HSBC Holdings, plc.

Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference call for HSBC's holdings, PLC's earnings release for the first quarter 2022. For your information, this conference is being recorded. At this time, I will hand the call over to your host, Mr. Ewan Stevenson, Group Chief Financial Officer.

Thanks, and good morning in London, and good afternoon in Hong Kong. Thanks for joining today for our first quarter results. I'll run quickly through the presentation and then open up for questions. At our full year results, Noel and I set out a path back to double digit returns, strong revenue growth driven by volumes and rising rates and tight cost discipline. Our strategy to get there is on track. All of these building blocks were reflected in our first quarter results. strong underlying volume growth across most of our businesses, with $21 billion of lending growth and lending up in every global business and region. The benefit of rate rises is now being reflected in our net interest margin. Our net interest margin was up seven basis points in the quarter, our highest quarterly NIM since the second quarter of 2020. And implied consensus policy rates have further strengthened since full year results, with further positive implications for our net interest margin and net interest income in 2022 and 2023. We maintain good cost discipline with adjusted costs down 2% versus first quarter last year, in line with our target of keeping costs flat this year and within a 0 to 2% growth range for 2023. Despite more challenged macro conditions this quarter, we remain firmly on track at this point to deliver double digit returns in 2023. While reported profits before tax were down on last year's first quarter, this mainly reflected a weaker quarter for wealth, driven by a combination of weak markets and Hong Kong COVID restrictions. together with a turnaround towards a more normalized level of expected credit losses from net writebacks in first quarter last year. On capital, with a 14.1% quarter one ratio, we're now back within our 14 to 14.5% target range. We've completed the $2 billion buyback we announced at our third quarter results. And we expect to launch our next $1 billion buyback in early May, following our annual general meeting later this week. And with the now expected benefit of higher interest income in 2023, this should strengthen our returns outlook and our capacity to fund attractive growth and distributions. On the next slide, we're seeing good momentum across most parts of our franchise, reflecting our focus back to areas of competitive strength. In wealth and personal banking, our underlying insurance business performed well with new business levels equivalent to pre-pandemic sales. And that's despite the closure of the Hong Kong mainland China border and the impact of COVID restrictions on Hong Kong branch openings. And our mortgage franchise continues to underpin good growth in personal banking. In commercial banking, we saw strong lending growth of $9 billion, or 3%, versus the fourth quarter, with credit and lending up $6 billion and trade balances up $3 billion. Commercial banking fees were also up 13%, the seventh straight quarter of increased fee income in commercial banking. We were profitable in all regions, including strong performances in the UK Ring Fence Bank and the Middle East. You will have already seen our sustainability announcements, which we're now working hard to implement. And we made further progress in reducing our real estate footprint. With a further seven buildings closed in the first quarter, our footprint is now down 25% since the end of 2019. On the next slide, we provided an update on our business in Hong Kong and mainland China in light of the material COVID restrictions that have been in place in both markets. In Hong Kong, branch closures and soft markets clearly impacted revenue, but we continue to see good sales activity in the quarter underpinned by the increasing shift to digital sales and the investment we've made over recent years to support this. Our remote sales capability particularly benefited insurance, which delivered pre-pandemic levels of sales volumes, despite the branch closures and the continued closure of the mainland China border. As we've seen globally with the short cycle of Omicron, Hong Kong is now starting to reopen. Branches are operating normally again as of last week, and we expect client activity to begin to normalize as a result. In mainland China, we had another solid performance, despite the impact of COVID restrictions on our own team and more widely. Revenues were up 9% on last year's first quarter. Lending grew by $6 billion, or 11%, with a strong commercial banking performance as the standout. Turning to slide five. I've touched on most of this already. Adjusted net interest income was up 10% at $7 billion in the quarter, reflecting both rate rises and balance sheet growth. But non-net interest income was down 16%, mainly due to insurance market impacts and the effects of COVID restrictions on Asia wealth. Tangible net asset value per share was $7.80, down 8 cents, with profit generation more than offset by fair value movements and the impact of FX. Turning to revenue on the next slide, while wealth and personal banking revenue was down 6%, the bulk of this was due to insurance market impacts. We had a good personal banking performance, revenues up 7% on first quarter last year, benefiting from rate rises and balance sheet growth. This was offset, however, by a weaker quarter in wealth, with revenues down 19%, driven by the impact of weaker markets and Hong Kong COVID restrictions. Commercial banking revenue was up 9%, spread across all our main products, with continued good fee income growth. GLCM and trade were the standout performers. GLCM up 21%, reflecting both higher balances and higher interest rates. and trade reflecting continued balanced growth. While global banking and markets revenue was down 4%, this was mainly from lower revaluation gains in principal investments. Markets and security services revenues were down 2% against the strong first quarter last year, underpinned by good performance in FX, up 15%. Global banking was up 4%, reflecting our different business mix to many peers, with GLCM revenues up 21% from higher rates and volumes. On slide seven, net interest income was $7 billion, up $483 million versus last year's first quarter. This was mainly driven by higher rates and volumes, particularly in wealth and personal banking and commercial banking. On rates, the net interest margin was 126 basis points. That's up seven basis points on the fourth quarter. Implied consensus policy rates have further strengthened since full-year results, with further positive implications for net interest income in 2022 and 2023, giving us even greater confidence in achieving double-digit returns in 2023. On the next slide, on credit performance, we've reported a net charge of 642 million of ECLs in the quarter, some 25 basis points of average loans. The overall quality of our loan book remains good. Stage three loans as a percentage of total loans are stable at 1.8%. The ECL charge includes around $250 million relating to Russia exposures. and around 160 million relating to China commercial real estate. We've released most of our remaining COVID-19 provisions, some $600 million in the quarter. This was largely offset by additional reserves of $525 million comprising 275 million of forward economic guidance driven additional expected credit losses, and a $250 million central management provision, reflecting a cautious approach given the increased economic uncertainty. We continue to expect ECLs to normalize towards 30 basis points of average loans for the year. Turning to slide nine, first quarter adjusted operating costs were down 2% on the same period last year, driven by continued cost control. and the lower performance related pay accrual relative to last year's first quarter. As in previous quarters, we are continuing to invest in technology while reducing other BAU costs. We've made a further $600 million of cost program savings during the first quarter with costs to achieve spend of around $400 million. We've remained on track to achieve the higher end of our five to five half billion of cost savings over the three years to the end of this year, with at least a further half a billion dollars of cost savings from this program now expected in 2023. To reiterate, despite a low run rate cost to achieve in the quarter, we continue to expect to have total cost to achieve spend of around $3.4 billion this year. which will complete our combined cost-to-achieve spend of $7 billion when the three-year program ends in the fourth quarter of this year. We remain on track to achieve stable costs this year compared with 2021, and we remain committed to keeping underlying cost growth in 2023 within a 0 to 2 percent growth range. Turning to capital on slide 10, our quartier one ratio was 14.1%, down 170 basis points on the fourth quarter, and back to being within our 14 to 14.5% target range. We flagged the impact of regulatory changes and the unwind of software capitalization benefits at our full year results. Together, these reduced our quartier one ratio by around 80 basis points in the quarter. And the dividend accrual and the announced additional $1 billion buyback accounted for another 30 basis points. In addition, the steepening of the yield curves on financial assets designated as hold to collect and sell reflected a negative after tax reserve movements of $3.1 billion or around 40 basis points, which was reflected in other comprehensive income and our core tier one. Reported RWAs were up $24 billion on the fourth quarter, due largely to regulatory changes in lending growth, partly offset by ongoing risk-weighted asset saves and FX movements. Our cumulative RWA saves are now $112 billion. We're firmly on track to achieve our new ambition of at least $120 billion of cumulative RWA saves by this year end. Just as a reminder, later this year we expect an impact of around 35 basis points of core tier one from the sale of our French retail business, which we expect to contribute to us falling below our 14 to 14.5% target range during the coming quarters. But as I said at our full year results, our intention is to manage within the 14 to 14.5% range over time. We've now completed our $2 billion buyback announced in October, and we expect to launch our next $1 billion buyback in early May following our AGM later this week. As we're now at the bottom of our target range due to the impact of fair value market losses, and that we're continuing to see good expected growth in the business, we're now unlikely to announce further buybacks during 2022. However, buybacks remain an integral part of our capital management toolkit going forward. So to conclude, despite a tougher set of operating conditions this quarter, we remain very focused on getting back to double digit returns in 2023. To achieve this, we need to see good volume growth, rising rates, and cost discipline. All of these attributes were there in these results. Underlying volumes grew in most parts of our business, underpinned by lending growth of $21 billion. Our net interest margin rose seven basis points for our highest quarterly net interest margin since the second quarter of 2020, and costs declined by 2%. So despite the macro environment impacting wealth revenues and expected credit losses this quarter, the fundamentals of the benefit of rising rates have only strengthened since our full year results. increasing our confidence in delivering double-digit returns in 2023 and our capacity to fund attractive growth and distributions. With that, Martin, if we could please open up for questions.

Thank you, Mr. Stevenson. If you would like to ask a question today, please press star 1 on your telephone keypad. Please ensure that the mute function on your telephone is switched off. If you find your question has been answered, you may remove yourself from the queue by pressing the hash key. Once again, to ask the question, please press star 1. Please ensure that the mute function on your telephone is switched off. As a reminder, ladies and gentlemen, if you wish to ask a question, please press star 1 on your telephone keypad. We will now take our first question today. This comes from the line of Joseph Dickinson of Jefferies. Please go ahead.