So I guess why are you trying to distinguish between those two conceptually for us? Because again, it’s creating a fair amount of confusion with investors.
Noel Quinn: Georges?
Georges Elhedery: Thank you Joe, yes, so I recognize your arithmetics. And yes, I agree with your arithmetics. This being said, I cannot give you guidance on total revenue. Otherwise, I’ll be giving you guidance on our full profitability. But we recognize your arithmetics. A couple of things just to highlight if you want to for your consideration. The first one is our guidance for banking NII is not $41 billion. It’s at least $41 billion, factoring in elements of uncertainty that I called out earlier, that’s for full year 2024. You do have the building blocks for cost and for ECL. And then the residual part, if you want, of our earnings story is the non-NII component, excluding the gains from Canada. And as I said earlier, about 80% of it is generated from transaction banking and wealth, both of which do have momentum, both of which are areas where we continue investing both in terms of digital capabilities and client servicing and in terms of net new invested assets.
And we are excited about the potential of these two businesses, and we believe our meetings RoTE is not based on unreasonable growth in these areas. It’s based on momentum growth in these areas. Maybe I can point you to our net new invested assets, $84 billion for the year, up from $80 billion last year, up from $64 billion the year before. So clearly, we’re acquiring new assets. But equally, as you’ve seen, Asset Management, Private Banking grew double-digit percentage points. That’s also partly due to the valuation because our AUM is also increasing because the underlying valuation is improving, which is, therefore, a generator of fees commensurately, subject to market conditions as we go forward.
Noel Quinn: I think if there’s any more questions, maybe we get the IR team to just work with you after the call.
Georges Elhedery: Just on your second point, so we’re guiding — we would like to move to banking NII guidance. We recognized last year, we have moved from NII into a dual guidance of NII and funding cost of the trading book. We think it is much simpler to look at our overall rate sensitive earnings through banking NII lens. They kind of shift from one to the other, which is zero-sum game. So it moves from one to the other is reflective of business decisions as regards how much of our funding we would want to give to the trading book based on various parameters, including opportunities in the trading book as well as opportunities for loan growth. And we would think that it would be too noisy if we have to really manage both on a separate basis.
Noel Quinn: Thank you. Next question, please.
Unidentified Company Representative: Our next question comes from Benjamin Toms at RBC.
Noel Quinn: Benjamin, hi.
Benjamin Toms: Good morning, both. Thank you for taking my questions. Firstly, on cost of risk. In relation to your guidance of 40 basis points, is there still a plausible downside to this guidance? Or does the 40 basis points encapsulate that plausible downside? And then secondly, on loan growth, I know you’re cautious on loan growth in the first half of 2024. Do you expect growth to pick up in Half 2, but 2024 as a whole, can you just confirm that you expect net growth in the balance sheet? It sounds like you do because you earlier described volumes and a potential tailwind to NII. And could you narrow down how much lending we should expect for growth for this year? Thank you.
Noel Quinn: Thank you. Georges, do you want to take both of those?
Georges Elhedery: Sure. Thank you, Benjamin. So our cost of risk of 40 basis points encapsulates everything we currently foresee in our balance sheet. We have not communicated a further plausible downside on the China commercial real estate portfolio booked in Hong Kong because we believe at this stage that, number one, we’re well provisioned for this portfolio afterwards — after the provisioning that’s taken place last year. And number two, we also have less concerns going forwards on our residual exposure in that portfolio. I can point you to our exposure is now at $6.2 billion, that’s down $3.1 billion from full year 2022. So therefore, we do not — we have reduced level of concern. I can walk you through, if needed, the — how well ECL positioning is in this portfolio but we’re comfortable.
No additional concerns than we caught out last year. On the loan growth, yes, our expectations is that as economic conditions continue improving and the interest rate environment becomes more supportive, we would expect to see loan growth. We continue to guide on a medium-term basis to mid-single-digit percentage points loan growth and balance sheet growth. It’s very difficult to forecast what H2 will look like, but that is part of our projections.
Noel Quinn: So I think our view is given the shift in the interest rate cycle and the shift in inflation, we’ll start to see more economic confidence or business confidence, consumer confidence in the second half. We’re not expecting significant growth in the balance sheet in the first half. If you start to see that kick in the second half, you’re unlikely to see full year mid-single-digit growth in 2024. You’re going to see a proportion of that start to kick in, in the second half of the year. And then you’ll see it kicking in more strongly in 2025 and beyond. So I think in your modeling, you’re probably looking at limited growth in the first half, growth starting to come back in the second half.
Benjamin Toms: Thank you.
Noel Quinn: Thank you.
Unidentified Company Representative: Our next question comes from Robert Noble at Deutsche.
Noel Quinn: Robert, hi.
Robert Noble: Can you hear me?
Noel Quinn: Yes.
Robert Noble: Thanks for taking my questions. What was the size of the hedge last year? So how much is it that ramped up this year? And can you give us an idea of what the currency mix of the hedges and whether there’s any duration differences between those currencies as well? Secondly, what exactly is in the quarter, the cash flow hedge reclassification, the impact it had from transferring from NII to non-NII. What exactly was that? And then lastly, the timing of the special dividend of the Canada sale, will it come with Q1 results if the deal is announced prior to release? Or is it not linked to the results down? That’s all. Thanks.
Noel Quinn: Okay. Georges?
Georges Elhedery: Thanks, Noel. So Robert, we’ve added about 80 — or north of $80 billion to our hedge this year in terms of bond notional a little bit more in terms of other derivative notional. And that’s on top of $80 billion we’ve added over Q4 and starting in Q3 in 2022. So that should give you an idea of also what is the quantum we could reasonably do in 2024 if the market conditions remain supportive for the hedge. In terms of duration, I mean, the kind of — the obvious one to call out is we can certainly hedge on our weighted average life for slightly longer currencies such as the pound, the U.S. dollar and some extent, the euro. We have an inability to hedge in any reasonable size or shape and this is due to structural market, our Hong Kong dollar exposure.
So our Hong Kong dollar exposure hedge would remain much lower. And therefore, our exposure in Hong Kong dollar would remain more sensitive to the rate outlook compared to the other currencies. In terms of Canada sale, you could expect in Q1, subject to completion, which is now I believe — which is now planned to be — on track to be by the end of Q1. We would expect to see a jump of 1.2%, 1.3% in our CET1 ratio. The special dividend, which we’re committed to consider would happen afterwards. Our best estimate is H1, but frankly, afterwards as soon as we can subject to all necessary approvals. And that will drop the CET1 by about 0.5, with a result in net of around 0.8 in our CET1 after the dividend. We will update you at the Q1 results about the special dividend considerations.
Noel Quinn: Yes. It’s probably not possible to close at the end of March and declare in the same quarter just for accounting reasons. So it’s likely to be closed at the end of Q1 and probably declare Q2 and then pay following that. That’s likely to be the accounting requirement just to get the books closed for Q1 and then declaring Q2 is the most likely outcome.
Robert Noble: Sorry, declare in Q2, not with Q2 results?
Noel Quinn: Probably with Q2 results.
Robert Noble: Right. So pay in Q3?
Georges Elhedery: It’s our intent to do it as soon as we can. I can take you through the process, but there is a process we have to go through and the time lines will need to just flow through. But we’ll confirm the timing at the 1Q results.
Robert Noble: All right. That was just that one little question of what the cash flow had customers in the quarter.
Georges Elhedery: Sorry, yes, that reclassification is an area in reporting. It’s related to one geography where some of our cash flow hedges were booked wrongly between NII and non-NII and we’ve done this correction. It is — it has affected one jurisdiction. The amount is a full year amount. So I wouldn’t — the $0.3 billion charge we’ve taken reflects a full year correction of which around 1/4 relate to — actually the fourth quarter, the rest is a catch-up for the first three quarters of the year.
Robert Noble: Alright, thanks very much.
Georges Elhedery: Sorry, just to be clear, Robert, the total income is not affected. This is just a reclassification of income from one line item to another line item.
Noel Quinn: Thank you. Next question, please.
Unidentified Company Representative: Alastair?
Alastair Warr: Alastair Warr from Autonomous. Just a quick question on the ECL charges and things are subsided a bit on the China property side. Obviously, nice for you guys to see, but some a few cracks popping up in Mexico, is that something you characterize the cycle stuff that might be going somewhere from here, we need to keep an eye on or something a little more one-off?
Georges Elhedery: Thank you, Alastair. So the one-off — the — sorry, the Mexico ECL related to an increase in our activity, specifically in unsecured lending. It’s a feature of that jurisdiction where margins are very healthy, but the ECL coverage or the ECL charge tend to be a bit higher. It will depend on our activity, but we expect to run at a slightly higher activity in unsecured lending among other in Mexico than we were before. So I wouldn’t look at it as a one-off, but obviously, it will depend on the cycle.
Noel Quinn: But it’s a function of doing business and growing the business as opposed to a function of a historic problem materialize. Next question, please.
Unidentified Company Representative: Our next question comes from Perlie Mong at KBW.
Perlie Mong: Thank you for taking my questions. Just a couple. I guess the first one is as — just what can you do with cost in the falling rate environment because you’ve talked about management actions. I guess the reason I’m asking is because this year, I believe all in is about 7% year-on-year. And of course, it includes a lot of one-offs like levies in this quarter and SVB earlier in the year. But on the basis that it crept up from plus 2% year-on-year, which is, I think, the first we talked about the 2023 guidance to the end result being something like 6%, 7%. And just wondering what levers do you have in your sort of cost management action pocket to combat costs if revenue were to disappoint. So that’s number one. And the second question is, I think we will talk a lot about what might happen to revenues in various rate environments.
