HSBC Holdings plc, H1 2024 Earnings Call, Jul 31, 2024 - SEHK:5

SEHK:5

Noel Paul Quinn, the Group CEO, Member of the Group Management Board & Executive Director of HSBC Holdings plc, made several statements during the earnings call. Here is a detailed summary of his comments:

Opening Remarks

• Introduction: Noel thanked the participants and mentioned that this would be his last results announcement before Georges takes over as Group Chief Executive in September.
• Appreciation: He expressed gratitude to his colleagues worldwide for their efforts over the past five years and wished Georges success in his new role.
• Financial Performance: Noel highlighted the bank's record profit performance in 2023 and strong first half performance in 2024, with revenue of $37.3 billion (up 1%) and profit before tax of $21.6 billion (stable).
• Capital Generation: He noted the strong capital generation, with a return on tangible equity of 17% (excluding notable items), and announced $4.8 billion in further capital distributions, bringing the total to $34.4 billion over the last 18 months.
• Guidance Update: Noel provided new guidance for a mid-teens return on tangible equity in 2025, upgraded 2024 banking net interest income (NII) guidance to around $43 billion, revised 2024 expected credit losses (ECL) guidance to within the normal medium-term planning range of 30 to 40 basis points, and confirmed 2024 cost guidance of around 5% growth.

Strategic Progress

• Portfolio Reshaping: Noel discussed the bank's strategy of exiting non-strategic, subscale, and unprofitable businesses, leading to a reduction in risk-weighted assets (RWA) of around $128 billion.
• Revenue Growth: He mentioned the bank's focus on growing fee income, particularly in wholesale transaction banking and wealth, and the investment in differentiated international propositions.
• Interest Rate Sensitivity: Noel highlighted the reduction in sensitivity to interest rates from approximately $7 billion for a 100 basis points down shock in interest rates in 2022 to around $2.7 billion today.
• Cost Discipline: He emphasized the importance of cost discipline across the group, which enabled investments in key areas.

Financial Performance Details

• Wealth Revenue: Noel reported that wealth revenue grew by 12% in the first half to $4.3 billion, with broad-based growth in wealth fee and other income (up 14%) and private banking revenue (up 16%).
• Transaction Banking: He noted stable transaction banking revenue in the first half, with good growth in payments (up 3%) and Global Payment Solutions (up 4%), despite a challenging environment for trade.
• Market Performance: Noel mentioned positive growth in the bank's scale markets, including Hong Kong, the UK, India (up 4% in the first half), and Singapore (up 2%).
• Multi-Jurisdictional Client Revenue: He highlighted the growth in both wholesale and retail multi-jurisdictional client revenue, with wholesale up 4% to $9.7 billion and retail wealth customers up 6% to $5.4 billion.

Reflections

• Retail Business Model: Noel commented on the transformation of the retail business model and the investment in people and digitization, which made wealth a key driver of revenue growth.
• Transaction Banking: He discussed the stable transaction banking revenue, with good growth in payments and a slowdown in the decline of trade in the second quarter.
• Hong Kong and UK Businesses: Noel mentioned the strong performance of the bank's businesses in Hong Kong and the UK, with profit before tax in Hong Kong up 1% and in the UK up 11% (excluding the gain on SVB UK last year).
• International Franchise: He highlighted the bank's strong international franchise, evidenced by the growth in international customers in the UK and the number of international wealth and personal banking customers.

Closing Remarks

• Mid-Teens Return on Tangible Equity: Noel reiterated the bank's expectation to deliver a mid-teens return on tangible equity this year and in 2025.
• Transition: He expressed confidence in Georges' ability to continue executing the bank's strategy and thanked his colleagues for their contributions over the past five years.

Question and Answer Session

• Response to Andrew Coombs: Noel responded to Andrew Coombs' questions about the bank's strategy and execution, stating that he had no regrets about the past five years and emphasizing the importance of continuous improvement and ambition.

• Response to Amit Goel: Noel addressed Amit Goel's questions about the bank's profitability target and the sluggish environment, explaining that the mid-teens ROTE guidance reflects a reasonable and sensible approach given the current uncertainties.

• Response to Raul Sinha: Noel deferred the questions about the structural hedge and the Hong Kong CRE book to Georges.

• Response to Jeremy Hugh: Noel commented on the bank's focus on Asia and global network, stating that the two are not mutually exclusive but interchangeable, as the bank is fundamentally an international bank with a strong presence in Asia.

• Response to Aman Rakkar: Noel deferred the detailed questions about net interest income to Georges.

• Response to Ed Firth: Noel commented on the strong performance of the wealth and private banking business in Q2, noting that it exceeded seasonal expectations and that lead indicators were positive.

• Response to Katherine Lei: Noel deferred the questions about capital and Hong Kong CRE to Georges.

• Closing Remarks: Noel thanked the participants for their questions and discussions over the past five years, expressing satisfaction with the bank's improved financial performance and wishing Georges and the team the best.

Georges Bahjat Elhedery, the Group CFO, Member of the Group Management Board & Executive Director, made several comments during the earnings call. Here’s a detailed summary of his statements:

Opening Remarks

• Transition: Georges expressed his honor at being appointed to lead HSBC into the future. He acknowledged that although he officially takes over as Group Chief Executive on September 2nd, he was ready to share some high-level thoughts.
• Continuation of Strategy: He stated that the group's strategy is working and that he is committed to building on the foundation laid by Noel Quinn. He emphasized the importance of the group's scale activities in Hong Kong, the UK, its international wholesale bank, and its wealth proposition, particularly in Asia.

Financial Performance and Guidance

• Q2 Numbers Summary:
  • Profit before tax was $8.9 billion, up $0.4 billion in the second quarter of 2023 on a constant currency basis.
  • Banking NII run rate was stable in the first quarter.
  • Strong wealth performance and stable wholesale transaction banking.
  • Cost growth of 7% in the first half, but on track to meet 2024 guidance of around 5%.
  • Growth in both loans and deposits in the quarter.
• HSBC Canada Contribution: Excluded from the commentary, contributing around $0.5 billion of revenue and $0.2 billion of profit before tax in the quarter.
• Notable Items and Strategic Transactions Impact: Excluding these, profit before tax was up 7% to $9.1 billion.
• Revenue: Up $0.3 billion to $16.5 billion, excluding notable items and the impact of strategic transactions.
• Banking NII Guidance Update: Upgraded from at least $41 billion to around $43 billion, assuming a $1 billion contribution from Argentina.
• Structural Hedge Details: Disclosed that around $55 billion of assets are due to mature in the second half of 2024 with an average yield of 2.8%, and around $105 billion will mature in 2025 with the same average yield.
• Wholesale Transaction Banking: Stable in the second quarter of last year or up 2% excluding the impact of strategic transactions.
• Wealth Performance: Wealth fee and other income was up by 13% compared to the second quarter of the previous year.
• Credit: Expected credit losses were $0.3 billion, equivalent to 15 basis points of average loans.
• Costs: Grew by 7% in the first half on a target basis, but on track to meet guidance of around 5% for 2024.
• Lending and Deposits: Positive loan growth in the quarter in both the UK and Asia, with deposits up 2%.

Capital and Distributions

• CET1 Ratio: Down 20 basis points to 15% due to strong organic capital generation offset by distributions.
• Share Buyback: Announced a new share buyback of up to $3 billion, expected to be completed within 3 months, with an impact of around 0.4 percentage points on the CET1 ratio.

Outlook and Guidance

• ROTE Guidance: Provided new guidance of a mid-teens return on tangible equity for 2025, in addition to the existing guidance for 2024.
• Banking NII Guidance: Upgraded to around $43 billion.
• ECL Guidance: Revised to within the normal medium-term planning range of 30 to 40 basis points.
• Cost Guidance: Confirmed guidance for 2024 cost growth of around 5% on a target basis and mid-single-digit loan growth over the medium term.

Question and Answer Session

• Structural Hedge Impact: Explained the impact of the structural hedge on NII, including the expected benefits from reinvestment at higher yields and the partial offset from additional hedging on an inverted curve.
• Interest Rate Sensitivity: Discussed the $2.7 billion sensitivity of banking NII to a 100 basis point drop in interest rates and the factors affecting the guidance for 2024 and 2025.
• Deposit Pass-Throughs: Addressed the assumption of a 50% pass-through in banking NII sensitivity and the difficulty in predicting pass-throughs on rate cuts.
• Performance-Related Pay: Clarified that $3.8 billion was paid in 2023 and that the accrual for 2024 is more evenly phased, with a commitment to limit cost growth to around 5%.
• RWA Increase: Explained that the $6.4 billion increase in RWA was due to adjustments in probability of default models for banks globally, reflecting learnings from the March 2023 crisis.
• Hong Kong CRE Book: Provided details on the 40% unsecured portion and the 60% secured portfolio, highlighting the strong collateralization and limited impact on ECL charges.
• Wealth Income and Lending Growth: Discussed the transition of customers from deposits to AUMs as interest rates come down and the strong deposit franchise that supports average interest-earning asset growth.

Closing Remarks

• Georges concluded by summarizing the strong first half performance and the group's confidence in delivering mid-teens return on tangible equity this year and in 2025.