Perlie Mong: Can I just dig a little bit further into Jason’s question just now on higher for longer. So, I know you probably don’t like to comment on longer-term NII. But I guess in a higher for longer rate environment, which is how are you thinking about the trajectory going from here because it sounds to me that deposit migration is probably, well, stabilized a lot. And I would have thought any longer pricing that hasn’t already come through will come through in the next few months. And I guess in a higher for longer rate environment, you can probably build more hedges at better rates as well, et cetera. And there’s obviously a tailwind as you mentioned in this year already. So, how does that inform your thinking on your medium-term RoTE?
So I guess that’s the first question. And the second question, again, on broader activity level, maybe not just on credit. So, again, I guess just noting your point that Hong Kong might be a mix in line to pick up. But I guess, overall, the emerging market is probably not benefiting in terms of activity level and in terms of capital inflows from the higher U.S. rates. So, how does that impact, I guess, trading activities and capital flows, et cetera, just how are you thinking about the flip side of hirer longer?
Georges Elhedery: Thank you, Perlie. So first, look, yes, we recognize higher for longer is definitely a tailwind or a reduction of a headwind we’ve forecast in our banking NII. And as I said, there has been a number of manifestation of tailwinds now compared to when we last spoke in February. But equally, it is early in the year. And as you’ve seen, these things do change. And, therefore, want to beccon in some sense of uncertainty due to the changing parameters. We will update some longer than what we’re updating but not at this quarter, barely. So, do expect us coming in the future quarters and give you further outlook for the future. I would say the one parameter, just to keep in mind, as you start planning for ’25 is take Argentina out because, obviously, subject to the sale completing, which we expect to complete in the next 12 months, that potential $1 billion contribution from Argentina will go away from our banking NII.
That’s the most kind of predictable parameter where we stand today as you look into 2025. In terms of the broader activity level, first, if you look at the wealth performance, it just demonstrates how wealth remains very resilient. And that’s particularly true in Hong Kong, but very much so across Asia. Second, when you look at our transaction banking activities, apart from foreign exchange, which has an idiosyncrasy related to Q1 ’23 with a very high volatility has performed across the various areas of its fee earning activities. And then our activity is very much benefiting from cross-border trends. If you look at some of the investments or foreign direct investments or trade flows taking place intra region in Asia between China and ASEAN between India and ASEAN, between India and the west, et cetera, all of those trends are growing.
I mean the numbers are staggering in some cases. And these are the activities that our business is operating on. So, therefore, while recognizing that there will be some interest rate challenges for borrowers at these levels, there is still a very strong underlying network activity, which is benefiting our overall businesses, particularly in wholesale transaction banking, anyway.
Perlie Mong: On that, it’s just I’ve also noticed that China exports volumes have been going up, but value has been coming down. And that is in part because of various things. FX is be part of it but also government subsidies. How does that affect your, I guess, your profitability in the region, volumes going up, the value is going down?
Georges Elhedery: Perlie, if I can just give you an indication. What we are seeing at the moment is a very strong level of activity of China corporates expanding across the rest of Asia. So, our outbound activity from Mainland China to the rest of the world is seeing a significant increase in activity over the past 12 months. We’ve seen that trend continue in the first quarter of this year. So, a lot of people talk about inward investment into China slowing down. But what I would say is outward investment from China to the rest of the world is actually picking up at quite a pace a very significant pace. We’re very well placed to capture that outflow, and we are capturing that outflow. And our business in Mainland China performed well last year.
It’s performing well again in the first quarter of this year and its outbound activity is performing extremely well. So, we’ll give more updates on that at the half year, but we are capturing that. And that is why actually I think the rest of Asia is performing well on balance sheet because a lot of it is being fed by good intra-Asia activity and outbound from Mainland China.
Operator: Next question today comes from Katherine Lai at JPMorgan.
Katherine Lei: I have three questions, three small questions, actually. The first one is on noninterest income. I look at the breakdown of noninterest income. It seems like wealth is doing quite well. But on Transaction Banking, there is some weakness, I think it’s down 9% Y-o-Y. Can we know what is the reason? And how should we triangulate this to the full year? What are the drivers to that? So this is the first one. The second one is on Hong Kong. With Hong Kong relaxing LTV ratios, I think basically, not only they would be they relax the the purchase requirements and the stability requirements on residential properties. So, I think that there is a significant jump in transaction. So, I was thinking that this should be positive to mortgage at least, and then we are a big mortgage providers in Hong Kong.
So, will that have any impact on our outlook in terms of growth, particularly related to Hong Kong? Second one. And then the last one, I think, is on cost. If I look at the first quarter, I think cost is up 8%, including levy. How should I look at this? And then are we on track to the 5% cost growth this year?
Georges Elhedery: Thank you, Katherine. I’ll take question 1 and 3, and I’ll hand over to Noel to address your second question about the outlook for Hong Kong. So, first on non-NII. Wealth has performed well. Transaction banking weakness is specifically due to foreign exchange. That’s driving the whole weakness. And the reason, as I called it out earlier, the reason is that foreign exchange had a record strong quarter 1 ’23 on the back of heightened market anxiety and volatility back then due to the banking crisis. So, therefore, we’re doing a comparison to a record quarter, and it will show that drop. But if you look at the number itself, and the revenue itself for foreign exchange, it is back to normalized levels. So, there is nothing to worry about here.
It’s on the contrary back to normalized levels, and we continue to expect some cyclicality in that space, while we continue expecting growth in the other areas of transaction banking. So, I wouldn’t read more than that into it, and we remain very confident that the investment we’re putting both in wealth and transaction banking and in the technology supporting our transaction banking activities do remain strategic focus and bearing results as we look into future quarters and years. On your third question about cost. So, first, I just want to reiterate, it is a clear priority for us to maintain cost discipline, okay? And we are very confident we will limit cost growth to circa 5%. We will limit cost growth to circa 5% on a target basis. We’re confident about it.
And we’re actually on track to do so. And the reason why we’re kind of on track to do so yet, we showed a 7% quarter 1 growth on a target basis is because of a few idiosyncratic items related to the quarter, which are not repeated in future quarters or some of them will reverse in future quarters. I’ll just call the 3 of them out that matter. First, there was a 2% accrual of the performance-related pay where we decided to phase that accrual more evenly throughout the year than we did last year. This will manifest in a higher performance-related pay accrual in Q1, hence, the 2% contribution towards the 7%, but it will contribute to lower accrual in future quarters because on a full year basis, we are not accruing to a significantly different number than the full year ’23 performance-related pay.
Second, there was 1% contribution from HSBC Innovation Banking this quarter because last year’s first quarter, we only acquired SBB in the middle of March, which means we practically didn’t have it in the first quarter last year, and that’s a base effect. And then third, we had the one-offs or the expected nonrecurrence of the FDIC special assessment additional charge this quarter as well as the bank of in levy. Bank of Finland levy is a new charge, which used to be an interest expense as an NII and now it’s moved to operations expense as in cost. And between the 2 of them, they contributed to 1%. So, if you adjust for those and you bake them in, we’re still and remain confident to meet our 5% cost target on a full year or circa 5% on a full year basis.
On your second question, I’ll hand over to Noel.
Noel Quinn: Katherine, I was in Hong Kong recently and spoke to a number of the market participants there and the developers. And I think firstly, I think the change to the stamp duty arrangements in Hong Kong in March in the budget was very well received, and it’s had a positive impact on the activity levels of sales in the Hong Kong market residential sales. It was an extremely significant inflow of activity in the first month. That will be very beneficial to the liquidity positions of many of those developers. We have to wait and see how that stabilizes because undoubtedly, there was an element of catch up in that first month because people were anticipating some change. Therefore, there was low activity in the preceding months.
And then we got to see how that stabilizes. But I think that is a very positive move. It will enhance liquidity within the market. It will enhance activity in the mortgage market. But I think it’s too early to call a trend at the moment. I think we need to see how Q2 stabilizes following those changes, but a very helpful intervention.
Operator: We have time for one last question today and that comes from Andrew Coombs at Citigroup.
Andrew Coombs: Just to commend [indiscernible] HSBC and two questions please, and firstly on the UK NIMs has been improved second consecutive quarter in other six basis points so performing some of the domestic peers, I can see your loans in deposit is looking very flat in the entity. Can you just comment on what you are seeing in terms of positive migration, mortage refi and what’s driving that NIM improvement and how sustainable NIM improvement is going forward as well? And second, allocation in Argentina, 2.5 in Q1, guiding to 1 billion based on last year’s experience. Assuming what your [indiscernible] a step down to 2 billion for the quarter for the remaining of the year given that you don’t expect that transaction to necessarily close until 12 months time? Thank you.
Georges Elhedery: Thank you, Andrew. So the UK NIM was up 6 basis points, indeed, essentially benefited from some idiosyncrasies of structural hedges and timing of structural hedge maturities and reinvestments. So, if you consider broadly flat to be broadly a range of plus or minus 10 basis points. I would say U.K. NIM has been broadly flat for the last couple of quarters. And we foresee it to remain broadly flat in the next quarter. And you will, therefore, add to that broadly flat, some structural hedge due increases, which will drive you within this plus or minus 10 basis point range. As regards our loans and deposits have been stable. Again, the U.K. economy has been resilient, we’re very optimistic about the outlook for the U.K., specifically around inflation and employment.
