HSBC Holdings, plc.

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

Thank you, Sharon. Good morning in London and good afternoon in Hong Kong, and thank you for joining us. I've got Ewan with me today, and he'll present the numbers in detail before we then go to Q&A. Let me start by saying that it's been another difficult quarter for our customers, colleagues and communities. But I have been pleased with how HSBC has responded. This is still a hugely unpredictable environment. We are conscious of that on both a human and a financial level. And we are doing all we can to support our customers and colleagues through this very difficult period. Against that backdrop, we are satisfied with our first-half performance. Our Asia business held up well, and our fixed-income businesses delivered strong revenue growth. This compensated for challenges in parts of the world that have been harder hit by the impact of COVID-19. The businesses that performed less well are those we are already changing. We will be accelerating our transformation in the second half of the year and making other necessary changes in light of the new circumstances since February. There's still a lot of uncertainty around, not least from the ebb and flow of COVID-19 and the steps needed to contain it. Our improved capital position and excellent funding and liquidity are the hallmarks of our strength and resilience. helping us to be there for our customers while also building the future of the firm. Our focus remains on helping our customers through this immediate period while making the changes necessary to serve them better over the long term. The current geopolitical environment is clearly complex. Tensions between China and the U.S., inevitably create challenging situations for an organization with our footprint. But our businesses in Asia have shown good resilience, and we will face any political challenges that arise with a focus on the long-term needs of our customers and the best interests of our investors. Turning to our second quarter performance, our Asia businesses continue to show good resilience, contributing $3.6 billion of reported pre-tax profit, and global markets grew adjusted revenue by 55%. Our profitability was most challenged in the businesses at the center of our transformation, Europe, the U.S., and the non-ring-fenced bank, which were severely impacted by high expected credit losses. Overall, pre-tax profits of $1.1 billion were were down 82% and adjusted profits were down 57% on last year's second quarter. ECLs of 3.8 billion were up on the first quarter, reflecting updated forward economic guidance in the UK in particular. We've updated our 2020 range for ECLs, which Ewan will talk about later. The interest rate cuts made earlier in the year began to impact our revenue from March onwards. We responded by pulling the cost levers available to us, reducing operating expenses by 7% compared with last year's second quarter. We continue to attract significant deposits in the quarter. I'm pleased to say that our capital ratio increased to 15%. providing a strong and resilient platform from which to serve our customers and manage the economic environment. Turning to slide three, the resilience of our Asia franchise continues to underpin our financial performance. This was due to the quality and strength of our business and client list and to the speed and decisiveness of the COVID response. which allowed many economies to restart sooner than others. The activity underpinning our Asia performance remains robust. We've increased our trade finance market share. Client FX volumes are lower but relatively resilient. And retail car transaction volumes recovered in June following a dip during the pandemic. Adjusted revenues in individual markets have been broadly stable despite the economic slowdown. And Asia lending is up 1% and deposits up 7% in the last 12 months. First half expected credit losses of $1.8 billion in Asia included a large single name provision in Singapore in the first quarter. Looking to the second half, parts of Asia and Hong Kong in particular have tightened COVID restrictions in recent days. This is something that we're all getting used to as cases rise and fall. And we are hopeful that the quick response of the authorities will contain any new outbreak and minimize the impact. Looking at slide four, we remain focused on helping our customers, colleagues, and communities through the pandemic with high operational resilience in the face of unprecedented volumes in customer interaction. Around 94% of our branches are currently open, and all our customer contact centers have been fully operational throughout. We have now granted around $30 billion of debt relief for our personal lending customers through more than 700,000 payment holidays on loans, credit cards, and mortgages. More than 172,000 wholesale customers have received more than $52 billion of lending support. $33 billion of that through government schemes and $19 billion through HSBC-backed lending. We arranged more than $1.1 trillion of loan, debt and equity financing for wholesale customers in the first half. including more than $48 billion of social and COVID bonds. We also retained our number one ranking for sustainable finance bonds in a rapidly expanding market. We've invested heavily in technology, driving digital transformation to connect more customers remotely and increase digital engagement during lockdowns. Downloads of our HSBC Net mobile app for business were up 157% on last year's first half. The value of mobile payments in the second quarter was up more than 200% on the same period last year. And digital wealth sales rose significantly year on year, up 44% in Singapore, 38% in Hong Kong, and 29% in mainland China. The strength of our COVID response contributed to a sharp increase in customer satisfaction, with double-digit increases in several retail markets, record satisfaction scores in trade and global liquidity in cash management, and global banking and markets being voted number one standout FX dealer for global corporates in the recent Greenwich BuySide study. Throughout all this, we maintained exceptional balance sheet strength and strong funding and liquidity with a CET1 ratio of 15% and $133 billion of first half deposit growth. Turning to our transformation program, While we slowed progress in some areas in response to the pandemic, we laid good groundwork for the rest of the year, and we'll be accelerating our plans in the second half. We lifted the pause on redundancies in June, and we'll be moving forward with those plans thoughtfully but purposefully. We've already seen around $300 million of cost savings in the first half, with a further $500 million estimated in the second half from our transformation activities. This is slightly below the $1 billion of transformation savings we promised for this year because of the pause on redundancies. But we expect to make up the difference in 2021. In the meantime, we take an additional action on discretionary costs and we expect to make many of those savings permanent. On the rest of our transformation, we've completed the combination of RBWM and global private banking, and we're making strong progress in the back office integration of commercial banking and global banking. As you've seen, the areas of weakness in the second quarter were the areas that we're already committed to changing. We're confident that the actions we've identified in February are the right actions to take. But we're obviously looking at what more we need to do given the changed economic and monetary environment. We've created the structures to reduce RWAs in global banking and markets and made a gross RWA reduction of $21 billion in GB&M in the first half of the year. In the U.S., Lower interest rates pose a challenge to our US retail strategy, and that's something we're looking at. But the US business has already closed 80 branches, and we're on track to reduce US global markets RWAs by around 45% by the year end. In Europe, we simplified our management structure and have a new team in place to push through the transformation. We remain committed to the Europe RWA reduction targets we announced in February, and we'll execute those plans in earnest as the economy starts to recover. I want to finish by talking about one of the most exciting growth businesses, and that's wealth. In 2018, we set out a plan to capture the growing global wealth opportunity centered on Asia. and we've been investing to grow that business ever since. In the last 12 months, we've grown our Jade and Premier customer numbers by 6%, and our wealth balances by 3%, with around half of this growth coming in Asia. In our asset management business, we've grown assets under management by 5%, and private bank client assets by 4% over the same period. In June, we launched Pinnacle, which is a new platform to significantly step up our wealth business in mainland China. This allows customers to access a full suite of wealth services, including insurance, in one place, which is unique for any Chinese wealth platform. We're investing to bring our wealth capabilities to new customers in China, and we intend to grow the number of wealth planners in phases over the next four years. The Greater Bay Area Wealth Management Connect Program, which was announced in June, only enhances the wealth opportunity. And we're excited at the chance this gives us to serve more people in the region. With that, I'll pass over to Ewan to go through the numbers.

Thanks, Noel, and good morning or afternoon, all. Given the impact of COVID-19, our second quarter was tough. We had an 82% fall in reported profit before tax and a 57% drop in adjusted profit before tax. There were a couple of bright spots. Fixed income in global markets was a standout, together with a resilient performance by Hong Kong and other parts of our Asian franchise. Overall, our results were heavily impacted by lower revenues from subdued customer activity in many parts of our business. and the building effect of ultra-low interest rates, the second quarter in a row of very high ECLs, and a $1.2 billion software intangible write-off, largely as a result of the weak return outlook for our non-ring-fenced bank. Adjusted revenue was down 4%. This included a $507 million benefit from volatile items, which in part reversed some of the negative impacts we saw from mark-to-market movements in the first quarter. ECLs were up on the first quarter at 3.8 billion, or 148 basis points of gross loans, with the largest impacts in the UK in commercial banking. We've continued to take action on costs to adjust for the weakened revenue environment. Our adjusted operating costs fell by 7%. against the second quarter of last year. Despite the weak macro environment, our balance sheet metrics continue to improve. Our quarter one ratio was up 40 basis points to 15% in the quarter, and customer deposits grew by $85 billion. Our first half return on tangible equity was 3.8%. That's down from 11.2% for the same period last year. and our tangible net asset value per share of $7.34 was down 10 cents on the first quarter due to movements and own credit adjustments. Turning to slide nine, looking across the three global businesses, in wealth and personal banking, revenues were down 12%, with retail banking revenues falling by $809 million, due largely to the impact of falling interest rates on liability spreads At a headline level, wealth management revenues were broadly stable, but excluding positive market impacts in insurance manufacturing, down 17% due to lower sales volumes. Commercial banking revenues were 14% lower due mainly to the impact of lower margins on global liquidity and cash management and lower volumes in trade finance. In global banking and markets, revenues were up 24%. Global markets grew by $755 million, which we achieved while keeping traded value at risk broadly stable. This included an excellent performance in our fixed income franchises, up 79%. Principal investments revenue grew by $185 million, primarily due to a material reversal of the mark-to-market losses we saw in the first quarter. In corporate center, revenues were $90 million lower, with $157 million of adverse movements in valuation differences on our long-term debt and associated swaps. Just to remind you all that the second half usually sees lower revenues from non-interest income and global banking and markets and wealth, And given the buoyant global markets revenues in the first half, we expect that seasonality to be more pronounced this year. On slide 10, net interest income was $6.9 billion, down 9% against the first quarter. The net interest margin was 133 basis points, down 21 basis points on the first quarter, of which 20 basis points came from the fall in interest rates. While we're beginning to see some modest asset repricing, we still expect recent interest rate cuts to have a negative impact of more than $3 billion for 2020, with a further significant negative impact expected in 2021. Turning to slide 11, adjusted operating costs were 7% lower than the second quarter in 2019 and down 5% in the first half relative to the first half of 2019. As a result of the operational impact of COVID-19, we're spending less on certain discretionary cost line items. We expect this to lead to some permanent benefits in our cost structure relative to previous planning assumptions. We're being disciplined on variable pay accrual in line with lower expected profits this year, and we've restarted the cost reduction program that we announced in February. At the end of June, headcount including contractors was down 8,300 in the last 12 months and down 3,800 since the start of the year. As we signalled at our first quarter results, we're now planning for full year 2020 costs to be below 2019 run rate. As you do your modelling and operating costs for the second half, please don't use the first half run rate as a guide. Second quarter costs were low due to COVID-19 and we expect both a step up in investment and technology spending and a high UK bank levy due to strong growth in our deposit base. On the next slide, we saw a further substantial ECL charge in the second quarter, some $3.8 billion or 148 basis points of gross loans, $2.3 billion of which were stage one and stage two charges. This reflected extra forward economic outlook charges across all global businesses and regions, particularly in respect of the UK and commercial banking. UK expected credit losses were $1.1 billion higher than in the first quarter, reflecting the worsening economic outlook of which 900 million of these related to our UK ring-fenced bank. Stage three ECL charges were broadly stable at around $1.5 billion in both the first and second quarters. Although the first quarter did include a significant charge on a single name corporate exposure in Singapore. Recognizing the deterioration in the economic outlook in the second quarter, we've updated our range for full year group expected credit losses to $8 to $13 billion. Given the first half ECL charge of $6.9 billion, adding the current run rate of stage three losses for the second half gives a full year ECL charge of around $10 billion. The range either side of this broadly reflects our disclosed economic sensitivities. The lower end reflects a path closer to our consensus central economic scenario, reflecting a strong economic rebound in 2021. with some unwinding of the economic adjustments taken to date. The higher end of the range reflects a path closer to our downside economic scenario, with a much more muted economic rebound in 2021, leading to further negative VCL adjustments for forward economic guidance in the second half. I would caution that there remains a wide range of potential outcomes, including the risk that the upper end of the range may need to increase further And in that respect, I would encourage you to read our expected credit loss sensitivities in the interim report. On slide 13, our quarter one ratio at the end of the second quarter was 15%. That's up 40 basis points in the quarter. Quarter one capital increased by $3.2 billion. This reflected lower regulatory deductions for expected losses, FX movements, fair value gains through other comprehensive income, and a reduced prudent valuation adjustment. On the next slide, risk-weighted assets rose by $11.2 billion in the first half, or $33.2 billion, excluding FX movements. This was mainly due to a $23.3 billion asset-side movement, mostly relating to first quarter lending growth. and also a $16.8 billion increase from changes in asset quality due to credit rating migration. A $100 billion gross risk-weighted asset reduction program is underway, with $12 billion of additional savings from global banking and markets in the second quarter. We continue to expect credit migration to cause RWA inflation in the second half, partially offset by progress against our gross RWA reduction program. In summary, a difficult quarter overall, a few bright spots, Asia resilience and a strong quarter for fixed income, but overall many parts of the business were hit by very high ACLs and significant revenue pressures. As we look out to the second half, there remains considerable uncertainty. The continuing impact of COVID-19, the ongoing Brexit negotiations and US-China tensions and any impact this has on a Hong Kong franchise. As such, it's too early to discuss distribution policy or medium-term return targets and we don't expect to do so until our full year 2020 results in February. However, we're pleased that we face into this uncertainty with a strength in core tier one ratio of 15%, an extra $85 billion in customer deposits, continued vigor in managing our cost base, and the benefit of a diversified portfolio of franchises globally. Noel and I remain very committed to the plan we announced in February, namely a material reduction in RWAs, particularly focused on the U.S., the non-reinfenced bank and global banking and markets, with a reallocation of capital towards our strongly performing Asian franchise, a significant reduction in the operating cost base of the bank, and a material reduction in the operating complexity of the bank. With that, Sharon, if we could please open up for questions.