HSBC Holdings plc (NYSE:HSBC) Q1 2024 Earnings Call Transcript

HSBC Holdings plc (NYSE:HSBC) Q1 2024 Earnings Call Transcript April 30, 2024

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Operator: Welcome, ladies and gentlemen, to the analyst and investor webinar on the 2024 first quarter results for HSBC Holdings plc. For your information, this webinar is being recorded. We are now ready to start the webinar, so I will hand over to Mark Tucker, Group Chairman.

Mark Tucker: Good morning to those of you in London, and good afternoon to those of you in Hong Kong. I’m joining you today from London and have alongside me know enjoy. I’ll be making some short opening remarks before handing over to Noel. As you may have already seen, we have announced today that Noel has informed the Board of his intention to retire from the bank after nearly 5 years in the law. The Board and I would like to pay tribute to Noel’s exceptional [indiscernible] As Group Chief Executive, he drags both our transformation strategy as well as creating a simpler, more focused business through the disposal of assets in the U.S., France and Canada. This has enabled us to deliver an improved performance, achieving record profits last year and create a platform for future growth and development.

Now, you’ll hear from him in a second, has decided it’s the right time to step back and find a better balance between his personal and business commitments. As you would expect, the Board keeps succession planning under constant review. We already have started a robust and rigorous process to find our next group Chief Executive. This process will look at both internal and external candidates. I’m very pleased that now has agreed to remain in his role while this process takes place, ensuring a smooth and orderly transition. And on a personal note, I’d like to thank Noel for his unwavering commitment and dedication to HSBC, which he joined 37 years ago. Now, it’s been a pleasure and privilege to work with and alongside you.

Noel Quinn: Thank you, Mark. I’m very grateful for your support, guidance, friendship and partnership. I’m proud of what my HSBC colleagues and I have achieved together over the past 5 years. Over that period, we have hit some significant milestones, record profits last year, the strongest returns in a decade and the highest dividend since 2008. As Mark mentioned, we have created a more focused business, and I believe we have built a strong platform for the bank’s next phase of development and growth. That’s why I feel this is the right time to step back to find a better balance between my personal and business commitments with the intention going forward after a break of pursuing a portfolio career. When I reflect back on the last 37 years, I have held intensive leadership roles, particularly since I took over the U.K. Commercial Bank in October of 2008.

After 16 years of intensive leadership, I’m ready for a change. But it’s also a natural inflection point for the bank as it comes to the end of the current transformation phase. It’s an ideal time to bring in new leadership. The Board has now started a process to find my successor, and I’m very happy to continue in my role as that process takes place. Rest assured, I will be working hard to ensure a smooth and orderly transition for my successor and to keep the momentum going in this business, as you have seen in Q1. Until then, it’s business as usual. So, let’s now turn to our Q1 results, which have showed continued progress. We had a good first quarter. Reported profit before tax was $12.7 billion. Excluding notable items, profit before tax was $9 billion.

Our return on tangible equity was 16.4%, excluding notable items. I’m also pleased with the further capital distributions of $8.8 billion, which brings the total amount of distributed capital by way of dividends and buybacks over the last 15 months to almost $28 billion. And we are on track to meet all of our previously communicated guidance for 2024. I will now hand over to George to take you through the numbers.

Georges Elhedery: Thank you, Noel. I’d like to open by paying tribute to the enormous contribution Noel has made to the bank. I’ve greatly enjoyed working alongside him. And I know everyone at the bank has appreciated this strong and effective leadership. I’m also grateful for the support he has shown me personally since my appointment as CFO, 15 months ago. The Board has announced the process to find a successor, and I know Non and I will continue to remain very focused on the job at hand until that process has been completed. Turning now to the numbers. Reported profit before tax of $12.7 billion was down $0.3 billion in the first quarter of 2023 on a constant currency basis. Excluding notable items, profit before tax was $9 billion, down $0.4 billion on last year’s first quarter.

On an annualized basis, we delivered a return on tangible equity of 26.1% or 16.4%, excluding notable items. We completed the $2 billion share buyback announced in February in 2 months. This means that since the end of 2022, we have bought back 6% of our outstanding shares. And the trend of strong shareholder distributions continues this quarter. We have announced, as Noel said, a further $8.8 billion of distributions consisting of first interim dividend for ’24 of $0.10 per share. The special dividend of $0.21 per share from the Canada sale proceeds and a new share buyback of up to $3 billion, which we plan to begin right after the AGM and complete within 3 months. Finally, we are reconfirming all of our 2024 guidance, including a mid-teens return on tangible equity, excluding notable items and our commitment to limit cost growth to around 5% on a target basis.

So, on the next slide, reported profit before tax of $12.7 billion included $4.8 billion gain on the sale of Canada, partly offset by the $1.1 billion impairment on the classification of Argentina as held for sale. Excluding notable items, profit before tax was $9 billion with revenue growth offset primarily by higher costs and ECLs. Revenue of $20.8 billion was up $0.5 billion on the first quarter of last year. Excluding notable items, revenue was $17 billion, which was up $0.5 billion on the first quarter of last year, with growth in banking NII, partly offset by lower fee and other income. Within that, we saw high single-digit growth in multi-jurisdictional revenue in the first quarter, which underlines the value of our global network. Banking NII of $11.3 billion was up $0.6 billion on the fourth quarter on the reported FX basis, mainly driven by Argentina banking NII as well as the nonrecurrence of the cash flow hedge reclassification in the last quarter.

Looking ahead to the rest of the year, a few things to keep in mind. First, our Q1 banking NII included $0.3 billion from Canada, which will not repeat in future quarters due to the completion of the sale in March this year. Second, first quarter banking NII also included $0.5 billion from Argentina. This contribution will continue to be highly volatile until the sale is completed, which we expect to be within the next 12 months. Please, therefore, do not extrapolate the $0.5 billion run rate for the remainder of the year. Our banking NII guidance assumes a contribution of around $1 billion in full year ’24 for Argentina, which is in line with full year 2023. Third, the banking NII outlook has improved in several respects since we announced our full year results in February.

The Hong Kong time deposit mix remained stable as a percentage of customer deposits in the quarter and markets are now pricing in more modest cuts to interest rates. However, it is still early in the year, and these things can change. So, we are maintaining our 2024 banking NII guidance of at least $41 billion. Turning to fee and other income. Wholesale transaction banking was down by 9%, primarily due to the normalization of FX revenues compared to a very strong foreign exchange performance in the first quarter of last year, which benefited from higher market volatility. Fees from Global Payment Solutions had another good quarter, up by 6%. Wealth is another growth area that had a very good quarter, up by 14% on the same period last year as our investment continued to drive improved results.

Private Banking was a standout performer, mainly driven by increased customer activity in brokerage and trading in Asia, but growth in wealth has been broad-based. To illustrate this, we acquired around 135,000 new-to-bank retail wealth customers in Hong Kong in the quarter. Approximately 60% of these were nonresidents attracted by our service and product capabilities in Hong Kong. Building on previous quarters, we attracted $27 billion of net new invested assets, of which $19 billion were in Asia. And our insurance new business CSM was $0.8 billion, up from $0.4 billion in the first quarter of last year. On credit, expected credit losses were $0.7 billion in the quarter, equivalent to 30 basis points of average loans. These were primarily Stage 3 charges across retail and wholesale.

There was a $54 million charge related to our Mainland China commercial real estate portfolio. While challenges remain within the sector, we expect a more benign ECL contribution from it than last year. We remain comfortable with our current level of provisions and continue monitoring developments closely. And we are reconfirming our 2024 ECL guidance of around 40 basis points of average loans, recognizing the overall uncertainty from the flow-through effect of higher rates on the economy. Next, we are on track to meet our target of limiting 2024 cost growth to around 5% on a target basis. This quarter’s year-on-year cost growth was impacted by 3 items. First, we chose to face the accrual of our performance-related pay more evenly this year than we did last year.

This accounted for 2 percentage points of cost growth this quarter. We do not currently expect the total amount of performance-related pay for 2024 to be significantly different to 2023. So, the accrual will be lower over the next 3 quarters than it was in the same period last year. Second, HSBC Innovation Banking contributed to 1 percentage point of cost growth this quarter as we only acquired SBB U.K. in the middle of March last year. We intend to provide you with a fuller update on that business at the half year, but I’m pleased that it has good momentum. In the U.K., we onboarded 183 new-to-bank innovation banking client groups in the quarter, the best quarter since acquisition. Finally, another percentage point of the cost growth in the quarter was due to the Bank Finland levy and the incremental FDIC special assessment.

We remain committed to cost discipline, and we are reconfirming our guidance of limiting 2024 cost growth to circa 5% on a target basis, inclusive of all the above items. On lending and deposits. There was good loan growth in the U.K., the Middle East, Mexico and Asia, excluding Hong Kong. Loan demand in Hong Kong remains subdued, largely due to the high interest rate differential with Mainland China. Overall, we continue to expect mid-single-digit loan growth over the medium to long term, but we expect demand to remain subdued in the near term. Deposits were down 2%. This was due to a range of factors, including seasonality, the switch from time deposits to wealth products in Hong Kong and our deliberate choice to forsake some highly price-sensitive deposits.

Next, our CET 1 ratio was 15.2%, up 40 basis points on the fourth quarter. Organic capital generation and the gain from the sale of the Canadian business enabled us to announce $8.8 billion of capital distributions this quarter. This includes a share buyback of up to $3 billion, which is expected to have an impact of around 40 basis points on our CET1 ratio in the second quarter. For modeling purposes, please note that the $5.8 billion of dividends announced today as well as the $5.9 billion in respect of the ordinary dividend announced at the full year results in February will both be reflected in TNAV in the second quarter. At closing of the sale of HSBC Argentina, which is expected within 12 months, we will also recognize $4.9 billion of foreign exchange reserve recycling losses subject to any movement in this reserve up until completion.

These losses have already been accumulated in capital over the previous years. Therefore, recognition in the P&L will have no impact on CET1 nor on TNAV. Finally, looking forward to the rest of the year, our good first quarter puts us on track and we are reconfirming all of our 2024 guidance. A mid-teens return on tangible equity, excluding notable items, a banking NII of at least $41 billion, ECLs of around 40 basis points cost growth limited to around 5% on a target basis and a 50% dividend payout ratio. And with that, Louis, can we please go to Q&A.

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Q&A Session

Operator: [Operator Instructions]. Our first question today comes from Joseph Dickerson at Jefferies.

Joseph Dickerson: Congrats, Noel on a great tenure at the bank and well done for the ROE and the capital return. I guess, just in terms of my question, the PD migration in Hong Kong, if you go back to the way you were computing it previously actually looks like it improved quarter-on-quarter and certainly under the new definition, has stabilized. I think it’s Slide 17, if I’m not mistaken, in the presentation. Is that a little bit better than where your expectations were a few months ago? I know when I was in Hong Kong recently, it sounded like things were starting to stabilize, but is that better than where you were thinking a few months ago? And then secondly, on the buybacks, is the $3 billion number due more to the calendar effect? Or are you looking to kind of boost the run rate there from the $2 billion in the quarter?

Georges Elhedery: Thank you, Joseph. So, first, on the time deposit reclassification, we have actually reclassified some private bank term deposits to time deposits. This is due to the observation of their behavior and the recognition that they better classify this time deposits. This rebases the number. But as you could see from the 2 choices we have, it does not affect the trend. So, therefore, the trend that we’ve seen under both classifications is the same, and we’ve seen the first quarter stable quarter-on-quarter. It’s too early to call it a peak, but we’ve always expected migration this year to be slower than what we’ve seen last year. And this just confirms the trend change from what we’ve seen in full year 2023. As regards to your buyback question, so the short answer is, yes, this is indeed due to calendar effects.

We just completed a €2 billion buyback in 2 months. That’s about $1 billion a month. That is the fastest run rate we’ve done in terms of share buybacks ever. We are now announcing a €3 billion buyback, which we intend to to do over the next 3 months, starting after AGM. We will see how the run rate goes, it will remain at the $1 billion run rate. We will see how it will go. As regards any future amount of buyback or whether we’re doing a buyback, one, it remains our intention to return excess capital to our shareholders through a rolling series of share buyback. And, second, we will decide on a quarter-by-quarter basis based on our capital outlook, the loan growth outlook and other parameters as and when every quarter.

Operator: [Operator Instructions]. Our next question today comes from Raul Sinha at JPMorgan.

Raul Sinha: Maybe two from me as well. Just doing, George, on this point on distribution and looking at the sort of moving parts for capital, one of the interesting things in this quarter was the move up in RWAs. I was wondering if you could give us a little bit more color on the growth in RWAs. The €7 billion of increase driven by asset quality trends. I think you’re calling out is predominantly in Asia. What should we think about the sort of outlook for RWA growth from here even if loan build is muted, just to get a sense of the amount of capital that you will have in content terms for distributions? And I guess the second question to Noel, just maybe a question for your broader thoughts, no. The 5 years proceeding have been pretty extraordinary, not just for HSBC, but I guess, for a lot of people given in your markets given the pandemic.

But when we look at where HSBC is now, you exited Canada, you announced Argentina. You’re in the process of exiting quite a few smaller markets. Return on tangible equity is already in the mid-teens. You’re buying back stock at $3 billion a quarter, you’ve got a special dividend as well. I guess what I’m really interested in is from here onwards, what do you think is left to do for the group to kind of progress?

Georges Elhedery: Thank you, Raul. I’ll start with your first question first. So, on RWA outlook. So the RWA growth, we called on a quarter-on-quarter basis, $24 billion. First, about 40% of it related to lending and other asset growth. And as you can see from our lending book, we’ve grown our lending book by €5 billion. There’s a number of areas of growth that contributed to around 40% of it, $9 billion. Then we’ve had a $5 billion market tristRWA growth. This is due to a pickup in NSS activity against a subdued 4Q, and it’s more in line with their activity levels in the first 3 quarters of the year, if you want. And this is the normalization of the market’s activity. And then there is $7 billion, which we classified broadly as asset quality.

Now, asset quality, first, it is a continuous exercise. We do this portfolio monitoring review on a regular basis. We have recognized across a number of geographies and a number of sectors, certain names, which we’ve decided to downgrade on the basis that the interest rate pressure on their cash flows has been more severe. You will not see an equivalent of that downgrade in ECL. And that’s mainly because for many of these customers, their balance sheet remains strong. So, we’re comfortable with their balance sheet and therefore, there is no ECL implication from this downgrade. But just closing the loop, this RWA downgrade, you will see some of it materialize in our Stage 3 loans, where we increased our Stage 3 loans by about $2 billion, and that’s exactly the mapping of some of this asset quality.

With regards to how we look forward, we are very comfortable where we are today. Our credit metrics remain solid. As I say, the balance sheet of our customers remains strong for a number of them for at least the exposure that is collateralized. We’re very comfortable with the level of collateralization and the LTV. And therefore, we do not foresee at this stage today any additional action we should be taking. We will obviously monitor the book on a regular basis as we always do. Noel?

Noel Quinn: Thank you. It has certainly been an extraordinary 5 years, I should say, not just for HSBC, but for the world. And I’m really pleased and grateful I want to pay tribute to the team for the way they’ve collectively navigated that. And during that whole process, the external environment executed on a complex but absolutely critical transformation plan over the past 5 years. And the outcome of that hard work is evident in the financial performance last year and the financial performance in Q1. I also want to say thanks to Mark, with such volatility in an external environment. Any CEO needs the support of their chair, their advice, their guidance, and I’ve had that all the way through and have had the support from the Board all the way through in navigating what has been a very complex external environment.

But the team, the Board, Mark, collectively, we’ve done a good job of navigating it. Now, if I look forward, I’m not going to give to do list to my successor because that is not the fair thing to do to anyone. But I will give you some thoughts about what we as a team are very much focused on. And I’m focused on for as long as I’m still CEO, and that is continuing the momentum. You don’t work as hard as we worked for the past 5 years and then take the eye off the ball at this moment in time. So, I’m very focused on a smooth, orderly transition. I’m very focused on continued execution of the strategy. I want to clarify our thinking on one element of the strategy. We have exited a lot of businesses, a lot of RWAs over the past 5 years. The one thing we’ve protected whilst doing that is the international core of HSBC.

The countries we remain in, the businesses we remain in are fundamentally now focused on the international nature and essence of HSBC, and we will continue to do that. Our key requirement is to continue to deliver good returns that are sustainable and repeatable whilst also taking advantage of the growth opportunities as they emerge in a world that becomes more stable and there are inherent in our customer franchise. Therefore, we’re very focused on continuing the development of wealth, our transaction banking capabilities, our global wholesale banking capabilities and then being ready for when corporate loan demand picks up, we can take advantage of that to couple good returns with sustainable growth. And I think you’ve seen evidence of that in these results.

Hong Kong is subdued at the moment, but we understand why with the rate differential in China. But if you look at the rest of the world, as George said, there’s balance sheet growth in Wholesale Banking, in the rest of Asia, in the Middle East, in U.K., in Europe. We’re seeing good growth elsewhere. So, it’s about focus, momentum, continuing to couple good returns with good growth.

Operator: [Operator Instructions]. Our next question today comes from Jeremy Hugh at CICC.

Jeremy Hugh: So, the first question is on deposits. We’re glad to see that cat migration in Hong Kong is slowing down, but if not stabilized at this level. But on the other hand, I think the bank has seen some deposit outflow in Q1, while your Hong Kong local peers still see some deposit growth. So, I’m wondering if there is a strategic trade-off between the deposit growth and the cost for you at this stage? And how do you see that trend in the rest of the year? The second question is on the structural hedge. So, I’m wondering if this quarter, you could share with us some breakdown of our structural hedge and how much did we benefit from the reinvestment of the structural hedge? And if there is any run rate that we can refer to?

Georges Elhedery: Thank you, Jeremy. So, on your first question about deposits in Hong Kong. So, if you remember at Q4, our deposits in Hong Kong have increased by about $14 billion. What we’ve seen in Q1 this year is a decrease of about $16 billion. Therefore, you can see seasonality playing across the 2 quarters, and therefore, is broadly stable across the 2 quarters. What happened though is, some of these deposit inflows in Q4 related to some deposit campaigns we were driving to drive some of our deposits into wealth. And when you look at Q1, while you see the deposit outflows, you also can see that $19 billion of our net new invested assets were in Asia. Therefore, a chunk of these outflows has manifested or translated into wealth inflows for us, which was the purpose of the campaign in Q4 and explains if you want the seasonality of this deposit.

Second, look, we have a powerful deposit franchise. We have a very cherished and viable franchise. We continue globally being a very attractive deposit proposition for both our retail and wholesale customers. We cherish this. We continue investing in our deposit capabilities. And throughout the last 6 quarters, you’ve seen how our deposit base has been very stable with our deposit costs being relatively benign compared to some of our peers. Therefore, I won’t comment on month-to-month movements between ourselves and our peers. If I move on to your second question about the structural hedge. So, first, you would have noticed that we increased this quarter, the structural hedge by about $10 billion, taking it to $487 million, with the average weighted average life broadly unchanged at just shy of 3 years.

Second, we commit at this stage to continue our structural hedging activity. Obviously, this will remain subject to market conditions, but we will continue the trend that we put in Q1 based on current market outlook. This activity of additional structural hedging will contribute to a mild headwind toward banking NII. And this is due to the fact that the rate curves are inverted as you know, and you can do the math. But equally, we also are reinvesting maturing structural hedges at higher rates. And this reinvestment of maturing of structural hedges at higher rates is a tailwind into banking NII. Between the 2 of those effects, the structural hedge activity for the full year 2024 would remain a net tailwind to our banking NII. We have not yet quantified to the market that tailwind.

We’re looking at enhancing our disclosure in this space. But that tailwind has been factored into our guidance of at least $41 billion bank NII and obviously, factored into our return on tangible equity mid-teens guidance.

Operator: The next question today comes from Jason Napier at UBS.

Jason Napier: First of all, just to echo the best wishes, Noel, for the next chapter of your career and private life, I think, a well-earned rebalancing. George, I just wondered whether you talk a little bit within the context of higher for longer, you’ve referenced subdued loan demand in Hong Kong due to the differentials in interest rates. And I just wonder whether one of your peers has spoken at some length about looking forward to a change in asset mix as loan demand comes back as a way to defend margins and revenue. So, I wonder whether you might talk a little bit about whether that’s a material part of the plan? And sort of what do you think that means for revenue sort of evolution in the next few quarters? I think I certainly was somewhat surprised that we didn’t see an upgrade to banking NII guidance this quarter.

I know you don’t rebalance every quarter, but I just wonder whether you might talk to the role that Higher for longer has on asset mix and then on credit demand. And then secondly, wealth was phenomenal in Q1. I know there’s a part of the business that’s quite closely linked to what goes on with the Hang Seng Index, which is now 20% in in a short space of time. But I just wonder whether you could talk to the sustainability of those run rates. Is that the strategy delivering the sort of net new money flows? Or is there an element of sort of market volume there that we should be a little bit careful about?

Georges Elhedery: Thank you, Jason. So, first on Banking NII, we recognize there are kind of a couple of encouraging developments. The first one is the higher for longer on the rate side that would look like more favorable than when we discussed last in February. And, the second one we just touched on, which is the balance sheet mix, specifically in Hong Kong, where we’ve seen term deposits remain stable for this quarter. So, we recognize these tailwinds to our banking NII, but we also recognize quite early in the year, and these factors can still change. So this is why we didn’t change our guidance. And as you said, Jason, I don’t think you should expect us to update our guidance every quarter. We would reconsider this every quarter.

But for this quarter, we’re just sticking with our at least $41 billion. In terms of the wealth performance, so recognize mid-teens percentage growth in wealth, 34% for our private bank. I would say a couple of things. The first one is, yes, this is an area that we’ve already said it’s a focused strategic area. We are investing in this area. Big part of our investments goes towards this area, and we’re very pleased to see the results of our investments generate revenue fairly quickly. You can see that through net new invested assets growth. You can see that through our CSM, new business CSM growth in insurance as well as in the actual revenue performance. This being said, I would just caution you not to annualize the numbers you’re seeing because Q1 2023 had somewhat subdued January in it when China and Hong Kong were still closed.

So, therefore, you’ve seen more pickup in activity in the Q1 ’23 at the back end of it, whereas we had a full proper Q1 ’24. So, there is an element of not annualizing the performance, but expecting that performance to continue growing. I just realized I didn’t touch on your asset mix question of the first question. Look, we do not foresee a material change in our asset mix. We had seen for the last few quarters of last year, the main growth take place in mortgages and recognizing mortgages have seen very competitive levels both in the U.K. and Hong Kong, and the margins have been quite tight. As we start seeing pickup in wholesale demand, as we start peeing pickup in unsecured lending, we are more hopeful that those will drive higher margins than if you want what we see in mortgages.

And our numbers in Q1 did show that this pickup definitely is there in areas of Asia, Southeast Asia, India, the Middle East, the U.K., et cetera. And the next in line for that pickup will be Hong Kong, which we expect at some stage later in the year as we see dollar rates ease.

Operator: [Operator Instructions]. Our next question comes from Perlie Mong from KBW.