at your rate sensitivity, at the end of '22, it looks like you've been quite purposefully bringing down your rate sensitivity on the year 1 view. And I was hoping you could perhaps give us a little bit of color of the direction that sensitivity over 1 year has changed in the first couple of months of the year. Can we assume that some of the structural hedges have been further increased, and when we see the sensitivity, might it have reduced further? Any kind of color with that respect would be really helpful.
Noel Quinn, CEO
Georges, do you want to answer that?
Georges Elhedery, CFO
Thank you, Omar. At the end of 2022, the rate sensitivity in a down 100 basis points scenario decreased from approximately $6 billion to around $4 billion. This $2 billion reduction in our net interest income sensitivity is partially attributed to the structural hedges we implemented and continued since last year, with about one-third of it justified by these hedges. The remaining two-thirds is due to the fact that we are operating at higher interest rate levels, which reduces the negative impact in a downside scenario. We have not published a revised rate sensitivity for Q1, but we are continuing with our structural hedges. It's important to note that these hedges will slightly decrease our rate sensitivity. Our goal is to lower that $4 billion figure to about $3 billion in the medium term, though we have not yet reached that target. We will provide an update in H1. I believe I have covered your questions.
Richard O'Connor, Group Head of Investor Relations
Next question please.
Operator, Operator
The next question is from Perlie Mong with KBW.
Perlie Mong, Analyst
I've got two questions. The first one is, obviously, the profit was very strong and a lot of it comes from noninterest income. And it appears that a lot of this is from commercial banking and maybe some from global banking and markets. How much of that do you think is sustainable? Presumably, you wouldn't encourage us to analyze the whole lot. So how much of that do you think is sustainable? And secondly is, I guess, on the AGM on Friday, so I guess a lot of the attention on Friday will be around the debate you are having with and they obviously recently published an announcement that made some comments, especially around your cost income ratio and ROTE. Well, you've obviously pointed very strong numbers today. But in some ways, we have guided to a lot of it already, especially around cost. And I'm sure you've also been communicating with them anyway. So why do you think those critics were still made?
Noel Quinn, CEO
Okay. I'll deal with the second one later. I'll ask Georges to deal with the non-NII first, if that's okay.
Georges Elhedery, CFO
Sure. So we expect many of you will adjust your full year numbers to reflect our Q1 outperformance, and that's a fair assessment Perlie. But I would caution you not to annualize Q1, so if I just unpack it, the non-NII relating to the funding of our trading activities, $1.4 billion is fairly reasonable to assume this number will annualize. The wealth business, obviously, with the outlook improving in wealth, fairly reasonable to assume we will see regain traction and bounce back, particularly in Hong Kong, whereas some of the other activities such as the foreign exchange trading outperformance. I would caution you not to annualize this number and just to bake it in as a Q1 outcome and then see how they develop in Q2 and Q3.
Noel Quinn, CEO
In terms of wealth performance, most of the non-net interest income was from commercial banking and global banking and markets. However, it’s also important to highlight that the wealth business in wealth and personal banking performed strongly in the first quarter. Average revenue increased by 13% year-over-year in Q1. This indicates that we are witnessing a recovery in wealth revenue, which we believe will continue throughout Q2, Q3, and Q4. It is too early to determine if the 13% growth will hold for the entire year or change, but we do not anticipate it fading in the upcoming quarters. There should be some level of annualization reflected in the non-net interest income for wealth and personal banking. Regarding the AGM comment, we have maintained for some time that the safest and quickest path to achieving higher returns, enhanced performance, better dividends, and capital generation is through our current strategy. The Q1 results support the view that this approach is the most effective. Over the past year, we have guided towards a return on tangible equity of over 12%. I stressed at year-end that we should concentrate on the "plus" rather than just the 12%. Excluding notable items, our return on tangible equity stands at 19.3%. It’s worth noting that this figure includes a tax credit, which is not an amount we can expect to see every quarter. Even after adjusting for that, the return remains impressive. Our primary focus is on improving performance for our shareholders, and we believe that our current strategy is the best path to achieving better returns and overall performance, instead of pursuing more drastic corporate restructuring. Q1 provides strong evidence of this. Georges, please clarify the tax situation.
Georges Elhedery, CFO
So then we've basically shown $1.9 billion as a tax charge, which is an effective tax rate of 14%, but I just want to caution you that 3.3% relates to the provisional gain on SVB, which is a nontaxable item. Another 3.3% related to the release of provisions for uncertain tax provisions, which is also a one-off item; so therefore, if you adjusted for those two, we still expect a 20% ETR guidance for the rest of the year.
Operator, Operator
The next question comes from Andrew Coombs with Citi.
Andrew Coombs, Analyst
One strategic question and then one question. On the strategic question, if the proposed French retail sale no longer goes ahead, what would be the plan? Would you put it back on the block again? Or would there be a plan to reabsorb it into the broader HSBC Group given that sale process and where it's got to? Secondly, on cost, you've acted a very good cost print this quarter, you're down 2% year-on-year on a constant currency basis, and yet you're still guiding to 3% cost growth or 4% with SVB U.K. So is this a timing issue? Is it a case of the wage inflation that will come through from Q2? Anything you can elaborate there?
Noel Quinn, CEO
Two good questions, and Georges will cover the second one. I'll cover the first one. I think, listen, we still believe that a sale of the French retail business is the right strategic outcome that business probably has a stronger future in other hands. However, we have been in discussions for a few weeks now with the current buyer to try and overcome the challenges they have on their acquisition accounting impact on their capital base. We'll continue that dialogue. We're hoping we can reach a mutually agreeable settlement with them on that, but we can't be guaranteed of that outcome. We have to consider what is financially the right decision for all shareholders, and it's hopeful that we can reach an agreement, but it's not guaranteed. In the event we can't, then I still think we'll continue to run the business, but I still think over time, we wouldn't see that as a long-term strategic hold, but we'll have to wait and see what happens thereafter. We're very much focused on trying to reach an agreement with the current buyer to bring that transaction to a close. So that's the update I have for you. On costs, I'll hand over to Georges.
Georges Elhedery, CFO
Thank you, Noel, and thank you, Andrew, for the question. Our reported costs on a constant currency basis are down 2% from Q1 last year to Q1 this year. If we adjust for notable items, including the $450 million of additional costs from the CTA program in last year’s Q1, our reported costs, adjusted for notable items, show an increase of 2% from Q1 to Q1. This is how we are measuring ourselves for this year, and we are targeting a 3% annualized figure, with Q1 currently at 2%. There are a few reasons for the difference from 2% to 3%. Firstly, we have not yet incurred most of the severance costs that we announced at year-end, which we expect to incur mainly in Q2 this year. Secondly, some of the pay increases were only partially factored in for Q1 starting in March, and will be fully included from Q2 onwards. This is why our 3% target for the full year is set as it is. Additionally, as you mentioned, Andrew, the acquired costs related to SVB and other necessary investments will contribute an additional 1% to that 3% target.
Noel Quinn, CEO
So just a couple of additional comments for me. On the capital schedule, I just want to clarify as well, the SVB business we bought, we acquired a cost base with that, and we acquired a revenue stream and that revenue stream was in excess of the cost base. So we've acquired a positive P&L that was contributing, if I remember correctly, around about $80 million to $90 million. So although we've acquired the majority of the $300 million in the acquired cost base of SVB, it is a profitable cost base.
Georges Elhedery, CFO
Andy, just to finish off, we provided the reconciliation on Slide 30 to show you the walk from reported cost to our cost target, and we will be showing this slide every quarter.
Operator, Operator
Next question comes from Guy Stebbings with BNP Paribas Exane.
Guy Stebbings, Analyst
One on interest margin and one back on SVB. So on NIM, I guess the U.K. bank did quite a lot of heavy lifting in this quarter, allowing for one basis point of sequential growth. As we look ahead, perhaps that tailwind, at least in quantum. So is that going to make it tricky from here to deliver NIM sustainability? Or is the drop in HBAP and the headwind from deposit mix, in particular, likely to fade in your view to allow for some sort of stable NIM backdrop? And then the second question on SVB. In addition to the acquired cost base, you flagged incremental investment spend and plans to build the business outside the U.K. So could you talk about sort of associated revenue ambitions and what sort of time frame you expect to see notable uplift there. I mean sort of how big a shift in that $80 million to $90 million PBT reference, could we see with SVB and HSBC with that incremental investment?
Noel Quinn, CEO
Okay. I'll take the second in a moment. I'll ask Georges to go on the NIM, please.
Georges Elhedery, CFO
Sure, thank you. You mentioned potential challenges in the U.K., and we might still encounter one or two rate hikes, which we plan to pass on to customers. In Hong Kong, we're observing ongoing challenges with approximately 1% monthly migration to term deposits, resulting in a 25% mix of term deposits across our entities there. However, we also have some positive factors. First, we are carrying strong momentum from the first quarter into our current performance. Second, HIBOR rates are normalizing; for context, in Hong Kong, the average HIBOR and exchange fund bill rates in the first quarter were significantly lower than in the fourth quarter, which posed a major challenge. Recently, we have started to see normalization in these rates, and if this continues, it could lead to substantial benefits for us in Hong Kong. Additionally, our deposit and loan base remains resilient, with stable performance despite competitive pressures, and we aim for mid-single-digit growth in both areas in the medium term, which should also contribute positively.
Noel Quinn, CEO
To reiterate what we mentioned at the full year results in February, we acknowledged the existing guidance at that time and expressed comfort with the consensus. The only modification required for net interest income is due to the IFRS 17 adjustment. Everything else remains as we indicated in February, and we still feel comfortable with it. This applies today as well; just account for the IFRS 17 adjustment, which is approximately a $2 billion change from IFRS 4 to IFRS 17. That is the sole adjustment based on our current update. Regarding SVB, we have recruited over 40 individuals in the U.S. to expand our SVB capabilities. We did not acquire any customer book, so these individuals will be in a development phase, and there will be a payback period for this investment. We believe it will be a relatively short payback period given the quality of hires we've made. We are also exploring opportunities in other regions globally. We view this as a sensible and moderate organic investment and are confident about the payback. We plan to share more details once we complete this development, hopefully by mid-year. There may be a profit impact in the first year or 18 months, but we anticipate returning to profitability afterward with these organic strategies. We will provide further updates at mid-year. Strategically, this investment is crucial for the medium term as this sector of the economy is vital across all regions and holds significant growth potential.
Operator, Operator
The next question comes from Rob Noble with Deutsche Bank.
Robert Noble, Analyst
Most of the questions have been answered. If you could just talk about the LCR, it's relatively low in a European context, mostly your deposit base is a different kind of structure. You have been running with that level in the medium term with the uncertainty in the market? And how do you expect the regulation or approach or liquidity to change given what's happened in the U.S.?
Noel Quinn, CEO
Georges, do you want to handle that?
Georges Elhedery, CFO
Sure. Thank you, Rob. So we don't target LCR. We are continuing to target medium-term single to mid-digit loan growth in our portfolio. And we obviously continue to cherish deposits and attract and continue wanting to attract deposits. The LCR would be an outcome, I think that we look at our liquidity management, it's the high-quality liquid assets ratio that we look at, it's the cash and cash equivalent within it that we look at. And in terms of loans, again, if the short term is somewhat subdued in particular in Hong Kong, in the medium term, some of the bounce back and some of the trade bounce back that we're seeing as well may support that loan growth ambition in the medium term.
Noel Quinn, CEO
I think on the regulation impact, I think we have to wait and see what the various regulators around the world do regulation, but I think the way I look at it, the primary responsibility for running a prudent balance sheet is on the management and the board of financial institution. That's a responsibility we've taken seriously throughout our history. Our high-quality liquid asset has been a feature of our heritage, our high-quality cash and cash equivalents have been a feature of our heritage for many decades. So we put the primary responsibility on liquidity management on ourselves, and then we'll see what the regulatory environment does as a consequence of some of the recent changes.
Operator, Operator
Next question is from Aman Rakkar with Barclays.
Amandeep Rakkar, Analyst
I need to revisit the revenues. Both your net interest income and noninterest income are performing very well in Q1, and they are annualizing at levels that indicate significant upside to market expectations for these segments. Your net interest income is annualizing over $36 billion based on the Q1 figure, while your guidance exceeds $34 billion. I understand there are many variables involved, but to be more specific about your comments on consensus for the full year, there is a $1.7 billion gap between market expectations and your guidance. The market anticipates $35.7 billion, and it seems you don't foresee much downside to that consensus number unless there are factors concerning term deposit mix, or if there is a level of conservatism in your NII guidance, or if I'm missing something. Could you clarify this? Additionally, regarding noninterest income, I recognize your markets business likely exceeded expectations in Q1, but you're also highlighting a wealth management segment that is improving and momentum in your fee businesses, with strategic initiatives supporting your projections for the full year. How much of that revenue figure is considered overearnings, or is this the level we can expect consistently throughout the year since it’s significantly above market expectations? Any insights you can provide would be greatly appreciated.
Noel Quinn, CEO
Two good questions. Let me clarify what I mentioned in February. You're correct in your calculations. Back then, we stated our expectations were over $36 billion. When discussing our net interest income, it was annualized around $38 billion, with consensus estimates between $37 billion and $37.5 billion, which we were comfortable with. At that time, we indicated that the consensus calculation was reasonable, projecting it slightly above the $36 billion mark, landing around the $37 billion level. Now, the only adjustment needed is for IFRS 17, which reduces that by about $2 billion. So, we're looking at over $34 billion, putting us above $35 billion. Essentially, we believe the market's estimate for net interest income was on track back in February last year, and no substantial changes are needed, aside from the mechanical adjustment due to IFRS 17. Georges, could you address the non-net interest income aspect? You're correct that there are factors in our non-net interest income performance for Q1, and while Georges mentions annualizing, some components may not be wise to annualize fully regarding trading income.
Georges Elhedery, CFO
Sure, Aman. To break down the non-NII, we've experienced significant outperformance in the funding of the trading book, with $1.4 billion this quarter compared to $0.1 billion in the first quarter last year when rates were at zero, and $1.3 billion in the fourth quarter, indicating it is relatively flat or slightly increased from that period. It’s reasonable to annualize this considering the current rate forecast consensus. Additionally, as Noel mentioned earlier, the resurgence of activities in wealth management, particularly in Hong Kong, is promising for the future, and we can expect to see ongoing performance in that area. However, not all market activities, such as foreign exchange trading, which had a record quarter, may achieve the same results going forward. We need to evaluate the business opportunities on a quarterly basis. While it’s possible to factor in the Q1 outperformance, I would advise against fully annualizing it. Overall, if I take a step back, the results are strong, and we are optimistic about what lies ahead. Given our robust Q1 performance, we will reassess and update our guidance in the first half of the year.
Operator, Operator
That comes from Martin Leitgeb with Goldman Sachs.
Martin Leitgeb, Analyst
First of all, congratulations on this good set of results. I just have one broader question on growth and one follow-up on deposits, please. Just looking at the much improved profitability levels of the group, with an annual profit being around $2 billion to $3 billion for the quarter, this great capacity to scale up growth. And I was just wondering if we look into the medium term or starting '24. Do you see the goal for the group to lean more into growth so that mid-single-digit loan growth could potentially be higher? Or should we just think that any increasing profitability could be essentially a return to shareholders just in terms of the trade-off between opportunity for growing more versus shareholder return. And second, with regards to the deposit trends. I was just wondering if you could comment on the strength of the deposit franchise during the quarter. Have you seen, in particular, inflows in certain parts of your footprint helping deliver that stable deposit growth in the quarter? And it was also wondering with regards to deposit migration into time, whether you have seen any change in trend. If this we towards the end of that cycle in terms of deposit migration? Or could this still go on for a number of quarters?
Noel Quinn, CEO
Okay. Just a couple of comments. One comment from me on growth. Listen, I think, clearly, we want to pursue growth, but I think we have the capacity in our dividend payout ratio of 50% to pursue growth and with the option of doing buybacks as well. Now at the moment, I think we've seen a relatively subdued lending market in corporate banking. I think the demand for term loans around the world is not particularly high at the moment and probably isn't going to be particularly high in the very near term. As Georges said earlier, I mean, once we get to 2024, one would expect there to be an increase in demand starting to emerge. But for the near term, for the next few months in '23, given the economic uncertainty, we're seeing subdued loan demand. So I think the message I'd give you, in a 50% payout ratio world, we believe the second 50% after we pay the dividend, there is potential to fund both growth and buybacks. And that's our plans going forward. Georges, do you want to just cover the deposit trend, the inflows, the outflows, and deposit migration?
Georges Elhedery, CFO
Sure, Martin. So yes, if I start with some of the outflows that we're seeing and then I go into the tailwinds. So some of the outflows we're seeing particularly in the U.K., so obviously, U.K. retail, Q1 is a tax payment period. So there is seasonality here. We are still seeing high cost of living resilient inflation in the U.K., which is obviously draining some of the U.K. consumers' savings, to a lesser extent competitive pressure as well in the U.K. Likewise, for corporates in the U.K., Q4 was year-end where people showed up their liquidity, whereas Q1, most of the companies pay dividends. And then you can see some of the draining liquidity; we're also seeing deleveraging of loans using some of the deposits to deleverage on the loan side, especially for those with a strong rate differential between what they're paying on their loans. This being said, we continue to see growth and strength in the deposit proposition. So if I take Hong Kong and all of Asia, actually, we've seen definite deposit growth in the retail and the personal banking space. We have seen 5% growth of our deposit base in Commercial Banking in the U.S. So we were one of the beneficiary banks of the deposit migration from medium-sized banks into large banks. We obviously continue to cherish our propositions and deposits to continue attracting deposits at the right price.
Operator, Operator
We will take our last question today from Tom Rayner with Numis.
Tom Rayner, Analyst
Two, please. First one, just on the loan growth. I mean, you flagged the corporate demand and maybe that is the answer. I was just going to ask, could you quite upbeat on the economic recovery you're seeing now in Hong Kong and China and the U.K., I think you said it was quite resilient. So is there any other reason why you're so sort of cautious in the short term on loan growth? Or is it purely a lack of demand from corporate? And a second question on costs, please.
Noel Quinn, CEO
Okay. What's your question on costs? Do you want.
Tom Rayner, Analyst
Yes, I'm looking at the 3% target for this year and considering next year as well. You're still experiencing some benefits this year from the prior cost-saving program, which has now concluded. I'm curious if you or Georges could share your thoughts on cost management for 2024. Will you aim for absolute growth similar to this year, or might a jaws approach be more fitting? Any insights you could provide for the upcoming year would be appreciated.
Noel Quinn, CEO
Regarding loan growth, I believe your observation is valid. If there's an area where loan growth could increase in the near term, it would likely be Asia, with the Middle East also being a possibility. I am somewhat cautious about near-term loan growth. I expect that it will begin to show more on the working capital side of the balance sheet, especially in trade finance, before companies start making investments in fixed capital. There seems to be some hesitance in the corporate sector when it comes to making long-term fixed capital investment decisions, which is separate from sustainability concerns. There's significant spending happening in infrastructure, and I anticipate some loan growth related to sustainable infrastructure investments. While I may be cautious about loan growth right now, I believe it’s a prudent approach in the near term. However, I do expect medium-term loan growth. Overall, it seems reasonable to say that Asia might experience a quicker pickup in loan growth compared to other regions, so my cautious stance may indeed be justified.
Georges Elhedery, CFO
If I kind of just add to Noel's comments, Tom, if you look at Hong Kong, in the retail space, both cards and mortgages have been growing in the first quarter. Even in the U.K., we are seeing green shoots in the mortgage sector. I mean, our market share in the mortgage sector in the U.K. for the first two months of the year is at 15%, that's for new business. That's against the book market share of about 7.5% and the Q4 new business market share of 9%. So we're certainly there in the retail space where we're seeing growth. On the wholesale side, I just want to add one comment to description, which is also bear in mind the rate differential between China and Hong Kong. So all those Chinese companies who used to use Hong Kong as a base for raising funding internationally will be less doing so as long as the rate differential between dollar rates and China rate are that wide. It is cheaper for these corporates to raise funding in Mainland China as opposed to Hong Kong, and that will remain the case up until the time we see a reversal in that rate trend. If I move to your second question, Tom, we have not shared targets for 2024 as yet, but the few guiding principles I can share with you, the first guiding principle, paramount guiding principal is that you should expect our focus on cost discipline to continue. The second guiding principle is that we will continue doing transformation and restructuring as part of our BAU cost base and expect some of those savings to flow through also into 2024 and beyond. Case in point is the spending on severance, which we're planning now to do in Q2 this year for which the benefit will flow through mostly in 2024. The third, at this stage, we're still looking to guide towards a dollar cost number as opposed to and the way we will be looking at 2024 as we come to be able to give you additional guidance later in the year.
Noel Quinn, CEO
So thank you all for your questions. I really appreciate you taking the time to close our first quarter results. I just want to say that the first quarter results provide further evidence that our strategy is working. We had a strong first quarter profit performance. Cost discipline remains tight, and we're clearly on track to deliver our target. We've resumed quarterly dividends and announced a share buyback of up to $2 billion, but I'm also confident about the rest of 2023. We built a strong platform for future growth, and our geographical footprint puts us in areas of high growth. I look forward to speaking with you soon. Have a good morning or afternoon. Thank you.
Operator, Operator
Thank you, ladies and gentlemen. That concludes the call for HSBC Holdings plc Q1 2023 results. You may now disconnect.