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Edited Transcript of 11.HK earnings conference call or presentation 5-Aug-19 9:00am GMT

Half Year 2019 Hang Seng Bank Ltd Earnings Presentation

HK Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Hang Seng Bank Ltd earnings conference call or presentation Monday, August 5, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Wai Wan Cheang

Hang Seng Bank Limited - Vice-Chairman & Chief Executive

* Wing Lok Leung

Hang Seng Bank Limited - CFO

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Conference Call Participants

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* Gurpreet Singh Sahi

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Huanan Zhou

UBS Investment Bank, Research Division - China Financials Research Analyst

* Leo Weng

JP Morgan Chase & Co, Research Division - Research Analyst

* Sam Wong

Citigroup Inc, Research Division - Research Analyst

* Sik Tin Chan

Haitong International Research Limited - Executive Director

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Presentation

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Unidentified Company Representative, [1]

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The -- our 2019 interim results announcement briefing. We trust that you have already looked through our press release. And due to the situation outside, if you don't mind, we've got Louisa Cheang, our Vice Chairman and Chief Executive; as well as our Chief Financial Officer; Andrew Leung. And if you guys don't mind, we will go directly to questions. Is that okay? Okay. Great. Thank you very much.

So who would like to start with the question? Please. If you could identify yourself, that would be great.

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Questions and Answers

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Sik Tin Chan, Haitong International Research Limited - Executive Director [1]

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I'm Steven Chan, Haitong. Three quick questions. First of all, the most important one to Louisa. We just heard about HSBC conference call. And we all know about the potential -- the change in management. So in the conference call, I think Mark Tucker say very clearly that they will have a very tight cost control because they expect that the revenue growth outlook may be a bit grumpy. So we've seen that for this first half, Hang Seng Bank's cost/income ratio has actually increased. So are you worrying about that the new management will likely to affect the expense growth of Hang Seng, say, in the next 18 months? They -- HSBC's time horizon is 18 months. So that's the first one. So I have...

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Unidentified Company Representative, [2]

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Should we answer them one at a time? We'll -- Steven we'll let you -- we'll come back to you.

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Wai Wan Cheang, Hang Seng Bank Limited - Vice-Chairman & Chief Executive [3]

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We have only a few of our friends here. So we can answer one at a time. I think we are always very cautious about cost in Hang Seng. That has been our philosophy. If you look at our cost efficiency ratio for first half, it's 28.2%. So it's actually very low within our peers in the industry. And in fact, I think it's very important that we continue to invest in area that we think will sustain the income in the future that include people and also technology, and that's where our 10% cost increase for the first half is mainly focused on. So with those investment, I think that's the key driver to sustain our revenue growth.

In terms of revenue, I think, while the second half will have a lot of challenges, giving all the macro situation as well as the situation in Hong Kong, I think our diverse range of product as well as our client base will provide us still a lot of momentum and continue to drive a good revenue for the second half.

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Unidentified Company Representative, [4]

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Okay. Your second question? Or should we go to the side first. Yes?

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Gurpreet Singh Sahi, Goldman Sachs Group Inc., Research Division - Equity Analyst [5]

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Okay. Maybe -- Gurpreet with Goldman. Maybe net interest margin, it was very -- not very, it was a bit weaker than what the market would have expected looking at the HIBOR level. Can Andrew please explain on, related to the drivers, the asset yield? And then the cost of funds, how did that behave? And then related to that, how would you look out for the net interest margin in the second half of this year?

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Wing Lok Leung, Hang Seng Bank Limited - CFO [6]

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Okay. Well, basically, if we compare to corresponding period in 2018, the net interest margin improved sequentially. Well, I think that you're referring to the half on half comparison, that in the second half 2018, the net interest margin was 2.27%, while the first half 2019, we've recorded 2.21% of net interest margin. So referring to the 6 basis point reduction, I think the major reason for the drop in the net interest margin, despite the fact that the average 1-month HIBOR was staying at the same level of [11.66%]. But if you look at other factors, that will lead to the change in the net interest margin, those are, for example, the factoring of the yield curve.

If you look at the 3-month HIBOR, actually, the average 3-month HIBOR was lower than the corresponding period in the second half 2018. And in fact, in certain period of the first half 2019, we saw the inverted yield curve phenomenon in -- particularly, in June, where we saw the average 1-month HIBOR was higher than the 3-month HIBOR by around 1 basis point. And at a particular point of time, in April, the same situation happened. It is not quite usual for us to see that yield curve in Hong Kong for quite a number of years. I think, last time, that maybe a few years ago. So the flatting of the yield curve affect the return from the balance sheet management as well as the, say, time structure for the assets and the liabilities. So this is one reason leading to some net of impact on the net interest margin.

The other factor is the migration from current account, savings accounts to time deposit. In the -- at the end of 2018, the CASA ratio was around 68.3%; in the first half of 2019, it dropped to 64.5%. As you know, the market, the competition for time deposit in the -- in particular, in the same quarter of 2019 was a little bit comparative. So the migration from current account and -- current account, savings account CASA to time deposit increased the cost of fund in the first half of 2019, leading to some contraction in the deposit spread. In fact, if we compare the asset yield and also the cost of funding for first half 2019 against the second half of 2018, we saw that the cost of fund actually was around 5 basis point increase while the asset yield was reduced or compressed by 1 basis point. So altogether, leading to a 6 basis point reduction half-on-half.

So going to the future, that will be quite difficult to give you a very specific answer because of uncertainties involved. On one hand, the HIBOR level is quite volatile. To call an example, last Friday, the 1-month HIBOR fixing was around 1.82%. Today, it actually is 2.02%. So in one day, there's 18 basis points or 20 basis point changes. And that actually is not unique to today, it's happened throughout the same quarter of 2019. We saw the HIBOR -- 1-month HIBOR shoot up to around 3% recently, and then it dropped to 1.8%, something like that.

So the volatility of HIBOR will definitely -- will contribute to the change in the net interest margin, but the volatility of the HIBOR is also affected by several factors. For example, this is another impact normally around the end of the quarter, we saw the HIBOR will shoot up because of the, say, tightened debt liquidity. And also, in the event of, for example, IPO, when the market is short of liquidity, the HIBOR will also shoot up.

So those are the uncertainties that we are encountering in the second half. Not to mention that with, say, more economic uncertainty, I think the borrowers will definitely have a -- the quality borrowers may have a better bargaining power. So loan pricing, well, it depends very much on the competition, but there may be downward trend or squeeze -- pressure for squeezing in the loan margin. So those factors needs to retain consideration when projecting the net interest margins.

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Sam Wong, Citigroup Inc, Research Division - Research Analyst [7]

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Sam Wong from Citi. My question is regarding provisionings. First half [COR] was pretty good. So is there any plan for overlay, given the recent macro slowdown and the political events in Hong Kong?

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Wing Lok Leung, Hang Seng Bank Limited - CFO [8]

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There is some trade war overlay made in the first half 2019, as far as some being made in the second half of 2018. Altogether, there's quite a bit of the ECL made in the first half coming from the trade war overlay. But...

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Sam Wong, Citigroup Inc, Research Division - Research Analyst [9]

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What are the kind of risk parameters?

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Wing Lok Leung, Hang Seng Bank Limited - CFO [10]

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Well it's a management overlay, not only relating to the risk parameters. When we calculate the ECL, actually, we have some economic models to use the micro consensus, economic forecast for the future to project the probability for the loss given default to come up with the ECL. But then the management will review whether there are additional factors that we need to consider. In this case, this is the trade war that we think that there will be other uncertainties. And we're more prudent for the management to add some additional ECL to cater for any potential deterioration in the external environment. So this is the situation.

But having said that, if you compare the level of the ECL made in the first half 2019 against the second half 2018, actually, it is a reduction of around $250 million. That actually affect the improvement in credit quality of the asset book. Because if you, say, look at our nonperforming loan ratio, it reduced from 25 basis point to 22 basis point. And if you look at the credit cost for the first half 2019, actually it's 11 basis point, the same level as the whole year of 2018.

So that polished effect that less statutory accounts evolved in the first half 2019 and asset quality maintained very -- at a very strong level. So I don't think there's a major concern for the asset quality at the moment.

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Gurpreet Singh Sahi, Goldman Sachs Group Inc., Research Division - Equity Analyst [11]

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Gurpreet from Goldman again. A couple of questions, follow-up from previous ones. First is, to the earlier questions, Andrew, can you give us a number, how much of the ECL is trade-war related that we can then look at against the book or can view as right back in future, maybe of some sort? And second, related to that is, have you done a stress test of the entire book against the backdrop of more protest in Hong Kong and then indirect impact to the retail sector? And how in a worse case, provisions can be higher, maybe later this year or earlier next year?

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Wing Lok Leung, Hang Seng Bank Limited - CFO [12]

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For the first part of the question relating to trade war overlay. In the second half of 2018, we have made around HKD 86 million for the management overlay for trade war, and in the first half of 2019, we have made additional HKD 178 million for the management overlay in relation to the trade war.

So regarding the potential additional ECL to be made in the second half, it depends very much on the economic development. For example, if the GDP is lowering then that may affect the economy's forecast for the future economy. So once they change the economic forecast, the market consensus' parameters will be changed, leading to a revised probability of default or loss given default because, for example, if they project the [property highs] will be affected negatively then the collateral value may affect the loss given default. So those parameters, when changed, will definitely affect the eventual calculation of the ECL and the amount to be put into the P&L.

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Sik Tin Chan, Haitong International Research Limited - Executive Director [13]

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I think 2 quick questions. One, although you haven't formally announced, but we can estimate that the TLAC instrument you have issuing through some subordinated liabilities as well as perpetual bonds, together, probably around HKD 25 billion. So my question is, what's the funding costs of both for the subordinated liabilities as well as for the perpetual, previously, is around 5% coupon. So not sure whether this coupon is maintained.

Second one, on risk-weighted assets. The growth of risk-weighted assets in the first half was 6.1%, a credit risk-weighted asset as a focus is much higher -- is higher than the loan growth half-on-half. So I just wonder why we have seen a faster rise in credit risk-weighted assets as comparable loan growth. And especially, we -- and can you also explain to us why a majority of the loan growth comes from offshore loans? So what's the end of both ways? Probably, are you seeing some cross-border loan demand decline? So what has caused the strong growth in offshore loans in the first half?

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Wing Lok Leung, Hang Seng Bank Limited - CFO [14]

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Okay. The first question is the TLAC. Actually, if you look at our financial statement in the interim report, I think, look to the account 33 and 34, we have spelled out all the information relating to the LAC instrument. There were 4 tranches of net subordinated debt that we have issued. The weighted average cost for the 4 tranches of the LAC debt was 1.49% -- 1.5% above HIBOR or LIBOR. And the average [TAN] was around 7.9% -- [ATS], excluding the core period. So this is the TLAC debt. And we have also issued altogether USD 1.5 million perpetual AT1 instrument. The weighted average cost is around 6% fixed rate. And then after core day, that will be subject to a variable rate features. Yes, those terms are actually disclosed properly in the interim report that looks to the accounts.

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Sik Tin Chan, Haitong International Research Limited - Executive Director [15]

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3-month HIBOR?

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Wing Lok Leung, Hang Seng Bank Limited - CFO [16]

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3-month HIBOR. Some of them are LIBOR.

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Sik Tin Chan, Haitong International Research Limited - Executive Director [17]

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No, no. 3 months is not 1 month then?

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Wing Lok Leung, Hang Seng Bank Limited - CFO [18]

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3 months. Yes. So the first question relating to the TLAC, I think we have come across. The other one is the RWA relating to comparison between the RWA increase against the loan growth. Well, you should remember that HKMA changed the risk rating for residential mortgages. So new mortgages underwritten will be, say, risk rate at 25% rather than the historical internal rating-based model with sales. So even though, for example, you increased the loan by, say, 5%, actually, it is the new loan that will be subject to 25% versus the loan being repaid that will only be subject to, say, 15%. So you cannot just compare the loan growth against the other rate growth because when they do loan, we placed all loan then for the mortgages then the other rate growth will be affected. And debt may be also depending on mix of the loan debt granting, and the credit quality may also affect, eventually, RWA as well.

So relating to the last question, that is the offshore loan. Apart from being used in Mainland, we also saw growth of the loan extended to customers that are eventually used in England, Australia and Vietnam, in particular, for customers that are trying to relocate their manufacturing facilities in Mainland, then we are financing those customers. So that's the reason that there are some loans used outside Hong Kong, but that doesn't mean they're related.

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Gurpreet Singh Sahi, Goldman Sachs Group Inc., Research Division - Equity Analyst [19]

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Gurpreet with Goldman. First, a simple one. On fees, we see credit facilities is a fee item, and that has very strong growth. Can you talk about the underlying driver for this? Because this seems to be much faster growth than your underlying balance sheet. And then I have a follow-up, so I hope I can keep the mic.

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Wing Lok Leung, Hang Seng Bank Limited - CFO [20]

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Okay. The strong growth in the credit facility is part of our capital management because we try to make a good use of our balance sheet. So rather than just lending our balance sheet, we also try to increase our participation and arrangement of syndicated loan. So by, say, arranging more syndicated loans, actually, we receive more credit facility fees for the arrangement.

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Gurpreet Singh Sahi, Goldman Sachs Group Inc., Research Division - Equity Analyst [21]

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And then the second one is broadly on behavioral change. It's been early days for the protest, if I may say. Have you seen in the second half of July or in this last one or 2 weeks any behavioral change from your set of customers towards how they interact with the bank, either they are taking out deposits or putting more deposits, not buying a wealth management product or your corporate customers paying back loans, not taking out loans? So anything out of the ordinary you have noticed, can you share with us? I know these things are very sensitive, and you would be responsible to say what can be, of course, quoted by us to other people.

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Wing Lok Leung, Hang Seng Bank Limited - CFO [22]

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So far, we do not observe any particular pattern that is not similar to a normal July or -- which is also the first half of the year.

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Wai Wan Cheang, Hang Seng Bank Limited - Vice-Chairman & Chief Executive [23]

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And I think the change in the consumer behavior has already started at the end of last year, when the trade war started. So people's appetite for investment and also the stock market turnover has reduced. So those are the 2 areas that we have seen, which is a normal phenomenon not because of the protest. Yes.

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Huanan Zhou, UBS Investment Bank, Research Division - China Financials Research Analyst [24]

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Alex here from UBS. So I have 2 questions. First, about your loan growth and balance sheet growth outlook for the next year -- for the half 2, I'm sorry. And second question about the -- so many banks has canceled their minimum balance fees. I wonder how did that contribute with your fee, and how would be -- would that be affected after these changes?

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Wai Wan Cheang, Hang Seng Bank Limited - Vice-Chairman & Chief Executive [25]

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You want to answer the loan growth, Andrew?

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Wing Lok Leung, Hang Seng Bank Limited - CFO [26]

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Loan growth. We saw some customers are considering their investment opportunities, whether there should be any change in -- to changing economic environment. So we saw a slower loan growth demand in the pipeline. But -- well, definitely, we continue to lend our support to those quality customers from time to time. So if they try to be -- arrange at financing, we will be the one to support them to, say, maintain closer relationship towards other customers.

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Wai Wan Cheang, Hang Seng Bank Limited - Vice-Chairman & Chief Executive [27]

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On the minimum balance fees, we also reduce it on the preferred base. So far, we haven't seen any significant impact in terms of our fee revenue.

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Gurpreet Singh Sahi, Goldman Sachs Group Inc., Research Division - Equity Analyst [28]

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A follow-up from cost. Gurpreet with Goldman. Earlier, there was a cost question, and I couldn't get a clear message. So let me put it -- ask it in a different manner. Given that revenue growth is now 9% in the first half on a Y-o-Y basis and assume it slows down from here, what are the management levers that you can pull to slowdown cost growth? How much of the -- I'll ask differently, how much of the investment spend can be then postponed? How much of the spending you are doing is discretionary asked different way? Is it 50-50 or 2/3 can be? So how much should we look for cost growth to tend to go down over time? Because right now, if you ask me, it's running too high on a Y-o-Y basis, looking at the operating environment we have entered.

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Wing Lok Leung, Hang Seng Bank Limited - CFO [29]

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We are always conscious about cost, but we also want to invest to make sure that we have a sustainable growth. We continue to automate or streamline our process in order to have a more efficient operation. So that will actually allow us to have some savings in the course. But on that hand, we continue to invest in technology as well as digital platform to enhance the customer experience of our customers as well as to make sure that we remain competitive in the market. So we continue to have a target that maintain a low-cost income ratio, but that is not a specific target that we have to maintain, for example, below, say, 28% or 30%. So I think any cost/income ratio below 35% is still manageable or a healthy level.

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Wai Wan Cheang, Hang Seng Bank Limited - Vice-Chairman & Chief Executive [30]

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And I think we also need to bear in mind that first half 2018 was actually a very good first half. So the baseline is actually quite high. As we go into the second half of '18, things has turned a bit more soften. So my sense is, for the full year, we should continue to maintain reasonable momentum. As Andrew said, we don't want to compromise by not investing in areas that actually will give us sustainable growth in the future. But there are, obviously, projects that we can defer, if absolutely necessary. And some of the things like renovations or workplace transformations, those we can defer. But in terms of technology, as much as I can control, I will ensure that it will continue to develop those capabilities that we need in order to ensure future revenue.

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Sam Wong, Citigroup Inc, Research Division - Research Analyst [31]

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Louisa just mentioned that you are very confident in the second half look -- outlook in terms of the growth momentum. So may I ask you which revenue line are you more confident in, in terms of like the second half outlook?

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Wai Wan Cheang, Hang Seng Bank Limited - Vice-Chairman & Chief Executive [32]

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I'm not overconfident. I think we have a good foundation, and even first half was challenging, we have delivered a good set of results. So I think we do get good momentum in our business. The area that I think we can continue to grow, of course, is our core business, which is deposit, lending and also some of the fee areas like credit card and insurance.

Some of the areas that is more vulnerable to what market volatility, like wealth management, particularly in the areas of stockbroking and investment funds, those will probably be under a lot more pressure. I think that's in terms of product in all areas that we can see different strategies. In terms of business line, I think our Retail Banking and CMB business will continue to be strong. Global Banking and Markets, I would say, the global market piece, similar to some of our other peers in the industry, will be -- continue to under pressure due to volatility.

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Sik Tin Chan, Haitong International Research Limited - Executive Director [33]

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The CET1 CAR now is approaching 16%. And I remember last year, Andrew, says that the reason why you increased the quarterly DPS, partly, of course, for -- maybe for some moving purposes and partly because of your confidence maybe towards that year's earnings growth. So now we're in a situation, maybe, we are going to have global economic slowdown. So does it mean that -- and our CET1 CAR now is approaching 16%. So does it imply that something like, we have already had 3 years in a row of increase quarterly DPS. So would that come to an end or what sort of implication, Louisa or Andrew, you have?

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Wing Lok Leung, Hang Seng Bank Limited - CFO [34]

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Well, our long-term dividend policy to provide a steady dividend room to the investors, hopefully, on a rising trend. But that definitely will -- depending on the unit situation in individual year, including, for example, the profitability and the external economic environment, any potential or say, imminent regulatory changes that will affect the RWA resulting in the -- impact on the CET1 as well as any M&A opportunities. So that will be a dynamic process that will be built year after year. So -- but basically, we have provided very steady income stream to the shareholders in the past.

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Leo Weng, JP Morgan Chase & Co, Research Division - Research Analyst [35]

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I'm Leo from JPMorgan. I just have a quick follow-up question about TLAC. In addition to the $19.5 billion sub-debt issued, there are -- we want to actually know how much more do you still need to issue, maybe based on the current RWA level? And was internal TLAC ratio in yen? If I remember, price should be between 75% to 90% of the external TLAC.

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Wing Lok Leung, Hang Seng Bank Limited - CFO [36]

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The issuance of the TLAC is subject to the records requirement that it will be -- we had to satisfy the published ratios times, the internal TLAC scale. That will be agreed between HKMA and the individual financial institution. So far, we have issued the TLAC to satisfy our anticipated RWA in the coming year. So we do not anticipate any further issuance of TLAC in 2019. We will definitely review this situation again in 2020. On the assumptions that there will not be any significant increase in the RWA resulting from any change in the external environment, so this is the TLAC issuance situation at the moment.

Regarding the internal TLAC scale, I'm sorry that I cannot answer your question because we are bounded by the regulations that we cannot disclose the internal TLAC scale. That is because the fact that each organization or each individual financial institution may agree with HKMA for a given, say, internal TLAC scale. So the regulators prohibit us to disclose the internal TLAC scale.

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Unidentified Company Representative, [37]

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Any more questions? Should we have the last 2, if any? Okay. Okay. Well, thank you very much.

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Wai Wan Cheang, Hang Seng Bank Limited - Vice-Chairman & Chief Executive [38]

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All right. Thank you. Thank you for coming over, even under such circumstances.

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Wing Lok Leung, Hang Seng Bank Limited - CFO [39]

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Thank you.

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Unidentified Company Representative, [40]

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Yes. Have a safe journey home.

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Wai Wan Cheang, Hang Seng Bank Limited - Vice-Chairman & Chief Executive [41]

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Yes.