But — and also just thank you for the disclosures on the structural hedge. But I guess stepping back a little bit from that. Just a couple of clarifications. So in a falling rate environment, how would you expect things like customer behavior to respond? So things like deposit mix shift like in Hong Kong. So I guess the mix shift towards term happened quite a lot faster in Hong Kong versus the U.K. on the way up and it’s still ongoing from the disclosures today. So if rates were to turn, would you expect that flip back to be pretty quick? Or on a pretty high rate environment? Or do you still expect to make sure to continue? So I think you talked about things like capital markets might outperform in a falling rate environment. So I guess, on an underlying basis, just how do you see that because capital markets and loan growth, etcetera, I guess a lot of it is also to do with the underlying GDP as well.
And there’s still a lot of uncertainty sort of on the horizon. So even if rates were to come down, just how quickly do you think these benefits can come through?
Noel Quinn: Okay. We’ll tackle the cost first and then maybe we come to the revenue second, and I’ll do a few introductory comments on how I see revenues. On costs, Georges, do you want to just do a quick analysis of reported costs 2023 versus 2022 target basis and then reported 2023 to 2024 target basis. And I might just add a few comments at the end of that on cost levers the way I look at it. But Georges?
Georges Elhedery: Good. Yes. Thanks. So on a reported basis, 2023 to 2022, we were down 1%. And so the growth against our target of 6% also is reflective of the fact that a lot of the restructuring costs we’ve taken in 2022 did not repeat. We’ve guided how the costs have increased from our initial 3% where we included severance into the 6%. Obviously, the last percent this quarter was unexpected. The rules for the FDIC special assessment came in November. The earlier draft rules we’ve seen in September indicated we would be incurring that cost in 2024 and 2025, but the rules that came in November had us to have to — have a different accounting treatment and accelerate all that as did all other banks who were subject to the FDIC special assessment.
So I just want to call it out that this one a particular event we called out. We — as we look at going forward for 2024, we’re looking at a 5% on a target basis growth. This is excluding the cost reduction we would get from exiting the French retail business and the Canada business. Between the two of them, we will be exiting on an annual basis and equivalent to $1 billion, just shy of that, which is around 3%. That would be a reduction in cost of 3%, but that is excluded from the way we’re managing our target basis. Just explaining how we’re coming up with this cost, and then Noel can talk you through the levers to manage our cost. So first, there is this flow-through inflation from 2023. There is some wage adjustments we need to take into account for 2024 based on the flow-through inflation from 2023.
That component, we feel is easing and hopefully, and the outlook of inflation will ease as we go out of 2024 into the future. There is continued spend in technology and continued investment in some of the growth areas — organic growth areas. That’s particularly true in wealth. And those spending are partly offset by a number of cost management actions, some of which we have taken already such as the severance program, which will have a flow-through benefit into 2024, and other actions we’re planning to take. Just before Noel talks to levers, we’re looking at cost as in growth on a target basis in dollar numbers. We’re not looking at our cost efficiency ratio basis. There may be fluctuation to our revenue, but frankly, in a year like 2023, our CER has dropped from 65% in 2022 to 48%.
So we will tolerate some volatility on the CER as long as we’re managing our cost in spend dollar basis. But…
Noel Quinn: Thank you. Thanks Georges. And I know this is an important topic, and let me reiterate upfront, we remain committed to cost discipline. The question is how are we achieving cost discipline? We obviously look for efficiencies in the existing organization. We invest in tech to drive efficiencies in our processing costs, and we’re continuing to do that. We invest in simplification of the portfolio, closing down businesses organically, exiting costs organically. But we’re also exiting costs through M&A. And in our target basis, we adjust for that. But I don’t want you to lose sight. We have exited — we’ll be exiting $1 billion of cost in 2024 as a function of M&A decisions. Portfolio choices made for good strategic reasons.
$300 million of that was the exit of our French retail business. It’s a business that was losing money. So we’ve exited $300 million of costs by selling and it’s going to be profit accretive because that business was a loss-making business. We’ve exited $800 million of costs in Canada through selling. We hope to by the end of Q1, not tempting fate. Why are we doing it? Because that business in our hands was probably valued at around 1 times book, and we were able to generate 2.5 times book as over 2.5 times book. We sold it because it was worth more to somebody else than to us. And we’re redistributing the proceeds of that to our shareholders because we thought it was the right answer for our shareholders. So we do internally generated cost efficiency and externally generated cost efficiency for good strategic reasons, and we’ll continue to pull those levers.
Now the other thing is we are — we do believe an organization like us with the growth opportunities we have, we should invest. And we made a decision last year on our original cost target of 3% to actually move it up to 4% because we were continuing to invest in tech. And in tech today as part of our overall cost base is now around 22%. When I took over four years ago, tech as a percent of our cost base was 16%. So we’re trying to remain disciplined on cost and change the nature of the costs to be a much more strategic cost component in driving future enhancements for customer propositions and efficiencies. So that’s sort of the thinking we have. You have our absolute commitment, both myself and Georges and the management teams. We will keep cost discipline.
We’ll invest and save at the same time. We have to acknowledge the flow-through of inflation. But the other component we made a decision on in 2023, given the very, very strong performance the business had, we thought it was right to go from 4% to 5% by topping up the variable pay pool by an extra percent. We thought that was the right decision for our people. So we think it’s the right cost decision, but it has inflated our cost compared to our original target of 3%. But I think we had to do the right thing by our people on that. And then the final 1% taking us to the 6% number you talked about was unexpected. When we talked to you in Q3, we didn’t expect that final 1% to come through for FDIC and bank levies. The FDIC is probably a timing issue.
It was going to come through in 2024 or 2025, but it actually surprisingly came through in the final quarter of the year. So you’ve got our commitment will remain tight with high cost. There is now turn to revenues. And let me maybe again, decompose how we think about revenue growth outside of NII or interest income. Clearly, the great work that Georges and the team have done on hedging and further structural hedges we put in place and the extra duration is a mitigant to the downside. I look at the opportunity on the upside in two components. One, is our core USP of International Banking. We have within our franchise, clients who operate in more countries than we currently bank them, be they personal clients or corporate clients. We still have huge amounts of untapped opportunity to further penetrate our client base.
And every time you saw in the revenue multipliers, we take a client to multiple jurisdictions, a revenue multiplier of 5 times domestic revenue in Wholesale Banking, 3 times domestic revenue in retail banking. That’s an internal generated revenue opportunity, not dependent on GDP. That’s in our hands. The second revenue opportunity you talked about in your analysis is countercyclical. And I do believe — I’ve been around 37 years, so I’ve seen some cycles. And I do believe lower inflation, leads to lower interest rates, lower interest rates lead to a pickup in economic activity normally for the lag effect. And I do believe that pickup will have a positive impact on capital market activity in our Global Banking and Markets business. I think it will have a big and positive impact on demand for corporate lending and personal lending in our wholesale and retail business, lag effect, as I’ve talked about.
And thirdly, I think consumers will start to shift out of cash into invested assets, and that’s a huge opportunity for our wealth business. And you’ve seen our track record on our ability to attract net new invested assets over the last three years, $84 billion, $80 billion, $64 billion. That’s where we’re very focused and a lot of our investment is going. Now it’s for us, the management team to deliver on that. So we know we got to deliver on tight costs and cost discipline, and we’ve got to deliver on revenue diversification. My final comment on this is I’m grateful that we’ve had four years of transformation because we now are through the majority of that transformation focus, majority, and we’re now focused on that growth opportunity. And we’re in a fortunate position that all of the hard work over the last four years has given us that platform for growth.
Thank you.
Unidentified Company Representative: So we have time for one last question, then I’ll hand it back to you, Noel, if you want to make any concluding remarks. So our final question comes from Aman Rakkar at Barclays.
Aman Rakkar: Thank you very much. Hi, Noel, hi Georges. I have two broad questions. The first one is kind of split into two. I’ve got a second question around GB&M, sorry, capital return. First broad question, it’s around fee income. The first part of it is, I’m a bit confused by your banking NII sensitivity. You can see on Slide 34, $3.4 billion on 100 basis points rate cap. But the majority of that comes from nonbanking — sorry, non-NII. So can you help me there because I just don’t understand that? I thought banking NII kind of stripped out the trading funding cost. So whatever color you can give us there? And the related question is that your outlook for fee income, more broadly, I get your messaging around wealth. Transaction banking is kind of demonstrating positive momentum.
But can I ask you about the other big chunk of fee income, which is GB&M. And there’s various moving parts there. I suspect that you think cyclically, it’s not earning its full amount. But I also do note that Global FX has kind of been decent for a while. So can you give us your view on to what extent that business is operating at, below or ahead of kind of capacity? That was a kind of broad two-pronged question on fee income, believe it or not. The second question was around your distribution, your approach to distribution that you’re potentially phasing down the barrel of slower volume growth in 2024. And I’m interested in you’re arguably then going to be more capital generative this year on still decent profits, and not a lot of balance sheet growth.
How do you approach that? Do you kind of give us additional buybacks through the course of this year? Or do you kind of hold that powder dry for a bigger rebound in 2025, say? Thank you very much.
Noel Quinn: Okay. I think, Georges, do you want to pick off those three points?
