Earnings Call Transcript - HSBC Q4 2021

Noel Quinn, CEO

Good morning in London, it's great to see everybody in the room with us today. Thank you for coming. And good afternoon to everyone watching and listening in Hong Kong and elsewhere. Ewen will take you through our Q4 numbers very shortly. But I'd like to begin with a summary of how we delivered against our strategic plan in 2021. As you know, we refreshed our core purpose as an organization a year ago. Opening up a world of opportunity draws heavily on HSBC's past. But it also encapsulates what we need to focus on to succeed now and in the future. By keeping our purpose and the values that underpin it firmly in mind, we've delivered good progress against our four strategic pillars. Focus on our strengths, digitize at scale, energized for growth, and transitions in net zero. And this has contributed to a strong financial performance, which was supported by the global economic recovery. Starting now with a few highlights, I'm pleased with the progress we've made on both our transformation and growth agendas. And I want to pay tribute to the whole HSBC team for the job they've done in 2021. Underlying growth in key revenue streams came through strongly in Q4 to offset the drag effects of declining rates, resulting in reported revenue growth of 2% in the quarter, coupled with tailwinds from higher interest rates. This provides strong revenue momentum for the future. We're also well on our way through a number of announced exits and acquisitions that materially alter our capital allocation to areas where we have distinctive competitive advantage. Reported profits before tax for the full-year were up 115% to $18.9 billion. All regions were profitable, Asia led the way with $12.2 billion of reported profits, including $1.1 billion from India, up $90 million on the year. There was also strong contributions of $2.2 billion of adjusted profits from our non-ringfence bank operations in the U.K., and Europe, and $900 million of adjusted profits from the U.S. business. I was also pleased there were strong fee income growth across all businesses which overall was above pre-COVID levels plus international account opening and commercial banking was up 13% and trade balances were up 23% overall and today stand higher than pre-COVID levels. We increase spending on technology and performance related pay. But I'm pleased we kept cost stable, able to do so due to the savings from our transformation programs, which are ahead of plan. If rates follow the path currently implied by the market, we now expect to reach at least 10% ROTE in 2023. That's a year earlier than we had previously signaled. We took a charge on expected credit losses in Q4 primarily due to changing market conditions in the Mainland China commercial real estate sector. Ewen will go into this in more detail. But I'm pleased to say we have seen some positive movements in market sentiments since the year-end. Finally, we've announced full-year dividends of $0.25 per share up 67% as well as our intention to initiate an incremental share buyback of up to $1 billion on top of the existing buyback of up to $2 billion announced earlier in the year.

Ewen Stevenson, CFO

Thanks, Noel. Good morning or afternoon all and Noel and I are great to see so many of you in the room today with us. We had another good quarter of reported pre-tax profits of $2.7 billion up 92% on last year's fourth quarter. Adjusted revenues were modestly up on last year's fourth quarter. This reinforces what I said at the third quarter, we think we're now past the trough in revenues. ECLs were $450 million net charge in the quarter. Operating expenses were down $800 million on last year's fourth quarter due to a lower bank levy and continuing good cost discipline. Our return on tangible equity for 2021 was 8.3%. Our core Tier 1 ratio remained strong at 15.8%. Tangible net asset value per share of $7.88 was up $0.07 on the third quarter. We've announced full-year 2021 dividends of $0.25 per share, that's up 67% on the prior year. We also intend to initiate an incremental buyback of up to $1 billion. This will begin after the buyback of up to $2 billion is concluded in April. Turning to Slide 11, as a headline we're pleased with the lending and fee income growth that we're now seeing. Lending balances were up 1% overall on the third quarter. Underlying this was 5% growth for our personal and commercial banking businesses combined equivalent to $38 billion in total, which was partially offset by planned reductions in global banking and markets. There were strong lending growth in wealth and personal banking up $27 billion or 6% on the fourth quarter of last year, reflecting another strong mortgage performance in the U.K. and Hong Kong. Lending was up $11 billion in commercial banking, mainly in trade and term lending in Asia. Fee income increased by 5% versus the fourth quarter of 2020. Within this commercial banking increased fee income by 15%, reflecting both good volume growth and repositioning in some areas towards fee income. On the next slide, despite the impact of lower rates, we've been seeing a recovery in revenues for commercial banking for a few quarters now. And this continued in the fourth quarter. Global banking and markets had another good quarter driven primarily by good performance in FX and capital markets and advisory. And we saw our first quarter of year-on-year revenue growth in personal banking since the onset of COVID-19. And in wealth strong new business growth was offset by adverse insurance market impacts. Tonight for the current quarter we expect some weakness in our Asian wealth revenues. As highlighted previously, our revenues will be impacted by the adoption of IFRS 17 in 2023. We continue to expect an initial downward adjustment to our insurance profits of around two-thirds.

Richard O'Connor, Analyst

Yes, good morning everybody. I'll take the first few from the room, as the operator said, if you just give your name and institution, please over to Raul in the front row to start with, if you wait for the mic, please.

Raul Sinha, Analyst

Hi, good morning. It's Raul Sinha from JPMorgan. Thank you for hosting this in person. I have a couple of questions to begin with. First, regarding net interest margin, could you explain the key factors affecting the main parts of the franchise? The net interest margin for HBAP seems to be relatively stable, while the U.K. net interest margin has declined quarter-on-quarter. What factors are contributing to the weakness in the U.K. net interest margin, and how might mortgage pricing influence this moving forward? I anticipate we can provide forecasts for HBAP net interest margin going ahead. My second question relates to the cost discussion. I found your comments about historical cost fluctuations when interest rates rise with HSBC quite interesting. One significant difference this time is the rising inflation. Could you discuss how you are managing inflation, what trends you are observing regarding inflation across the bank, and how you plan to address this in your cost strategies over the medium term? Thank you.

Ewen Stevenson, CFO

Yes, so look on NIM and I'm sure there'll be a few questions on NIM, in terms of what we're seeing look in the U.K., I think what you're predominantly seeing is that sort of mix shift towards mortgages at the moment impacting NIM together with continued very healthy liquidity levels. We do think over time, what we'll see is a recovery in some of the other loan books, particularly unsecured, so you should begin to see both an improving shift in the asset mix together with significant benefits coming through from rate rises. As you can see, in our interest rate sensitivity tables, Sterling is our most sensitive currency. Yes, in Hong Kong, I don't think there's anything particular to sort of call out in terms of asset mix again, I think the main thing, yes, the main sort of debate, I think in Hong Kong looking out is obviously Hong Kong Dollar is pegged to U.S. Dollar, just how quickly if we are seeing and when we do see a rising U.S. rate environment, how quickly that will translate into a rising HIBOR.

Noel Quinn, CEO

Yes, on costs, we've managed to contain the costs slightly down in 2021, relative to 2020, why because frankly, we took out $3.3 billion of transformation costs in the first two years of the transformation program that has allowed us to fund increased investment in Turkey has allowed us to fund an increase in the variable pay pool '21 relative to '20 of 31%. And if you look at the VP pool, it's up 31% on '20, is up 5% on 2019. So our VP pool in 2021 still inflated over '19. But we managed to keep the cost flat. Now, Ewen said, we are also planning a further $2 billion of cost takeout this year as part of that transformation program and another $0.5 billion in the year after.

Ewen Stevenson, CFO

So the other thing that we've had during COVID is obviously the benefit in certain activity that's just fundamentally changed as a result of COVID. So yes, if you go back two years, we were spending $400 million on travel and entertainment, that was placed in $60 million last year, we expect it to recover. But we've said, we're not going to allow our travel costs to return to see it's capped at 50% of what it was pre-COVID, we've announced that we're going to get out of 40% of our non-branch based commercial real estate. Yes, we've done about half of that so far. But again, I think COVID and the fact that we are going to adopt hybrid working on a permanent basis opens up a significant opportunity. I'm now hot desking and I know that CRO has gone and stolen a whole bunch of printers out of the building to make it harder for us to print. But for those of you who hot desk, you certainly don't want any paper at the end of the day, because then you have to store it. So I think, yes, and then you've got this big shift in digital engagement from our customer base that's gone on pre-COVID, particularly in some cohorts of the customer base, like the elderly, who previously were not that digitally engaged.

Noel Quinn, CEO

Let me give you an example on that if I can, just Richard, if you allow me. Trade transformation, we embarked upon a digitization program of our trade platform with the biggest trade bank in the world. As you know, we fundamentally re-platform that business over the past four years on some modern technology. Consequence of that, trade revenue for the full-year last year was up 9%, trade balances up over 23%. If you look at Q4-on-Q4, trade revenue was up around about 20%. So there's momentum in the trade in the revenue.

Ewen Stevenson, CFO

So we've got to get our efforts to preserve value for shareholders in light of a rising rate environment and ensure that we remain cost disciplined so that rising rates translate into enhanced returns. We've got good momentum heading into the year, and I believe we can achieve our targets.

Richard O'Connor, Analyst

Yes, good morning. I'll take the first few from the room, as the operator said, if you just give your name and institution, please over to Raul in the front row to start with, if you wait for the mic, please.

Noel Quinn, CEO

Thank you very much for attending today and for all of your interest in your questions. To sum up, I'm pleased with our 2021 performance. Particularly pleased with the return to revenue growth in Q4, which I think bodes well for 2022. We've got good cost control and we determined to maintain it. Based on current interest rate assumptions, we would expect a return on tangible equity of at least 10% in 2023 and a year earlier than previously planned. We've made good progress executing against our key areas of our strategy and our transformation.