HSBC Holdings plc (NYSE:HSBC) Q1 2024 Earnings Call Transcript April 30, 2024
HSBC Holdings plc isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome, ladies and gentlemen, to the analyst and investor webinar on the 2024 first quarter results for HSBC Holdings plc. For your information, this webinar is being recorded. We are now ready to start the webinar, so I will hand over to Mark Tucker, Group Chairman.
Mark Tucker: Good morning to those of you in London, and good afternoon to those of you in Hong Kong. I’m joining you today from London and have alongside me know enjoy. I’ll be making some short opening remarks before handing over to Noel. As you may have already seen, we have announced today that Noel has informed the Board of his intention to retire from the bank after nearly 5 years in the law. The Board and I would like to pay tribute to Noel’s exceptional [indiscernible] As Group Chief Executive, he drags both our transformation strategy as well as creating a simpler, more focused business through the disposal of assets in the U.S., France and Canada. This has enabled us to deliver an improved performance, achieving record profits last year and create a platform for future growth and development.
Now, you’ll hear from him in a second, has decided it’s the right time to step back and find a better balance between his personal and business commitments. As you would expect, the Board keeps succession planning under constant review. We already have started a robust and rigorous process to find our next group Chief Executive. This process will look at both internal and external candidates. I’m very pleased that now has agreed to remain in his role while this process takes place, ensuring a smooth and orderly transition. And on a personal note, I’d like to thank Noel for his unwavering commitment and dedication to HSBC, which he joined 37 years ago. Now, it’s been a pleasure and privilege to work with and alongside you.
Noel Quinn: Thank you, Mark. I’m very grateful for your support, guidance, friendship and partnership. I’m proud of what my HSBC colleagues and I have achieved together over the past 5 years. Over that period, we have hit some significant milestones, record profits last year, the strongest returns in a decade and the highest dividend since 2008. As Mark mentioned, we have created a more focused business, and I believe we have built a strong platform for the bank’s next phase of development and growth. That’s why I feel this is the right time to step back to find a better balance between my personal and business commitments with the intention going forward after a break of pursuing a portfolio career. When I reflect back on the last 37 years, I have held intensive leadership roles, particularly since I took over the U.K. Commercial Bank in October of 2008.
After 16 years of intensive leadership, I’m ready for a change. But it’s also a natural inflection point for the bank as it comes to the end of the current transformation phase. It’s an ideal time to bring in new leadership. The Board has now started a process to find my successor, and I’m very happy to continue in my role as that process takes place. Rest assured, I will be working hard to ensure a smooth and orderly transition for my successor and to keep the momentum going in this business, as you have seen in Q1. Until then, it’s business as usual. So, let’s now turn to our Q1 results, which have showed continued progress. We had a good first quarter. Reported profit before tax was $12.7 billion. Excluding notable items, profit before tax was $9 billion.
Our return on tangible equity was 16.4%, excluding notable items. I’m also pleased with the further capital distributions of $8.8 billion, which brings the total amount of distributed capital by way of dividends and buybacks over the last 15 months to almost $28 billion. And we are on track to meet all of our previously communicated guidance for 2024. I will now hand over to George to take you through the numbers.
Georges Elhedery: Thank you, Noel. I’d like to open by paying tribute to the enormous contribution Noel has made to the bank. I’ve greatly enjoyed working alongside him. And I know everyone at the bank has appreciated this strong and effective leadership. I’m also grateful for the support he has shown me personally since my appointment as CFO, 15 months ago. The Board has announced the process to find a successor, and I know Non and I will continue to remain very focused on the job at hand until that process has been completed. Turning now to the numbers. Reported profit before tax of $12.7 billion was down $0.3 billion in the first quarter of 2023 on a constant currency basis. Excluding notable items, profit before tax was $9 billion, down $0.4 billion on last year’s first quarter.
On an annualized basis, we delivered a return on tangible equity of 26.1% or 16.4%, excluding notable items. We completed the $2 billion share buyback announced in February in 2 months. This means that since the end of 2022, we have bought back 6% of our outstanding shares. And the trend of strong shareholder distributions continues this quarter. We have announced, as Noel said, a further $8.8 billion of distributions consisting of first interim dividend for ’24 of $0.10 per share. The special dividend of $0.21 per share from the Canada sale proceeds and a new share buyback of up to $3 billion, which we plan to begin right after the AGM and complete within 3 months. Finally, we are reconfirming all of our 2024 guidance, including a mid-teens return on tangible equity, excluding notable items and our commitment to limit cost growth to around 5% on a target basis.
So, on the next slide, reported profit before tax of $12.7 billion included $4.8 billion gain on the sale of Canada, partly offset by the $1.1 billion impairment on the classification of Argentina as held for sale. Excluding notable items, profit before tax was $9 billion with revenue growth offset primarily by higher costs and ECLs. Revenue of $20.8 billion was up $0.5 billion on the first quarter of last year. Excluding notable items, revenue was $17 billion, which was up $0.5 billion on the first quarter of last year, with growth in banking NII, partly offset by lower fee and other income. Within that, we saw high single-digit growth in multi-jurisdictional revenue in the first quarter, which underlines the value of our global network. Banking NII of $11.3 billion was up $0.6 billion on the fourth quarter on the reported FX basis, mainly driven by Argentina banking NII as well as the nonrecurrence of the cash flow hedge reclassification in the last quarter.
Looking ahead to the rest of the year, a few things to keep in mind. First, our Q1 banking NII included $0.3 billion from Canada, which will not repeat in future quarters due to the completion of the sale in March this year. Second, first quarter banking NII also included $0.5 billion from Argentina. This contribution will continue to be highly volatile until the sale is completed, which we expect to be within the next 12 months. Please, therefore, do not extrapolate the $0.5 billion run rate for the remainder of the year. Our banking NII guidance assumes a contribution of around $1 billion in full year ’24 for Argentina, which is in line with full year 2023. Third, the banking NII outlook has improved in several respects since we announced our full year results in February.
The Hong Kong time deposit mix remained stable as a percentage of customer deposits in the quarter and markets are now pricing in more modest cuts to interest rates. However, it is still early in the year, and these things can change. So, we are maintaining our 2024 banking NII guidance of at least $41 billion. Turning to fee and other income. Wholesale transaction banking was down by 9%, primarily due to the normalization of FX revenues compared to a very strong foreign exchange performance in the first quarter of last year, which benefited from higher market volatility. Fees from Global Payment Solutions had another good quarter, up by 6%. Wealth is another growth area that had a very good quarter, up by 14% on the same period last year as our investment continued to drive improved results.
Private Banking was a standout performer, mainly driven by increased customer activity in brokerage and trading in Asia, but growth in wealth has been broad-based. To illustrate this, we acquired around 135,000 new-to-bank retail wealth customers in Hong Kong in the quarter. Approximately 60% of these were nonresidents attracted by our service and product capabilities in Hong Kong. Building on previous quarters, we attracted $27 billion of net new invested assets, of which $19 billion were in Asia. And our insurance new business CSM was $0.8 billion, up from $0.4 billion in the first quarter of last year. On credit, expected credit losses were $0.7 billion in the quarter, equivalent to 30 basis points of average loans. These were primarily Stage 3 charges across retail and wholesale.
There was a $54 million charge related to our Mainland China commercial real estate portfolio. While challenges remain within the sector, we expect a more benign ECL contribution from it than last year. We remain comfortable with our current level of provisions and continue monitoring developments closely. And we are reconfirming our 2024 ECL guidance of around 40 basis points of average loans, recognizing the overall uncertainty from the flow-through effect of higher rates on the economy. Next, we are on track to meet our target of limiting 2024 cost growth to around 5% on a target basis. This quarter’s year-on-year cost growth was impacted by 3 items. First, we chose to face the accrual of our performance-related pay more evenly this year than we did last year.
This accounted for 2 percentage points of cost growth this quarter. We do not currently expect the total amount of performance-related pay for 2024 to be significantly different to 2023. So, the accrual will be lower over the next 3 quarters than it was in the same period last year. Second, HSBC Innovation Banking contributed to 1 percentage point of cost growth this quarter as we only acquired SBB U.K. in the middle of March last year. We intend to provide you with a fuller update on that business at the half year, but I’m pleased that it has good momentum. In the U.K., we onboarded 183 new-to-bank innovation banking client groups in the quarter, the best quarter since acquisition. Finally, another percentage point of the cost growth in the quarter was due to the Bank Finland levy and the incremental FDIC special assessment.
We remain committed to cost discipline, and we are reconfirming our guidance of limiting 2024 cost growth to circa 5% on a target basis, inclusive of all the above items. On lending and deposits. There was good loan growth in the U.K., the Middle East, Mexico and Asia, excluding Hong Kong. Loan demand in Hong Kong remains subdued, largely due to the high interest rate differential with Mainland China. Overall, we continue to expect mid-single-digit loan growth over the medium to long term, but we expect demand to remain subdued in the near term. Deposits were down 2%. This was due to a range of factors, including seasonality, the switch from time deposits to wealth products in Hong Kong and our deliberate choice to forsake some highly price-sensitive deposits.
Next, our CET 1 ratio was 15.2%, up 40 basis points on the fourth quarter. Organic capital generation and the gain from the sale of the Canadian business enabled us to announce $8.8 billion of capital distributions this quarter. This includes a share buyback of up to $3 billion, which is expected to have an impact of around 40 basis points on our CET1 ratio in the second quarter. For modeling purposes, please note that the $5.8 billion of dividends announced today as well as the $5.9 billion in respect of the ordinary dividend announced at the full year results in February will both be reflected in TNAV in the second quarter. At closing of the sale of HSBC Argentina, which is expected within 12 months, we will also recognize $4.9 billion of foreign exchange reserve recycling losses subject to any movement in this reserve up until completion.
These losses have already been accumulated in capital over the previous years. Therefore, recognition in the P&L will have no impact on CET1 nor on TNAV. Finally, looking forward to the rest of the year, our good first quarter puts us on track and we are reconfirming all of our 2024 guidance. A mid-teens return on tangible equity, excluding notable items, a banking NII of at least $41 billion, ECLs of around 40 basis points cost growth limited to around 5% on a target basis and a 50% dividend payout ratio. And with that, Louis, can we please go to Q&A.
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