With regards again on Canada, so $10 billion proceeds, $4 billion will be considered, well we committed to consider as a priority use for a special dividend. The residual $6 billion will constitute about 0.8%, 0.9% additional CET1, which may, which very likely will be at the Q1 outcome. We will continue looking at opportunities, but it remains our intent, subject to market conditions, our capital position, regulatory position, it remains our intent to continue a rolling series of share buybacks beyond this one.
Gurpreet Sahi: Thank you.
Unidentified Company Representative: Any others in the room? Okay, so we’ll take our first question from the line, will be from Andrew Coombs from Citi.
Andrew Coombs: Hi. Good morning from London, good afternoon to yourselves. Two questions please. Firstly, I just want to clarify the messaging on the banking NII outlook. If I rewind 12 months ago, I think you gave guidance for greater than $36 billion of reported NII, but then this time a year ago you said you weren’t seeking to move consensus, which at the time was actually higher, it was at $37. If I fast forward to today, you’re guiding to greater than $41. If I look at consensus NII, I adjust the trading book funding costs, it looks like consensus banking NII is around $44. So are you seeking to rebase consensus banking NII or should we put greater emphasis on your greater than within that $41 target? So that’s my first question.
I just want to clarify that messaging. My second question is around the hedge. Thank you for the extra disclosure on the $478 billion nominal and the 2.8 years average life. Can you give us an idea of both the average yield on that book and also where it’s currently rolling off that and what you’re aiming to roll it back on at if you are extending the duration now? Thank you.
Noel Quinn: I think Georges will answer both of those.
Georges Elhedery: Thank you, Andrew. So obviously today we cannot see consensus banking NII and basically I’ll use this opportunity to ask you collectively if you can start giving us your banking NII. So we can see the NII forecasts and then the funding costs of the Trading Book gets lumped together with the non-NII and it’s to be fair difficult for us to unpack it. Although $44 billion does sound high if we try to do the math ourselves. But let me take a step back and just walk you through how we’re thinking about NII and just bear with me for two minutes. But I think that explanation will probably help guide you. So we start from a Q4 10.7 billion banking NII. We would adjust then Q4 for the parts related to Argentina hyperinflation as well as the reclassification of the cash flow hedges between NII and non-NII.
We’ll adjust for the part that does not pertain to Q4. So that’s a full year correction. And that’s about an additional $0.5 billion you could use on the Q4 10.7 number. So that takes you to 11.2 adjusted quarterly run rates. Annualized taking into account day counts you get to 44.4. From that 44.4 remember you have to deduct the full year French NII, France retail NII, as well as three quarters from the Canada NII, which together combined come to about $1.3 billion. So $44.4 minus $1.3 takes you to just above $43 billion. That would be our starting position if you want, in terms of an annualization of a run rate, factoring in structural hedges, etcetera. Now from that $43 billion, there are various tailwinds and headwinds. We have the tailwind of reinvestment of all the structural hedges from lower rates into the current rate environment.
We do have some tailwinds, probably cautious on H1, but tailwinds beyond H1 in terms of volume growth and loan growth. And we do have headwinds, including the rate cycle, if indeed we start seeing the decreases in the second half of the year. And we obviously have the headwinds, which we’ve observed specifically in Hong Kong around deposit migration to term deposits. Kind of baking all of that into account, we’re getting to the guidance of at least $41 billion that we’re comfortable sharing today. With regards to the structural hedge, we have shared with you volume. We have shared with you the weighted average life. And we have shared with you now banking NII sensitivity. We have not yet shared and we have not yet found the level of standard we would need to be able to share the yield.
But what I can tell you about the yield is that both the yield of the maturing hedges being replaced at current rates, as well as the additional hedges we’re doing with inverted curves are all baked into our at least $41 billion banking NII guidance.
Noel Quinn: So if I could just add a couple of comments. One reason we’re not giving a statement regarding consensus is, as Georges says, we think consensus is a mixture of updated thinking that has adjusted for some of these annualization effects of disposals and other things. And some consensus hasn’t adjusted for that at the moment. So I think there’s a little bit of apples and pears in today’s consensus position. So what Georges is clearly trying to articulate for you is, take the Q4, adjust it for the known items, get to a new starting position of $43 billion, and he’s underpinned that starting position of $43 billion with at least $41. Therefore, the range of modeling is going to be somewhere between $41 and $43, depending on the assumptions you might make on the headwinds and the tailwinds.
And we think that given that lack of consistency on consensus, the uncertainty in the market, that’s probably the best way to guide you on banking NII. There’s a very clear repositioning of the starting position to get us back on an apples and apples basis. And then the other thing, no, that was it. That’s what I wanted to say. Those two comments. Thank you.
Unidentified Company Representative: Thank you. Next question. We’ll take one from the room.
Katherine Lei: Katherine Lee from JPMorgan. So I have two questions here. The first question I want to clarify, the mid-teen RoTE guidance is on normalized lot. That means that the RoTE, excluding Canada disposal game. So I want to clarify that because if that is the case in mid-teen RoTE, then if you look at the company compiler consensus, I think the RoTE is 17.4%. Then I just calculated on a very like top-down basis, excluding the disposal gain and consensus RoTE is roughly about mid-teens as well. But the thing is that I think that means that the HSBC guidance and consensus is quite in line in terms of normalized RoTE. But I think on NII, on cost, I think in the previous questions, I think there may be a bit of reset in expectation.
And then I think cost, the 5% cost is a bit higher than where consensus was indicating. Then that means — does it mean that you are quite optimistic on non-NII growth, i.e., fee growth or maybe you have a different view on asset quality and, hence, the ECL charges. I think this is the first part of the big question. The second part is on BoCom. May I know like what trigger the $3 billion impairment charges? And as China’s yield is declining like they just announced a 25 basis point on 5-year LPL cuts in all those. Should we be expecting more impairments on the BoCom investment? So basically, I want to see if there is any onetime of events that trigger this impairment or if it is going to be a normalized part of the business. So I think in the statement, you clearly stated that they will have no impact on dividends and shareholders’ return.
I believe this is related to the $14 billion capital deduction, which you have already made on associate. I think that is primarily BoCom. But can you explain a bit of that mechanism? Because I think today’s share price reaction is partly factoring in the kind of concern that if there is an ongoing impairment on BoCom, that will affect the company’s ability to deliver shareholders’ return. Yes.
Noel Quinn: Two excellent questions, and you’re going to get two excellent answers from Georges.
Georges Elhedery: Thank you, Katherine. So Katherine, taking them in the order you said the first mid-teens RoTE is excluding notable items. Therefore, it is excluding the gain on Canada. So your calculation is correct. In terms of NII and cost, there’s a couple of things to share. We recognize the cost assessment. In terms of banking NII, we have given the guidance here. Just point to — I mentioned it in my earlier speech, but I just point you that our banking NII sensitivity has reduced more than — by more than half from the full year 2022 due to, among other parameters, our structured lending activity. So therefore, the rate impact on our banking NII is reduced commensurately. Equally, we do have some anticipation of volume growth if and when rates start increasing, which is now planned for H2, and this is why we have some positive outlook for H2.
If rate decrease volume could pick up, subject to economic conditions, etcetera. But that’s the assessment we have made today. And then thirdly, on the non-rate sensitive earnings. I’ve called out transaction banking and went earlier. Between them, they constitute about 80% of our non-rate sensitive earnings. One has grown 5%, 23 to 22, and the other one has grown 7%. And therefore, we do feel there is momentum in both these areas for continued growth. And I didn’t talk about the residual 20%, but in the residue 20% capital market activities, for instance, is included. And again, in a different rate environment, we have grounds to believe this can also pick up. So yes, we are comfortable with the momentum we have in the revenue. Can I point you on one thing about cost?
We called it out 5% for the 2024 has a flow-through impact from inflation in 2023. 2023 experienced high inflation. There is some flow-through, some adjustments, including wage inflation, which we anticipate to do in 2024. Based on current outlook of inflation, that parameter is easing as we look forward beyond 2024 without giving you any guidance for 2025. The inflationary component flow through into 2025 does look like easing from where we stand today, looking at 2024 outlook for inflation. If I move on to your second question about BoCom. So this is a — we do talk about the value-in-use model. It’s following the Hong Kong accounting standards, international accounting standards. Without boring you with the accounting details, the ARNA has many pages, which we can point you to that explain it.
It feeds into parameters all in the — essentially, in the public domain including macro data, other factors, including analyst comments, feeds into the model. But the model is not highly intuitive, but the outcome is the outcome, and we’ve been consistently applying it for umpteenth quarters now and therefore, we’ll apply for Q4. It is very difficult to predict what the model will give us in Q1. We will take into account the information we receive over the course of Q1, and we will run the model as we do every quarter and consistently apply the outcome. Finally, captive deduction. I think this is a very important point. Your math, Katherine is correct. There is about $14 billion sitting today in our regulatory capital deductions because they sit above our threshold.
Therefore, you could legitimately assume that there is that much of buffer against any impairments we face in our financial holdings, BoCom being one of them. The other one is insurance. That’s the two essentially. And therefore, you can legitimately assume that the compensation we would get from any hypothetical future impairment will be commensurate given the size of our threshold deductions at this stage. Yes.
Noel Quinn: So he did give you two excellent answers. Thank you. Thanks, Georges. Next question, please?
Unidentified Company Representative: Our next question comes from Joseph Dickerson at Jefferies. Joe, we cannot hear you.
Joseph Dickerson: Can you hear me now? Sorry about that. Just adding to the chase on the… So just cutting to the chase on some of the questions that have come through on the NII guide. I think you can probably get a sense that there’s some reasonable confusion about what the message is for the 2024 baseline. If we work back from your kind of clean mid-teens ROE, you’ve given us some guidance on cost. You’ve given us some guidance on credit. It’s kind of getting into a baseline revenue number of about $64 billion in consensus is $63.5 billion or thereabouts. Are you comfortable with that consensus number? Are you seeking to change that with this guide? So that is question number one. And question number 2 is, why the focus on banking NII versus total NII because it’s going to be as rates come down a lot of moving parts on the trading book funding cost dynamic because, indeed, if I look at your annual report, you’ve actually got a benefit coming through in the USD bucket from rates falling in terms of the aggregate NII.
