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Edited Transcript of HSBA.L earnings conference call or presentation 19-Feb-19 7:30am GMT

Full Year 2018 HSBC Holdings PLC Earnings Call

London Mar 7, 2019 (Thomson StreetEvents) -- Edited Transcript of HSBC Holdings PLC earnings conference call or presentation Tuesday, February 19, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ewen James Stevenson

HSBC Holdings plc - Group CFO & Executive Director

* John Michael Flint

HSBC Holdings plc - Group Chief Executive, Member of Management Board & Executive Director

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Conference Call Participants

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* Alastair William Ryan

BofA Merrill Lynch, Research Division - Co-Head of European Banks Equity Research

* Christopher Cant

Autonomous Research LLP - Partner, United Kingdom and Irish Banks

* Christopher Robert Manners

Barclays Bank PLC, Research Division - Co-Head of European Banks Equity Research

* David John Lock

Deutsche Bank AG, Research Division - Research Analyst

* Edward Hugo Anson Firth

Keefe, Bruyette & Woods Limited, Research Division - Analyst

* Joseph Dickerson

Jefferies LLC, Research Division - Head of European Banks Research & Equity Analyst

* Magdalena Lucja Stoklosa

Morgan Stanley, Research Division - MD

* Martin Leitgeb

Goldman Sachs Group Inc., Research Division - Analyst

* Ronit Ghose

Citigroup Inc, Research Division - MD, Head of European Banks Research and Global Sector Head for Banks

* Thomas Andrew John Rayner

Numis Securities Limited, Research Division - Analyst

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Presentation

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Operator [1]

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This presentation and subsequent discussion may contain certain forward-looking statements with respect to the financial condition, results of operations, capital position and business of the group. These forward-looking statements represent the group's expectations or beliefs concerning future events and involve known and unknown risks and uncertainty that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Additional detailed information concerning important factors that could cause actual results to differ materially is available in our Annual Report and Accounts. Past performance cannot be relied on as a guide to future performance.

This presentation contains non-GAAP financial information. Reconciliation of the difference between the non-GAAP financial measurements with the most directly comparable measures under GAAP is provided in the Annual Report and Accounts available at www.hsbc.com.

The Analyst and Investor Conference Call for HSBC Holdings plc's Annual Results 2018 will begin in 2 minutes. (Operator Instructions)

Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference Call for HSBC Holdings plc's Annual Results 2018. For your information, this conference is being recorded.

At this time, I will hand the call over to your host, Mr. John Flint, Group Chief Executive.

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John Michael Flint, HSBC Holdings plc - Group Chief Executive, Member of Management Board & Executive Director [2]

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Good afternoon from Hong Kong, good morning in London, and welcome to our 2018 HSBC Annual Results Call. with me today is Ewen Stevenson, Group Chief Financial Officer.

I'll start by putting the results in the context of our strategy and broader vision for the bank before Ewen takes a look at the numbers, and I'll finish by talking a little bit more about 2019.

In June, I outlined 8 strategic priorities to get the organization growing again and create value for shareholders. Those priorities focus on delivering growth from areas of strength, particularly from our Asia franchise. They commit us to redeploying capital to higher-return businesses and the turnaround of our U.S. business, but they also aim to fundamentally change some elements of the bank, so we can compete in the long term and serve our customers better.

In particular, we are focused on improving our digital services and future capabilities. We are also committed to improving our ESG performance and creating stronger, healthier relationships with all of our stakeholders. This includes all 235,000 people who work for HSBC. Helping our people be at their best is the critical enabler of our business strategy and absolutely fundamental to delivering our financial targets. If we can do all that, and I'm confident that we can, then the financial outcomes should be a return on tangible equity above 11% and a stable dividend.

We made encouraging progress against 7 of our 8 strategic priorities in 2018. We've accelerated growth from Asia and our international network. We've established the U.K. ring-fenced bank, grown our U.K. customer base and increased our U.K. market share. We've also delivered more sustainable financing and continue to be a leading player in helping clients make the low carbon transition.

The U.S. turnaround is our most challenging strategic priority. We made progress last year, but there is still much further to go. We've improved capital efficiency, largely on the back of revenue growth. Our technology investment is improving customer service and making us more competitive. Again, there is more to do, but the progress is positive.

And on the human side, we started a conversation throughout the bank about how we help every person who works for HSBC be the best version of themselves. Employee advocacy, our key measure here, is up on 2017. Again, lots to do, but we've made real strides in a relatively short space of time. These achievements are reflected in our 2018 financial performance.

Reported profit before tax of $19.9 billion was $2.7 billion or 16% higher than 2017. Group return on tangible equity, our headline target, was 8.6%, up significantly on the 6.8% delivered in 2017. This is a good first step towards achieving our return on tangible equity target of over 11% by 2020.

The area where we've fallen short is jaws, strategic priority #6. When I updated you at the third quarter, we were on track for full year positive jaws. What we didn't know then was that markets would weaken in the last 2 months of the year and hit us and many other banks hard on revenue. While costs were on plan at the end of the year, revenues weren't because of market movements in the fourth quarter. I don't take the jaws miss lightly, and our commitment to the discipline of positive jaws has not changed.

What has changed is the economic outlook, which has softened since our June strategy update and even since Q3. I'll go into the outlook in a bit more detail at the end of the presentation, but what we are seeing is that risk and uncertainty have increased, and customers are more cautious.

We remain alive and alert to these risks. Where necessary, we are proactively managing costs and investments in line with a softer outlook, and we'll continue to do so. What we absolutely will not do, though, is take short-term decisions that harm the long-term interests of this organization. We will continue to invest sensibly and sustainably.

Ewen will now talk you through the numbers.

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [3]

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Thanks, John. Good morning or afternoon all. Particular thanks to those of you in London, having to be up early today. It's a pleasure to be presenting my first full set of full year results at HSBC. And despite a softer fourth quarter, it's a good set of full year numbers.

John just talked about the strategic progress we made last year, and you can also see this reflected in our financial performance.

Underpinning our business strategy is a clear set of financial objectives. We're targeting growth where we've sustainable competitive advantage. We're investing both to support that growth and to accelerate our digital transformation. And we're also actively managing our capital base as we transition to higher returns, sustaining our dividend, keeping a healthy core Tier 1 ratio and funding our growth aspirations.

A few numbers for you for full year 2018. Reported revenues were $53.8 billion, some $2.3 billion or 5% higher than 2017. Reported pretax profits were $19.9 billion, 16% higher than the previous year. On an adjusted basis, revenues were up 4%, and pretax profits were up 3%.

Our return on tangible equity was up 180 basis points to 8.6%, and earnings per share were up more than 30% to $0.63. Adjusted loan growth was 8%, while RWA growth was 2%.

Our core equity Tier 1 ratio was 14% at year-end. We declared a final dividend of $0.21, representing a stable full year dividend of $0.51.

Slide 4 breaks down our full year revenue performance in more detail. While total adjusted revenue growth was 4%, this masks much stronger underlying growth in the areas we've targeted.

Looking at our 4 global businesses in turn. Retail Banking and Wealth Management had a very good year with particularly strong growth in Hong Kong and the U.K. And in spite of adverse Q4 market impacts hitting revenue in insurance manufacturing, adjusted revenue for RBWM was up 8% on 2017, and within this, Retail Banking was up 13%.

Commercial Banking had a strong 2018, with adjusted revenues up 12%. We increased revenues in all business lines with a notable 22% growth in our Global Liquidity and Cash Management franchise.

In Global Banking and Markets, we increased adjusted revenues by 1%. This was largely due to the strength of our transaction banking franchises, Global Liquidity and Cash Management, FX and Security Services all achieved double-digit revenue increases. This more than covered the impact of market volatility and lower customer risk appetite on our market-related franchise, with revenues and rates, credit and equities down materially. Overall, market revenues were 7% lower than 2017.

With Global Private Banking, we've returned to growth. While adjusted revenues were up only 4%, we see strong potential for this business, with material scope to improve both returns and profits in the coming years.

Revenue fell in Corporate Centre. Several reasons for this, but primarily a combination of lower Balance Sheet Management revenues, higher interest expense on MREL debt issuance as our MREL stack continues to build, valuation differences on long-term debt and associated swaps and the impact of Argentinian hyperinflation.

In terms of split by geography, our 2 biggest markets, Hong Kong and the U.K. ring-fenced bank, both delivered strong adjusted revenue increases, with Hong Kong adjusted revenues up 14% and the U.K. ring-fenced bank up 7%.

We're also pleased with the growth we achieved last year across Asia, including in the Pearl River Delta in the ASEAN region and in the Americas in both Mexico and Canada.

On the next slide, looking at our Q4 revenue performance in more detail. We were clearly impacted by volatile markets in November and December. Compared to a soft Q4 2017, adjusted revenue in our Global Markets franchise fell by around $200 million or 16%, and we're down by around $700 million or 38% on Q3 2018.

In Wealth Management, revenues were down by about $250 million, primarily adverse market impacts in our Insurance business as a result of weak equity markets in Q4.

But away from these market-sensitive revenue streams, Retail Banking and Wealth Management and Commercial Banking both had strong quarters. We grew adjusted revenue by 10% in Commercial Banking compared to Q4 2017. And revenue growth in Retail Banking and Wealth Management was 4%.

Overall, group adjusted revenue was still up 5% on a soft Q4 2017, but down 8% on the third quarter. Markets have been more supportive so far this year. We've made a good start to 2019 with our group revenue performance in January ahead of plan.

As John said earlier, we've got a clear strategy to accelerate growth in areas of strength. Slide 6 shows the progress we've made, both in terms of our mix of revenues and the allocation of our capital. Asia now accounts for 49% of total revenue. That's up from 46% in 2017, and this understates the Asia-centric growth we've achieved across other geographies.

If you look at the adjusted revenue split by business, the contribution of Retail Banking and Wealth Management and Commercial Banking increased by 3 percentage points to 68%, in line with prioritizing capital towards the higher returns we're achieving from those businesses.

In Global Banking and Markets, we're continuing to focus on allocating capital where we see the potential to sustain returns above the cost of capital. And all of this, together, represents real improvements since our Strategy Day last June.

As you can see on Slide 7, net interest income in Q4 was up 8% on the same period last year and up 8% for the full year. This was mainly due to a 7% increase in average interest-earning assets, with a more modest benefit from a 3-basis-point increase in our net interest margin.

There are 3 things I wanted to call out on NIM. The first is the improving rate environment. This increased the yield on free funds, benefiting NIM by 3 basis points. The second is the change in how we've made our net interest spread, the improved rate environment may -- meant we made less from the asset side and more from the liability side. The third is the excess funding from the formation of our U.K. ring-fenced bank, which reinforced our strategy of building mortgage share by targeting the broker channel. Equally, we needed to build up liquidity in the non-ring-fenced bank, and this resulted in a largely one-off resetting to a lower non-ring-fenced bank NIM in 2018.

Looking ahead to the rest of 2019. For those of you who know me, you know that I'm not a fan of guiding on NIM, given the various macro and competitive variables that we don't control as a management team, including volatile HIBOR movements. But given underlying loan growth, we do expect a modest net interest income growth in 2019.

Turning to operating expenses on Slide 8. They were up $1.8 billion or 6% for the full year. While jaws was negative for the year, cost growth was on plan.

In 2018, we made a very conscious decision to step up investment into both growth and our digital transformation, with total investment up $4.1 billion -- of $4.1 billion was up 10% on 2017. We firmly believe this is the right thing to do, investing sensibly now for long-term value creation.

As John mentioned earlier, we'll not make short-term decisions that jeopardize our long-term competitiveness. But equally, we do recognize the need to be flexible on cost growth and the need to be responsive to the outlook for revenue growth.

As we look out to 2019, we can see that the revenue environment is less predictable. There's idiosyncratic risk to growth in the U.K. and, to a lesser extent, Hong Kong and Mainland China. The outlook for interest rate rises has become less certain. In Hong Kong, in particular, this translates more rapidly into net interest income than other markets.

So we've dialed down the speed of some investment growth for 2019, and we've tightened up on headcount plans until we've got more confidence that we'll see strong revenue growth coming through.

Turning to the next slide. We had a total ECL charge of $1.8 billion or some 18 basis points in 2018. This is not strictly comparable to 2017, given the introduction of IFRS 9 at the start of 2018. To understand ECL trends under IFRS 9, you'll know that you need to split the discussion into 2 parts: the first being the underlying asset quality and impairment trends; and the second, the impact of changing forward economic guidance.

If you look at actual default data, there's very limited signs of deterioration at the moment, with only the U.K. showing some softness in certain corporate sectors.

With forward economic guidance, the U.K. presents unique challenges at the moment. Given this increased U.K. forecasting uncertainty, we've taken what we consider to be an appropriately conservative additional adjustment of some $165 million in the quarter. This is on top of the $245 million adjustment we made when adopting IFRS 9 on 1st of January last year.

Looking forward, we expect credit performance to continue to normalize compared to the historic lows of the past few quarters. No change to how we previously guided, the lower end of a 30 to 40 basis point normalized range. And as a result, we're planning for ECL charges to be higher in 2019 and 2020. However, the total ECL charge will be sensitive to forward economic guidance, particularly in the U.K., but to a lesser extent, in Hong Kong and Mainland China.

I'll finish with a few words on our core Tier 1 position before I hand back to John. No change to our guidance in keeping our CET1 ratio above 14%. Our CET1 ratio was 14% at the end of 2018, down 50 basis points from the previous year, including adverse FX movements of around 20 basis points.

Just to remind you, the Q4 movement of 30 basis points include the impact of the U.K. bank levy and the final dividend of $0.21.

With Basel III reform on the horizon in a few years' time, we'll continue to prioritize a strong core Tier 1 position until we have more clarity on its impact. We know there'll be some RWA uplift from Basel III reforms. But given the continuing uncertainty around the final reforms and national discretions, we're not comfortable providing guidance at this point.

Ahead of Basel III reform, we're managing competing demands on our CET1 and CET1 ratio. Three core objectives for me: keeping the CET1 ratio healthy; sustaining our $0.51 dividend, including neutralizing any scrip takeup over time; and being able to fund attractive growth in areas that we want to grow.

Achieving higher returns underpins managing these competing demands. Our 2020 return on tangible equity target of over 11% equates to a return on core equity Tier 1 capital of over 13%, allowing for a sustainable mix of dividends and growth.

We still see more opportunities on RWA management. Last year, I think, is a good example of us continuing to deliver on this.

For Q1, we do expect some one-off uplifts, some $7 billion to $8 billion of higher RWAs on top of net business growth, primarily due to the implementation of IFRS 16.

And with that, I'll hand over to John to briefly sum up.

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John Michael Flint, HSBC Holdings plc - Group Chief Executive, Member of Management Board & Executive Director [4]

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Ewen, thank you. So we have taken the first steps in getting HSBC back to growth. We're doing what we set out to deliver: growing revenues from areas of strength, using capital more efficiently and investing in the future of the business while empowering our people. This is reflected in a good set of numbers for 2018.

As I said earlier, the outlook for 2019 has softened. Uncertainty and risk in the global economy is higher, relating mainly to the U.K. economy, global trade tensions and the future path of interest rates. This is yet to translate into higher credit losses, but that could change if the global economy deteriorates further.

We've made a good start to 2019, but we remain alert to the downside risks of the current economic environment. And we will be proactive in managing costs and investment to meet any risks to revenue growth.

We remain committed to the plan that we outlined last June. The strategy is working and the long-term drivers of revenue growth remain strong.

The fundamentals of growth in Asia are sound. We expect China to avoid a hard landing and continue growing. And while barriers to trade are increasing in parts of the world, they're also falling rapidly in others, especially Asia.

We're also at the heart of financing the low carbon transition, one of the biggest drivers of global investment this century.

At the same time, we have a business that is diversified, resilient and well placed to navigate the risks inherent in today's world. So HSBC is in a good position, I'm encouraged by our progress and looking forward to the year ahead. We remain focused on growing returns, creating value for shareholders and meeting our return on tangible equity target of greater than 11% by 2020.

We will now take questions. The operator will explain the procedure and introduce the first question. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We would now take our first question from Magdalena Stoklosa from Morgan Stanley.

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Magdalena Lucja Stoklosa, Morgan Stanley, Research Division - MD [2]

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I will -- I have 2 questions. One is about the revenues within the retail division, and that's Page 5 I will be referring to. And the second one is a little bit -- is on NII. So let me start with the Page 5.

Ewen, could you give us a sense what it would take to reverse some of the kind of the negative delta that we have seen within the Insurance Manufacturing and Wealth Management? Of course, you have talked about the market impact, but of course, I'm sure there's also a big transactional impact there as well. So could you give us a sense of how -- of the moving parts of those 2 revenue sources, particularly with the year-to-date market trends and what you're seeing kind of in Asia transactionally? So that's one.

And two, I will try to draw you on the NII discussion because we are -- of course, there's a lot of moving parts, as you've mentioned in your remarks. But of course, year-to-date, particularly, they all look more challenging. So we've got the flatter curve, the absolute levels of HIBOR, the HIBOR/LIBOR spread, the mix shift and, of course, not even mentioning the good old kind of asset -- asset spread competition across your key markets. But you still kind of mentioned that you think that your NII is going to grow slightly. But how should we think about, particularly Hong Kong and U.K. -- in U.K. margins in that context of what's been happening kind of year-to-date?

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [3]

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Thank you. So I think John is going to take your first question on Insurance Manufacturing.

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John Michael Flint, HSBC Holdings plc - Group Chief Executive, Member of Management Board & Executive Director [4]

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Yes. Magdalena, it's John. Thanks for the questions. So Page 5, at the top bar, the Insurance Manufacturing market impacts and then the one below that is the Wealth Management excluding market impacts. So to the extent that there was any lower customer activity, you can read that into the $51 million number. The big number on top, the $205 million is the effect of the previous accounting for insurance, so we present value enforce all of the contracts. And in substance, when risk assets fall in value, we take losses through the P&L. And when risk assets rise in value, we take profits through the P&L.

The vast majority of that negative adjustment in the fourth quarter, the $205 million, was driven by weakness in the equity markets, predominantly in Hong Kong. Now -- and we did actually disclose that sensitivity somewhere, I don't remember which page, but we can point you to that later. Given what's happened to equity markets since the start of the year, I think it's reasonable to kind of read across a lot of that will have been reversed through the course of this year already, but it still remains subject to any future movements in the markets. So it really is market-driven and not, primarily, customer-driven.

Ewen, on the NIM?

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [5]

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Yes. On NIM, I didn't mean to convey that I was overwhelmingly negative on it. I just said I wasn't going to forecast it. The NIM in Q4 was 163 basis points. And as we look out in 2019, and you'll obviously be able to run your own numbers on this, yes, we're continuing to see some benefit come through from rate rises in 2018. We continue to see a mix shift going on because we're growing lending faster than deposits, which is, obviously, beneficial to NIM in some markets. That's clearly the case like the U.K., where we continue to have excess funding position in our ring-fenced bank.

We -- I talked about earlier the fact that we've done the liquidity repositioning in the non-ring-fenced bank that we had to do in the second half because, effectively, ring-fencing created a funding surplus inside the ring fence and liquidity deficit outside the ring fence that we had to address. We're obviously continuing to build up our MREL stack that will have some impact on margins, and I'm not going to predict, yes, what will happen when asset and liability spreads. But yes, there's a bunch of pluses. There's some neutral factors. There's some negative factors in that.

But I think the main underlying driver of net interest income growth in 2019 will be no different to what we saw in 2018, i.e., it will be driven by underlying volume growth that we see. And we continue to be reasonably positive about the volume growth that we're going to be able to put on in various markets.

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Operator [6]

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Our next question today comes from Chris Manners from Barclays Research.

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Christopher Robert Manners, Barclays Bank PLC, Research Division - Co-Head of European Banks Equity Research [7]

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So just sort of 2 questions, if I may. The first one is on, sorry to bring it back, is the net interest margin again. Maybe if you could talk a little bit about the U.K. dynamics. You obviously have a lot of surplus liquidity in your ring-fenced bank. But then, when we look at some of the offers that you have out there, like the 1.6% 1-year fixed-rate bond, it does look like you're sort of paying up in certain segments. So just maybe trying to understand a little bit more about the U.K. net interest margin and how you expect that to develop.

The second question was on sort of revenue outlook. When we look at where consensus is, it's about $57.5 billion of revenue for 2019. And if we look at your revenue just printed for the year, the $54 billion, we re-profile it for current FX, that would probably get you down to about $52.5 billion. That looks to me that you probably need about 10% revenue growth to get to where consensus is. Yes, do you think that's achievable? And just trying to work out what parts of the business might be able to grow at that pace and what parts might struggle.

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [8]

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Okay. Well, on U.K., look, I wouldn't read, overread into the fact that we have a short-term deposit offer out in the U.K. market at the moment. The overall funding spreads in the U.K. -- funding spreads in the U.K. continue to be -- we have one of the lowest funding costs in the U.K. We continue to enjoy a significant funding surplus.

I think we are sensitive to the fact when we look at future deposit pressures in the U.K., the fact that the term funding scheme has got over $120 billion of funding out on the market, we obviously didn't take any of that. That's, as you know, about 3 to 4 years of funding growth in the U.K. So understanding price elasticity is stuff that we'll do every so often. Yes, that offer out on the market, I think, at the moment, in totality, has less than a 1-basis-point impact on our net interest margin in the U.K.

On the revenue outlook, a couple of things. Firstly, I mean, if you look on Slide 4 on full year adjusted revenue performance, you'll see any number of those line items, the red bars, they're volatile items that we would expect some or much of that to turn around in 2019, depending on how much of that you want to take. I think that provides about 2% to 3% of underlying revenue growth support into '19.

As I said, we continue to be reasonably positive on loan growth in 2019. I think you can run your own analysis on what you think will happen to NIM. I don't think that gets us to close to double-digit revenue growth in '19. But -- so consensus, if you're saying it's at $57 billion, feels a bit high in that respect if that's implying 10% revenue growth.

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Christopher Robert Manners, Barclays Bank PLC, Research Division - Co-Head of European Banks Equity Research [9]

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Okay. That makes a lot of sense. What, basically -- to get to the sort of lower baseline, to get that 10% revenue growth, what I was doing is just taking your sort of Q4 adjusted FX revenues, the ones that you re-profile for the rest of the year, which got me to about $52.5 billion rather than the $54 billion reported. That was -- that's how I got to that number.

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [10]

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Yes. But I think, equally, you probably need to adjust consensus somewhat for FX as well because I don't think consensus has been adjusted for the same FX, which maybe you'd take $1 billion of consensus for that as well.

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Operator [11]

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Our next question today comes from Alastair Ryan from Bank of America.

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Alastair William Ryan, BofA Merrill Lynch, Research Division - Co-Head of European Banks Equity Research [12]

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One on Hong Kong and one Global Banking and Markets, please. On Hong Kong, there's quite material slowdown in both loans and current and savings accounts in the market in Hong Kong. You had good momentum in the fourth quarter, but does that catch you up into Q1? It looks cyclical rather than permanent, but it is quite material. So things are sort of going backwards rather than forwards at present, is that your experience as well?

And then Global Banking and Markets, was there anything wrong you'd called out in the fourth quarter? I mean, rates and credits were very poor. And those are naturally volatile items, but they're sort of particularly weak this quarter. Was there anything you'd call out? Or that was just the market and in the rounds you're happy with sort of the income mix at GB&M?

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John Michael Flint, HSBC Holdings plc - Group Chief Executive, Member of Management Board & Executive Director [13]

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Alastair, it's John. I'll start then Ewen will chip in. Hong Kong balance sheet, so we saw an obviously very, very strong year in Hong Kong last year. Revenue was up 14%, a really good balance sheet growth. We saw that moderate towards the end of the year. Just checking in with the team, early part of yesterday for the first part of the year, it's fine actually. So I think your question kind of suggested that there was going to be a drop of it into the beginning of this year from where we were last year. And I'm not aware that, that's what we've seen. But I do think we should expect to see, irrespective of that, a lower rate of asset growth this year than we enjoyed last year.

I think the other thing to note whenever we think about Hong Kong is just the state of the HIBOR/LIBOR basis, which is very wide at the moment. It's at its kind of widest point for quite a while now. And there's nothing in the market other than the fact we're close to the top of the [T2] band that suggest, other than that, nothing that suggest that, that's going to narrow in the short term. That's for Hong Kong.

With respect to GB&M, I think, worth remembering, we had a really strong third quarter and the fourth quarter was weak by kind of any measure. But relative to the third quarter, it looked extraordinarily weak because we had a great quarter in Q3, much of that was driven by FX. I'm not sure we've got any calls wrong. I don't think there are any big market positions in fourth quarter that we got wrong.

Our results in the fourth quarter kind of stacked up with the other Europeans. We're quite a long way behind the Americans, driven mostly by equities, where our equity franchise is small relative to the Americans, and the Americans outperformed. So I think it's just one of those quarter. I don't think there was anything particular.

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [14]

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I think the other thing, as you know, Alastair, is that the mix of our GB&M business is different to others, given that we have more transactional-related business in there. And if you look at the underlying trends in some of the transactional businesses last year, they continue to be very positive. FX, Security Services, Global Liquidity and Cash Management all had double-digit growth rates. So while the overall market franchise for the full year was down 7%, I think in terms of revenues, Global Banking and Markets in totality was up 1%. And Samir and the team did that while managing RWAs down by 4% too. So they did well.

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Operator [15]

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Our next question today comes from Tom Rayner from Numis.

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Thomas Andrew John Rayner, Numis Securities Limited, Research Division - Analyst [16]

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A couple, please. Just to stick on the NIM, one final NIM question maybe. I think if I take out Q3 (technical difficulty) can you hear me?

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [17]

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Yes.

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Thomas Andrew John Rayner, Numis Securities Limited, Research Division - Analyst [18]

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Yes. So I think the Q3 NIM was 1.69, so that's fallen to 1.63 in Q4. I think there was also 1 basis point in there for the hyperinflation, so it would have been 1.62. It's quite a big drop in the quarter. Could you just help us understand how that splits down between the liquidity issue in the U.K. and maybe some other competitive issues in Hong Kong? And then I've got a second question on the ECL, please. I can give you that now or wait.

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [19]

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Yes. There were a few things going on, on Q4 NIM. The -- there was liquidity buildup going on in the non-ring-fenced bank, partly in anticipation of Brexit. So, if anything, yes, we're over liquefied in the non-ring-fenced bank at the moment and we'll continue to be so. There was a bit of NIM pressure on the deposit side in Hong Kong. And there were slightly lower balances in Global Banking and Markets and in some of the Global Liquidity and Cash Management overdraft products. But the biggest swing, I think, were the first 2 things I talked about. In terms of where to from here, I wouldn't view that drop as something we view as that we would anticipate seeing in Q1.

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Thomas Andrew John Rayner, Numis Securities Limited, Research Division - Analyst [20]

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Okay. All right. The second one, when you talk of normalizing charge, the sort of low end of the 30 to 40-basis-point range, which I think is fairly in line with what consensus expects over the next 2 to 3 years. Have you -- when you talk about the ECL charge is going to, are you thinking about any additional buildup in the coverage on Stage 1 and Stage 2 as things normalize? So maybe something might push the charge higher in the near term.

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [21]

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You all may not have the chance yet, but we've provided some additional disclosure on Pages 98 and 99 of the annual report.

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Thomas Andrew John Rayner, Numis Securities Limited, Research Division - Analyst [22]

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I expect (technical difficulty) probably looking at that right now.

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [23]

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You will see in there, yes, what our economic scenarios are for the U.K. We've also taken an economic scenario on trade disruption. Yes, as we look at -- when we guide to higher ECL charges the next couple of years, I think we're just being prudent. If you back out the additional U.K. overlay we took 18 points for the full year, it was about 16 basis points ex that. There's a long way to go from there to get to the low end of the 30 to 40-basis-point range.

Those overlays, when we look at the U.K. overlays, we've got $400 million in total, which, certainly, to date is higher than U.K. peers so even though we've got a smaller book. And if you look in last year's stress test results, actually, a less stressed book than others. So we feel that we're being appropriately conservative there. And we can even imagine scenarios in the U.K. where we get to softer versions of Brexit would cause us to revisit that overlay and write some of it back during the year.

So, yes, they will normalize. How quickly they normalize, I don't know. The only places we talked about earlier that we're seeing any softness at the moment in credit is the U.K., and most of that's not to do with Brexit.

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Operator [24]

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Next question comes from Ronit Ghose from Citi.

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Ronit Ghose, Citigroup Inc, Research Division - MD, Head of European Banks Research and Global Sector Head for Banks [25]

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It's 3 quick questions, please. Just if I can go back to NIM. So the standalone exit run rate, 1.62 basis points in the fourth quarter, and if assuming the rates don't change from here, are there any positives that I should be thinking about for the year ahead? I know you don't want to guide explicitly, Ewen, but are there any positives? I can think of lots of negatives that I need to add to the 1.62 exit run rate, but what are the positives I should be thinking of? That's question number one.

Question number two is on buybacks. I think you said that you'd like -- you're hoping to neutralize the scrip dividend. But can you just clarify what your plans are on the buyback? That would be great.

And thirdly, circling back to your -- you called out -- John, you called out January started well. How much of this is simply reversal of marks in the tough end of the year November, December going positive in GBM in Q1? Or is there anything else you want to call out about January going well?

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [26]

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Do you want to do buybacks, John? I'll come back to the other 2.

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John Michael Flint, HSBC Holdings plc - Group Chief Executive, Member of Management Board & Executive Director [27]

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So I will do the buybacks and then talk about the January, December thing. And then we'll come back to Ewen for the NIM again since you're so good at this now, Ewen.

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Ronit Ghose, Citigroup Inc, Research Division - MD, Head of European Banks Research and Global Sector Head for Banks [28]

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I know Ewen loves NIM, so.

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John Michael Flint, HSBC Holdings plc - Group Chief Executive, Member of Management Board & Executive Director [29]

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Yes. Buybacks, so I think what we're saying is our policy towards buybacks has not changed. What we intend to do is neutralize the scrip takeup, and over time, use buybacks to keep the share count broadly stable. At this point, I don't want to get drawn into a conversation about the timing of the next buyback, but the policy remains the same, the attitude is the same. We want to keep the share count broadly stable over the medium term. So that's buybacks.

With respect to what we've seen in January, clearly, there is -- and there's clearly some element of revenue slipping out of December into January. Outside of that, I would say January has been a solid month. We're seeing lower levels of credit demand in some parts of the group than at the same time last year. So we note that. I think, for the retail investors in Asia, they're a big part of our revenue base. Their core investing activity is holding up well, but their equity broking activity is low, for example.

So there are definitely some signs that customers' confidence is in some way impacted by the trade tensions and the uncertain outlook. But our balance sheet is holding up well, no issues, as Ewen has already indicated, from a credit perspective. And yes, there's definitely some slip of revenues out of December into January, in both the retail business and, I think, to some extent, also in Global Markets as well.

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [30]

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Yes. On sort of positive things on NIM that I'd point to. We still are getting some benefit from rate rises that happened in '18. I think we still do anticipate some further rate rises in '19, albeit at a slower rate than what we may have anticipated 1 or 2 quarters ago. We are getting benefit in terms of mix shift going on. In several markets, we're growing lending faster than deposits. We've got, as you can see from our liquidity metrics in most markets, still pretty liquid in most markets, and therefore, we can continue to just sustain that for a while.

The other thing I would say is they're not -- I wouldn't do 2 negatives on top of each other, i.e., if you're going to see margin pressure, it's probably because asset quality trends are benign. And therefore, yes, take the 2 together. But if you're going to take a harsh view on margin pressure, then I think you do need to slow down the normalization of the ECL charges as part of that because the 2 go hand-in-hand with each other.

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Ronit Ghose, Citigroup Inc, Research Division - MD, Head of European Banks Research and Global Sector Head for Banks [31]

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Sure. I'm just thinking, I'm circling back to your earlier comment about moderate or modest NII growth because I've got a 1.62 exit run rate, given you started the year in Q1 at 1.67 or so and then you had rate rises during the year, so if there -- let's assume there aren't rate rises from here, then I'm looking at year-on-year quite a big delta on NIMs. So I'm struggling to get even moderate NII growth. I guess, it goes back to what we define as moderate at that point. It's -- yes, I guess, it circles back to what Chris was saying before about consensus looks quite punchy right now on NII.

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [32]

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Well, again, I'd sort of go back to the fact that we grew average interest-earning assets last year by 7%. NIM expanded by 3 basis points and we grew net interest income accordingly. But growth and underlying volume growth will be a key support for net interest income growth in 2019. And we are positioned in a bunch of markets that are growing. Last year, we grew top line revenues, just as a reminder, in Hong Kong, at 14%; in Mainland China at 14%; Retail Banking at 13%; Commercial Banking at 12%. There's very few other banks in the U.K. that are achieving that.

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Ronit Ghose, Citigroup Inc, Research Division - MD, Head of European Banks Research and Global Sector Head for Banks [33]

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Right, right. No, I mean, obviously, you had a strong tailwind going into last year and you started the year strong into the volumes and NIMs. But given where we are today, I guess, you're looking at more like low single-digit NII growth based on your comments. So you're going to need pretty strong non-NII growth to get to kind of previous guidance of mid-single-digit revenue growth.

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [34]

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Those are your comments, not mine.

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Ronit Ghose, Citigroup Inc, Research Division - MD, Head of European Banks Research and Global Sector Head for Banks [35]

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Indeed. Indeed. Is there -- can I have a quick supplementary, just going back to cost? Because I know, I know we don't want to get too hung up on jaws, particularly on a short-term basis. But based on my comments that I just made of low-single NII growth and it's going to be a challenge to get to mid-single-digit revenue growth. What kind of -- can you just elaborate a bit more what you're doing on sort of levers that you can pull on costs, John and Ewen?

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John Michael Flint, HSBC Holdings plc - Group Chief Executive, Member of Management Board & Executive Director [36]

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Yes, sure. So I think worth remembering that we start this year in a fundamentally different position to, with respect to jaws, than when we started last year. So we transitioned from '17 into '18 moving away from a CTA budget of $3 billion to 0. So we spent pretty much all of '18 chasing the jaws discipline. And the plan was to get -- to land positive jaws in December. And for the reasons we just stepped through, we missed it.

But the way that we planned this year, we're not going to be chasing jaws, I would expect to see quite a different start to the year from a jaws perspective.

Now we are noting that the revenue outlook is a little more difficult than it was at this point last year. So as Ewen indicated in his remarks, we are phasing some of the planned investments that we've contemplated, probably 3 to 6 months ago. We're not changing how we plan to invest or what we prioritize. But we'll phase it and we'll defer some of the spend. So that's what we're doing now, effectively. We'll still be investing more this year, probably, than we invested last year. But the rate of growth will moderate in line with what we see is the revenue outlook.

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Operator [37]

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Next question comes from Joseph Dickerson from Jefferies.

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Joseph Dickerson, Jefferies LLC, Research Division - Head of European Banks Research & Equity Analyst [38]

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A couple of quick things, if I may. Just on the comment around the U.K. softness. How broad-based is that? I mean, one of your competitors who reported last week, very close to your heart, Ewen, who lends to 1 out of every 2 corporates in the U.K., did not indicate that there was a broad-based deterioration outside of a few single names here and there. So how broad-based is the U.K.? And what are the mechanics between the $165 million effectively Brexit top-ups, I mean, what's a top-up? And why not $100 million or $500 million? What drives that, the calculation thereon? Number one.

And then number two, I think you alluded to it, but could you just clarify, I mean, it looks to me like there was just under $400 million in Q4 quarter-on-quarter swing in low-quality revenues, notably in GBM around Principal Investments and credit and funding valuation adjustments. So since you've been already discussing the start to the year, could you just discuss what drove the Q4 result there and how we might think about that as having started the year?

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [39]

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Yes. Look, on softness, I would sort of echo the comments from my -- the bank that's close to me -- reported last week, we don't see it as a broad-based deterioration at the moment. It is quite concentrated on a few sectors, high street retailers, restaurant chains and the like, some of the government contractors. So very, very specific at the moment, not broad-based.

The $165 million charge is, I mean, as you know, under IFRS 9, with forward economic guidance, we need to construct a set of forward economic forecast, which we do in our annual report. We then need to probability weight them. What we've done this quarter because of Brexit and because of the -- yes, it's hard to call a central economic scenario at the moment in the U.K. So we've broadened out the probabilities across a range of scenarios. Obviously, the skew is to the downside, and that creates the need for that additional overlay.

You can put different probabilities in. No doubt, as the year progresses, we will get to different probabilities depending on the future of the Brexit negotiations. Yes, there were negative funding and credit valuation adjustments in Q4. And those -- and there were some swings in Principal Investments, so you should assume that they are not repeated so far in 2019.

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Joseph Dickerson, Jefferies LLC, Research Division - Head of European Banks Research & Equity Analyst [40]

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I guess, I'd also ask. John, you mentioned the fundamentals of Asian growth are sound, I think along those lines. What gives you conviction? What really drives that comment?

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John Michael Flint, HSBC Holdings plc - Group Chief Executive, Member of Management Board & Executive Director [41]

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Well, there's nothing fundamentally that's changed other than, I guess, the injection of trade tensions between China and the U.S., which are not to be diminished in any way. They're significant, and they are causing customers to pause. But otherwise, the demographic trends that underpin Asia's growth, the emerging middle class, the very high savings rates, et cetera, all of those drivers remain intact. And we've got a strategically privileged position for that, particularly in Hong Kong and Greater China.

So yes, we're not -- it remains sound. I think we're looking at slightly lower rates of growth this year in Asia than we saw last year. But otherwise, we're talking about another year of growth.

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Operator [42]

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Next question comes from Chris Cant from Autonomous Research.

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Christopher Cant, Autonomous Research LLP - Partner, United Kingdom and Irish Banks [43]

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I just had 2 quick ones, please. I appreciate you don't want to guide on NIM. But, obviously, you made reference to the HIBOR/LIBOR gap. I was wondering if you could just give us a sense of how you think about the sensitivity to changes in that gap if we do see that move over the course of the year? Just sort of a rough rule of thumb would be really helpful.

And you also talked in your opening remarks about flexing cost growth, given the softer revenue outlook. Just looking at your consensus, consensus is looking for about 4% cost growth into 2019, do you think you could do better than that, potentially, given that you just did about 6% cost growth year-over-year into 2018? 4% already seem to give you some credit for slower cost growth. I'm just wondering how you're thinking about the cost number since that's obviously an area of focus for you.

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John Michael Flint, HSBC Holdings plc - Group Chief Executive, Member of Management Board & Executive Director [44]

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Yes. Chris, it's John. So I'll do the first one on HIBOR/LIBOR. So yes, the HIBOR/LIBOR basis is kind of around about 100 basis points in the 1 month at the moment. That's as wide as it's been. We either need to see intervention, i.e., the exchange rate move to the top of the band, and Hong Kong dollars drained through the system that way. That's either going to happen either through FX demand or through IPO activity in the Hong Kong market, which will often create liquidity squeezes. I think we need to see resolution on the U.S., China trade tensions before we see Hong Kong, China IPO pipeline open back up again, so they're the things to watch for.

We do show NII sensitivity in our appendices. If the Hong Kong dollar's 100 basis point uplift, so closing that basis on -- for the full year would benefit us to the tune of USD 700 million to USD 800 million. It's that kind of order of magnitude, so it is material. And at the moment, I don't think that basis will widen from here. I don't think it will deteriorate or get any worse than $100 million. That wouldn't be my view. But if it were to close, on a full year basis, it's kind of a $700 million to $800 million number, as indicated in the tables, somewhere in our annual report.

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [45]

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Yes. On the cost growth, Chris, it's a sort of rare luxury for me being at HSBC and being able to talk about cost growth, something that I wasn't used to in my previous role. So can we manage costs below 4% growth? Yes.

I think the trade-off that we're constantly debating internally is we can continue to pace the growth of investment growth, consistent with headcount growth, consistent with what we see going on in terms of underlying volume and revenue growth. And to the extent we've already started so far this year with a much more prudent view on pace of investment growth and pace on headcount in the areas that we want to grow into, consistent with a more uncertain revenue outlook. As that revenue outlook firms up one way or the other, I think will dictate the pace of cost growth.

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Operator [46]

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Next question comes from Ed Firth from KBW.

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Edward Hugo Anson Firth, Keefe, Bruyette & Woods Limited, Research Division - Analyst [47]

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Just a very quick question, actually on -- back on revenue. I said I've got slightly -- it was a bit a lot of mixed messages about revenue growth in terms of one-offs and in terms of underlying drivers, et cetera. So can I just ask you a fairly simpler question, which is if we look into 2019, are you expecting revenue growth to be better or worse than 2018?

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [48]

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Okay. So I'm not sure that's a simple question. But as I said, I mean, if you look at Slide 4 in our pack and the red bars, I think you could easily convince yourself that there's underlying 2% to 3% revenue growth just from the reversal of one-offs of volatile items in '18. And then on top of that, yes, underlying volume growth, and we spent a long time on this call talking about our confidence in volume growth. And then I've spent a long time telling you I'm not going to guide on NIM. So, yes. You take all that together, yes, we think you get decent levels of income revenue growth in 2019.

But I think -- I think the other thing we are signaling is there's 2 idiosyncratic events out there that we don't control. One is the outcome of Brexit negotiations, and the other is the outcome of U.S.-China trade discussions. The deltas around those are not insignificant, particularly around the first one. So we are injecting an element of caution into anyone's ability to forecast at the moment.

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Edward Hugo Anson Firth, Keefe, Bruyette & Woods Limited, Research Division - Analyst [49]

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Yes. I know, Ewen, I guess, I'm sorry, but it sounds to me then, if I'm looking at Slide 4 as a sort of where we end up focusing as the basis for our outlook, that you would expect revenue growth in 2019 to be better than 2018. Because you've got -- I mean, the one-off negative reds have almost -- or if you took out the red, you'd almost double your revenue growth.

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [50]

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Yes, just be careful because those reds, you wouldn't plan for them to be reds in the same way again. But equally, they could be. So for example, the insurance manufacturing market impacts, if there is a scenario in which risk assets deteriorate, equity markets correct again through the year, it will be red again. Year-to-date, clearly, it's been positive because markets are up. So it's -- I completely understand what you're trying to read from this, I guess, don't be too mechanical about it.

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Edward Hugo Anson Firth, Keefe, Bruyette & Woods Limited, Research Division - Analyst [51]

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No, what I'm saying is the reds, I guess, we can accept are unforecastable or unforecastable by me anyway, so we're left with the blues. And my impression from what you're saying is that you expect the blues' orders of magnitude to be not dissimilar this year versus last, which sounds quite optimistic to me given the broader environment.

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [52]

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Was that a question or a statement?

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Edward Hugo Anson Firth, Keefe, Bruyette & Woods Limited, Research Division - Analyst [53]

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Yes, that was a question.

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [54]

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Well, you would expect us to be optimistic, but I do think you have got some capacity to forecast the blues, so we're not going to forecast it for you.

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Operator [55]

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Your next question comes from David Lock from Deutsche Bank.

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David John Lock, Deutsche Bank AG, Research Division - Research Analyst [56]

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I've got a couple, please, and then a clarification. The first one, just on the loan growth expectations. Apologies, I missed -- if I've missed it on the call, but you previously pointed to mid-single-digit growth that you're talking about some headwinds to that on this call. I'm just wondering if you could clarify whether you're still -- that's still the medium-term target, to have mid-single-digit loan growth within the organization.

And then, secondly, on the January comment. I'm conscious that the first quarter last year was particularly strong in Wealth Management. I wonder if you could give any further color on the kind of revenue trends you're seeing, which areas have been particularly strong in January, as it would help kind of frame how we're thinking about cost jaws in the first quarter of the year.

And then the final kind of clarification, really, just on the scrip. They were the lowest -- there was a lower scrip takeup in 2018. Would it be prudent, therefore, for us in the market to think about a lower buyback as result of that? Or you're really thinking about buybacks as sort of conforming to the average scrip takeup, which has been, I think, of around 25% over the last few years?

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [57]

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Yes. On the last one, we think of our commitment as being neutralization. So if it is a 15% scrip takeup, we would think of lower numbers obviously.

On loan growth, Q4 was just over 5% annualized, which gets you into your sort of mid-range. I think, depending on economic scenarios, we can get more bullish in there. But depending on others, yes, we'll see. But as we keep referring to our 2 biggest markets, Hong Kong and the U.K. And the U.K., in particular, is facing some quite broad economic scenarios at the moment, so difficult to predict.

On January, John, on Wealth Management?

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John Michael Flint, HSBC Holdings plc - Group Chief Executive, Member of Management Board & Executive Director [58]

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Yes. So on the Wealth Management, I think probably just 3 things to think about. One, the markets have been favorable so far. So the red bars, there will be some reversal of that.

In terms of underlying customer activity, I think I indicated earlier the core savings activity, mutual fund investing, insurance policy investing, that's holding up really well.

Where we've seen customers a little bit less active is in things like foreign exchange and equities, which are the smaller pieces of the revenue pie for us. But there's definitely lower customer activity indicating lower customer confidence or an inability to decide what the trend in equity markets is. So we've definitely seen that to date. Yes, 6 weeks in, though, it looks okay at this point. It still looks reasonably solid.

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Operator [59]

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We will take our last question today from Martin Leitgeb from Goldman Sachs.

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Martin Leitgeb, Goldman Sachs Group Inc., Research Division - Analyst [60]

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Two questions from my side. And the first one on growth and just the mix of growth going forward. And in light of the weakening global growth outlook, I was wondering if your expectation of the global mix in terms of geographic mix where the growth comes from. Obviously you previously mentioned Hong Kong, Asia, the U.K., or in terms of product since you -- the split between loan growth and maybe Wealth Management. Has anything changed in terms of your expectation how the contribution of that growth stacks up?

And the second question related to that, in terms of U.K. ring-fenced bank, obviously, you saw a nice acceleration of loan growth, I think, in the beginning of the second half 2018. And I was just wondering, has that reached now kind of a steady-state level in terms of your growth ambitions from here or could that be one of the levers, potentially, to compensate, potentially, some weaker growth elsewhere, assuming obviously market uncertainty, what you would assess over time?

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [61]

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Yes. Look, on the U.K., yes, if we choose to grow in the U.K., we continue to think we've got capacity to take share, both in retail and commercial. Over the last few years, as you all know, we were not a significant player a few years back in the broker mortgage channel, which is about 2/3 of all mortgage origination.

We've rebuilt access to the brokers last year, we grew mortgages in the U.K. by about 10%. We shifted stock share from 6.1% up to 6.6%. We've got a low double-digit share of current accounts. We can continue to take decent share in, which is if we choose to take it. And similarly, in commercial, we do think that we've got an advantage position in relation to customers who want to trade internationally. So under whatever Brexit scenario you come up with, we do think that we've got a set of core competencies that will advantage us relative to others.

Yes, on geographic mix, product mix, globally, I don't think we're trying to signal any significant change in terms of how we're thinking about the business, where we think growth will come from just to repeat. We've clearly got areas that we are competitively advantaged: U.K., Hong Kong, Asia, international trade and the like. You saw that in the growth that we achieved in 2018, no reason to think that we're going to continue to be advantaged in those areas and will be able to continue to take share.

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John Michael Flint, HSBC Holdings plc - Group Chief Executive, Member of Management Board & Executive Director [62]

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Very good. Thanks, Martin, for the question, and thank you all for dialing in. That's the last question, I think we've got on the list today and I think we're out of time as well. So to all of you who dialed in to be with us, thank you very much for your time. And any further questions, let us know, the team will do their best to help with any answers. Thanks a lot, everyone.

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Ewen James Stevenson, HSBC Holdings plc - Group CFO & Executive Director [63]

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Thank you.

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Operator [64]

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Thank you, ladies and gentlemen. That concludes the call for HSBC Holdings plc Annual Results 2018. You may now disconnect.