Earnings Call Transcript
HSBC HOLDINGS PLC (HSBC)
Earnings Call Transcript - HSBC Q3 2022
Operator, Operator
Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference Call for HSBC Holdings plc's Q3 2022 results. For your information, this conference is being recorded. At this time, I will hand the call over to your host, Mr. Noel Quinn, Group Chief Executive. You may begin, sir.
Noel Quinn, Group Chief Executive
Thank you. And good morning in London, and good afternoon in Hong Kong. Thank you for joining our third quarter results call. Ewen is going to lead the financial presentation, but I want to start by first talking about the leadership changes we've also announced. We've now spent nearly three years transforming HSBC. And while there's still work to do, we are now in a much better place to accelerate our financial performance and deliver stronger returns. As we approach the end of our three-year transformation program, the Board and I have taken the opportunity to review the composition of the GEC with an eye to long-term succession planning. As a result, we have today announced that Georges Elhedery will take over as Group Chief Financial Officer on the 1st of January 2023, and Greg Guyett will take on the role of CEO of GB&M permanently, effective immediately. Ewen will therefore step down as Group CFO on the 31st of December and will leave the Bank in April 2023. I want to put on record my thanks to Ewen for everything he's done during his time with us. He played a key part in creating and executing our transformation and growth agenda over the last four years. He helped HSBC through the COVID pandemic and has been fundamental in reshaping our portfolio globally, improving our capital efficiency, and embedding disciplined cost management across the organization. He has also driven the transformation agenda within the finance function, reshaping its strategic direction, encouraging innovation, and building the team's engagement levels. He's been a great professional and has contributed much to the bank. I wish him the very best for his future career. I want to emphasize we remain absolutely committed to delivering our strategy and the 2023 targets we announced with our Q2 results. There is no change to my commitment as a consequence of these personnel moves. Turning to Q3, I'm pleased with our third-quarter performance. All regions performed well, with particularly good performances in the UK, the Middle East, and Southeast Asia. We delivered a double-digit return on tangible equity for the nine-month period, excluding significant items, and we remain on track to achieve our financial targets in 2022 and 2023. We've also kept a tight grip on costs and are driving greater efficiencies across the organization. Clearly, this is important in an unpredictable and challenging external environment, but it's also a sign that our digitization strategy is working. Our work to structurally reposition the business and invest in areas of growth continues to gain traction. We are in a much better position at the start of the new interest rate cycle as a result of the actions we have taken on capital efficiency, portfolio rationalization, organic revenue generation, and cost control. We can also see in Wealth, for example, that we're building a strong earnings platform for the future. Over the last 12 months, we attracted $91 billion of net new invested assets, with $32 billion in the third quarter alone. I really expect you to ask about M&A activity when we get to the Q&A section of today's call. As a result, we've provided some additional information about our Canada business in the Appendix. I'll now hand over to Ewen to take you through the details.
Ewen Stevenson, Chief Financial Officer
Thanks, Noel, and good morning or afternoon, everyone. As Noel said, these are a good set of results. Reported pre-tax profits in the quarter were $3.1 billion. While down on last year’s third quarter, this was due to the $2.4 billion revenue impairment associated with the disposal of our French retail bank. Adjusted pre-tax profits in the quarter increased by $1 billion, or 18%, to $6.5 billion, reflecting a strong net interest income performance of $8.6 billion, which is up $2 billion on last year's third quarter. We had higher ECL this quarter, $1.1 billion, or 43 basis points. This primarily reflects increased economic uncertainty in the UK together with further provisioning for our China commercial real estate portfolio. Operating expenses are up 1% year-to-date against the same period last year and up 5% on last year's third quarter due to higher technology investment and different timings for our variable pay accrual. We remain on track to deliver broadly stable costs this year. Our core Tier 1 ratio was down 20 basis points to 13.4%, including an around 30 basis point impact from the loss on the French retail bank disposal. We continue to expect to be at the bottom end of our 14% to 14.5% core Tier 1 range during the first half of 2023. At our second quarter results, Noel and I said our current strategy is the best and safest way to improve returns, with strong revenue growth driven by rising rates and volumes, along with tight cost discipline. With these results, our strategy remains firmly on track, showing good underlying growth across all of our businesses with operating costs remaining broadly stable year-to-date, and an annualized reported return on tangible equity of 9.2%. Adjusted revenue was up $3.1 billion, or 28%, as the positive impact of rate rises was reflected in our strong net interest income performance. Non-interest income of $5.7 billion was up $600 million, or 13%, on last year's third quarter, despite a $400 million insurance market impact charge in the quarter. ECLs were a $1.1 billion net charge compared to a net release of $600 million in last year's third quarter. We now expect an ECL charge of around 30 basis points for this year. Lending was down 2% on the second quarter and deposits down 1%. However, excluding the impact of the reclassification of the French retail bank as held for sale, lending and deposits were both up $5 billion. Our tangible net asset value per share of $7.13 was down $0.35 on the second quarter due to negative FX and adverse fair value movements. Turning to Slide 4, we're seeing good organic growth across all of our global businesses as well as the benefit of rising rates. Wealth and Personal Banking revenue was up 25%, driven by a strong performance in Personal Banking. Personal Banking revenues were up $1.4 billion on the third quarter last year due to higher rates and balance sheet growth. There was a good underlying performance in Wealth due to the strong insurance and Private Banking performance, although revenue was down 9% or $200 million due to adverse market impacts in insurance of $400 million. We remain very confident in the growth of our Wealth franchise, having attracted $91 billion of net new invested assets in the last 12 months, including almost $32 billion in this quarter. Commercial Banking revenue was up 40%, with Global Payments Solutions benefiting from higher rates combined with continued strong underlying growth. Global Banking and Markets revenue increased by 16%. Market and Security Services revenue was up 20% due to market volatility and the benefits seen in Global Payments Services and Global Banking, which was partly offset by lower Capital Markets & Advisory activity. On Slide 5, net interest income was $8.6 billion, an increase of $2 billion compared to last year's third quarter, driven primarily by higher rates across all regions and businesses. On the right, the net interest margin was 157 basis points, an increase of 22 basis points on the second quarter, putting us back at pre-pandemic levels. We now expect net interest income of around $32 billion for this year, and at least $36 billion in 2023, compared to the previous $37 billion guidance. Relative to the second quarter, we are upgrading our plans on a like-for-like basis by around $1.5 billion for 2023 revenues, including $1.2 billion for FX movements, and at least $1.3 billion of planned higher cost of funding for the trading book. This benefit is reflected in higher trading income in non-interest income, but as a dollar-for-dollar offset with lower net interest income. In addition, given the unprecedented speed of interest rate rises we've seen this year, we believe we are being cautious about our planning assumptions across deposit betas, deposit migration, and asset margins from here. The FX movements will have a similar impact on costs, with 2021 adjusted operating costs of $32 billion translating to around $30 billion at year-to-date average FX rates and around $29 billion if September average rates are used. Given the flow of growth, we now expect low single-digit lending growth in both 2022 and 2023, before returning to previous expectations of mid-single-digit growth from 2024 onwards. On the next Slide, non-interest income was $5.7 billion, up 13% against last year's third quarter. Net fee income was down 11%. The decline in fees was largely due to lower capital markets and advisory levels in Global Banking and Markets and lower equity market activity in Hong Kong in Wealth and Personal Banking. Total fees in Global Payment Solutions were up 18% in Commercial Banking and up 8% in Global Banking and Markets. Other income was up 49%, including another strong FX performance in the quarter. On the next Slide, we've reported a net charge of $1.1 billion, or 43% of ECLs, in the quarter. This included $600 million of modeled Stage 1 and Stage 2 provisions and overlays, $400 million of Stage 3 loans, and $100 million of write-offs. There was a $300 million charge in the UK, including $200 million of additional allowances for heightened economic uncertainty. The $400 million also relates to the Mainland China commercial real estate market, around two-thirds of which are Stage 1 and 2 provisions, with the remaining third being Stage 3. The overall quality of our loan book remains good, with Stage 3 loans as a percentage of total customer loans stable at 1.8%. In terms of outlook, we expect an ECL charge of around 30 basis points for this year. For 2023, we now expect ECLs to be at the higher end of our 30 to 40 basis point planning range, but with a higher degree of volatility around this guidance given the uncertain market outlook. Turning to Slide 8, we've had three quarters now of relatively stable costs year-to-date and we continue to expect costs to be broadly stable compared to last year. Within that, third-quarter adjusted operating costs were up 5% on the same period last year, driven by continued investment in technology and timing differences in the variable pay accrual versus the third quarter of 2021. We made a further $600 million of cost program savings during the third quarter, with cost to achieve spend of around $700 million. The formal three-year program ends this year. We now expect to spend between $6.5 billion and $7 billion, slightly lower than our original $7 billion CTA target. However, the expected cost savings from the program remain unchanged at around $5.5 billion by the end of this year, rising to around $6.5 billion of cost savings by the end of 2023. We continue to target around 2% adjusted cost growth for 2023, with an ongoing focus on active cost management to mitigate inflationary pressures. Turning to capital on Slide 9, our core Tier 1 ratio was 13.4%, down 20 basis points on the second quarter. This includes the sale of our French retail banking operations, which had an impact of around 30 basis points, and further negative reserve movements through other comprehensive income due to higher rates. Reported risk-weighted assets were down $23 billion on the second quarter, principally due to FX movements. We've now achieved our year-end ambition of at least $120 billion of cumulative RWA savings, with modest further savings still expected in the fourth quarter. We expect core Tier 1 to recover strongly in the fourth quarter back towards 14%. This reflects several factors including the formulaic impact of our dividend as accrued during the year. We accrue at the top end of our payout range, having accrued $0.28 year-to-date, and additional capital management actions we've taken to offset the negative OCI movements. Please remember that this is not guidance for our full-year 2022 dividend intentions. The dividend accrual is purely a formulaic calculation that will turn up at the full year based upon the results and outlook at that time. We continue to expect to move back to the bottom end of our 14% to 14.5% target core Tier 1 range during the first half of 2023 and to consider buybacks from the second half of 2023 onward. In summary, this was a good set of results, showcasing good earnings diversity across the group, growth in all our business lines, and continued strong control over operating costs. Despite a weakening credit outlook, our credit quality remains strong. For 2023, we're upgrading our like-for-like revenue assumptions. We continue to target around 2% adjusted cost growth, and we expect to be at the bottom end of our target core Tier 1 range in the first half of 2023. Finally, after another quarter of good progress, we remain confident of delivering our targeted 12% plus return on tangible equity in 2023 and beyond. We expect a 50% dividend payout ratio for both 2023 and 2024, supplemented by acts of capital management for surplus capital beyond this. We've included a slide on Canada in the Appendix, so you can see the shape of the business and the tangible equity within it. We've also included slides on Mainland China commercial real estate and the Hong Kong loan book. With that, Elmer, if we could please open up for questions.
Operator, Operator
Thank you, Mr. Stevenson. Our first question is from Mr. Omer Keenan from Credit Suisse. Your line is now open.
Noel Quinn, Group Chief Executive
Hi, Omar.
Omar Keenan, Analyst
Hi, everybody. Good morning. Thank you very much for taking the questions, and best of luck for the future, Ewen. Can I please ask a question on capital planning and on the provision scenarios? So just on capital planning, could you give an update on where HSBC is on the tactical load viewing measures that are meant to get the core Tier 1 ratio up above 14%? It would just be good to have an idea of that. And just given the focus on real estate prices in the UK and Hong Kong and Mainland China, would it be possible to give a sensitivity in terms of RWA migration to low real estate prices in 2023? For example, what would a sort of 10% to 15% across-the-board reduction in real estate prices mean for RWAs? And my other question on asset quality; could you give a little bit more color on the guidance for full year ‘23? I guess there's a lot of moving parts between Stage 3 and moving towards a Downside or Downside 2 scenario. So when you're thinking about the FY23 guidance being at essentially 40 basis points, what sorts of assumptions are in there? Thank you.
Noel Quinn, Group Chief Executive
Ewen, do you want to pick up those points directly? And Omar, thank you for your questions.
Ewen Stevenson, Chief Financial Officer
Look, on capital planning, I guess, there are various parts to that. Firstly, I touched on when I spoke about the technical nature of how we accrue dividends during the year. So we've accrued $0.28 so far this year, meaning there will be very limited drag in Q4 from dividend accrual. Secondly, we've largely completed the $120 billion program that we committed to. I think there'll be a bit of carry-through into Q4 of a few billion. Additionally, back in Q1, we implemented a series of other tactical measures to support the core Tier 1, given the movements we were seeing driven by the OCI losses and their impact on capital. We're already seeing some of that benefit come through in the Q3 results, and there will be incremental benefits in Q4. But I would say that you should see material improvement in the core Tier 1 ratio in the fourth quarter. We expect to be back at the bottom end of the core Tier 1 range by the middle of next year, which also supports the buyback comments made for the second half of 2023. Regarding the second question on the real estate crisis, I don’t have at hand what a 15% impact would be on ratings migration across the book. But perhaps I can get you to follow up with the IIR team afterwards; there is quite a bit of detail in the Pillar 3 documents that I think they can help you sort of step through to try and estimate what that impact may be. And on asset quality for 2023, I think we do expect continued losses on the China commercial real estate book throughout ‘23. It still feels like we have some time to go before achieving stability and improvement in the China property markets. For the UK, currently, the biggest delta around for us is the UK. We have already front-loaded potential Stage 3 losses for 2023 with forward economic guidance adjustments made during the third quarter. Beyond that, I think we're being reasonably prudent with the guidance at the moment. We didn't say 40 basis points; we indicated the higher end of the 30 to 40 basis points. When looking at consensus, it's setting slightly higher than 40 basis points at the moment, but we're not aiming to change that guidance. It's also important to recognize that places like Hong Kong and China are likely to see better economic performances in ‘23 compared to ‘22. For us, when you consider our business mix, we have parts of the world expected to perform better economically next year.
Noel Quinn, Group Chief Executive
I’d just reiterate that, despite the guidance indicating the top end of 30 to 40 basis points, we're still committed to achieving a return on tangible equity of at least 12%. So it's manageable within the RoTE guidance we've provided. We're building Stage 1 and Stage 2 provisions now in anticipation of potential lawsuits, converting into Stage 3 losses in 2023. So we're taking a prudent position on balance sheet management as well. Next question, please?
Omar Keenan, Analyst
Thank you.
Operator, Operator
Thank you. Our next question is from Rob Noble, Deutsche Bank. Your line is now open.
Rob Noble, Analyst
Morning. I was wondering if we could just walk through the NII guidance. So you're saying the $37 billion estimate has gone down by $1.2 billion for FX. My understanding of the trading book funding cost is that this was already within your previous NII sensitivity. So rates have gone up, and I would have assumed that your NII should have gone up by more than your current guidance. So the $36 billion looks quite low to me. Can you walk us through your thoughts on that one, please?
Ewen Stevenson, Chief Financial Officer
Yeah, sure. I'll do my best. Look, on the NII guidance, there's a sort of technical aspect to the guidance. Regarding the walk from the second quarter, firstly, as you've noted, we've had adverse FX movements of $1.2 billion. Additionally, planning assumptions indicate that rate movements will increase the cost of funding in the trading book by at least $1.3 billion. Hence, while the cost of funding will be a drag on net interest income, we will see dollar-for-dollar improvement in trading income and non-interest income. Relative to the second quarter, we think we're guiding like-for-like revenue guidance up by at least $1.5 billion, even though the net interest income guidance was down by $1 billion. However, on a cautious note, the net interest income assumptions at the moment are very conservative. Increasingly, the interest rate sensitivity tables that we show you are less helpful as they are based on a 50% deposit beta. Given the unprecedented speed of rate rises we've seen recently, we are trying to be deliberately cautious in key assumptions. We're assuming very high deposit betas, elevated levels of migration out of non-interest-bearing current accounts, and contraction of asset margins in some areas. We'll see how this plays out in the coming quarters, but I would say at the moment, we're trying to showcase a cautious approach in our guidance.
Noel Quinn, Group Chief Executive
And just for clarity, the cost of funding in the trading book was inherently part of the Q2 numbers, but that cost has increased by $1.3 billion since then. So we noted an increase from the Q2 numbers. And there’s an offset between NII and non-NII; a lot of costs on NII are higher by $1.3 billion. The benefit reemerges in non-NII, which gets reflected in the totals. So just to clarify.
Ewen Stevenson, Chief Financial Officer
Another point to note, which was in my comments but may have been unclear, is that FX impact will also correspondingly affect operating expenses. The 2021 costs translated were $32 billion, which was a rough estimate translating down to $30 billion using year-to-date average FX rates, and around $29 billion based on the September averages. Therefore, where consensus sits currently seems high relative to those numbers.
Rob Noble, Analyst
Thank you. Just to follow up on the NII discussion; the trading book funding costs go up, but you've effectively assumed that the banking book doesn't benefit at all from incremental rate rises that you've assumed in Q4. Is that right?
Ewen Stevenson, Chief Financial Officer
Yeah, and implicitly, in those assumptions, I believe that's broadly correct. But I stress that within our planning assumptions at the moment, we are very cautious regarding deposit betas, deposit migration, and asset margins. That answer may be more nuanced when delving into individual entities. For instance, I think we're nearing our target in Hong Kong during Q4, but in some other markets, I still think there's further growth ahead of them.
Rob Noble, Analyst
Alright, thank you very much.
Operator, Operator
Thank you. Our next question is from Joseph Dickerson from Jefferies. Your line is now open.
Joseph Dickerson, Analyst
Hi, good morning. Thank you for taking my question. Ewen, you cited a weakening credit outlook. Can you discuss a couple of factors for us, such as how a strengthening dollar influences credit costs in your Asia footprint? Additionally, regarding Hong Kong, interbank liquidity is down to approximately HKD 100 billion, and the HKMA has been active in defending the peg. There is a possibility that the peg may break. If so, what would be the consequences for the bank, particularly from a credit standpoint? Could you help us think through those two dimensions? Many thanks.
Noel Quinn, Group Chief Executive
Let me take the second question first, if I may. Ewen, you can address the first. We do not believe there is any risk to the peg at all. We believe that the HKMA has sufficient capabilities to defend the peg, and that's not a scenario that we foresee.
Joseph Dickerson, Analyst
Thanks.
Ewen Stevenson, Chief Financial Officer
On the first part of your question, Joe, we don't believe that there's any significant impact from a stronger US dollar on our Asian portfolio, except potentially in smaller markets, for instance, in Sri Lanka. However, that is not fundamentally dollar-related. Overall, on a macro level, we don't anticipate the strengthening dollar to have a material impact on our credit quality analysis in the region.
Noel Quinn, Group Chief Executive
Next question, please?
Operator, Operator
Thank you. Our next question is from the line of Fahed Kunwar from Redburn. Your line is open.
Noel Quinn, Group Chief Executive
Thank you. Hi, Fahed.
Fahed Kunwar, Analyst
Thanks for taking my questions and best of luck, Ewen, with your future career. Just a couple of follow-up questions: the first was on impairments. I am sure this is my misunderstanding, but regarding a $300 million CRE overlay and the $200 million UK overlay, if I look at your overall coverage ratio on your loans to customers, it’s nearly flat at 1.1%, which is comparable to 2Q and FY21. I expected that to increase if a lot of the provisions you're taking are just reserved, rather than treated as underlying delinquencies. Why hasn't the coverage ratio increased? Are there moving parts at play, say when you write off some underlying delinquencies? That would be my first question. My second question is, regarding your greater than 14% guidance on CET1 for the first half of ‘23, have you factored in potential risk migration from higher loan losses stemming from falling CRE? If we see increased migration, would that pose a risk to that greater than 14% CET1 guidance in H1 ‘23? Thank you.
Ewen Stevenson, Chief Financial Officer
On the second question, we have clearly factored in our outlook for economic conditions and what impact ratings migration will have as a result. You can see our viewpoints on the macro outlook from our IFRS 9 scenarios. Within that framework, in some markets, we are accounting for an element of ratings migration built into our forecasts regarding RWA and capital. Regarding your question on impairments, it’s difficult to answer at the macro level, as the commercial real estate portfolio in China has seen an overall increase in provisioning. On the UK side, I find it challenging to reconcile the provisions we had at the beginning of the year because of COVID with adjustments we put back on. I think, net-net, we have added more provisions for the UK than what we removed at the start of the year. But I will work with the IR team to provide you with more specific numbers on this. For the two portfolios we are primarily focusing on, we have heightened provisions compared to the levels seen at the beginning of the year.
Noel Quinn, Group Chief Executive
I think there are some currency impacts on the balance sheet as well, but the investor relations team will follow up on that.
Fahed Kunwar, Analyst
Thanks, guys.
Operator, Operator
Thank you. Our next question is from -
Noel Quinn, Group Chief Executive
Next question, please?
Operator, Operator
Thank you. Our next question is from Yafei Tian from Citi. Your line is open.
Ewen Stevenson, Chief Financial Officer
Hi, good morning.
Noel Quinn, Group Chief Executive
Morning.
Yafei Tian, Analyst
Thank you for taking my question. Hi, morning, Ewen, and best of luck with your future career. I have two questions. The first is just to clarify the revenue and cost guidance to ensure I've heard it correctly. Assuming constant currency revenue is $1.5 billion higher, and considering that cost guidance has not moved to 2% inflation, does that imply a $1.5 billion increase at the pre-provision level for you? That's my first question. My second question is about the exit from Canada. Compared to many other markets that HSBC is leaving, Canada is actually quite a profitable market and has been generating returns above our cost of capital. I want to understand the rationale behind that exit. As you evaluate HSBC's footprint strategically, are there any further markets under review at present? Thank you.
Noel Quinn, Group Chief Executive
Ewen, if you want to take the first question, I'll address the second.
Ewen Stevenson, Chief Financial Officer
Yes, you've accurately captured our guidance. On a constant currency basis, revenues are expected to rise by $1.5 billion, with no change in cost guidance. Therefore, at a pre-provision level, we expect a $1.5 billion increase. Even after considering the guidance provided on ECLs, there should still be an improvement in pre-tax guidance.
Noel Quinn, Group Chief Executive
Thank you. Regarding Canada, let me share some rationale as to why we're considering alternative options there. Firstly, you're correct that the business has performed well and continues to make a return on capital above our cost of capital, and there's a pressing recovery post-COVID. The rationale for evaluating alternative options goes as follows: first, our market share in Canada is about 3%. Second, it's largely a domestic business, meaning the international connectivity between our Canadian business, especially in Wholesale Banking and supply chain finance, is less compared to many other markets we operate in. Thirdly, we've received considerable interest in our business from potential buyers. What's important for all shareholders is the valuation that other banks attribute to that business is deemed significantly higher than what we can as a profit stream within HSBC. As such, it's right that we consider that option. Furthermore, strategically, our market share falls in the 2% range, while the international connectivity of that specific business is relatively low. That’s why we've given serious thought to an alternative strategy for Canada. I want to emphasize that the management team in Canada has done an outstanding job. Regarding your question about evaluating similar strategies in other markets, we routinely assess the performance of our businesses, value in our hands compared to value in others, and strategic importance. However, currently, we're only commencing a process related to Canada. To preempt your follow-up question, let me also share insights into Mexico. If I analyze Mexico similarly, we have a market share ranging from 7% to 10% across product lines or customer segments, indicating a much stronger position there. We are witnessing strong growth in our Mexican business now, with substantial upside. We believe that our positioning as an international bank in Mexico has become more favorable compared to other competitors. Furthermore, we have a strong market share in Retail Banking in Mexico, with significant interconnectivity between Retail and Corporate Banking. Thus, we are not planning to undergo a similar process for Mexico; we believe there are good opportunities to continue growing that business from a stronger position.
Yafei Tian, Analyst
Thank you. It’s helpful.
Noel Quinn, Group Chief Executive
Next question, please.
Operator, Operator
Thank you. Our next question is from Tom Rayner from Numis. Your line is open.
Tom Rayner, Analyst
Yes.
Ewen Stevenson, Chief Financial Officer
Hi, Tom.
Tom Rayner, Analyst
Hi, Ewen. Good morning. Can I just ask about the cost target for next year, please, the 2% in 2023? Everyone appreciates it’s a tough target, especially in this inflationary environment. Ewen, I believe you mentioned that it would require active preparation to achieve it, and Noel, you noted that Ewen has been key to the cost transformation and discipline. Given that the CFO is leaving, is there a risk that hitting the target may become more reliant on cutting investments rather than discovering additional cost savings? Thank you.
Noel Quinn, Group Chief Executive
I can respond very clearly: there will be no easing in our cost discipline at all. I am absolutely committed to that cost target. Ewen has done a tremendous job driving cost discipline within the bank, but I share that agenda and am committed to it. As we've said before, we've set a target of around 2%. We understand that it is challenging in a high-inflation environment, but we also know that there are cost savings anticipated next year from the transformation program we've undertaken, which equates to about a billion dollars of flow-through savings or approximately 3%. We are also identifying further cost-saving opportunities through additional simplification, increased digitization, and organizational changes that can enhance the underlying capacity to pay. I won't pretend that achieving 2% in a high-inflation environment is easy, but I remain resolute in our commitment to delivering that. I want to thank Ewen for his significant contributions to instilling those disciplines in the bank, and I will ensure these disciplines remain for the future.
Tom Rayner, Analyst
Okay, thank you, and best wishes to Ewen in his future endeavors.
Ewen Stevenson, Chief Financial Officer
Thanks, Tom.
Tom Rayner, Analyst
Thank you.
Operator, Operator
Thank you.
Ewen Stevenson, Chief Financial Officer
Next question, please?
Operator, Operator
Thank you. Our next question is from Manus Costello from Autonomous. Your line is open.
Noel Quinn, Group Chief Executive
Hi, Manus.
Manus Costello, Analyst
Good morning, guys. I have a couple of questions to clarify regarding the cost target for next year. The basis from which the 0.2% growth comes from is the $29 billion FX adjusted, not the $30 billion you have as the year-to-date FX average rate, is that correct?
Ewen Stevenson, Chief Financial Officer
Yes, but I would caution that exchange rates are fluctuating, so that was accurate at the end of September, but we’ll see how it develops by year-end.
Noel Quinn, Group Chief Executive
But it’s on a net adjusted basis.
Ewen Stevenson, Chief Financial Officer
That thesis is correct. We'll not try to manipulate FX numbers in setting that target.
Manus Costello, Analyst
Sure. My second question concerns the commercial real estate outlook in China. When reviewing your disclosures, it appears that you are taking significantly higher impairment on your Hong Kong booked exposures compared to your Mainland booked ones. Are the additional $400 million of impairments taken this quarter primarily related to the Hong Kong booked? Why does Hong Kong appear in worse condition? Is there a risk that the Hong Kong booked could deteriorate quickly away from you? Thus far, you've taken about 8% or 9% impairment on the booked value. Could this rise if there's a structural issue with your lending agreements in Hong Kong?
Ewen Stevenson, Chief Financial Officer
The $12 billion is from the offshore component of the China commercial real estate portfolio. We've about 20 billion total exposure, with approximately $7 billion being onshore and slightly over $12 billion offshore. The offshore book is indeed weaker compared to the onshore book. The numbers disclose on substandard and impaired loans are distinctively different—about 35% on the offshore book and around 3% on the onshore book. Policy support is providing considerable support for the onshore portfolio, as well as liquidity, though this support does not necessarily extend to the offshore book. Thus, we do anticipate higher provisioning against the offshore book. Despite this, it's important to note that $12 billion represents just over 1% of our total exposure as a bank, so we remain vigilant.
Noel Quinn, Group Chief Executive
I think that's a fair assessment. The offshore book does carry a different risk profile compared to the onshore. Our clients, especially in the Tier 1 and Tier 2 cities, represent a relatively high quality loan book. Nevertheless, we must closely monitor how policy measures benefit not only onshore but also offshore clients.
Manus Costello, Analyst
Should we at this point regard the offshore book as essentially unsecured if they cannot access liquidity measures and collateral issues arise? Is it effectively an unsecured book that you’ve got offshore now?
Noel Quinn, Group Chief Executive
Relative to the onshore book, it is less secure than the onshore book, so that assessment is definitely valid. However, it wouldn’t be fair to say that the onshore policy measures won't benefit the offshore book. The reality is, we must assess this on a client-by-client basis to determine how much onshore liquidity support can help service offshore debts.
Ewen Stevenson, Chief Financial Officer
While I wouldn't classify it as unsecured, the onshore book is generally secured against specific properties. The offshore book does not have the same level of specific security, but there is still security backing that portfolio. Though it does not completely fall into the unsecured category, it certainly lies between the two.
Manus Costello, Analyst
Got it. Thank you very much.
Noel Quinn, Group Chief Executive
Next question, please?
Operator, Operator
Thank you. Next question is from the line of Martin Leitgeb from Goldman Sachs. Your line is open.
Ewen Stevenson, Chief Financial Officer
Hey, Martin.
Martin Leitgeb, Analyst
Good morning. Ewen, thank you for your contributions over the years. I have two questions: one on pass-throughs, the second regarding asset quality. I was wondering if you’ve noticed any meaningful signs of attrition in your core markets such as Hong Kong and the UK regarding the migration of current accounts into higher-yielding accounts? Is this a trend that's picking up and could imply higher pass-throughs moving forward? Secondly, on asset quality, could you highlight the implications of higher mortgage rates in the UK? Notably, mortgage rates have recently escalated to around 6%. From your UK business perspective, what are the primary implications of such elevated rates?
Ewen Stevenson, Chief Financial Officer
On pass-through levels, our experience has been that they have been lower than anticipated thus far. However, we've noticed a gradual increase, and as reflected in our guidance, we've maintained conservative assumptions regarding where deposit betas may lead us. There has been migration out of non-interest-bearing current accounts into savings accounts, and we're starting to see some momentum in Hong Kong recently due to rate changes. However, as a reminder, historically, our rate of migration out of non-interest-bearing accounts has typically trailed sector averages in Hong Kong. Regarding asset quality, our book in the UK is usually comprised of a mix of two- and five-year fixed mortgages. Thus, the effect of increased rates will take time to work through the book. Typically, loans stress at rates approaching 7%. Should you wish to explore the potential sensitivity analysis of higher provisioning levels based on observed figures, you can reference the Downside 1 and 2 scenarios based on IFRS 9 modeling. For most of our customers, we do not perceive these higher rates as unsustainable given stress analysis at the time those loans were issued.
Martin Leitgeb, Analyst
Thank you very much.
Operator, Operator
Thank you. Our next question is from Raul Sinha from JPMorgan. Your line is open.
Noel Quinn, Group Chief Executive
Hi, Raul.
Raul Sinha, Analyst
Good afternoon, everyone. Thank you for taking my questions, and best wishes to Ewen as well. Noel, I would like to follow up on your comments regarding Canada and Mexico. I'm trying to understand your reaction to any capital proceeds from a potential M&A. How might you approach capital deployment if you were to generate excess capital? Would you consider further acquisitions or should we expect a majority of the capital generated from these disposals to be returned to shareholders? The reason I ask is that historically, HSBC has linked various share buybacks to specific disposals. Thus, I was wondering if you'd be willing to connect any upcoming disposal capital proceeds to share buybacks directly. The second question pertains to Wealth Management. We have been anticipating a recovery in Wealth in Asia for some time now, but conditions appear quite challenging. I was hoping for an update on how you view the business going forward and if you anticipate any structural challenges affecting Wealth growth.
Noel Quinn, Group Chief Executive
Thanks, Raul. First, it's still early in the process for Canada, so I don't want to be definitive regarding the use of proceeds. However, a significant expectation is that the capital generated will indeed lead to shareholder returns. I do not wish to retain excess capital beyond our target range of 14% to 14.5%. If, however, we do achieve that range without considering the Canada disposal's impact, you can assume that we will have excess capital. Therefore, it might be reasonable to anticipate that we would return some capital to shareholders, though I don't want to provide specific guidance now. As for Wealth Management, we are observing the market in Hong Kong reopening, and domestic activity levels are improving. The reopening in Hong Kong signifies a more optimistic outlook for 2023 compared to 2022. Elevated activity levels are expected alongside stabilization within equity markets. While investment conditions have been less supportive, we are still establishing a platform for future earnings growth through net new asset accumulation. As mentioned earlier, we've attracted $91 billion of net new assets in the past year. Although the current market conditions, along with limited investment appetite, prevent immediate earnings from benefiting, we continue to build a foundation for future results. This mirrors our strategy regarding deposits; even when market conditions were less than favorable, we accumulated deposits from operational accounts and have subsequently enjoyed the resulting revenue streams. We are advancing in Wealth as well, broadening our customer and asset base to establish a platform for future growth. With that, if I may share some concluding remarks. Firstly, thank you for participating today and for your questions. In summary, we had another successful quarter, showing underlying growth across all sectors, benefited by rate increases, along with sound cost management. We're on track to meet all of our financial targets, aiming for a RoTE of at least 12% from 2023 going forward. I wish to reassure you that no changes will occur in our strategy or our commitment to cost discipline resulting from today’s personnel announcements. I want to acknowledge Ewen's significant contributions to the bank over the past four years, particularly during my transition into the CEO role, and the invaluable insight and guidance he’s provided to the broader HSBC team. I extend a warm welcome to Georges as he prepares to step into this new role on the 1st of January and I ask for your support for him as he begins this transition. Thank you, and I look forward to speaking with you again at our full year 2022 results, or possibly before then. Have a pleasant morning or afternoon.
Operator, Operator
Thank you, ladies and gentlemen. That concludes the call for the HSBC Holdings plc Q3 2022 results. You may now disconnect. Thank you very much.