HSBC Holdings plc, 2019 Earnings Call, Feb 18, 2020 - SEHK:5

SEHK:5

Mark Edward Tucker, the Non-Executive Group Chairman of the Board, made the following remarks during the earnings call:

1. Introduction and Context Setting:

   • He thanked everyone for joining the call and set aside a few minutes to provide context.
   • During the last year, the Board determined that it had two major priorities: selecting a new Group Chief Executive and enhancing performance to improve sustainable returns.

2. Group CEO Selection Process:

   • The Board embarked on a thorough and rigorous process to search for and identify a new CEO.
   • The process is well underway, and the Board intends to announce the outcome within a 6- to 12-month timescale as outlined in August.

3. Business Update:

   • There was a pressing need to reallocate capital away from underperforming businesses to support the growth of higher-return businesses, particularly where the bank has a competitive advantage.
   • The Board and executives were aware of the need to improve efficiency, reduce costs, and inject pace.
   • Noel Quinn and the executive team have worked closely with the Board to formulate and determine the plans announced.
   • The plans amount to a significant shift in the allocation of the bank's capital and resources, designed to improve sustainable returns for shareholders.

4. Recognition of Staff Efforts:

   • He recognized the exceptional work of the team, especially those in mainland China and Hong Kong dealing with the impacts of COVID-19.
   • He expressed gratitude for their dedication, care, and professionalism.

5. Transition to Presentations:

   • He handed over to Noel Quinn and Ewen Stevenson to take the attendees through the details of the results and the plan.

Noel Paul Quinn, Group CEO, Member of the Group Management Board & Executive Director, made several statements during the earnings call:

1. Introduction and Objectives:

   • Thanked Mark for his introduction and greeted the attendees.
   • Outlined two objectives for the call:
     • To discuss the Q4 and full-year results for 2019.
     • To explain the plan to address underperforming parts of the business and simplify the group.

2. Presentation Structure:

   • Announced the three-part structure of the presentation:
     • Ewen would cover the numbers for 2019.
     • Noel would discuss the plan.
     • Ewen would cover the financial implications of the plan.

3. Impact of Coronavirus:

   • Paid tribute to the resilience of HSBC's employees during the difficult time of the coronavirus outbreak.
   • Stated that the well-being of people and customers is the first priority.
   • Acknowledged the short-term economic impact on clients but emphasized the long-term strategic importance and attractiveness of mainland China, Hong Kong, and the broader Asian region.

4. Plan Overview:

   • Announced three action programs to be implemented by 2022:
     • An RWA upgrade program to strip out low-returning RWAs and redeploy them into higher-returning areas.
     • A $4.5 billion cost-reduction program to reduce total costs while investing in the business.
     • A simplification program to increase revenue synergies and accelerate execution.

5. Targets by 2022:

   • Targeted a gross RWA reduction of more than $100 billion, a reduced cost base of $31 billion or lower, and a CET1 ratio in the range of 14% to 15%.
   • Aimed for a return on tangible equity of 10% to 12% by 2022, with the full-year benefit of cost reductions and redeployed RWAs flowing into subsequent years.

6. Strategy Clarification:

   • Clarified that the 12% return on tangible equity is not considered a ceiling for the group and expressed aspirations to achieve higher returns.

7. Business Restructuring:

   • Detailed plans to upgrade the return profile of RWAs by removing more than $100 billion of low-returning RWAs and reinvesting them in high-growth, high-returning activities.
   • Mentioned the strong heritage of HSBC with a wholesale and personal client base centered around faster-growing, higher-returning markets.
   • Identified parts of the organization, such as the U.S. business and the non-ring-fenced bank in the U.K. and Continental Europe, that are not producing acceptable returns and outlined plans to reshape them.

8. Regional Focus:

   • Discussed the focus on Europe, the U.S., and Global Banking and Markets, outlining specific measures for each region.

9. Cost Reduction and Simplification:

   • Announced plans to combine Retail Banking and Wealth Management and Global Private Banking into a new global business called Wealth and Personal Banking.
   • Mentioned the merger of the back and middle offices for wholesale banking businesses.
   • Simplified the geographic management structure from seven geographies to four.
   • Reorganized global functions to align with the size and simplified structure of frontline teams.
   • Incentivized the Executive Committee to deliver the right outcome for the bank as a whole.

10. Summary:

    • Summarized the detailed restructuring plan to address low-return portfolios in Europe and the U.S., reshape Global Banking and Markets, and reallocate freed-up capital into higher-growth, higher-return businesses and markets.
    • Highlighted the simplification and cost-reduction program while increasing IT investment.
    • Emphasized the reorganization of the management structure for faster execution.
    • Established a dedicated transformation team to focus on restructuring and a separate team for future growth strategies.
    • Stated that tough decisions have been made to deliver quick results, including reducing RWAs, reversing the direction of travel on cost and headcount, and refreshing the executive management team.

11. Closing Remarks:

    • Concluded by summarizing the achievements in 2019 and the ambitious yet realistic plan to improve overall group returns by 2022.

    • Reiterated the commitment to deliver on the plan.

Ewen James Stevenson, a former member of the Group Management Board at HSBC Holdings plc, provided detailed insights into the company’s financial performance and future plans during the earnings call on February 18, 2020. Below is a summary of his statements:

Fourth Quarter Results Overview

• Adjusted Revenues: Up 3%, reflecting a weaker quarter in 2018 and the strength of HSBC's franchises.
• Adjusted Profits: Up 29% due to a $7.3 billion goodwill impairment.
• Reported Loss Before Tax: $3.9 billion.
• Hong Kong Performance: Resilient results in the fourth quarter with adjusted profits up 3%.
• Coronavirus Impact: Expectation of a weaker first half in 2020 due to the ongoing impact of the coronavirus.

Financial Highlights

• Headline Results: Impacted by a large goodwill impairment reflecting weakened interest rate and revenue outlook.
• U.K. Ring-Fenced Bank: Impacted by redress costs, primarily related to higher expected litigation costs for Payment Protection Insurance (PPI).
• Cost Reduction: Progress in reducing cost run rate from 5.6% to just under 3% in 2019.
• Core Tier 1 Ratio: Increased by 40 basis points to 14.7%.
• Net Risk-Weighted Assets (RWAs): Reduced by $22 billion, including a $19 billion reduction in Global Banking and Markets.

Business Segment Performance

• Retail Banking and Wealth Management (RBWM): Full-year adjusted revenues up 9%, with good growth in deposits, mortgage balances, and customer numbers.
• Global Private Banking: Net new money of $23 billion in the year.
• Commercial Banking: Revenues up 6%, underpinned by strong growth in lending and deposits.
• Global Transaction Banking: Revenues up 3% despite a softer interest rate environment.
• Asia: Revenue up 7% overall with good growth across most of the region.
• U.K. Ring-Fenced Bank: Revenue growth of 3%, underpinned by deposit balance and mortgage growth.

Hong Kong Performance

• Macro Conditions: Became more challenging in the second half of 2019 and remain challenging due to the coronavirus.
• 2019 Performance: Resilient, with adjusted revenue growth of 7%, robust credit quality, and profits before tax of $12.1 billion.

U.S. and Non-Ring-Fenced Bank Performance

• U.S. Turnaround: Impacted by the changed U.S. outlook for interest rates; full-year revenues down 3%, and profits before tax down 39%.
• Non-Ring-Fenced Bank: High costs and challenging conditions; revenues down 3% in the full year.

Full Year Results

• Total Adjusted Revenues: Up 6%.
• RBWM Revenues: Up 9%, including 7% in Retail Banking and 13% in Wealth Management.
• Commercial Banking Revenues: Up 6%, with strong growth in Global Liquidity and Cash Management and Credit and Lending.
• Global Banking and Markets Revenues: Down 1%, with transaction banking showing good growth and Global Markets declining by 8%.
• Global Private Banking Revenues: Up 5%, underpinned by net new money performance.

Fourth Quarter Revenues

• Up 9% overall or almost $1.2 billion, despite $300 million of lower Corporate Centre revenues.

Net Interest Income and Margin

• Stable Net Interest Income from the third quarter.
• Net Interest Margin: Unchanged at 156 basis points, helped by lower provisions from U.K. redress programs and releases relating to Argentine hyperinflation.
• Asian Franchise: Experienced asset margin compression, with the net interest margin down 5 basis points.
• U.K. Ring-Fenced Bank: Headline net interest margin up 2 basis points, but excluding lower U.K. redress provisions, the underlying net interest margin was broadly stable.

Costs

• Adjusted Operating Costs: Up 2.7% in the fourth quarter relative to the fourth quarter of 2018.
• Cost Run Rate: Down by half and slightly better in the second half than the first, despite higher investment spend.

Credit

• Credit Costs: Down 5 basis points to 28 basis points in the fourth quarter.
• Impact of Coronavirus: Expectation of additional expected credit losses in the first quarter of 2020, with a broader potential set of financial impacts on the group.

Capital Adequacy

• Core Tier 1 Ratio: Improved by 40 basis points to 14.7%.
• Risk-Weighted Assets: Reduced by almost $22 billion during the year, with a significant reduction in Global Banking and Markets.
• Return on Tangible Equity (RoTE): Declined by 20 basis points to 8.4%.

Summary of 2019 Financial Performance

• Adjusted Revenue: Up 6%.
• Adjusted Profits: Up 5%, reflecting much better cost discipline.
• Return on Tangible Equity: 8.4%.
• Core Tier 1 Ratio: Up 70 basis points to 14.7%.

Financial Implications of Restructuring Plan

• Risk-Weighted Assets: Planning to reduce RWAs in the non-ring-fenced bank and the U.S. and to increase capacity to invest in planned growth and priority markets.
• Gross RWA Reduction: Targeting over $100 billion, with reductions in the non-ring-fenced bank, the U.S., and parts of Global Banking and Markets.
• Leverage Exposure: Targeting a gross reduction of $250 billion in the non-ring-fenced bank in the U.S.
• Cost Base: Targeting an annual cost base of $31 billion or less in 2022.
• Return on Tangible Equity: Targeting 10% to 12% in 2022.
• Core Tier 1 Ratio: Maintaining in the range of 14% to 15%.

Cost Reduction and Simplification

• Cost Program: Requires intense focus on delivery, with almost 200 separate cost initiatives.
• Expected Cost Savings: $4.5 billion phased across the three years of the plan.
• Additional Restructuring Costs: Approximately $6 billion, with more than 90% incurred in 2020 and 2021.

Capital Management

• Capital Flexibility: Important due to the significant restructuring and the precise timing of RWA rundown.
• Basel III Reform: Limited uplift post-mitigation.
• Structural Issues: Addressing complexity due to subsidiary structure and peak-to-trough stress across the group.
• Capital Efficiency: Planning to reduce core Tier 1 ratio back to the lower end of the 14% to 15% range in the medium term.

Additional Insights

• Capital Accretion: If the capital ratio accretes above 15%, HSBC will manage its capital base appropriately.
• U.S. Business: Optimizing the gap between U.S. and PRA RWAs, with significant equity release embedded in the plan.
• Technology Investment: Using the cloud and creating a single data warehouse to improve productivity and efficiency.
• U.K. Overlay: Reduction in overlay due to the election, which reduced probabilities associated with downside scenarios.
• U.K. Economy: Resilience of the U.K. corporate base has been surprising.
• Q1 2020: Expectation of a 20-basis-point fall in the capital ratio, with significant regulatory and modeling-related headwinds.
• Global Banking and Markets Returns: Materially higher returns expected by the end of the plan compared to current returns.

These statements provide a comprehensive overview of HSBC's financial performance and the detailed restructuring plans aimed at improving returns and simplifying the organization.

Richard O'Connor facilitated the Q&A session during the HSBC Holdings plc earnings call. Key points he mentioned include:

• He introduced the process for asking questions, requesting attendees to state their names and institutions and limit themselves to two questions initially.

• He highlighted that there were questions from the web and the audience, and he would alternate between them.

• He managed the flow of questions, ensuring multiple participants had the opportunity to ask their queries.

• He addressed specific questions from analysts such as Raul Sinha, Martin Leitgeb, Claire Kane, Guy Stebbings, Magdalena Stoklosa, Amandeep Singh Rakkar, Ian David Gordon, Joseph Dickerson, and John Cronin.

• He clarified that some questions from the web were related to the coronavirus impact, capital ratios, and revenue guidance.

• He noted that the web had additional questions on RWAs, capital, and buybacks, which were common concerns among participants.