HSBC Holdings, plc.

Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference call for HSBC Holdings PLC's Q3 2022 results. For your information, this conference is being recorded. At this time, I'll hand the call over to your host, Mr. Noel Quinn, Group Chief Executive. You may begin, sir.

Noel Quinn Thank you, and good morning in London. Good afternoon in Hong Kong. Thank you for joining our third quarter results call. Ewan is going to lead the financial presentation, but I want to start by first talking about the leadership changes we've also announced. We've now spent nearly three years transforming HSBC, and while there's still work to do, we are now in a much better place to accelerate our financial performance and deliver stronger returns. As we approach the end of our three-year transformation program, myself and the Board have taken the opportunity to review the composition of the GEC with an eye to long-term succession planning. As a result, we have today announced that George L. Hedery will take over as Group Chief Financial Officer on the 1st of January, 2023, and Greg Geyer will take on the role of CEO of GB&M permanently, effective immediately. Ewen will therefore step down as Group CFO on the 31st of December and will leave the bank in April, 2023. I want to put on record my thanks to Ewan for everything he's done during his time with us. He played a key part in creating and executing our transformation and growth agenda over the last four years. He helped steer HSBC through the COVID pandemic. He's been fundamental in reshaping our portfolio globally, improving our capital efficiency, and embedding discipline cost management across the organization. He has also driven the transformation agenda within the finance function, reshaping its strategic direction, encouraging innovation, and building the team's engagement levels. He's been a great professional, has contributed much to the bank, and I wish him the very best for his future career. I want to emphasize we remain absolutely committed to delivering our strategy, and the 2023 targets we announced with our Q2 results. There is no change to my commitment as a consequence of these people moves. Turning to Q3, I'm pleased with our third quarter performance. All regions perform well, with particularly good performances in the UK, the Middle East, and Southeast Asia. We delivered a double-digit return on tangible equity for the nine-month period, excluding significant items. And we remain on track to achieve our financial targets in 2022 and 2023. We've also kept a tight grip on costs and are driving greater efficiencies across the organization. Clearly, this is important in an unpredictable and challenging external environment. But it's also a sign that our digitization strategy is working. Our work to structurally reposition the business and invest in areas of growth continues to gain traction. We are in a much better position at the start of the new interest rate cycle as a result of the actions we have taken on capital efficiency, portfolio rationalization, organic revenue generation, and cost control. We can also see in wealth, for example, that we're building a strong earnings platform for the future. Over the last 12 months, we attracted $91 billion of net new invested assets with $32 billion in the third quarter alone. Clearly, I expect you to ask about M&A activity when we get to the Q&A section of today's call. As a result, we've given some more information about our Canada business in the appendix. I'll now hand over to Ewan to take you through the details.

Thanks, Noel, and good morning or afternoon, all. As Noel said, these are a good set of results, reported pre-tax profits in the quarter of $3.1 billion, while down on last year's third quarter, this was due to the $2.4 billion increase revenue impairment associated with the disposal of French retail bank. Adjusted pre-tax profits in the quarter increased by $1 billion or 18% to $6.5 billion, reflecting a strong net interest income performance of $8.6 billion. That's up $2 billion on last year's third quarter. We had higher ECLs this quarter, $1.1 billion or 43 basis points. This primarily reflects increased economic uncertainty in the UK, together with further provisioning for our China commercial real estate portfolio. Operating expenses are up 1% year-to-date against the same period last year, and up 5% on last year's third quarter due to higher technology investment and different timings for our variable pay accrual. We remain on track to deliver broadly stable costs this year. Our core tier one ratio was down 20 basis points to 13.4%, including an around 30 basis point impact from the loss on the French retail bank disposal. We continue to expect to be at the bottom end of our 14 to 14.5% target core tier one range during the first half of 2023. At our second quarter results, Noel and I said our current strategy is the best and safest way to improve returns, with strong revenue growth driven by rising rates and volumes and tight cost discipline. With these results, our strategy remains firmly on track, good underlying growth across all of our businesses, with operating costs remaining broadly stable year to date, and an annualized reported return on tangible equity of 9.2%. Adjusted revenue was up $3.1 billion or 28% as the positive impact of rate rises were reflected in a strong net interest income performance. And non-interest income of $5.7 billion was up $600 million or 13% on last year's third quarter. despite a $400 million insurance market impact charge in the quarter. ECLs were a $1.1 billion net charge compared to a net release of $600 million in last year's third quarter. We now expect an ECL charge of around 30 basis points for this year. Lending was down 2% on the second quarter and deposits down 1%. but excluding the impact of the reclassification of the French retail bank as held for sale, lending and deposits were both up $5 billion. Our tangible net asset value per share of $7.13 was down 35 cents on the second quarter due to negative effects and adverse fair value movements. Turning to slide four, we're seeing good organic growth across all of our global businesses. as well as the benefit of rising rates. Wealth and personal banking revenue was up 25% with a good personal banking performance. Personal banking revenues were up $1.4 billion on the third quarter last year due to higher rates and balance sheet growth. There was a good underlying performance in wealth due to the strong insurance and private banking performance. while revenues down 9% or $200 million due to adverse market impacts in insurance of $400 million. We remain very confident in the growth of our wealth franchise. We had $91 billion of net new invested assets in the last 12 months, including almost $32 billion in this quarter. So our investment is building a strong future earnings platform. Commercial banking revenue was up 40% with global payment solutions, formerly known as GLCM, benefiting from higher rates, together with continued strong underlying growth. Global banking and markets revenue was up 16%. Market and security services revenue was up 20% due to market volatility. And global payment services solutions and global banking up 100%. partly offset by lower capital markets and advisory activity. On slide five, net interest income was $8.6 billion, up $2 billion versus last year's third quarter. This was primarily driven by higher rates and was strong across all regions and businesses. On rates, the net interest margin was 157 basis points, up 22 basis points on the second quarter, putting us back at pre-pandemic levels. We now expect net interest income of around $32 billion for this year and at least $36 billion in 2023 compared to the previous $37 billion guidance. Relative to the second quarter, we are upgrading our assumptions on a like-for-like 2023 revenues by around $1.5 billion on a constant currency basis, including $1.2 billion for FX movements and at least $1.3 billion of planned higher costs of funding for the trading book, with this benefit being reflected in higher trading income in non-interest income and as dollar for dollar with lower net interest income. In addition, given the unprecedented speed of interest rate rises we've been seeing this year, we believe we're being cautious on our planning assumptions across deposit betas, deposit migration, and asset margins from here. The FX movements have a similar impact on costs, with 2021 adjusted operating costs of $32 billion translating to around $30 billion using year-to-date average FX rates and around $29 billion if you were to use September average rates. Given the slower growth we now foresee, we now expect low single-digit lending growth in both 2022 and 2023. before returning to previous expectations of mid-single digit growth from 2024 onwards. On the next slide, non-interest income was $5.7 billion, up 13% against last year's third quarter. Net fee income was down 11%. The decline in fees was largely due to lower capital markets and advisory levels in global banking and markets. and lower equity market activity in Hong Kong in wealth and personal banking. Flow fees and global payment solutions were up 18% in commercial banking and up 8% in global banking and markets. Other income was up 49%, including another strong FX performance in the quarter. On the next slide, We've reported a net charge of $1.1 billion or 43% of ECLs in the quarter. This included $600 million of modeled Stage 1 and 2 provisions and overlays, $400 million of Stage 3 loans, and $100 million of write-offs. There was a $300 million charge in the UK including $200 million of additional allowances for heightened economic uncertainty. $400 million also relates to the mainland China commercial real estate market, around two-thirds of which are Stage 1 and 2 provisions, and the remaining third are Stage 3. The overall quality of our loan book remains good. Stage 3 loans, as a percentage of total customer loans, are stable at 1.8%. In terms of outlook, we expect an ECL charge of around 30 basis points for this year. And for 2023, we now expect ECLs to be at the higher end of our 30 to 40 basis point planning range, but with a higher degree of volatility around this guidance given the uncertain market outlook. Turning to slide eight, we've had three quarters now of relatively stable costs year to date. And we continue to expect costs to be broadly stable on last year. Within that, third quarter adjusted operating costs were 5% up on the same period last year, driven by continued investment in technology and timing differences in the variable pay accrual versus the third quarter of 2021. We made a further $600 million of cost program savings during the third quarter, with cost to achieve spend of around $700 million. The formal three-year program ends this year. We now expect to spend between $6.5 billion and $7 billion, slightly lower than our original $7 billion CTA target. But the expected cost savings from the program remain unchanged at around $5.5 billion by the end of this year. rising to around $6.5 billion of cost savings by the end of 2023. We continue to target around 2% adjusted cost growth for 2023, with an ongoing focus on active cost management to mitigate inflationary pressures. Turning to capital, on slide nine, our core tier one ratio was 13.4%, down 20 basis points on the second quarter. This includes the sale of our French retail banking operations, which had an impact of around 30 basis points, and further negative reserve movements through other comprehensive income due to higher rates. Reported risk-weighted assets were down $23 billion on the second quarter, principally to FX movements. And we've now achieved our year-end ambition of at least $120 billion of cumulative RWA saves, with modest further saves still expected in the fourth quarter. We expect Court Year 1 to now recover strongly in the fourth quarter, back towards 14%. This reflects a number of factors, including the formulaic impact of how our dividend is accrued during the year, We accrue at the top end of our payout range, so have already accrued 28 cents year to date. And additional capital management actions we've been taking to offset the negative OCI movements. Please remember that this is not guidance of our full year 2022 dividend intentions. The dividend accrual is purely a formulaic calculation that will trough up at the full year based upon the results and outlook at the time. We continue to expect to move back to the bottom end of our 14 to 14 and a half percent target quarter one range during the first half of 2023, and to consider buybacks from the second half of 2023 onwards. So in summary, these were a good set of results, good earnings diversity across the group, growth in all of our business lines, and continued strong control on operating costs. Despite a weakening credit outlook, our credit quality remains strong. For 2023, we're upgrading like-for-like revenue assumptions. We continue to target around adjusted cost growth of around 2%, and we expect to be at the bottom end of our target quarter one range in the first half of 2023. Finally, after another quarter of good progress, we remain confident of delivering our targeted 12 plus percent return on tangible equity in 2023 and beyond. We expect a 50 percent dividend payout ratio for both 2023 and 2024, supplemented by active capital management for surplus capital beyond this. We've included a slide on Canada in the appendix, so you can see the shape of the business. and the tangible equity within it. We've also included slides on mainland China commercial real estate and the Hong Kong loan book. With that, Elmer, if we could please open up for questions.