HSBC Holdings, plc.

Good morning, ladies and gentlemen, and welcome to the Invest and Analyst Conference call for HSBC Holdings PLC's earnings release for the first quarter 2020. For your information, this conference is being recorded today. At this time, I will hand the call over to your host, Mr. Noel Quinn, Group Chief Executive.

Thank you, and good morning in London and good afternoon in Hong Kong. Thank you for joining us. I've got Ewan with me today, and he'll present the numbers in detail before we go to Q&A. Let me start by saying that these are clearly unprecedented and challenging times for society, for our customers, and for our people all over the world. The COVID-19 pandemic is testing us all in ways we could never have anticipated and is causing huge disruption, stress, and uncertainty. HSBC has a massive role to play in supporting our communities, providing stability, and helping to rebuild economic growth. That purpose has been true throughout our history and remains true today. We are determined to play our part to the very best of our ability. I'd like to pay tribute to the extraordinary work that our people have done and are doing for our customers and for each other each and every day. I have been humbled by their dedication and commitment. Our operations have been highly resilient, with around 80 percent of our branches open for business, more than 90 percent of our staff working from home, and a high degree of business continuity. Since the start of the year, we have issued more than 28,000 additional laptops to enable our colleagues to work from home. We have increased our VPN capacity from 118,000 to 250,000 and enabled more than 80 percent of our contact center staff to work remotely. This has enabled us to react quickly and effectively in support of our customers. We have introduced a broad range of customer support measures and have worked very closely with governments and regulators. to channel state support to the real economy quickly and efficiently. In Hong Kong, we have approved more than 30 billion Hong Kong dollars of immediate liquidity relief to businesses facing market uncertainty and supply chain pressures. We have granted more than 80 percent of our eligible Hong Kong commercial banking clients a pre-approved extension to their imports trade loan facilities. And we have put in place a dedicated 100-strong team to proactively identify eligible businesses and process applications to the Hong Kong government's 100 percent loan guarantee scheme, with thousands of applications underway after the first week of operation. In the U.K., we have granted more than 118,000 applications for retail payment holidays and approved more than 1.9 billion pounds of COVID-19 related financial support for small and medium-sized businesses. We have been heavily involved in the UK CBIL scheme, approving more than 4,200 applications worth over 600 million pounds. That's around 17 percent of all CBILs lending by accredited lenders, which is nearly double our market share for SME lending in the U.K. In total, we have grown group lending by $41 billion and seen $47 billion of deposit growth in the quarter. As far as the plans we announced in February are concerned, our intention is to continue to improve the long-term capital and operational efficiency of the bank. In the short term, we have decided to pause the vast majority of redundancies associated with this program when notices have not already been issued. Continuing with our job reduction programs in the current environment would simply not be appropriate at a time of significant stress for our people and communities. We are proceeding in other areas as planned, including the combination of our wholesale back office operations and the combination of retail banking and wealth management with global private banking. We have invested a further $1.2 billion in business growth and digital in the quarter and accelerated our digital plans to improve customer access during the current crisis. We are also applying the lessons of the last few weeks, particularly from parts of the business that have responded to a fast-moving situation with exceptional pace and agility. We will press ahead with our transformation thoughtfully and purposefully while doing everything necessary to safeguard the well-being of our customers and our people. There will be no let-up, and we'll move at pace wherever we can. As you know, in response to a direct request from the Bank of England, the Board canceled the payments of our fourth quarter dividend of 2019. The Board also decided that until the end of 2020, we will make no quarterly or interim dividend payments or accruals in respect of ordinary shares. We will review our dividend policy at or ahead of our 2020 year-end results. Turning to our performance, we had a good start to the year with a solid January and February. But in March, the spread of the COVID-19 pandemic and the fall in oil prices had a sizable impact on our first quarter numbers. The resulting increase in expected credit loss provisions contributed to a 48 percent drop in reported pre-tax profit and a 51 percent fall in adjusted profits compared with the same period last year. The impact of falling markets on volatile income streams in insurance manufacturing and global banking and markets led to a 5 percent fall in reported revenue. Generally, though, our businesses showed good resilience, particularly in Asia, while retail banking, global markets, and global private banking all grew revenue compared with last year's first quarter. We maintained good cost control with a drop in adjusted operating expenses of 3%. And our balance sheet remains robust. with a CET1 ratio of 14.6 percent and strong liquidity and funding at the end of the first quarter. Turning to some of our performance highlights in the quarter, we added more than 100,000 retail banking customers and grew retail deposits by more than $13 billion worldwide. We also enhanced our digital capabilities to serve more customers remotely, to accelerate verification, and to improve our ability to get our customers the products they need during the current crisis. Commercial banking lending balances saw good growth, largely due to client drawdowns on existing facilities. Our trade finance business showed great resilience, particularly in Asia, and our recently upgraded upgraded HSBC Net Treasury Management Platform for businesses saw a substantial increase in activity, with downloads of the mobile app up 32 percent and a 97 percent rise in the volume of mobile payments, both of which stand as in good stead for the future. Global private banking added a further $5.3 billion of net new money in the quarter, bringing the total over the last 12 months to $17.7 billion. And global banking and markets did an excellent job keeping capital flowing to our customers, leading on more than $685 billion of financing for clients in the capital markets globally. With respect to social and COVID response bonds, We helped our clients raise $19.9 billion to support the COVID-19 relief effort. We were at the forefront in reopening the global debt capital markets, achieving a top two book runner position for international bonds in Europe, the Middle East, and Asia ex-Japan. And we provided sustained access to equity capital markets for our customers. achieving a leadership position in Asia ex-Japan and ex-Asia, and raising more equity capital for UK-listed corporates than any other bank since the start of the year. I'm pleased with the way the business has responded in support of our customers. And we continue to work extremely hard to meet the significantly increased funding demands we are seeing across many parts of the bank. We know that the rest of 2020 will be immensely challenging, but we face it with a resilient business and strong capital and liquidity. With that, I'll pass over to Ewan to go through the numbers.

Ewan Birney, EWN Business Services, Thanks, Noel, and good morning or afternoon, all. Compared with last year's first quarter, it was clearly a much tougher quarter, a 48% fall in reported pre-tax profits and a 51% drop in adjusted pre-tax profits. We had a decent January and February, but March was heavily impacted by COVID-19 and the fall in oil prices. And the outlook has significantly deteriorated since our February 18th business update. Certain parts of our business continue to perform well in the quarter, including a resilient performance in our Hong Kong and broader Asian franchises, the continuing turnaround of global private banking, and a strong quarter for fixed income and currencies trading revenues in global markets. But our results were heavily impacted by the sharp fall in equity markets, the widening of credit spreads, and much higher expected credit losses. Net volatile items were $1.6 billion adverse to the first quarter of last year. The prudent valuation adjustment against quarter one was half a billion dollars higher than the previous quarter. And expected credit losses were $3 billion or 118 basis points of gross loans. Overall, adjusted revenues were down 6% against last year's first quarter. but up if you exclude volatile items. Net interest income grew by 3 percent overall, while non-interest income reduced by 16 percent. We've started to take action on costs to adjust for the weakened revenue environment. Our adjusted costs fell by 3 percent against the first quarter of last year, reflecting a reduced accrual for variable pay and various lower discretionary cost items. Our tangible net asset value per share of $7.44 includes 17 cents of our own credit adjustments or reserves. That's a 29 cent move quarter on quarter from a negative 12 cents at year end. Turning to revenue on slide five, total adjusted revenues in the first quarter were $13.3 billion. That's down 6% on the first quarter in 2019. but up 6 percent, excluding volatile items. Looking across the four global businesses in retail banking and wealth management, revenues were down 17 percent, but stable before negative market impacts in insurance manufacturing. Retail banking revenues grew by 1 percent, driven by higher customer deposits, but wealth management revenues were down 52 percent, heavily impacted by a $872 million negative movement in market impacts and insurance manufacturing. However, investment distribution revenues grew 4% as a result of strong Hong Kong trading activity. Global private banking revenues are up 13%, underpinned by another strong net new money performance and higher customer activity levels in the quarter. Commercial banking revenues were down 5 percent, with global liquidity and cash management down 10 percent due to lower interest rates. Credit and lending up 3 percent, reflecting growth in lending balances. And trade finance up 2 percent, a resilient performance, particularly in Asia. Within global banking and markets, while revenues were down 8 percent overall, global markets grew 25 percent, with a strong performance in fixed income and currencies trading, up 38 percent. Against this were adverse movements of $392 million in credit and funding valuation adjustments and $313 million in bid-offer adjustments, while our principal investments business made a loss of $235 million in the quarter. In corporate center, revenues were up $634 million. Balance sheet management was up $221 million due to gains on disposals. And we had a $209 million increase in favorable fair value movements on our own long-term debt and associated swaps. On slide six, net interest income was $7.6 billion. That's stable against the fourth quarter of 2019. Our net interest margin was 154 basis points. That's down two basis points on the fourth quarter. This included a combined two basis point adverse impact from margin compression, reflecting lower rates and hyperinflation in Argentina, and a one basis point favorable impact from lower customer redress costs in the U.K., Room Fence Bank. Given the drop in interest rates since the start of the year, around 100 basis points globally, we expect an impact on net interest income of more than $3 billion in 2020, which is greater than our February guidance at our full year 2019 results. Turning to slide seven, adjusted costs were 3% lower than the first quarter in 2019, and that's despite a further $1.2 billion of investment in business growth and digital. Where we can, we've begun to take action on costs, including a $359 million lower accrual for variable pay, the start of a material reduction in the approximately $400 million we spent last year on travel and entertainment, and discipline across various other discretionary cost line items. We now expect full-year 2020 costs to be below 2019's run rate, with the degree of reduction in some line items dependent on various factors, including group profitability, which could drive further cuts to the variable pay accrual in the coming quarters, and the impact on activity levels in our operations as a result of COVID-19. And due to the current pause in parts of our transformation plan, we also expect to spend less on costs to achieve in 2020 than previously guided. On the next slide, we saw substantially higher credit cost provisions in the first quarter, some $3 billion or 118 basis points of gross loans. This reflected extra charges across all global businesses and regions, largely reflected to the change forward economic outlook as a concept COVID-19 and the falling oil price. Around half of first quarter expected credit losses were for stage three exposures, with all of the stage three increase coming in wholesale, including a significant charge in commercial banking related to a corporate exposure in Singapore, as well as charges in global banking and markets relating to a small number of clients. As you can see, we have provided a range for group expected credit losses of $7 to $11 billion for 2020. The midpoint of that range is based on the $3 billion charge for first quarter 2020, plus $2 billion for the rest of 2020 based on the historic average run rate, plus a further $4 billion representing the incremental expected credit losses from 100 percent weighting of our severe scenario, which is disclosed in the earnings release. The bottom end of the range represents a milder economic scenario than our severe scenario, with an economic recovery commencing in the second half of 2020. And the top end of the range represents an economic scenario worse than our current severe scenario, extending into 2021. We will no doubt update our thinking here as we go through the year. There's a wide range of potential outcomes, including the risk that the upper end of the range may increase. And I would encourage you in that regard to read our COVID-19 risk factor in the earnings release. Turning to slide nine, both customer loans and advances and customer deposits saw good headline growth on a constant currency basis since the end of last year. Customer loans and advances grew by $41 billion, or 4%, and customer deposits grew by $47 billion, or 3%. Part of this growth came from customers in commercial banking and global banking and markets as a result of both drawing down on committed credit line facilities and then partially redeploying these funds into their deposit accounts to increase their cash reserves. This continues the trends of the past several quarters where we've seen consistently good volume growth across the customer franchises and resilient performances in key areas such as trade financing, cash management. Our funding and liquidity ratios remain robust. We continue to have a low and stable loan to deposit ratio and significant excess high quality liquid assets. On slide 10, our quarter one ratio at the end of first quarter was 14.6%. That's down 10 basis points from the end of 2019. The cancellation of the fourth quarter dividend in 2019 added 40 basis points to our quarter run ratio. This and the decision to not pay an interim dividend in this quarter offset the negative impacts of lower profitability FX movements, and an increased prudent valuation adjustment. Risk-weighted assets rose by $13.7 billion in the quarter. This was primarily due to loan growth, partially offset by FX movements due to the strong U.S. dollar. We've seen limited impact from procyclicality so far, less than $5 billion of movements from changes in credit quality in the first quarter, However, we currently expect pro-sick locality impacts to increase materially during 2020, hence our guidance on expecting mid to high single-digit RWA growth for the year as a whole. As a result, we expect our quarter one ratio to decline in the coming quarters, and we're comfortable, if necessary, falling below our 14% target over 2020 and 2021. as we progress through the pro-cyclical impacts of COVID-19 while retaining capital capacity to continue to support our customers. So in summary, a good January and February and a difficult March, the combined impact of COVID-19 and lower oil prices has significantly impacted some of our businesses while others have proved fairly resilient. Changes to forward economic guidance coupled with certain stage three exposures caused a significant spike in expected credit loss provisions, and we expect expected credit losses to remain elevated over the remainder of the year with a broad range of outcomes foreseeable depending on the economic impact of COVID-19. We were there for our customers in the quarter with good volume growth in both lending and deposits. We've begun to take necessary action on costs, and retain some capacity to partially offset a further drop in revenue across the coming quarters. Our liquidity and funding ratios remain robust, providing our customers with stability during the current disruption. But the economic outlook for the remainder of the year is expected to now be much weaker than previously guided at our full year 2019 results. We'll continue to monitor the impact of the COVID-19 crisis and review our financial performance and business plan accordingly. At the same time, we'll continue to assess the appropriateness of our 2022 financial targets, and we'll review our dividend policy at or ahead of our full year 2020 results. We're not expecting the next few quarters to be easy, but we enter this difficult period with stocks strong capital and liquidity, a strong and resilient franchise, particularly in Asia, an ability to invest in the business while also managing costs down, and a commitment to continue to build for the future while responding to the needs of our customers in the present. With that, Sharon, if we could please open up for questions.