Good morning ladies and gentlemen and welcome to the Investment Analyst Conference Call for HSBC Holdings plc's Interim Results 2020. For your information this conference is being recorded. At this time, I will hand the call over to your host Mr. Noel Quinn Group Chief Executive.

Thank you, Sharon. Good morning in London and good afternoon in Hong Kong and thank you for joining us. I've got Ewen with me today and he will present the numbers in detail before we then go to Q&A. Let me start by saying that it's been another difficult quarter for our customers, colleagues, and communities, but I've been pleased with how HSBC has responded. This is still a hugely unpredictable environment. We are conscious of that on both a human and a financial level. And we are doing all we can to support our customers and colleagues through this very difficult period. Against that backdrop, we are satisfied with our first half performance. Our Asia business held up well and our fixed income businesses delivered strong revenue growth. This compensated for challenges in parts of the world that have been harder hit by the impact of COVID-19. The businesses that perform less well are those we are already changing. We will be accelerating our transformation in the second half of the year and making other necessary changes in light of the new circumstances since February. There's still a lot of uncertainty around, not least from the ebb and flow of COVID-19 and the steps needed to contain it. Our improved capital position and excellent funding and liquidity are the hallmarks of our strength and resilience, helping us to be there for our customers, while also building the future of the firm. Our focus remains on helping our customers through this immediate period, while making the changes necessary to serve them better over the long-term. The current geopolitical environment is clearly complex. Tensions between China and the U.S. inevitably create challenging situations for an organization with our footprint. But our businesses in Asia have shown good resilience and we will…

Thanks, Noel and good morning or afternoon all. Given the impact of COVID-19, our second quarter was tough. We had an 82% fall in reported profit before tax and a 57% drop in adjusted profit before tax. There were a couple of bright spots, Fixed Income and Global Markets was a standout together with a resilient performance by Hong Kong and other parts of our Asian franchise. Overall, our results were heavily impacted by lower revenues from subdued customer activity in many parts of our business and the building effect of ultra-low interest rates, the second quarter in a row of very high ECLs and a $1.2 billion software intangible write-off largely as a result of the weak return outlook for our non-ring-fenced bank. Adjusted revenue was down 4%. This included a $507 million benefit from volatile items, which in part reduced reversed some of the negative impacts we saw from mark-to-market movements in the first quarter. ECLs were up on the first quarter at $3.8 billion or 148 basis points of gross loans with the largest impacts in the U.K. and Commercial Banking. We've continued to take action on cost to adjust for the weakened revenue environment. Our adjusted operating costs fell by 7% against the second quarter of last year. Despite the weak macro environment, our balance sheet metrics continue to improve. Our core Tier 1 ratio was up 40 basis points to 15% in the quarter and customer deposits grew by $85 billion. Our first half return on tangible equity was 3.8%. That's down from 11.2% for the same period last year. And our tangible net asset value per share of $7.34 was down $0.10 on the first quarter due to movements in own credit adjustments. Turning to slide 9. Looking across the three global businesses. In…

Thank you, Mr. Stevenson. [Operator Instructions] Your first question this morning comes from the line of Martin Leitgeb, Goldman Sachs. Please go ahead. Your line is open.

Good morning and thank you very much for the presentation and for the remarks. My first question, I was just wondering in terms of the tougher revenue outlook you're pointing out, I was just wondering what could potential offsets to this be? Is there a difference now how you think about the prospects of some of the smaller retail franchise that you have? And I think you mentioned obviously the revisiting of the U.S. strategy data. Or could there be other offsets in terms of volume growth or even more pronounced volume growth like in U.K. mortgages or maybe in changes in the way you charge for accounts sort of the current accounts or corporate deposits in order to try to mitigate some of those revenue headwinds? And the second question just on capital. In terms of core Tier one trajectory from here, I was just wondering, should most of the credit migration you're guiding -- for sort of mid- to high single-digit RWA inflation this year, should most of the credit migration occur this year? Or could this also go well into 2021? I'm just trying to look at the numbers here and the guidance here because it would appear like given your impairment guidance that you're likely to remain well within the mid to upper range of your core Tier one target range? Thank you.

Okay. Martin, thank you. Let me deal with some of the revenue offsets first and then ask Ewen to comment on that and the capital position. With respect to our U.S. business, they actually had a very strong Q2 in the U.S. business. Their revenue in Q2 of this year was the highest quarterly revenue since Q4 of 2017. I'm also pleased with the way that Michael and the team have started to execute on the transformation plan. They've already closed around 80 branches retail branches on the East Coast of America, which is around about a 50% reduction. And they've been successful in retaining around about 85% of the deposit base even though they've gone through that reduction program. And they're also well on track on their cost reduction plans as well where they've already completed 50% of the planned 2020 staff exits and are on track to meet or exceed the goal we set them back in February of this year, so progress on the transformation. We clearly need to understand the full economic impact of the lower interest rate environment, but we're committed to transforming that business and improving the returns. On a broader basis on revenue, we're clearly looking at what other options we have to mitigate some of the revenue shortfall from lower interest rates. And we see wealth and growth in our Wealth business as an opportunity for that. And I'll ask Ewen to comment more on that in detail. But we're exploring all options to look at revenue mitigation. Ewen, do you want to pick up on that and the capital comment?

Yes. Martin, so on net interest income, I think, we are beginning to see some asset side repricing, particularly in Asia. It's relatively modest at this point, but we do think there is an opportunity. Secondly, we are seeing particularly in Hong Kong, a changing mix back towards current accounts and away from term deposits which again, I think it's not unexpected given the rate environment, but will help alleviate some of the pressure on liability margins. On non-interest income, what we're seeing at the moment is very subdued customer activity which we attribute predominantly to the impacts of COVID. So, I would think coming into '21, you will and should expect to see some recovery in that customer activity. We're -- in some of the government-related lending activity, for example, in the U.K. we've been taking more of a natural market share. We've taken about a 15% share in the bounce back loans, a 20% share in some of the other lending schemes, which is well above our natural market share in commercial. I do think, in terms of the U.K. mortgage opportunity, potentially we will be relatively cautious there, given the outlook for the U.K. economy, I think and until we get a better sense of direction of travel on Brexit. And the other area where, obviously, we can help offset revenue losses by doing a better job at costs and I think you saw this quarter, some progress on that. It was an unusual quarter because of COVID and the fact that no one was flying a lot of our head offices were largely shut down. But we do think coming out of COVID, there will be an opportunity to make permanent some of those shifts in business operations that we're beginning to see. On RWAs, yes,…

Perfect. Brilliant. Very clear. Thank you. Thank you very much.

Thank you. Your next question comes from the line of Tom Rayner, Numis. Please go ahead.

Yes.

Hi, Tom.

Hi, Noel. Good morning. Can I just ask you please a bit more color on the net interest income guidance? It's sort of greater than $3 billion. Looking at the disclosure on page 87, the sensitivity analysis, there's been quite a big increase in rate sensitivity, both in sort of year one and year two impact. And obviously, rates have sort of moved down pretty much across the board. Has there been any change within that greater than $3 billion, I mean, from say maybe just a bit greater to significantly greater? And just looking into sort of 2021, how confident can you be now that that will be the trough year for net interest income? I mean, are we -- it's a little bit hard, I know, to look out to 2022, but would you be confident that some recovery in volume and asset repricing should start to offset the other negative impacts from rates? Thanks.

Yes. So there's no change, I think, in terms of net interest income guidance for this year. You do have to adjust for the shift in dollars, FX movements. But my only caution around that is, obviously, HIBOR has come down a bit further in July relative to the end of Q2. That interest rate sensitivity is the interest rate sensitivity from here with lower interest rates, so it has gone up because of the flooring effect on some of the liability product, but that's if interest rates shift down from here. I think you will, in some books, obviously, see accumulating effect as you can see in those interest rate sensitivity table. So we do think there'll be another meaningful net interest income hit in 2021, as we currently sit. Yes, as you look out to 2022, when I checked a few days ago, consensus views on policy rates where they were broadly going to stay at current levels 2020, 2021, 2022 and begin to rise in 2023. I would hope by the time we got into 2022, unless you were complete there that you would be seeing sustained economic recovery which means back to growing loan books again, asset side repricing coming through more powerfully and therefore, yeah the start of a recovery in net interest income.

Yeah. Okay. Thank you. And just a quick second question. So I -- just could you give us any size of the, scale of the capital benefits you flagged that are coming through in the second half? I think from the software and SME changes? Material they may -- might be.

Yeah. I mean, that with the -- I mean, there's a whole bunch of things going on in the second half. We're expecting sort of core asset growth to be relatively muted. You've got some benefit from the RWA rundown program, which is continuing probably some modest benefit -- net benefit from regulatory changes although, we have got some offset going the other way like TRIM in Europe. And the yeah the dominant theme I think will be, ratings migration. But all of that is captured into the guidance of sort of mid-to-high single-digit RWA growth. Yeah, software is -- software intangible is probably no more than 20 basis points benefit to core Tier 1.

Okay. Great. Thanks a lot.

Thank you. Your next question comes from the line of Ed Firth, KBW. Please go ahead.

Morning.

Yeah, hi everybody, I just have two quick questions actually. One was just on this NII thing just to get absolutely clear, what you're saying. If I look at the implied second half from your, -- from the current run-rate. It looks like your second half is annualizing around $25 billion. So when you say further pressure into 2021, is that further pressure from the second half run-rate? Or is that effectively factoring in that pressure you're seeing? So I mean, are we expecting to see further pressure from here? Or are we at that right now. And it's just the sort of annualizing effect as we go into next year that you're looking to highlight? I guess, that was question number one. And then, the second question, could you just talk a little bit more about all the sort of U.S.-China pressures at the moment? And in particular, how you expect that to be able to implement the sanctions, have had some chat about? Have you had -- what the sort of feedback, you're getting from Chinese authorities et cetera? I mean you seem to be in a very invidious position through no fault of your own, I might add. But I -- just would be very helpful just to get some sense of how you're thinking about that. And how that might sort of, play out over the rest of the year? Thanks so much.

Ewen, do you want to take the first one. And then, I'll take the second one?

Yeah. I mean -- yes you can get there various ways. But if you annualize the second half as you set out, I think you're sort of broadly, in the ballpark of where you need to be.

Okay. That's great. Thanks.

On the U.S.-China pressures, I mean as you will see from the first half results, we've had a very strong performance in our Asia business. So we -- and we've had a particularly strong performance in China, in the second quarter. I think our profit in China, in the second quarter was up around about 29%. We've seen strong deposit growth in our Asia business. The deposit growth in Asia in the second half of the year was -- or in Q2...

$27 billion.

Yeah. $27 billion, so we're not seeing any material impact of any sort on our business performance in the second quarter or the first half, from the U.S.-China pressures. And in respect to -- looking forward, we're still committed principally to supporting our customers in all of the geographies that they operate in. … We believe there is still a strong role for an international bank in meeting the needs of our clients as they want to trade internationally or expand internationally. And we're very focused on that. And it's not right or proper for me to speculate on what, might or may not happen with regard to sanctions. But I'd come back to, we've seen a very, very strong performance in the first half of this year from our business in Asia.

Okay. Thanks so much.

Thank you. Your next question comes from the line of Guy Stebbings, Exane. Please go ahead. Your line is open.

Guys hi.

Hi. Thanks for taking my question. Firstly, can I just ask on Wealth? It was quite a good quarter but included the insurance manufacturing. So if we adjust for that I think it was down around about sort of 10% in the second quarter. Just trying to think, how should we be thinking about that line going forward? Because it seems there's quite a lot of disruption in that business but I was hoping it maybe is improving versus the first quarter.

I'll give you a first response on that is, clearly, new business activity will be down from normal levels of new business activity. So you would have seen a rebound in the financial performance because the manufacturing part of the business had a claw back on some of the mark-to-market adjustments that were experienced in Q1. But new business activity of selling Wealth products would have been impacted in April and May but we started to see a pickup in that activity in June. So I think that that's what you would have expected, to have seen given the impact of COVID.

Yes, we've seen some shifts supported by the regulators to be able to shift some of that face-to-face business to the ability to sell Wealth product through digital channels. But 2020 should be a trough year for Wealth, if you believe in an economic recovery into 2021. So – and then other things to watch for are things like the reopening of the Mainland China border with Hong Kong, which will obviously help as well.

Okay. Thank you. And then the second question was just on costs in the context of the D&I headwinds, which we already talked through. And obviously, a very good quarter, down 7%. Suggest the run rate could be quite a lot more than the targeted 3% plus but you've called out that investments comes a bit low at Q2. I think Q2 2019 was particularly elevated. So just trying to gauge how much should we be tempering our enthusiasm relative to the 7% we saw in the second quarter? Thank you.

Yes there's a few things. I mean second quarter yes, effectively most of our workforce, roughly 200,000 out of the 235,000 employees were working from home. No one was traveling. Office costs, central office costs were very low. So I would just be cautious that using that as a guidance. In addition, marketing spend was materially down too because we took a very conscious decision to market less in the second quarter. I would think if you – and then offsetting that, I said we're planning to step up investment spend. But in the second half, we think bank levy is probably going to go up rather than down this year. So yes, probably 3% to 4% down for the full year feels better than what you saw in the second quarter.

Okay. Very helpful. Thanks.

Thank you. Your next question comes from the line of Manus Costello, Autonomous. Please go ahead.

Hi, I just had a question about the retail business. Your big improvement in NPS is very impressive. I wonder to what extent is the flip side of weaker returns for shareholders? Customers obviously feel like they're getting a good deal. And you mentioned this Noel, but I wonder if you could give a bit more detail. How might you think about addressing that balance between customers and shareholders in the retail business going forward such that you can boost shareholder returns and maybe spend some of the NPS improvement?

Manus, thank you. I'm very pleased with the NPS performance in both retail and the bank as a whole. And I think we look at that very much as a positive. I attribute it to two things and that is the quality of the support our colleagues provided to customers in the first and the second quarter of this year. They really responded amazingly well. We've lots of outreach to our clients to make sure they understood where they stood and responded to their concerns. Plus we put in place some new digital support programs to make sure that we had regular dialogue with them and they were able to transact despite the fact that we couldn't serve them face-to-face. And I'd also point to the fact that we provided our customers, particularly in retail with circa $30 billion of payment holiday support and our commercial or wholesale customers with around about $52 billion of credit support in response to COVID. So I think those were the right things to do. And I believe supporting clients at a time of stress is a good thing for any bank to do. In terms of translating that into higher returns for the future, we're clearly looking to extend the use of digital and lower the cost to serve. We're looking to increase further our penetration of the wealth market, particularly in Asia and to diversify our revenue stream away from pure NIM or NIM and into NFI sources of revenue. And we believe that our opportunity to grow wealth in China is strong and our Wealth in the rest of Asia is strong and that can lead to higher returns. We're also looking to improve the returns in our retail business by taking down our cost base.

Yes. Manus I wouldn't think the two are inconsistent in the slightest. Improved NPS, where we have the highest NPS scores, they typically correlate with digital distribution. And digital distribution as you know is lower cost to serve than physical distribution. So actually I view that improvement in NPS as excellent and reflect a lot of work that Charlie Nunn and his team have been putting in to improving the quality of the digital offering we've got. And you saw in the slide that Noel put up earlier, one of the outcomes of COVID has been a very rapid acceleration in some cases by several years in terms of digital engagement from our customer base. Yes, that's both good for NPS, but it also should be good over the medium term for how we can adjust and accelerate our cost structure.

So it'll be more a question of as you say the cost structure rather than thinking about changing fee structures or anything to help improve the top line? It will be about...

I think it's a combination. I think it's adjusting to the new revenue realities of today's world plus our continued focus on cost and continued focus on providing good quality service. It's a combination of those three things together.

I mean, the thing that we are going to have to think about on revenue Manus is just in an environment of ultra-low interest rates where you are not earning a return on your liability product. Yes do – we need to think about adjusting some of the cost structure to a more fee-based cost structure, but we're sort of early into that thinking.

Yeah, that's what I was driving at. Okay. I look forward to hearing more. Thank you.

Thank you. Your next question comes from Fahed Kunwar, Redburn. Please go ahead.

Hi. Good morning. Thanks for taking my questions. Just a couple of questions. The first one just back on NII, I think I heard you say the first half 2020 run rate that the annualized net asset was broadly correct. So I understand, why that's the case because HIBOR looks like it's down probably about 100 basis points kind of first half versus where it is right now. So how does 2H 2020 NII hold up so well in the face of HIBOR coming down to that extent? And the second question, I had was just on the U.S.-China situation. I appreciate, it's quite a difficult question to answer but could you give us a sense of how you think profitability might be impacted? And where your biggest concerns are when you think about the kind of political kind of noise coming up between China and the U.S.? What – as I look your number, I appreciate you said deposit growth has been strong. But looking forward where do you see the potential risk to your profitability from that kind of stuck in the two countries? Thanks.

Ewen, do you want to do with the NII?

Yeah. On the NII we had always assumed that HIBOR was going to normalize towards dollar interest rates in the second half so that might be the disconnect in your modeling. But yeah, I don't have the benefit of your model. But I think what we said is broadly true that in terms of the previous answer to the other question.

I think on the second part...

Sorry, as follow-up on that, I think your sensitivity is now about a 30% increase in terms of the year two impact on NII versus the year one impact. Is that a decent kind of way to think about the cumulative hit to year two NII? Or is there anything to mitigate that size of increase?

Yeah, but I think as you think about that interest rate sensitivity, it's interest rate sensitivity from here i.e. that we've already had the first half impact on rates. So it's not a clean read across, I think. So be careful about how you interpret that interest rate sensitivity, because it's from here rather than where it was at the start of the year.

Thank you. On your second point, I think there are – I'm not going to get into speculating on what actions may or may not be taken between respective governments. It's not my role to do that. At the end of the day, I'm a banker not an economist or a politician. But clearly, there are potential impacts on general economic confidence from any form of trade tensions and that will have an impact on all financial institutions. Clearly, there is the potential for change in supply chains. And over 155 years, we've seen many changes to supply chain activity over that time and we'll continue to respond to anything that comes our way going forward. We absolutely believe strongly in the strength of the PEG. So, we do not see that as a viable risk. We believe the PEG is strong and is well supported and see no risk to that. And clearly there are the potential for sanctions against individuals or entities. But again I'm not going to speculate whether they will or won't happen or if they do what impact it may have. That's not my place to do so. I think to be honest I'll return back to -- if you look at the first six months' performance it's been mainly impacted by COVID. It has not been significantly or materially impacted by political tensions or geopolitics. Most of the impact in the first six months is COVID-related.

Perfect. Thank you both. Cheers.

Thank you. Your next question comes from the line of Rob Noble, Deutsche Bank. Please go ahead.

Morning all.

Morning.

Just a clarification on -- do you have any more excess expected loss within your -- is it -- was there any excess expected loss deducted in capital anymore? Is that all gone? And do you have to rebuild that as we go forward into 2022, 2023, whenever it is? Thanks.

Yes. We've got some disclosure I think at the back of the slide back on that. Sorry just trying to find it but it is in our slide pack. And if not I can get IR to follow-up with you.

All right. Thank you.

Okay. Next question.

Thank you. Our final question is from Joe Dickerson from Jefferies. Please go ahead.

Hi, just a quick one. So, you've taken this extra charge provision charge in the U.K. and noted the downside risks to the economy. And I think you made some similar comments at Q1 about the relative weakness in the U.K. Can you just help me square the circle? I mean, if I look at your mortgage balances they're up 6% year-on-year in the ring-fenced bank which is like 2 times the industry growth. Can you just help me square the circle between the two views and whether or not you feel like you're being appropriately paid for this risk given your caution around the U.K.? Thanks.

Ewen, do you want to?

I mean, I think yeah, where we're concerned about credit in the U.K., I think it's more on the commercial side than the retail side. The mortgage book, if you look at the average LTV of new lending, you look at where their book is overall in terms of the average LTV. You look at the returns that we're still generating out of that business I think, we're getting adequately and more than adequately compensated for the downside risks. And mortgages, consumer debt, credit card spending has declined markedly over the last few months as a result of COVID. And I think folk have been using things like mortgage relief to pay down consumer debt. So, consumer balances have fallen as a result of that, and therefore, less for us to ECLs. It's really on the commercial side that I think we've got more sensitivity and you can see that. And you can see that in the overall level of commercial provisions, commercial ECLs, which are over $2 billion in the quarter relative to retail. I don't think the two views are inconsistent at all. Our sweet spot in mortgage lending is typically prime mortgage lending where we think we are running relatively low risk and getting adequately compensated. The other thing, I'd say, is you can look at the stress characteristics of our portfolios in the Bank of England, ACS results. What you see there is relatively strong outperformance in retail and still outperforming in wholesale versus U.K. peers.

That’s very helpful. Thank you.

Thank you. Our final question comes from the line of Aman Rakkar, Barclays. Please go ahead.

Hi, Aman.

Good morning. Good morning. Just -- actually a couple of them have been addressed. Two follow-up questions. So, obviously not to comment on the dividend. Could I ask if you came in at the top end of your ECL guidance, I mean there is a chance that you make very, very little profits this year? I mean you could potentially even dip into being loss-making. Interested if your best guess at the moment was as to whether that may preclude you from resuming a dividend in February, if you were indeed loss-making? Or do you think the strong capital wins out? And then secondly, just on restructuring, I mean, is it the right read from the tone of everything today is, I mean you clearly faced a much weaker revenue environment than you thought in February. And it sounds like you are doing the work on some additional restructuring. You've obviously not provided the new targets in terms of saves cost saves or RWAs. But, is it right to assume that the work is happening in the background? We're perhaps just not ready to announce something? Or do you think I'm just getting a little bit ahead of myself? Thank you.

Let me deal with the second one first. I mean, we're clearly committed to delivering on the cost reduction program that we identified in February. We also need to reflect the fact or respond to the fact that the revenue is softer now than it was in February. I mean looking at what additional measures we need to take. So, you're right to say that we're looking at what other additional actions we can take on revenue or costs or capital to improve the returns. But, we'll got no details to talk through on that at this point in time. And we have to see how COVID develops over the next quarter or two quarters to determine how enduring this revenue position and cost position is going to be. But we committed to delivering that which we said in February and looking at additional actions as required. Ewen, on the first point?

Yes. So, maybe just a couple of other things on -- I mean COVID clearly does open up I think some opportunity and time will tell how permanent some of this is. But we talked earlier about the fact that we've seen a substantial acceleration in digital engagement from our customers. I think that will allow us to think more carefully over the medium term about some of our assumptions around the mix between physical and digital distribution and also how we work and seek to go back to work as a workforce what that means for our commercial real estate portfolio, what that means for previous assumptions on traveling, et cetera. Again, I think over the medium term, COVID has opened up a unique opportunity for us to rethink how we engage and work as a workforce. But as Noel said, it's too early to sort of model that out for you at the moment. And I suspect for the time we get full year results, we'll be -- able to be more fulsome on what we can say around that. On dividend, I think it's also -- those two ends of the ECL range, I think, signal different things. The high end of the range means that you're facing into probably other line items being severely impacted because you've got a more meaningful economic recession going on and a much more muted recovery into 2021. You're also going to see much greater levels of RWA inflation. So, it's not just the impact from profitability. It's also the impact on RWAs which means your core Tier 1 is going to be under a lot more pressure. At -- and at the other end of the range, you're facing a much more benign stronger recovery into 2021 RWA migration will be a lot less and you've got a lot more confidence thinking about the outlook for 2021 and 2022 at that point. So, it's sort of speculative at the moment. We don't know -- we think we're going to learn a lot in the next six months on COVID both in terms of the impact of second and third waves on various economies around the world and the likelihood of an effective vaccine in 2021. We'll know where we are in relation to Brexit. We'll have had another six months on geopolitics and I think can have a much better grounded view on what if any impact that's having on our business particularly Hong Kong. And that's why we sort of pushed the discussion on dividends to full year results. But we clearly understand the importance offered to the equity story. We clearly want to return to making distributions again as soon as we can. But we don't want to come out with definitive statements until we've got more clarity on the economic outlook we're facing.

That's fair. All right. Thank you very much both.

Thank you. I will now hand back for closing remarks.

Thank you.

So, thank you so much for joining us today and it was good talking to you.

Thank you ladies and gentlemen. That concludes the call for the HSBC Holdings plc interim results 2020. You may now disconnect.