Transcript Analyst and Investor Call 1H18 Results Announcement 6 - PDF document

Transcript Analyst and Investor Call 1H18 Results Announcement 6 August 2018, 7.30 am BST Corporate participants John Flint, Group Chief Executive Iain Mackay, Group Finance Director

1 John Flint, Group Chief Executive Good morning from London, good afternoon to everyone in Hong Kong, and welcome to our 2018 interim results call. I’m here today with Iain Mackay and I’ll pass over to him shortly. Let me start though by recapping our strategy and covering the main points of our results. In June we set out eight strategic priorities that will enable us to grow our profits on a consistent basis and create value for shareholders. In particular, we aim to deliver a return on tangible equity of more than 11 per cent by the end of 2020.To do this, we intend to deliver growth from areas of strength; to turn around low- performing businesses; to invest in revenue growth and the future of the business; and to simplify the organisation and invest in future skills. Central to this is our ability to use the revenue capacity of the Group to invest in growth and competitiveness, within a constraint of full year positive jaws. For the first half of the year, reported profit before tax was up 5 per cent compared with the same period last year, and adjusted PBT was down by 2 per cent, due to increased investment in the business. For the second quarter, reported profit before tax was up 13 per cent, and adjusted profits were broadly in line with last year’s second quarter. This performance was in line with our expectat ions. Our global businesses delivered an increase in adjusted revenue of 7 per cent in Q2. This was offset by the Corporate Centre, which was down against a strong second quarter of 2017. In line with the guidance we issued in May, our second quarter adjusted costs rose by 7 per cent and were stable compared with the first quarter. We grew lending by a further 3 per cent compared with the first quarter, and 5 per cent from the start of the year. Our common equity tier one ratio remains strong at 14.2 per cent. This includes the impact of foreign currency movements and the full amount of the 2 billion dollar share buy-back that we announced in May. Iain will talk you through the numbers. Iain Mackay, Group Finance Director Thanks John. Looking quickly at some key metrics for the first half: The return on average ordinary shareholders’ equity was 8.7 per cent; The return on average tangible equity was 9.7 per cent; We had a lower tangible net asset value per ordinary share of 7 dollars, driven by foreign exchange movements; and we had negative jaws of 5.6 per cent due to increased investment in the business. We remain committed to achieving positive jaws for the full year. Slide 4 provides detail on the items that take us from reported to adjusted. You’ll note that there are no “costs - to- achieve” this year. The other main difference in the first half related to legal settlements and provisions. In July we reached an agreement-in-principle with the US Department of Justice to resolve its FIRREA investigation i nto HSBC’s historical origination and securitisation of residential mortgage -backed securities. This amount was substantially covered by the provision we made in the first quarter, as covered on page 105 of the Interim Report. You’ll find more details i n the appendix. The remainder of the presentation focuses on adjusted numbers. Slide 5 breaks down adjusted profit for the first half by global business and geography. Profits in our four global businesses rose by a total of 851 million dollars. By contrast, Corporate Centre PBT fell by 1.1 billion dollars due to lower revenue. In Asia, excellent performances from Retail Banking and Wealth Management and Commercial Banking contributed to a strong PBT performance. Europe bore much of the impact of the fall in Corporate Centre, and was also affected by a drop in revenue in Global Markets. The drop in Corporate Centre revenue comprised: 241 million dollars of valuation differences on long-term debt and associated swaps, which would broadly reverse if held to maturity; A 242 million dollar fall in Balance Sheet Management revenue; A 169 million dollar movement in losses on the disposal of legacy assets; and 114 million dollars of additional interest expenses, primarily due to MREL issuance Slide 6 looks at profit before tax for the second quarter, which was broadly stable compared with the same period last year. PBT was up in all four global businesses, and up significantly in Asia, North America and Latin America. The drivers of the increase in Asia were broadly the same as for the half year. (amend as appropriate)

2 In North America, revenue increases and ECL releases related to the oil and gas sector contributed to a large increase in profits. In Latin America, the increase in PBT was driven by a good all-round performance from our global businesses in Mexico. Corporate Centre was again the main driver of the fall in Europe, due largely to a 632 million dollar fall in revenue. The drivers of this movement were again very similar to the half-year. Slide 7 shows the revenue trends in our global businesses. Second quarter revenue from our four global businesses was 865 million dollars, or 7 per cent, higher than the same period last year. I’ll go through each business in more detail over the next few slides. Slide 8 looks at Retail Banking and Wealth Management revenue, which grew by 326 million dollars, or 6 per cent, compared with last year’s second quarter. We also made market share gains, particularly in the UK mortgage market. Higher balances and higher interest rates drove a 472 million dollar increase in deposit revenues, particularly in Hong Kong and the UK. Income from investment distribution increased by 57 million dollars, reflecting higher sales of retail securities and mutual funds, mainly in Hong Kong. Lending revenue fell by 83 million dollars due to asset margin compression from competition in the mortgage market. We continued to grow lending quarter-on-quarter and year-on-year. Customer lending rose by 8 per cent, and customer accounts increased by 3 per cent compared with the same period last year. As slide 9 shows, Commercial Banking revenue grew by 466 million dollars, or 14 per cent. Growth in Commercial Banking is increasingly broad-based, with good performances from Credit & Lending and Global Trade & Receivables Finance, in addition to another excellent quarter from Global Liquidity & Cash Management. Global Liquidity & Cash Management revenue grew by 22 per cent on the back of increased balances and the impact of wider spreads in Asia. Credit and Lending revenue grew by 6 per cent due to balance sheet growth in the UK and Hong Kong. Global Trade & Receivables Finance revenue rose by 4 per cent as we grew balances in Hong Kong and the UK. Commercial Banking grew lending by 3 per cent in the second quarter, and b y 8 per cent compared with last year’s second quarter, mainly in Asia and the UK. Global Banking and Markets revenue grew by 65 million dollars, or 2 per cent, compared with last year’s second quarter. After credit, funding and valuation adjustments, revenue was broadly stable. We saw continued positive momentum in key product areas, including double-digit percentage revenue growth in Global Liquidity & Cash Management, Securities Services and Foreign Exchange. Global Banking revenue was broadly stable, as the impact of growth in lending balances and market share in Debt Capital Markets was offset by lower corporate issuances and tighter margins. Global Markets revenue was down by 13 per cent against a strong second quarter of 2017, due mainly to lower client activity in Rates and Credit. Adjusted RWAs fell by 11 billion dollars in Global Banking and Markets in the second quarter. Global Private Banking revenue grew by 2 per cent compared with last year’s second quarter, supported by positive net new inflows Corporate Centre was a major factor in our second quarter performance. As noted earlier, a significant portion of the reduction in revenue arose from valuation differences on long-term debt and associated swaps, on which we expect ongoing volatility from quarter-to-quarter. These differences would broadly reverse if held to maturity. We continue to manage down our Legacy Credit positions. In the first half we realised a loss on one specific transaction that was capital accretive. With respect to Balance Sheet Management, full-year revenue guidance remains broadly unchanged at 2.3 to 2.5 billion dollars. Interest expenses are expected to stay at broadly the current level for the rest of the year. We remain focussed on improving capital efficiency in Corporate Centre. Net interest income largely reflected higher deposit margins in the second quarter, rising 4 per cent to 7.6 billion dollars. As we worked through the quarterly NII and NIM trends we identified a few possible minor adjustments to the Q1 NIM number which, if made, would confirm continued quarterly progression. NIM in Asia rose by 15 basis points from the full year to 2.03 per cent, due to higher deposit margins. (amend as appropriate)