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HSBC Holdings PLC (HBC)

May 15, 2013 3:30 am ET

Executives

Douglas Jardine Flint - Executive Chairman

Gulliver Stuart Thomson - Chairman of Group Management Board, Group Chief Executive Officer and Executive Director

Sean P. O'Sullivan - Group Chief Operating Officer, Group Managing Director and Member of Group Management Board

Iain James MacKay - Group Finance Director, Member of Group Management Board and Executive Director

Patrick J. Burke - Chief Executive Officer, President, Chief Executive Officer of Card & Retail Services and Senior Executive Vice President of Card & Retail Services

Peter Wong

Analysts

Manus Costello - Autonomous Research LLP

Thomas Rayner - Exane BNP Paribas, Research Division

Michael Helsby - BofA Merrill Lynch, Research Division

Raul Sinha - JP Morgan Chase & Co, Research Division

Arturo de Frias Marques - Grupo Santander, Research Division

Steven Chan - Citic Securities Co., Ltd., Research Division

Michael Trippitt - Numis Securities Ltd., Research Division

Gary Greenwood - Shore Capital Group Ltd., Research Division

Andrew P. Coombs - Citigroup Inc, Research Division

Gurpreet Singh Sahi - Goldman Sachs Group Inc., Research Division

Chris Manners - Morgan Stanley, Research Division

Christopher Wheeler - Mediobanca Securities, Research Division

Sabine Bauer - Fitch Ratings Ltd.

Douglas Jardine Flint

Good morning, and welcome. My only task this morning is to welcome everybody to this strategy update. This is now the third that we've done, and I guess over the last 2.5 years, a huge amount has been achieved against that which was set as in the first one. So this is an opportunity to update you on that, to describe the progress and the program, which is maybe approaching halfway through, but a long way to go, and Stuart and the team are going to take you through what the next phase will be. It's been quite a journey so far. Stuart and the team are all committed to take you to next stage. So at this point, let me hand you over to Stuart.

Gulliver Stuart Thomson

Thanks, Douglas. Good morning. So over the course of the next few hours, I will promise it will be less hours than 2011, we'll explain the investment case again for HSBC. And the order of the day will be as set out on this agenda, which is, I'll start effectively by rehearsing what I think is still a distinctive position that HSBC has, even in the change environment that's evolved over the last 2.5 years. And then I'll go into actually quite considerable detail on what we've achieved in the last 2.5 years. Because although we live it every day, you're all investing in many companies and covering many different stocks. And then we'll go into, after a break, a detailed run-through of the next phase of our strategy. And then we'll take questions and answers about an hour. After which, you're welcome to join us for lunch. The management team is actually in the room. And the reason I want to take a break at one point is so that you can actually talk to them directly, and that also becomes an opportunity over the course of the lunch.

But first, 2 summary slides. The first one being this one, which sets out what we actually have done since 2011. So we announced this actually back in May 2011, and since then, I think we have made considerable progress to transform and reform the HSBC group. And the key highlights include that the 52 disposals and exits announced since 2011, with 12 of these this still to complete, there's been an $8 billion gain on sale, USD 4 billion on annualized sustainable saves, and a headcount reduction of about 28,000 from those sustainable saves, plus actually another 12,000 from the disposals, so headcount down by 40,000. We actually have achieved double-digit loan growth in 15 of our priority markets. We generated $27 billion of capital and we've actually paid $16 billion in gross dividends. And I think, as a management team, we've broken the trickly inertia that others feared would hold us back. And we have evidenced focus management group over at HSBC, unlocking value for you all. As Douglas just said, we're not even halfway through the programs to reshape HSBC. And clearly, some things did not go to plan, which I'll come back on to a little bit later on, and we'll be open and transparent about those as well.

And the second snapshot is what this presentation contains. This is the key takeaways from today. And I wanted to put it upfront, just incase some of you were busy and needed to pop on somewhere else, and to save you having to march through 90 slides to get the conclusion, we'll have it upfront here. Fill up briefly, as we move to the next phase, which is 2014, I'll remind you that we're still on the 2013 targets, obviously, funny enough for 2013. And allow me basically to run through the strategy. The strategy actually remains unchanged. It is actually working. So we're not changing the strategy. There are 3 priorities going forward. When we grow both the business and the dividends. And we're going to run HSBC for both, with our unique geographies, when macro trends support investment and we generate surplus capital, so we can fund growth and we can fund the progressive dividends, okay. What I don't like to think about is we're running the company now simply for the dividend. There's a lot of growth opportunities. We're positioned, as I'll go through in some detail, and those geographies in the world that really will deliver the big difference in the next 20 years. So it's a great opportunity to invest, but there's also, potentially, a great opportunity to increase the dividend. And the logic will simply be, we generate about 60 basis points of capital per year, if GDP growth supports it, we'll deploy the RWAs, the return will come back through PBT and dividends that way. If, actually, GDP growth is weaker, then the capital generation will increase the dividends. What we're also going to look at during as well is subject to PRA approval, and this will be from 2014, is to neutralize the script dividend program. We want to abolish it, because it's really important for our retail shareholders in Hong Kong. But obviously, there's been a dilution, really, in the last -- well, since the rights issue, actually of about 1.3 billion, 1.4 billion shares simply coming about through the scripts. So again, subject to PRA approval, but starting from 2014, we'll look to neutralize the script dividend. We set out therefore these targets. We're sticking to the 12% to 15% return on equity. We actually believe we can achieve this, because the underlying bank is achieving it. The dilution at group level comes about, because we have household and legacy portfolios that are running down, and also because we have sets in conduits in the Global Banking markets business. If you put those to one side, we are actually retrieving the 12% to 15%. And we're actually happy to reconfirm it with a higher Tier 1 capital minimum. What we're also setting is the run with a common equity Tier 1 minimum of 10% on a fully-loaded CRD IV version of Basel III 20, 22 basis, and we're quite confident we can still drive the 12% to 15% with that in mind. The advanced deposit ratio cap will remain less than 90%, it's actually 73%. It's the cap as opposed to our target, but we remain comfortably inside that, and clearly, we continue therefore to signal that this bank will be retail-deposit funded, which we think is again, a substantial source of strength. We're also setting out $2 billion to $3 billion of additional sustainable saves, that will take us through a total of $7 billion of sustainable saves since we started in 2011 by the end of 2016. And that's why we're starting to move. We've focused heavily on sustainable saves to adjust the cost efficiency ratio. This clearly has been the mix. We're in a kind of situation where we've actually outperformed on the cost saves, we're at $4 billion in the first quarter 2013, when we said we'd actually get to $3.5 billion -- well, $2.5 billion to $3.5 billion, actually, by the end of '13, but of course, we've missed the cost efficiency ratio. And actually to be honest, that's mostly because we didn't foresee the collapse of the Eurozone, which came on as immediately after the May 2011 Investor Day. And clearly, the revenue is difficult to drive, you're all aware of that. That wouldn't be the case at the Bank of Japan, the ECB, the bank in the Fed [ph] all had key way if revenue growth was just something along and GDP was great. So therefore, what we want to do is unhook ourselves from the inability to control the revenue because of big macro trends beyond, of course, taking market share, and we'll dig into some of that, and proof of concept to some of that a bit later on. But to reassure you, a very specific, further sustainable cost save is now being set out. So we're going to run it in the mid-50s, but with it -- with also a focus on positive jaws. Clearly, positive jaws implies an improving cost efficiency ratio by definition, yes? And again, well, bear in mind, that even if we're in the mid-50s, we're still a lot better than most our peer group who tends to be in the high 50s to the low 60s. So we're going to be 100% focused on both unlocking and creating value in the group, and realizing that value based on the share price and dividends and in other forms of capital return. So that's basically the output from today, and now we'll build up the kind of logic and detail as to how we've arrived at this.

So I want to basically revisit, and I think it is logical to retest the validity of the strategy that we set out in 2011. In other words, is it still valid? And the fact of the matter is, not an awful lot has happened since 2011. The market environment's been very challenging, and there are several things we didn't expect since May 2011. First, the Eurozone crisis and its impact on the interest rates. Interest rates are going to stay lower for longer. We've got $1.2 trillion of deposits which therefore, net interest margin all will remain quite compressed. We saw a weaker-than-expected global macroeconomic performance. And after the global credit crisis, we saw a breakdown in trust in banks and sovereigns. So this has kind of resulted in strict deregulation and policies which have continued to evolve, and actually evolved quite considerably since 2011. So we've got the EU interpretation of: Basel III by CRD IV; ring-fencing proposals; vectors in the U.K. like in Europe; G-SIFI surcharges from FSD; the Dodd-Frank Act in the United States; and most recently, compensation restrictions in the EU under CRD IV. So the outcome is obviously a significant change in the industry environment and challenges on banks profitability. All of these has happened in the last 2.5 years. And actually, the interesting fact, which you'll all be aware of, is the banking industry has increased its capital base by about 57% since 2007, while revenues remain mostly flat. So effectively, the industry has de-leveraged. Growth outlook does remain challenging, which means banks will have to do a lot more discipline about margin that costs going forward, and Shawn will talk in detail about this. And actually, one of the things I think that's happening and changing in the industry, is the banking industry will have to now manage its cost in a way most other industries have had to do for a very long time. The banking industry, in a way, probably because of 3 main trends, has not had to be as focused on its cost as manufacturing companies have had to be. The banking industry was able to reach, in the case of some of our competitors, not us, the high levels of leverage. The banking industry was able to reach the alchemy, which also, we didn't do, i.e. making products that are worth 2 that you sell for 12. And the banking industry was also able to benefit from ever-new emerging markets, where the demographic wave actually resulted in entering new markets with very high spreads, which initially in the first 10, 15 years of any developing markets development remain very high and then eventually narrow up. That, we have benefited from, and that is no longer there. So we think we're going to be running this firm basically each year, challenging management to take 2% to 3% after the cost base, and that's kind of what we would have been doing, had we worked in the auto industry or pharmaceuticals for the last several years.

But I think all of these important questions, therefore, raise the issue of are the 2 major global trends which we actually set our strategy on, are they still actually valid? Well, the first one, if you remember, was our belief that the world economy was rebalancing. That there was a shift, a once-in-generation shift of economic activity moving from the developed world to the emerging markets. We believe this trend remains completely valid, and it benefits HSBC because of our long history in those economies which will represent the greatest growth opportunity for the next 20 years. That still remains completely intact today, macro position that benefits of this bank. Secondly, we said as well that the global macroeconomic environment and the economic development and this rebalancing would continue. And since 2011, the global macro economic environment has actually deteriorated. But despite the slowdown, the fundamental trend is still intact, because if you look at the last 2.5 years, faster growing market GDP has averaged 3 to 4x higher than mature markets. So that effect of a once-in-a-lifetime shift in the emerging markets and the emerging markets themselves growing at a much faster pace, has remained completely intact. We also said that continued trade growth and capital flows to offset global imbalances would be a considerable beneficiary to HSBC given our geographic footprint. And we believe that this trend is still in place in terms of trade, but not in terms of capital flow. So if you look at this, and since trade is so critical, I think it's worth diving into this in some detail. Trade continues to grow, but it's clearly affected by the overall macroeconomic environment. The fastest-growing trade corridors remains those between mature and faster growing markets, which fits us, and the south -- so-called South-South trade, which is emerging markets to emerging markets, which fits us. Now the capital, cross-border capital flows, have seen a significant decrease, and that's primarily driven by West European banks, scaling back their international activities, to focus more on their respective home markets. In actual fact, although we didn't foresee this in considerable detail back in 2011, of course, this has actually also benefited us. Because as those European banks pulled out of Asia Pacific, particularly in the case of the French, out of the Middle East, in the case of the Germans, and actually pulled back in Latin America, in the case of the Spanish, we've been able to actually take quite considerable market share. So in a funny sort of way, the declining capital flows, at this point in time, because of the cause of it, i.e. it weakness in European banks, in particular, has actually resulted in a beneficial effect to HSBC. So that underlying proposition, again, has remained intact.

So if you look at, in essence, these significant trends, and then mat them to HSBC's ability to capture the opportunities the trends create. We have a meaningful presence in many attractive growth markets that allows us to take advantage of organic growth opportunities. We're one of the best capitalized banks in the world, and we have a stable funding base in deposits. And we're obviously very committed to these strategic markets because we've been in them for a very, very long time. We've not just woken up to some of the opportunities that exist in Asia Pacific or the Middle East. And on that work comes about 90% of all global trade and capital flows. The other big advantage we have is we have local balance sheets, liquidity and local currencies, which actually is a very heavy and high entry-level barrier just at the micro level if you want to do high-yield bonds in Asia, because an awful lot of these are actually in domestic currency. Unless you go to domestic deposit base, you actually can't do this. And we also have local trading capabilities in the most relevant financial hubs, so I continue to believe that we have key competitive advantages. And we're also present in the most attractive markets. We have meaningful exposure to grow through our presence in the most attractive, mature and fast-growing markets. Now, our priority markets cover about 58% of the total addressable banking revenues growth through 2020 based on data from McKinsey. So what's this is trying to do, is to say that, what's the addressable revenue pull that a bank can get at, okay? And what we've done here is we've excluded from the adjustable banking revenue Retail Banking in the U.S.A., Mainland China and Germany, because we're not going to be able to. We don't want to in the U.S.A., regulation won't allow us in China, and we do not have that business strategy in Germany. So this is the addressable wallet that actually HSBC can aspire to get to. And clearly, if you look at this, you can see essentially that we are positioned across most of that opportunity, a very significant chunk of that opportunity.

Now growth is projected, if you look at this, to be concentrated in Mainland China, Brazil, India and the U.S. And a study by Boston consulting group projects there'll be approximately 10,000 billion-dollar companies by 2020, versus 4,000 in 2012. And the majority of these companies, over 60%, are going to be from faster-growing markets where HSBC has an established presence, such as China and India. So these are markets where we have a presence and can capture a meaningful share of the available wallet.

Let me spend a bit of time on China because this is an incredibly important country for HSBC, clearly being in the name. So if you look at China, we actually don't need thousands of branches to capture a meaningful share of the economic development. This is a bit of a myth that actually a number of people have adopted. GDP growth in the Commercial Banking opportunity are highly concentrated in city clusters, okay. I think that you need to recognize that, actually in most countries, there is a move towards urban or city clusters, the creation of conurbations rather like the Tokyo, Kawasaki, Yokohama conurbation in Japan. So GDP growth in Commercial Banking opportunity are basically concentrated in city clusters. And these are defined as areas in the radius of 100 to 200 kilometers carrying several large cities. Now the top 10 city clusters in Mainland China are forecast to cover 70% of total GDP, and international banking revenue opportunities between 2010 and 2025. Now, for example, the cities in Guangdong province, and that's a map of Guangdong province, which is mainland China's greatest exporter, and it contribute 11% of China's GDP, with Guangzhou and Shenzhen of both populations of over 10 million. And what we think will happen in here, and this is the big growth opportunity in Hong Kong, is that actually as the border becomes more porous, Guangzhou, Shenzhen, Hong Kong will become a conurbation. It will become a conurbation of 45 million people. And the factual analogue you need to think about is Tokyo Kawasaki Yokohama, that's the big growth opportunity. So using CEPA, the Closed Economic Participation Agreement between Hong Kong and China, because the Hong Kong Shanghai Banking Corporation is a Hong Kong-listed entity, we're allowed to open 20 to 30 branches per year in this province. So we will be able to build up, and this is in addition to the branches that we're opening in the rest of China. So the focus will be on this conurbation. If you look across the rest of China, we are in all of the big urban clusters, the city clusters, which represents 70% of the GDP opportunity, and most importantly, 70% of the Commercial Banking in GBM opportunity, because that's the bit that we can address. So the idea when you look at this and say, well, you've got 150 branches, and you're opening 30 a year, maybe you're at 400 branches in due course, big focus on this conurbation, how can you piece against the local Chinese bank? And we're not. We're not trying to do Retail Banking and Wealth Management, we're trying to actually represent the fact that we've got the biggest international network and therefore, as Beijing goes to it -- going overseas policy, we can connect Chinese companies and British, German, French companies, et cetera, to that opportunity. And you need to be in those city clusters, and we're in those city clusters because you don't need a pan-Chinese strategy to do this. Then specifically, and this is really important, this focus on essentially Guangzhou, Shenzhen, Hong Kong as a conurbation, is part of the growth opportunity for our Hong Kong business. And this is actually really quite exciting. And as I say, we have under CEPA, completely alongside the CBRC approval process for, if you like national branches, the ability to open to 20 to 30. So who else can do this? Well, Bank of East Asia can, and Dah Sing Bank can, but you need to be a Hong Kong incorporated listed bank to take advantage of CEPA. So actually, American banks can't, yes. So this is also something where clearly since Hong Kong is, and this is the Cantonese-speaking area, we have tremendous recognition. Because by definition, most people in this area are watching kind of Hong Kong satellite TV every day, are traveling backwards and forwards as the high-speed railway is put in place, and this will become essentially a completely connected economic corridor.

Now, again, in terms of size of network, we also get criticized for the size of our network in Brazil, maybe ideas with subscale and the size of our network in India, where it's taken us since 1854 to get to about 55 branches, so a disappointing rate of opening. To replicate the U.K. branch network, about year 3020, by which time we'll all be well overdoing Investor Days. But actually again, in Brazil and in India, it's the same argument, it's all about about city clusters, it's all about our urban clusters. It's really good work the booking institute have done about this. So again, in Brazil, the top 10 city clusters to fill, cost to cover 80% of total GDP and 80% of the international commercial banking revenue growth between '10 and '25.

In India, the top 10 city clusters are forecast to cover about 40% of total GDP. But 70%, again, at the international commercial banking revenue growth. And again, it's a concentration where your export industies sit. In both cases, we have meaningful coverage within our existing network of both of these.

Now going into the network, the network continues to cover, post disposals, 90% of the international trading capital flows. So trading capital flows connectivity remains concentrated in 38 markets, they represent about 90% of growth. This was the case 2.5 years ago, it remains the case today. And our network covers actually 90% of the global trading capital flows, thus we're well positioned to capture trade, FDI, FX reserve growth, external debt growth. The 22 home and priority markets cover 64% of trade growth and 60% of FDI flows, and I'll come on in a moment to define the home and priority markets. But you can remember, I showed this one last couple of years.

And so therefore, in many ways, we believe, that our business benefits from that cost law that asserts that the valuable network grows as the square of a number of its nodes. In our case, it means we have to be present in the places that are key for global connectivity, yes. And the disposals have made no and no way have impaired this network during the last couple of years. Because clearly, we did the analysis before we did the disposals.

We also still believe, rather self-evidently, in the advantages of the universal banking model. We believe that there are tremendous benefits and it being diversified by customer group, by geography and by activity, it creates tremendous stability. What it causes change is that HSBC is now materially more focused post disposals and reorganization than it was in the past. And actually, I think, we now have started hopefully to build as a management team some track record around focused execution.

So I now want to talk about effectively the track record in delivering change, what we have done over the first phase. For those of you follow us intimately, I apologize, some of this will be repetitive. But I think it is worth spending a little bit of time going through this almost as a report card, report back to you, our owners. So as you've seen, the macro trends still support HSBC. So now let's look up what we've actually done. But first, I want to make it rather simple, but actually a quite powerful point. If you read the transcripts of the 2011 and 2012 investor updates, we have attempted what we said we would. It seems rather simple a comment, but it doesn't seem to be often the case with banks, in particular, over the last couple of 2 years. So the vision that we articulated for HSBC and defined for HSBC, and this is a really key slide, has a very logical sequence. So starting with our purpose, we defined the reason why the group exists. It's extremely important actually for your internal community of your colleagues to define why on earth the firm exists, okay. And actually, obviously, for most banks, they would never gaze any thought to this for a large part of recent history. Why does the bank exist? What's the point of it all? So we actually have set out, and I won't read it out to you, a very, very clear statement of why this firm exists and what it does, yes. And actually to be honest, and this is a bit of a slide bar, is incredibly important for your recruitment. So if you're going to get graduates now from university to want to join this industry, which is key if we're going to bring talent in, now, that eventually will be leading the firm, they have to think that there is a purpose and there's a value to what on earth the firm does, okay. It is no longer good enough to have a complete unstated or not-thought-through reasons to why or not your firm exists. The second thing we did is we rolled out a very significant program around values, and these are set out here as well. But this is incredibly important because it defines how we behave at HSBC. And we started this from January of 2011, and clearly, this is part in part of helping us deal with the deferred prosecution agreement and the events that have taken place also around customer addresses on in the U.K. You have to be able to shift the soft side, the behavioral values of the company, as well as kind of hard financial targets. We set out a strategy, which I've just rechecked against these significant macro trends. So there's an -- if we believe that trading capital flows will continue to grow, which we do, we capture it through commercial banking, global markets. If we believe that the emerging market's economic growth are shifting from the developed, the emerging markets, then we will capture that, a faster wealth creation in Retail Banking Wealth Management and Private Banking. And the outcome is actually that we would deliver consistent returns with what we think is an appropriate balance. And the appropriate balance generally was set out as a mix of 50%, 35%, 15%. 50% retains a build capital, to create a buffer, to protect the taxpayer from any economic accidents that we might have. 35% to gather our owners, the shareholders, and 15% to the staff. And we felt that, that was a logical and sensible and supportable balance. What we're effectively illustrating here is we're going to shift it slightly. Because we have now got to position where we believe we have sufficient of a capital buffer to meet regulatory requirements, which kind of 9.5%, to create a 50 basis points clear water between that, which is what the 10% is about. And therefore, we're going to shift this to a 45% of earnings retained, 40 dividends, and 15% in terms of compensation to staff. And we'll talk about in detail about how this dividend shift sort of take place, but this is an important market to put down. We're quite clearly signaling that the mix of the appropriate balance we're nudging towards dividend growth. And again, it is clearly going to come about that if economic growth is not at a level to consume the additional capital we're creating, we will return it to our shareholders. And what we want though, to do though, and expect to do, is to be able to do both. We expect to be able to grow the business and to be able to grow the dividend. But as I say, there's been some confusion, I think, around in terms of what our attitude to this is, so that's why we're clearly setting out here what it is.

So what we also just need to quickly bounce through again is the unexpected things that happened since May of 2011, and this is my way of really explaining and accepting the fact, we did miss the cost efficiency ratio. We missed it mainly because of -- mainly because of revenue, because didn't foresee what was going to happen to the Eurozone in QE. And we also missed it because we -- and this is a mistake, we, as a management team made, we underestimated the size of the underinvestment and compliance of legal, so there is a permanent increase in cost there. We also, I think arguably, should have had a better sense of the severity of the regulatory enforcement actions in the U.S.A. and indeed, the size of the customer address in the U.K. On the other hand, actually, there were also unexpected opportunities that came up. There were opportunities to invest in certain of the emerging market businesses, which we also didn't project in May of 2011 that have clearly generated positive jaws. But we clearly did miss on certain things, a, because certain things reduced our revenues which were kind of unforeseeable. And b, because of internal, if you like specific to HSBC things that we probably should have had a better handle around.

But we have made material progress over the last 2 years. And despite these events we generally have, and this is key, I think we have shown an ability to change HSBC, to reform it, to transform it, and together, our arms around this group and actually manage it. A lot of the criticism of HSBC historically has been that is a very large bureaucratic organization. This trickly inertia comment that you'll recall was made after the first Investor Day by one of the newspapers. And I think what we've indicated now is, actually, we can drive significant change. So we've announced a total of 52 disposals, cut 40,000 off the headcount, $4 billion off the cost base, and actually we have increased revenues in faster-growing regions by 25%. There's been a 20% increase in commercial banking revenues over the period. It's been double-digit loan growth in 15 out of the 22 priority markets. And I think all of this, which has clearly generated capital dividends and has led to some re-rating of the stock comes about because we're showing much greater management grip on how we run the firm. So we set up the initially the 5 filters, which I talked about on the very first day, which we've run every business and continue to run every business through, okay. So this is a continuous process, this is not a one-off event. So we continue to run everything through, what is the strategic relevance of the country? Is it going to be in the top 30, 40 economies in the world? What it's connectivity by trading capital flows to other comes? What its connectivity by trading capital flows to other economies. Once it's through that, then the specific ones about HSBC, how profitable is it? What's its cost efficiency ratio? Is its AD ratio under 100%? And therefore, you come with decisions if the connectivity in that current development is high, I'll invest, turnaround to improve if it's low, continue as is if we're hitting all of the profitability to finish liquidity targets or x that. Then we've also added the sixth filter, which is about global risk standards. And this is clearly about financial crime risk, and it's fairly obvious why we would need to do this and would need to actually clearly future proof our business against ever having the kind of terrible situation that happened to us in the 2002, 2008 period in Mexico and the United States. Those 6 pillars have therefore led to an unprecedented number of disposals and exits. The 6 pillars of framework helps us to identify a large number of nonstrategic businesses in our portfolio and there's been 52 disposals and exits. There's 12 still to close at this moment. In the past, in 2010, the group redeployed capital and a number of acquisitions across different geographies and business lines. And clearly, some of these acquisitions were not successfully integrated into our business. So if you look, there's quite a contrast. There's a period clearly from 2000, 2010 where we invested and bought things. And in a period from 2011 to now, we have disposed of a number of investments to make the firm easier to manage, easier to control, more focused. What, I guess, I'm also saying is that, therefore we are unlikely to redeploy capital into any significant M&A deal.

And there's 2 reasons -- 3 reasons for that. One is we're already in the top level of G-SIFI. We're already amongst 4 banks that are regarded as the most systemically significant.

So therefore, we are unlikely to get regulatory approval for any big transformational deal. Secondly, we've exhibited quite clearly a great ability to run our bank organically and a less great ability to do acquisitions. And then the third thing is, I think it is much more likely, given that we will deploy the 6 thoughts on any acquisitions, that any acquisition that does take place, I'm not ruling them out, would be in-country and as a bolt-on on. So they're going to be in countries, most likely in the 2 home markets, the 20 priority markets, where we're also, and this kind of a 7th filter, absolutely confident that our bank has great management, great people, and can completely dominate the target that we're actually taking on.

So therefore, what I'm really saying is any acquisition we will be bolt-on, it will therefore be quite small. It will, therefore, be in the obvious set of countries, and in those countries where we can absolutely dominate any target that takes place. It is therefore most likely that our growth will be organic, and that's actually a good thing because we've got a very good track record, Commercial Banking, Global Banking and Markets, are building businesses organically.

So if you look at an overview of the 52 disposals and exits, which makes the firm much more focused, in the U.S. we're repositioning the bank. We disposed off the car business and the upstate New York branches. These were 2 large transactions in which we achieved a very positive outcome. We have further major transactions across Panama, Ping An, disposal first our insurance businesses. And at the same time, the 6 filters identified a number of small, non-strategic businesses, which rather than strengthening the group with subscale, consumed a disproportionate amount of resources in management and/or create a substantial potential risk for compliance issues. So the firm has actually, I think, made much more fit for purpose by what we've done over the last 2.5 years.

We've also refocused our associates investment. So we have 2 major associate holdings, which are strategic. Bank of Communications in Mainland China, where we're continue to strengthen collaboration. And you should just be aware that we have a joint program going between Bank of Communications and ourselves, with me leading it from the HSBC point of view, Helen Wong [ph], who is our CEO in China, running it day to day. And now Chairman Yu [ph] of Bank of Communications, who was [indiscernible] just recently and was promoted, running it from the Bank of Communications side.

Because Bank of Communications and we both know that people don’t buy HSBC stock for us to go and buy another listed stock that they could buy themselves. Unless we can clearly demonstrate that by having that shareholding, we do our business between the 2 banks. So there absolutely is a program, and clearly where the focus is, is the coming overseas policies. Because actually BoCom, through it's access to HSBC, has got the biggest international network. ICBC is in 34 countries, BoCom by virtue of its connection to us is in the 70 to 80 countries that HSBC sits in.

So there's a significant work stream focused on doing this and we would expect, possibly not in 2014, but certainly in 2015, to have the Chairman of BoCom here at Investor Day. He has agreed to do so. To talk to a couple of slides that actually talk about the work between BoCom and HSBC. So we're critically aware of what the issue for you all as shareholders is, and that's why we are putting a great deal of effort into being able to demonstrate that there is a value to HSBC shareholders from us having the stake in BoCom.

Saudi British Bank has been a bank that we've had since the late 1970s, where we have the management contract, we have the maximum shareholding you're allowed within Saudi Arabia and this has been a long standing and profitable operation, which is a core part of our Middle East strategy. There are 2 that we haven't classified effectively as available for sale, Industrial Bank and Bank of Shanghai, so I take each in turn.

Bank of Shanghai is actually quite modest. It really isn't something that, frankly, will move the dial as and when we do whenever we do with it. It's probably worth USD 500 million to USD 600 million, so one should really not spend too much time on it. Industrial Bank is obviously owned by Hang Seng Bank, and it's up to Hang Seng Bank's board to decide what they do. But the change of accounting treatment is clearly signaling as to what the intention is for Industrial Bank. And clearly, during 2012 and closing in the first part of 2013, we completed the sale of Ping An.

I also want to talk a bit about the progress we've made in running down and derisking the U.S. legacy portfolio. This is clearly a runoff business. And we have made progress this year in selling the non-real estate piece, which is the little gray bar with 4 in it at the top of the sort of red bars. And that basically closes -- closed in April, so that's now been sold. We expect the book to run down to about $20 billion by 2016, which will consist of about sales of approximately $7.5 billion and a run-off charge off of about $13 billion. So by 2016, the residual piece will be about $20 billion based on what we see today, i.e. what the property market looks like at this moment in time as opposed to forecasting either a considerable improvement in it or deterioration in it. So that's the kind of freeze the economic conditions in the property market today, look forward, that's where that book would run down to.

So it continues to basically become less and less of an issue for HSBC as we go forward. And this is also clearly part of what releases capital and releases that ROE, because this is the dilutive bit. And the other dilutive bit is obviously the asset-backed securities held and available for sale, and this is in conduits. This again continues to run down and again, is being run within Samir's area on the basis of looking wherever we can, wherever the mass work to create release of capital to actually run this book down. It's harder to put a number on how this run down because it doesn't have to have a natural kind of run-off the way the mortgage book does. It is though worth reminding everyone that actually back in 2008, there was an AFS reserve of nearly $18.9 billion negative against this, which is actually now, actually completely come back.

So when we said then, that actually the distortion was largely due to illiquidity, and actually the underlying assets were reasonably strong, that has actually so far proven to be the case. So that AFS reserve negative has improved actually by about $17 billion, $17.5 billion over the period since 2008.

This is incredibly important. It's a deeply wordy slide, for which there is no other way of showing this. And it is, however, really at the heart of making HSBC easier to control, easier to manage, more focused, okay? And this is the kind of the biggest changes that we have. We have created 4 global businesses. The firm, as you know, was run geographically. It was run in a very geographically decentralized basis, and there was a large problem of fiefdom within the organization.

So starting in January of 2011, we created 4 global businesses, we created 10 global functions, plus the IT business, so 11 in total. And we basically, for the -- and 5 regions. And for the first time, we said to the people running the global functions, you have total authority over all your people worldwide. So if you are the Heads of Risk, if you're the Chief Financial Officer, if you're the Chief Legal Officer, you own all of finance, legal, risk, et cetera people, HR people around the world. That was not the case previously. Previously, there would be direct reporting lines to the country head, and there would be a reporting line also to the function. But authority has to be clear, one of the problems in Mexico was the failure to escalate information. Now failure to escalate information can be reduced -- the risk of it can be reduced by effectively moving from a situation where you have the country head, so you kind of got 2 eyes looking at the operation, you rely on the country head to come to the center and tell you what's going on.

Now, you've got effectively 11 functions and 4 global businesses plus the country heads, you got 16 people who actually have a obligation to look at the risks in every country. So the likelihood of us getting to know and the board getting to know that something is going awry is considerably greater by this organizational change. It also enables us to manage costs and to manage capital allocation in a much more structured way than has previously taken place.

So we've defined the global business and function, we've also started to drive through consistent business and operating models, which is part of the reason why we've been able to take the cost out. Because again, if you run this thing out, 88 different retail banks, you can quite easily see, there's massive duplication or there's massive missed opportunities to get effectively systems synergies or indeed, cost savings.

So the last 2 years, we focused on delivering consistency and operational rigor across all our markets in recognition of the [indiscernible] works, that we have all the parts lined up and march against that. And we've also reduced unnecessary layers in the organization. There's been a program again that Sean will talk about, to reduce the layers in the firm, this 8x8 strategy, so that no manager should have less than 8 direct reports and there should be no more than 8 layers between myself, and effectively, the kind of lowest common denominator in terms of revenue producer. At certain parts of the firm in 2011, there were 17 layers, and actually there were quite a number of people reporting to themselves. Who did very well in their appraisals. Consistently. Quite like school cards.

So what we've also done is define the cost for these 4 global businesses, the activities that take place in them. So effectively, we're doing 17 core activities, but this is really most important. One of the big things that's put up against HSBC is, "Okay, HSBC, you're a huge organization, you're too big to manage. And you know what, because you stumbled in Mexico and the United States, we thought you are quite well managed, but obviously you guys can't get your own [indiscernible], either. So you should break all these banks up." My thoughts of this is I think you can be big if you do a number of straightforward things. So if you effectively say, "Look, there are 4 businesses and we can undertake these activities in each of them, then you can logically see how you can scale across multiple geographies." I think if you're massively complex, it's very difficult to be extremely big as well. But I think if actually you do reasonably straightforward things, it's possible. And this, again, is a very important element in simplifying the group and dealing with this challenge. And of course the most important thing in dealing with the challenge of is to be to manage, is effectively about the talent.

So the senior leadership team that lead the bank have been subject to quite significant change. So we've changed roughly half of our management team since the end of 2010, 5 group management board members and 19 group general managers have retired or left. The leadership team is now a strong mix of experienced HSBC executives and selected external hires. I think we believe it's always important and essential to inject fresh ideas from outside. We've also established strong connections between leaders across businesses and functions by forcing cooperation. And we've also basically established a talent pool and are looking to grow it.

So there are 250,000 people roughly in the firm, 254,000. So we're basically looking to populate the talent pool of 250 to move the number of group general managers up from 34 to 60 and the group managing directors from 12 to 15. That will give us about 320, 325 people that we can describe as the senior management to the firm. Because one of the things I would observe as the CEO of a bank is because the way the industry is regarded in a very low way, in a very distrusting way, there's been this kind of shift that really banks are sole proprietorships, which is where you get to this it's too big to manage notion, because you get this kind of thematic that something goes wrong somewhere in the world, and the CEO of whatever bank should immediately resign.

That builds this notion as any one person running that bank at any moment in time, which actually if there was any one person, clearly, this is a bit big to manage. But actually I have 325 people in my senior management team. We're running something that's bigger than the U.K. armed forces to put in the context, so the size of a small town. So therefore, you would expect us to have a structure, and we have a structure. So that structure is 15, 60, 250, and we brought together that senior management team a couple of weeks ago at an offsite to talk about this presentation that I'm going through today to actually get consensus around those 325 people as the fact that, clearly, we're going to out and that you execute this in the next stage.

We've also, therefore, are developing a talent pipeline. There's a lot of organization going around this. And we've also developed now very deep succession plans, a very deep succession planning document. There, for the top 270 jobs in the firm, have successes named in the 0 to 12 months, 12 -- 1-year to 3-year and 3-years to 5-year, every job. What? For every job in the 269. That therefore clearly gives us mapping. It also gives the board sight to who the emerging talent is in the firm. And so this becomes effectively a document that I will, I carry with me and used to actually move people around the firm. So it's the position roundness.

I also think it's just worth talking again about 2 things, the international manager program. This has been a defining program for HSBC since time began. We continue to run it, the change we've made is as follows: What we've actually looked around? If I look around at the group management board and the people who attended and look at that 20 people, there's actually only 3 people who are international managers. If you go back to say 1997, the equivalent group, 100% would have been international managers. And what's happened is the international manager program, as historically configured, not as now will be, did not equip international managers with technical banking skills to become approved by regulators. So the international manager has tended to move around, rather like an ambassador into the foreign office here.

Now I want to change that. So what we've done is, we stopped taking international managers direct from university into the international manager program. You join into Commercial Banking, Global Banking and Markets, Private Banking, Retail Banking, Wealth Management. Then after 3 to 5 years, you apply for the international manager program from within. You've started to pick up banking skills. You become both part of Commercial Banking and an International Manager, part of Global Banking markets and International Manager, therefore, 25 years in your career, you will be able to get through the PRA, the Feds, the OCC's qualifications to rise right to the top of the firm. It's a really important part of our culture, I think, it's therefore being reset to what we now need to create in a much more complicated world.

And we also continue actually to be able to attract quite a lot of graduates. This is quite important because clearly, given our significant brand and reputational damage from the deferred prosecution agreement, we were quite concerned that we would actually find a drop off. We haven't actually. Just recently at a leading European business school, 20% of the MBA-plus [ph] applied for a position at HSBC. So we're still seeing actually the firm as being an attractive firm to work for. And again, just to take some diversity examples, 78% of the GGMs, 19% of the talent pool, and 53% of our total staff are women. And we've got a total of about 28,000 Chinese staff in Mainland China. And if you take the Chinese Diaspora, there's about 80,000 in the firm globally.

I think we've also emphasized and I wish to reemphasize, the extent to which we've made strong progress in transforming organization. We really have reshaped the portfolio, we simplified the organization, we've launched these 4 programs to basically take cost out, and the cost have come out of the firm.

There's also, as I said, being considerable progress. We have achieved material growth in PBT in both Retail Banking Wealth Management, but household to one side, and look at the business that exists in the rest of the group, and in Commercial Banking. And we've grown market share in these businesses. We've grown market share in Global Banking and Market, and quite clearly, benefiting from the fact that some of our European competitors have been impacted. And we've also, defined and broken the set of countries down into the home markets, the priority growth markets, networks and the small markets and exited the rest.

Again, if you start looking at 88 countries, what you very quickly discover is actually the 2 home markets camp for 45% of the PBT, and if you add in the priority and growth markets, you're up at kind of 90% of the PBT. But you need the network markets to drive your trade proposition and to drive your payments and cash management proposition. If you're not in some of the smaller countries, you can't do Unilever or GlaxoSmithKline Beecham's BCM. You can't do the trade unless you're on the receiving side. But therefore the portfolio is now logical that you can expect the bulk of our investment will go into these 22 countries, the home markets and the priority growth markets.

There's a lot of talk about that little growth coming through, but I think this is quite an interesting slide. So listing 12% GDP growth over the 2010 to 2012 period in the faster growing priority markets, and our loan growth has grown by 24%. So actually there is considerable growth coming through, this is my point about we didn't foresee this either, no we didn't foresee customer regress in the U.K., but we didn't see the opportunity of such spectacular GDP growth in a number of markets. So there has been substantial loan growth. And we have therefore maintained our position as the largest foreign bank in China, we've established 17 China desks globally. In India, we've turned around a loss-making RBWM business. In Singapore, we have leadership in foreign exchange, in advisory. Indonesia, Malaysia, we've got the top share in trade. Brazil, the loan growth in CMB has moved on in a sharp pace. And actually, in Mexico, we've grown our business as well. So it's quite clear that in the emerging markets, there's actually been pretty good to growth quite honestly.

And then in the U.K., even in the mature markets, we focus on growing our share of new mortgages, which is at 12%, up from 9%, and our share of U.K. trade finance, which has actually substantially increased from 13% to 17%. A clear competitive advantage, for this firm, is to connect U.K. SMEs with international business to the countries outside of the -- or beyond the Eurozone. In Canada, there's been strong progress. In the U.S., there's been strong progress, and even in France.

So in the priority mature markets, we've taken advantage of the dislocation of the market in order to be able to grow. And even in Retail Banking and Wealth Management which clearly has the legacy issue of the household book, there's been substantial momentum. This was the most local and fragmented business. So this was the business that came furthest away from being able to be run as a global business. I think even now, and I think John Flint [ph], who is in the front here, would agree with me that whilst the business is now governed globally, it's still not yet run today, today as such. And that's a journey which John will deliver for me shortly, by lunchtime.

But in all seriousness, to get something -- this is where the big cost opportunity is. If you run 88 separate businesses, you've got multiple product variety. You've got multiple systems variety. This is why we are confident we have the ability to take more cost out. It's because we have in certain places have 9, 10, 11 different varieties of credit cards. We have 9, 10, 11 different varieties of the most basic things, checkbooks, et cetera, all of that adds to your cost base. There are multiple variations on Internet offerings and Internet platforms. Just in the Retail Banking area, there's 30-odd different versions of Internet offerings. Because it's being run decentralized. So everyone's developed their own. So rather than actually having 1 portal and having it in 9 languages, you've got massive variety. The team can therefore take significant cost out by bringing this together.

We've also seen reasonably good progress in collaboration between Commercial Banking and Global Banking and Markets, the low hanging fruit we've captured quickly, which is internalizing our own foreign exchange flow and actually the big growth in high-yield. We have a dominant now high-yield position in Asia, where we are now the lead table rankings of 1. Again, go back for 1 year, Morgan Stanley will be one way to being kind of outside it. Why that happened is actually now there's tight working relationship between Sameer and Allan, between Commercial Banking and Global Banking and Market, so those SMEs are going to the high yield bond market without the HSBC leading it.

So what this is -- the outcome so far has been, is as follows. We've generated and retained about $27 billion of shareholders' equity since 2010. This has contributed an increase in our Capital One ratio, CT 1 ratio, to 12.3 from 10.5. That's despite the implementation of Basel 2.5, CRD3. We've made a total of $16 billion of dividend payments from '10 to '12, we were #2 dividend payer in the FTSE and #5 dividend payer in the Hang Seng. And I think we've seen a reasonably strong commitment from our top shareholders. 80% of our top shareholders at the end of '12 were also the top 50 at the end of '10. So there hasn't been significant churn in the register. And more than 60% of the top 50 shareholders have increased their holdings of HSBC during this period.

If you then take a look at it from a share price growth versus the world index, we slightly outperformed the MSCI World Index, we've slightly outperformed the MSCI World Index. And this effectively, I think, is clearly down to some sense that we've re-rated back to a price-to-book of 1.2, because we have delivered on what we said we would do in 2011. So that brings us up-to-date, and that share price is at the 10th of May.

And now we're going to take a 15-minute break, and then we'll get into the next phase of the strategy. Thank you.

[Break]

Gulliver Stuart Thomson

Okay, thanks for very much for coming back. Disappointingly full house actually, having done that snapshot right at the beginning. Let's go into the next section. I think what we hopefully have given you the impression that we created a lot more simplicity in our business model, and actually some depth in our management team. And we've got a clear plan for continued deliver. So let's focus first of all on the priorities. So there are 3 priorities.

We're going to grow the business and we're going to grow the dividends. We're going to leverage our capital generation to invest in mostly organic opportunities. And so I wouldn't rule out an in-country bolt-on where we could dominate whatever we're bolting-on. But mostly, this will actually be organic growth. We're going to progressively grow the dividend, and as may be appropriate, starting share buybacks from as early as 2014, subject to meeting U.K. regulatory capital requirements and receiving shareholder approval.

We will secondly, implement global standards, building a more sustainable business model, by investing in best-in-class risk and compliance capabilities and derisking operations in the high-risk locations. And we're going to continue to streamline processes and procedures. By 2016, the legacy and nonstrategic markets, reduced impact on PBT and RWAs will make significant progress in implementing global standards, and we'll also have delivered the $2 billion to $3 billion of sustainable saves.

So let me first of all talk about how we're going to go about investing. There will be a process around this, there will be a structure around this, just as we have the 6 filters to decide what we're going to keep and what we may buy, we will also create a structure of how we will invest the surface capital to grow the business. In 2011, we introduced the 5 filters, now 6, which has been a great tool to determine what fits and does not fit into our portfolio. And based on the strong historical capital generation of about 60 basis points gross of dividends -- or net of dividends per year and our robust capital position, we have the capacity for additional growth. Obviously, it depends on what GDP delivers whether we can grow, but we have the capacity to grow. So we have the capacity to do 2 things, to grow and to increase dividends.

And clearly, we're going to prioritize opportunities within our portfolio, and decide where we should invest, i.e. are we going to grow Retail Banking and Wealth Management in Brazil, are we going to grow Commercial Banking in Turkey. We're going to run the process in a very disciplined way. And since there's 5 way we invest additional resources going forward, we'll follow a similar stringent framework assessing investment decisions on 3 dimensions: First of all, strategic. So every investment has to be aligned with our strategy, as most of our investments will be in the priority market, 2 home markets and the priority markets.

The investment has to be consistent with the risk appetite statement set by the board, and it has to create value for our shareholders. And as a very specific purpose, this is a bit of a complicated chart to try and show, that effectively, we're going to do a focused disciplined capital allocation with a focus lead from the center with effectively the group management board chaired by myself, in effect, acting as a CIO as well as the CEO, okay?

In essence, what happens is, we will deploy capital out, having approved at the group management board that we want to invest in Commercial Banking in Singapore, and actually Singapore at then of the year will pay a dividend back into the holding company. So we will take the capital out of the operating entities and clearly then reintroduce capital sufficient to meet regulatory requirements. What we won't enable countries to do is to sit with our own surplus capital and, therefore, effectively get back to the situation that we used to have which for example, today, explains why we're the second-biggest credit card issuer in the Philippines, because the CEO, 5 lots ago, like credit cards. Yes? That won't happen.

So effectively, capital will be allocated, RWAs will be allocated, profits will be taken out and then recycled back by Iain and his team in the most capital-efficient structure.

So therefore, at the center, where the HSBC Holdings box is, you, in essence, have the group management board and myself. Then clearly, at the center, we will also decide on what the distributions, which ultimately is a board decision, are made to the shareholders in the form of dividends or, indeed, in the forms of neutralizing the script dividend or further share buybacks. So this process is quite important, and this is a very significant slide. This matrix shows you where we believe we will allocate most of our risk-weighted asset growth over the next few years.

So first of all, 40% of it will be in Commercial Banking, going into the faster-growing regions. A huge chunk of it actually goes into Commercial Banking overall, so roughly 65% of the growth will go there. Then 15% to 20% will go into Retail Banking and Wealth Management in the faster-growing regions. So if you look at the term [ph] to access, the businesses that will pick up the biggest delta [ph] of our new RWA deployment created by surplus capital are Commercial Banking, in particular, in the faster-growing regions; Retail Banking and Wealth Management in the fast-growing regions; and by definition, in total, the faster-growing regions. So 70%, 75% will be going into the faster-growing regions, and 65% of that within which will be going into Commercial Banking. So actually, directionally, this is where we're going to force the skew and the change in the shape of the firm. And actually, if you look over the last several years, you can see that we have actually forced the start of that shift of the balance between developed markets and emerging markets.

Let me now go into specific global businesses. Commercial Banking is absolutely the jewel in the crown. The mission of this business, which I think is completely achievable, is to be the leading international trading business bank. We grew our share of our bank finance world trade, according to Oliver Wyman, to 11%. And we have a substantial, I think, competitive advantage given the focus on the city clusters I talked about and the countries that we're actually sitting in. This business's target is a 2.2% to 2.5% return on risk-weighted assets and is a very high entry level barrier to compete in this business for anyone to actually to get into this business.

I just want to talk about a couple of client examples to try and point out the difference for HSBC. So these are 3 client examples of how we can leverage our international network capability to support clients expanding their presence. Tangle Teezer started, clearly, first as a sponsor, started as a U.K. manufacturer of hairbrushes in 2005, according to the [indiscernible] times. We're supporting them since 2011 and supported their expansion to 60 overseas markets. So that's a U.K. to overseas trade example.

We're working with Luen Thai since the 1960s, when it was just a small Hong Kong trading company. And over the years, we supported its growth into a multinational group. It's active in manufacturing, services, hospitality and logistics in 17 countries, now with revenues of USD 1.5 billion. That's a Hong Kong to overseas example.

And then the last one, which is Hisense, is a leading Chinese home appliance manufacturer. Our relationship began as recently as 2004, and we're now banking them in Hong Kong, Singapore, U.S., Canada and South Africa and about to start banking them in Australia. So that's the PRC to overseas example.

So here are some examples of why clients choose HSBC. We have an international network, we're on the ground in their country, we have a local currency balance sheet, as well as an international capability, including we have the products and advisory capabilities.

The growth opportunities in Global Banking and Markets are equally significant. We're well positioned in several product areas. I think, we'll benefit from powerful global trends.

First of all, debt capital markets. The DCM business, you can actually already see this year in the developed world enormous jump in DCM activity, in DCM fees, because what's effectively happened, post-LTRO and the funding for lending scheme in the U.K., is that most banks can now access credit again. But actually, very few can access credit spreads that are tighter than weather and corporates can borrow. So therefore, that corporates insists remediating them and going to the bond market. Therefore, you benefit from this if you've got a big DCM platform. And actually, that's why there's been this big jump in both investment grade and high yield, yes, as they search for yield, but the phenomenon is more that if you're an Italian or a Spanish bank, yes, you can access the money markets again, but the price at which you can access it is generally higher than where your top-notch credits can borrow themselves. So they actually will go to the bond market. So if DCM platform becomes critical, we have a significant DCM platform, which is why so far this year, just a continuation from last year, we've had great results in DCM.

In project and export finance, you can see both in the developed world in the U.K., there's going to be considerable infrastructure expenditure eventually. And in the emerging markets, there already is considerable infrastructure expenditure. We have considerable expertise and the balance sheet size to participate in this. And the balance sheet size is important because it also explains why we increasingly have a strong position in the event financing in the emerging markets. It's a $2.7 trillion balance sheet, so we're one of the few banks who can actually simultaneously finance 3 or 4 deals at USD 10 billion a ticket. Because we can do that, we can now also lock in the advisory, whether that advisor is actually at a strategic level or it's at a financing and hedging level. That balance sheet heft [ph], in the past, was discounted because there were many banks who could do this. There are now not many banks that can do this in the geographies in which we actually left.

And also, we think that there's a significant opportunity for us as the RMB internationalizes. We clearly have an ambition to be the leading international bank in RMB, and we think that this is a significant opportunity not just in trade but, eventually, in payments and cash management and, indeed, in terms of foreign exchange.

Now we said for a long time that we have a distinctive business model, and generally, nobody believed us. But I think by this point in time, it's fairly clear that our Global Banking and Markets model is different than the Bulge Bracket Investment Banking model. It is based around foreign exchange, debt capital markets, payments and cash management, securities custody. It's quite unusual as well in the sense that, if you look at the last box, our mix of clients is actually pretty evenly corporate and financial institution. If you did this in most other banks, the financial institution and government number would be 80% to 90%. They will be dealing with insurance companies, banks, hedge funds and governments. The corporate sector is unusual. Probably if you did this for Citibank, it would have a similar set of numbers. But that corporate base is incredibly sticky, and that corporate base is the piece that we've grown our market share in over the last 2 or 3 years, as the large French and German banks had to pull back particularly from the emerging markets. And indeed, we've grown here in the U.K., as people like RBS have exited the markets business as well. So there's been a significant market share gain in this, and that's why we have this rather unusual kind of client mix. So it's quite a differentiated wholesale banking business model and should not be boxed with a Deutsche Bank, Barcap sort of a model at all.

And our areas of focus, combined with our mix of clients, I think, in short, we remain top ranked in our chosen key products. And the rankings, actually, with the footnotes is to where the rankings are from, are examples of the areas of focus are in the gray box on the right-hand side and show, actually, pretty dominant positions in the things that we've chosen to specialize in. So this is a business, actually, that has really now kind of come of age. And again, before the financial crisis back in 2006, we kind of made USD 5 billion, USD 6 billion a year in this. We now make USD 9 billion, USD 10 billion in this because we basically captured the market share of customer business.

And if I may, I can just give you a few Global Banking and Markets examples. What I would mention on these customer examples is all of these customers have given us permission and approval to use their data, which is also, by definition, a bit of an indication of the fact we do have really good relationships with them. So both the CMB clients and these guys have actually preapproved us using these examples today.

So each of these clients is a multinational, which we bank in between 20 and 29 different countries. All of them are headquartered in a developed country, but they have significant operations across the globe. Our global footprint means that we can provide support for these companies, both the headquarters and in the field. And the deep client partnerships that usually began decades ago, and actually in the case of Glaxo, over a century ago, we look to provide banking services to these clients across a range of products and around the globe, as is the case in AES. Specifically in Siemens, we've just developed an RMB trade settlement solution for them. We commit capital. For example, we were Joint Global Coordinator and Bookrunner for EDF's EUR 6.2 billion hybrid bond issuance. And in the case of both GlaxoSmithKline and, currently, Unilever, we're financing the increase of stake in their Indian subsidiary, Hindustan Unilever, in the case of Unilever, and Glaxo's deal earlier on. And the Unilever deal has a value of USD 5.4 billion. We're the only bank doing this.

So this again shows our ability to connect both our operation in India, our operation in Hong Kong, where, actually, the equity capital markets guys sit, and clearly, the coverage here in the U.K. So you can see in this, this is quite a unique business model, and the linkage pieces are starting to produce actually quite significant advantage to the group.

Now let me turn to the Retail Banking and Wealth Management. We're now targeting incremental wealth revenues of $3 billion by 2016. This is less than the original target, so let me explain why. We set $4 billion back in 2011. Actually, really, what's happened is that the Conduct Risk agenda and the customer redress risk has changed phenomenally in the meantime. So the Conduct Risk agenda of regulators effectively looking back 10 years and effectively looking at whether the banks explained all possible outcomes means that the type of wealth management products you can sell has to change. Secondly, the compensation structures that we had in place for wealth advisors have already changed from the start of this year. So we no longer have any commission-based people operating, selling wealth products anywhere. So therefore, we think it is actually part of, frankly, our Global Standards in de-risking to settle a more reasonable target for this opportunity. The opportunity is absolutely still there, but we think that, actually, $3 billion is an achievable target that won't expose the firm to undue conduct risk and, therefore, customer redress in due course.

The return on risk-weighted assets of this business both including the runoff portfolio actually, but excluding the runoff portfolios, is superb. What I would say, though, in answer to the question of why don't you put all of your risk-weighted assets into Retail Banking and Wealth Management, is the majority of the P&L is out of U.K. and Hong Kong. So it's a narrow geography with a sensational return. The fact is you couldn't deploy all the surface capital into these businesses. We have thought about that.

And then also in RBWM, we're investing in our digital capabilities. And here, you can see some examples of several new mobile and tablet tools. A new version of our banking app was launched in Hong Kong, in the U.S. and for first direct. And so you can now trade stocks and FX in Hong Kong right now, and that will be deployed across other markets throughout the year. We've also just taken on an individual from Google, who'll be joining us as Head of Digital for RBWM. Clearly, this is an area of expertise that we believe that is best populated by an outside hire.

In addition, we've also started to create some innovation centers within the group. Again, you would think that a large organization like this is lacking on innovation. But, of course, again, if you flip it around the other way, within a community of 250,000 people, you actually are going to find some pretty bright interesting people who are interested in this. And actually, therefore, we are actually being able better to identify that talent and bring it out and bring it forward. So there are some exciting things going on in this, which, of course, will also raise questions about our branch strategy going forward. The modest enough adoption of digital smartphones, et cetera, the less likely we are to need the entire branch networks that we have everywhere. People won't be banking by going into branches. Commercial Banking clients will be going into corporate centers. And actually, individuals will be mostly conducting their banking through a smart device of some sort. But that obviously has political difficulties in certain countries as you exit branches but also has a significant cost-saving opportunity. One of the things about a branch network, clearly, is you have a substantial sum of fixed costs that sits for any bank branch network.

Lastly, let me turn to Private Banking and the growth opportunities there. The Private Banking growth opportunities, it's very logical for us to have a private bank because we are sitting in places with fantastic wealth creation. But we clearly need to reform, as indeed, frankly, the industry does, the private banking model. And actually, specifically in HSBC's level, we need to move us to being much more in line to HSBC's strengths and its values and Global Standards. So what I mean by that -- and Peter Boyles is now running the Private Banking, and he's here and you can talk to him at the lunch -- is that we're going to fix the focus of the private bank towards the mission statement that's actually the top of this slide, and this is actually important.

So the private bank, in our view, should really be sourcing its customers from our Commercial Banking business. Our Private Banking customers should be the entrepreneur who sets up his business, we finance his trade, we eventually list him on the Hong Kong Stock Exchange or the São Paulo Stock Exchange, and that wealth event creates the private banking opportunity. You know the customer, your AML, your KYC has been in place for years and years and years. You want to capture that value chain. Therefore, we need to make some changes to our current private banking portfolio because the piece that we have in Hong Kong and Singapore and in London and in Miami and, actually, in New York fits that. The piece in Switzerland, which was the Republic National Bank of New York piece, doesn't necessarily fix that. So therefore, there'll be work here. But the key point is this is an important business. This has a reasonably high return on risk-weighted assets. We will stay in private banking, but we will need to change the shape of our Private Banking business, so it's absolutely lockstep with the rest of HSBC.

Now I want to turn to the second priority, which is implementing Global Standards. I actually believe that implementing Global Standards in the medium term will give us a distinct competitive advantage. You can see this as a significant cost increase in the cost base, which it is, and a significant exit of certain revenue streams, which it also is. But actually, those revenue streams and that cost base is preventing you having the size of customer redress and the size of fines that we, as a firm, have run into over the last several years.

So on the one hand, we probably have increased our run rate cost by USD 700 million, USD 800 million for compliance. And we estimate there's probably USD 800 million of revenue that we will forego as we exit certain activities. But we paid 4.6 -- USD 4.3 billion last year in customer redress and fines. So this is improving the quality of the PBT of HSBC. And I think it's very important that you're aware of why we're doing this.

So let me tell you how we're approaching this. Yes, we've said -- I've said earlier the purpose of the firm. This is very much integrated. This is not a separate project to the day-to-day running of the bank. We define the clear values of the firm. About 5,000 people have gone through values workshops, most of which were topped by how the business go. Actually, last year, we exited nearly 600 people from the organization for values-related breaches, so this is real. This is actually how we're managing the firm. And I think we've also been very successful at attracting and retaining talent. We've also put in place a significant structure of governance. Let me provide you on some detail as to, therefore, how Global Standards is executed. At the board level, Douglas has created a financial systems vulnerability committee, which is a new board committee of independent advisors, which provides governance, oversight and policy advice. This is populated by, actually, some of the leading figures, frankly, from law enforcement, which is clearly where we need to get to, to a future piece HSBC, from what's likely to be the next threat. And it may not be money laundering from drug cartels. It may be cyber terrorism or something similar.

We set up a Global Standards steering committee, which is part of the group management board, which is basically the most senior committee that I chair that runs the firm and sets the strategic direction as a priority. And there's, in essence, then, some execution committee, where the rubber hits the road. And then there's at least 3 significant programs which we're running on customer due diligence, financial crime and financial intelligence to better improve the situation that HSBC finds itself in. We operate in a complex set of countries. So therefore, we have to do this so that we can actually be on top of the risks that come to us as we drive this forward. And this is also resulted in the terms of changes to the day-to-day activities. As I said moments ago, we're actually completely in our Wealth Management business moved away from commission structures [ph], we're requiring higher qualifications from people, and we've absolutely now started a process of driving through review of all products to make sure that they fit the purpose and don't expose us to vulnerability.

So now I'm going to pass the presentation to Sean, who'll address the third big priority, which is streamlining the processes and procedures. Sean?

Sean P. O'Sullivan

Thank you. Well, thanks, Stuart, and good morning, everyone. So Stuart mentioned before that we've generated $4 billion of sustainable cost saves on an annualized basis across the 4 programs since the middle of 2011. So how have we done it?

Well, we've successfully implemented a number of initiatives, including people and structure, which has involved the restructuring of the group, as Stuart mentioned before, into the 4 global businesses and the 11 functions. So far, we've implemented the 8x8 delayering exercise across 54 markets across the group. Our delayering initiative has made a significant contribution to the sustainable saves objective. We're on track to exceed more than $1 billion of saves and reduce headcount by 10,000 as a result of this initiative.

Software development, where we've reduced overall software development headcount by 11%, increased the proportion of IT developers in low-cost locations from 47% to 54% and increased our overall developer profit productivity by 8%. So simply put, that means that we're doing -- create more lines of software code with fewer people at a lower average cost.

Now Stuart mentioned before that we're investing a lot in digital, and we've increased significantly that investment over the past 18 months. And at the start of that journey, we asked ourselves, frankly, do we have the capabilities to deliver efficiently and effectively? And the answer, to be honest, was no, not the way we were structured. We had our capabilities dispersed all around the world. So what we've done is we've put our key resources -- our key engineering resources for digital into 3 optimal locations around the group, and we're supplementing our capabilities with external firms with an expertise in the field.

Look at process optimization, where we've started to introduce production management tools and also progressed end-to-end process engineering initiatives in areas such as trade, call centers and payments areas. We've generated $300 million in sustainable saves almost from that area.

Implementing consistent business models, where we've implemented globally consistent productivity metrics in RBWM and CMB, that's allowed us to reduce headcount by almost 3,000 as a result of that initiative, in addition to what those businesses have achieved through the people and structure initiative.

Corporate Real Estate portfolio rationalization, here, we've reduced our overall business as usual, ongoing square foot requirements by 3.5 million square feet. So to put that in perspective, we've basically reduced 3x the size of this building. We've done it due to the headcount reductions and also by implementing consolidation, workplace activities, et cetera.

Now a significant amount of the sustainable saves has come from a holistic review of our external spend. As you can imagine, we spend a lot of money externally. And we've implemented tighter management control over external vendors, and we've taken a deep review of how we spend our money and what we spend it on. So, so far, we've delivered more than $450 million of sustainable saves as a result of this initiative, but I should point out that some of those numbers are included in the numbers you see on the slide.

Now if you look at what we've achieved, we have put in place the global structure. So we've moved from a fragmented business to a cohesive portfolio of businesses; from a complex and inconsistent management structure to a consistent streamlined structure across the group; from a federated and functional business model to a global model.

However, while we've changed the management structure and we've implemented and basically designed the target operating models, there's just a huge amount of opportunity to simplify, streamline and globalize the on-the-ground processes and practices that go on across the group.

So let me give you a few examples of that. So around the group, we've produced more than 4,000 management information reports. A significant number would have overlapping info in them, and it takes tons of people to manually intervene to get the work done. We currently spend $500 million a year on 1,100 vendors who provide facilities management services, such as cleaning and maintenance. In terms of globalizing, we have 57 different versions of personal Internet banking. We have -- we had 46 versions of business Internet banking until we happily retired 12 of them over the past year. There are multiple ways of opening up an account -- a corporate account across HSBC, and the unit cost variance between the best country and the worst country is more than 13x. I could go on and on, but I hope you see the opportunity.

Now as Stuart mentioned before, the banking industry is not unique and having to respond to transformational changes in its operating environment. If you look at other industries, as you can see on the slide, telecoms, automotive, et cetera, they face similar shocks and have had to restore profitability through rigorous cost discipline and productivity improvements. So we at HSBC are leveraging front to back industrial engineering methodologies deployed successfully in these other industries to simplify, streamline and globalize our processes to reduce costs but also make it easier to do business for our customers and for our colleagues. I've challenged our COOs across HSBC to start to think more like vice presidents of manufacturing. Our head of operations is an industrial engineer. His first job was in a plastics manufacturing company.

Let me give you an example, and it's a mortgage process globalization, which we started in the U.K. We completely redesigned the mortgage process, leveraging customer insight, technology and business process engineering. We've delivered live underwriting, enabling referred customers to get an instant credit decision, whether it be in the branch or on the phone. We've provided an online application and swifter process, which has supported incremental lending, incremental lending of over $1 billion. And we've created a modern, efficient and effective back office, way less paper than we had before.

So what's the result? The result has been the customer experience has significantly improved. Back office costs are down by 30%, notwithstanding the fact that we've increased new business volumes by 25%. This has enabled us in our -- in the U.K. to increase our market share in mortgages from 2% to 12% and more than double our mortgage income since 2007.

In China now, we're leveraging the U.K. experience, and we expect to roll this out to other priority markets, such as Brazil and France, in 2013 and beyond.

Now our plan is to streamline, globalize and simplify our operational practices and processes to generate a further $2 billion to $3 billion in sustainable saves between 2014 and 2016. So to clarify, we're planning incremental sustainable saves during 2013 that get us to $4 billion on a P&L basis by the end of the year. Now some of you have analyzed that and basically taken it to $4.5 billion, $4.6 billion, and that's probably reasonably accurate. So $4 billion on a P&L basis by the end of 2013, plus an incremental $2 billion to $3 billion, so at the top end, as Stuart says -- Stuart said, $7 billion.

Now over the medium term, we anticipate our overall headcount as a firm, based on our current business scope, would gradually bottom out between 240,000 and 250,000 because we'll be reinvesting our sustainable savings to support investment in organic growth and investment in the Global Standards initiative. So to clarify on that, again, that 240,000 to 250,000 number is an estimate considering the medium-term impact of known disposals, estimated role reductions and investments in new roles. Okay?

We have a robust pipeline to take us and hopefully achieve the next target. So let me provide a few examples. I mentioned management information before through an initiative called MI simplification. We are implementing a standard finance operating model across the group to centralize, standardize and rationalize MI production and deliver $75 million of sustainable saves. We've recently signed a 5-year facilities management contract with 1 vendor, which is replacing 1,100 suppliers, will save us $50 million a year and takeout a whole bunch of complexity.

The United States is a key part of our transformation. Stuart has spoken about our plans to grow revenue in the U.S. Let me speak about our plans regarding the infrastructure. In this area, we have 3 key strategic priorities.

One, remediate the identified control deficiencies and improve the risk management infrastructure, creating an improved compliance infrastructure that consistently meets regulatory expectations.

Two, disposals and rundown. Manage the transitional service agreements to conclusion, progress the CML business rundown with responsible ethical collections and customer service, potentially accelerate the wind down through the portfolio sales as market conditions improve.

And finally, three, core bank business engineering. We are executing a transformation plan in the U.S. focused on streamline and simplifying our IT environment, the operations environment and the global functions. At the same time, we intend to enhance our risk and compliance areas and improve efficiency and effectiveness. The plan also involves the replacement of our overly complex systems environment in the U.S. with the group's core banking platform.

So if you look at the U.S. in terms of infrastructure, core bank reengineering, TSA [ph] exits and portfolio reductions should enable us to reduce U.S. costs by roughly $800 million between now and 2016 and reduce our cost efficiency ratio in the U.S. to the mid-60s, which is comparable to other banks in the U.S.A.

Now in terms of globalizing, we've got a number of initiatives focused on standardizing the way we do things. So we're implementing a number of front to back RBWM reengineering programs, which are expected to generate a further $500 million of sustainable cost saves between 2014 and 2016. So for example, if we're going to deploy the reengineering approach that I mentioned before with respect to mortgages to other products, such as personal lending and wealth products. We're deploying scanning and imaging technology and leveraging the digital enhancements that we talked about before to improve straight-through processing for our customers and for our back offices, and that will help us reduce paper. And by the way, just for your information, last year alone at HSBC, we reduced our paper consumption, excluding the impact of disposals, by more than 20%. More to do.

We're deploying Global Standards in areas such as customer due diligence and payment screening to enhance the consistency of our customer offerings, improve our overall financial crime compliance and increase efficiency. I don't see the global standards initiative as being inconsistent with improving the operational capability of the company. I see it absolutely aligned.

And finally, in 2012 -- my last example, in 2012, we spent about $1 billion managing documents, cash and checks in multiple different ways across the group. We're implementing a globally consistent approach to managing these activities as we speak, and we expect to generate $100 million in sustainable cost saves from doing that between now and 2015.

So in summary, we've exceeded the sustainable saves target between $2.5 billion to $3.5 billion, where there is a significant opportunity for us to do more, we've got a world-class plan to deliver and some really good initiatives to back up the plan.

Thanks very much, and I'll pass it now over to Iain to talk about the financial targets.

Iain James MacKay

So keeping the temperature nice and warm in this room hasn't worked because you're still awake, which is clear, we really have interesting presentations here. We're going well. Right, this is the bet that none of you are really that interested in. We'll go through our soldiers to push through the financial targets.

Few key things here. In 2011 and 2012, we committed to 2 targets, in capital and liquidity and the profitability and cost efficiency of the firm. There's absolutely no change in that regard. That's what we're going to do for the remainder of 2013 and '14 through '16 as well. We have made a couple changes to this, so I'll briefly cover these just now, and then we'll go into a bit more detail on each of the key metrics here.

First change were in the cost efficiency ratio. We've altered the emphasis here to one of positive Jaws as opposed to an absolute range or in the cost efficiency ratio. This is really to strike a more appropriate balance around the need to recognize change changes within the environment from an economic standpoint, from a revenue standpoint, which are somewhat out of our control, while maintaining a clear discipline and cost management and the need to continue to invest in the core capabilities and the growth of the business. And from our experience, certainly, with the couple of years of working through this, maintaining a positive Jaws, growing revenues at a rate faster than that, which would grow costs, clearly continues to move us progressively towards a better cost efficiency ratio than we certainly experienced over the last couple of years. And we saw improvement in that in the first of this year, but we'll continue that momentum of moving the cost efficiency ratio in the right direction over '14 to '16. So this is the first key change.

Now that being said, we're not going to abandon the cost efficiency ratio. This is something that we monitor very closely. And setting out a range that strikes middle-50s, and I'm sure I'll get lots of questions about what this middle-50s mean. It means middle-50s, so if you keep asking the question, that's the answer you're going to get. I'm just trying to keep that short.

So from that standpoint, the positive Jaws will move us to a better cost efficiency ratio over time whilst, at the time, striking that balance. This doesn't mean we're just deemphasizing cost discipline. As Sean just said, $2 billion to $3 billion more of sustainable saves over the next few years. The pipeline around our propensity to do that is strong, and I think what we've demonstrated over the last couple of years is our ability to deliver against that. So positive Jaws and continue to keep a close eye on monitoring where we are from a cost efficiency ratio perspective.

Second change we'd talk about is really just a fairly subtle change in the capital ratio, the common equity tier 1 ratio for the firm, where we'll move this to be greater than 10% over the coming few years. I think what we see is we've got a better understanding of where we need to be from a Basel III perspective against CRD IV. The final technical guidance around that is not complete yet. We should hopefully have that at the beginning of the second half of this year. But based on what we understand and really everything that we talk about here in capital is informed by, really, the version of CRD IV that came out in July of 2011 and any further clarifications we've got from working with the PRA.

But greater than 10%, I think, puts us in a well-capitalized position. And certainly, when you see where we were at the end of the first quarter, taking into account the management actions based on our current understanding of the rules, we're in good shape against that. I think that positions us as a very strongly capitalized institution. And then when you reflect on our capital-generating ability, it gives us propensity to take actions in certain other areas.

Taking these factors into consideration, we keep the costs -- the return on equity very much focused on 12% to 15%.

Thinking about the efficiency aspect of this now, the cost efficiency, we've clearly demonstrated our ability to drive sustainable saves. There's been great execution around the lengthy pipeline of projects that's delivered annualized cost savings of nearly $4 billion. But what we talked about at the beginning of 2011, really, if you like the origins of the need to drive that sustainable saves was to create capacity to invest in our businesses around the operating capabilities, the growth of the businesses, and to deal with headwinds from the ever-present inflation across the many markets in which we operate.

In 2012, we invested much of the sustainable saves that we generated in that year, investments in compliance and infrastructure and investment in growth. Over the course of that, we invested about $1.3 billion in growth infrastructure and compliance programs. Really, from a compliance investments perspective, our focus was primarily in the U.S. and in Mexico, but it also supported the launch of our Global Standards program globally. In terms of other projects where we saw investment, it was around addressing real estate streamlining and other infrastructure projects, and Sean had highlighted some of those. And those were primarily oriented in the U.S., Europe and Asia.

In terms of supporting the reshaping of the portfolio, there were significant investments around developing transition support agreements. The most significant, perhaps, of which was transitioning the ownership of our cards and retail services businesses to Cap One, which is a 2-year commitment, which we are now halfway through and online to complete. But there's a significant investment in these TSA programs, and we have more than a couple hundred of these agreements in place. And the investment associated with ensuring that these transitions are conducted efficiently, effectively and completed is an important part of what we've invested effort and resources in.

Another aspect, which we've -- which Stuart touched in earlier, was making sure that where we do acquisitions, that we get the integration right the first time and get it right quickly. And not an insignificant amount of resources were focused on 2 relatively small acquisitions and mergers that we did in the Middle East and North Africa during 2012.

I think the other thing to take away from this, and we've talked about it, is 2012 was significantly impacted by the fines and penalties that we incurred over the course of the year, as well as customer redress mainly in the United Kingdom. So the construct around driving sustainable saves hasn't really changed: It is about funding the capacity for growth within the business, it is about dealing with inflationary headwinds, and it's about creating the operational capacities and capabilities that we need within this firm going forward.

A little bit more around the balance on positive Jaws here and why we think this is a sensible transition. This is largely informed about what we've learned over the course of the last 2 years, again, about striking the right balance between investing in the capabilities of our businesses whilst maintaining a very strong discipline within the firm. And I think this comes down to an operational level, and it's very easy for people to grasp. But if we're having challenges in any of our markets around the world in growing and driving growth within the business, then we need to have a reflex on the costs within the business. You can't just simply go, my goodness, we're not getting growth out of this without looking at the overall profitability equation and addressing costs in a serious manner, and that's what Jaws really entrains, revenue growth, cost growth at a low -- at a slower rate than that.

But what this also gives us is the flexibility to respond to ongoing macroeconomic changes and, frankly, changes in the regulatory environment as well. It would be an understatement if I said we invested significant amounts of money in meeting simply the requirements of regulatory change, regulatory reporting across the risk and finance functions over the course of the last couple of years. It certainly allows us to strike the right balance, put on an investment perspective and ensuring that we do make the right allocation decisions around investing in the growth of our businesses. And certainly, I think from our perspective, it means that we can maintain consistency around, if you like, an operating metric that everybody can understand, that's pretty easy, and with which we can clearly measure our progress over the next few years.

I think what's equally obvious is that the positive Jaws is not necessarily something that you can do in perpetuity. To suggest that we get to cost efficiency ratio of the firm overall of 30% isn't realistic, but this is something that, certainly, for the next few years, I think helps us strike the right balance around the challenges that I've talked about, but also to continue to instill within the workforce, as a whole, the discipline that we need and the responsiveness that we need around managing the cost base in line with economic activity.

So this is an important change. I think it's something that we've been talking about for some time, but it is certainly something that will get greater emphasis to from a management perspective. And we will, as a guideline, keep a focus on what's going on from a cost efficiency perspective overall, with a goal of getting it into and maintaining it in the mid-50s.

What's the main thing, perhaps, to take away from this page? This is just a cut of our 2012 results. We have inadvertently injected a little bit of humor into how many different ways we can describe the operating results of HSBC. But at the risk of boring you, we're going to stick with a slide that we actually used last year as well. This really takes 2012 and, again, reflects on the impact on profitability and returns of the runoff in legacy portfolios within the CML sub-prime portfolio in the U.S. and the ABS portfolio -- legacy ABS portfolio within Global Banking and Markets; the impact of disposals on profitability; as well as outlining the impact of what we've called the notable items, in which we've given you significantly detail over the last number of quarters. When you reflect on that from a return on risk-weighted assets perspective about that part of the business, on which we focus the growth investment and our energies around growing this business, we're generating our return on risk-weighted assets in the range of 2.3% for the group. And that I'll take you through over the course of the next couple of pages, and what that really means in terms of global businesses and the main operating regions that we've got around the world. But this really just breaks down some of the key components about what drives and what informs how we've established targets around the return on risk-weighted assets and how we monitor it within the group.

Talking about this from a Global Business perspective. You reflect on Stuart's remarks in terms of organic investment and oversight by the group management board and the allocation of risk-weighted assets and capital to subsidiaries and operating regions focused on delivering growth and returns to the shareholders through global businesses and regions. When you reflect on this at an operating level, the main -- if you like, the main set of targets that we've got out there for our teams around the world in the global businesses is a return on risk-weighted assets. The targets are based on and developed through an analysis of the capital requirements that we've got, the -- if you like, the profit generating and the profitability capability of our global businesses and, clearly, triangulated around achieving a return on equity for the group within the 12% to 15% range.

All of these targets are informed from a capital perspective by endpoint CRD IV. So this is not -- transitionally, this is not 2.5, this is endpoint CRD IV on a fully loaded basis. I think one of the things you will note here is that we haven't included the target for the Global Private Bank principally because we have very little risk-weighted assets sitting within the Global Private Bank. It's not really a credit and lending business. And therefore, in terms of return on risk-weighted assets, it's not really well [indiscernible] from a group perspective overall. And as we mentioned earlier, probably a return on assets, the client assets, is a better way to reflect on that.

So we have really challenged the Global Private Bank in this regard. So again, going back to how these targets are informed, it's against the capital requirements, the common equity tier 1 requirements under a CRD IV construct.

However, I think what we've also got to realize the clear relationship is, is that we still face somewhat of a moving feast from a regulatory capital standpoint, and we've based these targets based -- driven off greater than 10% common equity tier 1. However, were you to see a requirement from a regulatory standpoint for, perhaps, common equity tier 1 needed to be a 12% or slightly greater than that, then clearly, our businesses would need to be delivering at the top of the -- at the top end of these ranges and, in some circumstances, even beyond that to deliver the 12% to 15% return on equity that we've targeted. The main point I'm trying to get across here is that the relationship, although we drive this from a return on risk-weighted assets perspective to an operational level, the relevance of these targets will possibly change over time as the capital construct of the group changes over time. And clearly, we'll be informed by the rate of investment that we're capable of driving, as well as the distribution to shareholder decisions that we will make over time.

I think the clearest thing to bear in mind here is that the actions that we've outlined today will move our business returns into the ranges that we've described here. And I think another key factor and one of the things that influences these ranges is that the effects of our legacy runoff portfolios will continue to be managed down quite aggressively within Retail Bank, Wealth Management and Global Banking and Markets.

This is really the same thing by our operating regions, so there's no wonderful magic around this. Clearly, the composition of this is made up of the relative composition of each of the 4 global businesses within the operating regions, as well as, obviously, the economic factors that are driving the different performances within these regions. You will notice 1 or 2 changes within this when compared to some of the targets that we laid out in previous years.

As one small example, if you reflect on the change in Asia, this is largely informed by the fact that we disposed of Ping An. That was a high return on risk-weighted asset business principally because there weren't a lot of risk-weighted assets coming through that, and really, only laterally, where we're picking up risk-weighted assets as Ping An had invested in the Shenzhen Development Bank. And through rate consolidation, we picked up some of those banking risk-weighted assets. If you reflect on the U.S. improvements, it's principally informed by the run-off and the successful run-off and improving performance of the CML portfolio. And it's really some of the subtleties around that and the prevailing economic conditions, as well as changes in capital construct that informed these targets. But they remained largely consistent with what we've talked about in previous periods.

Moving on to capital strength. I think, probably, the main thing to take away from this chart is, against the greater than 10% common equity tier 1 target at the end of the first quarter, taking into consideration the management actions executed and anticipated based on our understanding of CRD IV at this point in time, we have achieved this target. This is something that is, as I've mentioned, a little bit of a moving feast, but it continues to be a fair bit of regulatory uncertainty. CRD IV finalization will help enormously. And then I think as the U.K. authorities in particular get their arms around how they intend to interpret and apply this, we'll learn more. But there is clearly a pathway that we've largely executed against here in terms of delivering compliance against CRD IV capital requirements, but we'll continue to monitor this and keep you posted as we move through it.

Some of that uncertainty. This possibly is up there for the prices, one of the business slides that we've got in the deck is -- and it's probably a pretty good analogue for the fact that the regulatory framework and the regulatory scenery is probably one of the busiest things that's going on around just at the moment. This really just lays out some of the uncertainties that we face. We'll get clarity on CRD IV to a significant degree later this year. One hopes and suspect we'll be implementing that within the European zone from first of January next year.

The level of national discretion that CRD IV offers is quite significant around countercyclical buffers, domestic city buffers, global city buffers, sectoral buffers, as an example. Very difficult to say how the PRA will necessarily interpret that and apply it. Perhaps, some of the pronouncements from the FPC over the course of the 6 months helps inform that, but I think this is an area where, again, hopefully, over the next 6 to 12 months, we'll get much greater clarity.

Another area that's out there, which again remains very uncertain at present is structural reform principally within the U.K., but not uniquely the case as the Europeans continues to challenge with this as well, and it possibly becomes an, increasingly, element of the debate within the United States also.

But the uncertainties are there, but I think, again, the key point that I'd make is very strong progression with the capital generation that we've got from the operations of the group. The reshaping structure [ph] transactions have taken place over the course of the last 2 years to put us in a strongly capitalized position. And certainly, when we continue to focus on investing in the businesses, managing down the run-off in legacy portfolios, it's certainly -- I think, it would be fair to say that we're very confident of being able to meet in a fairly comfortable fashion the requirements of regulatory change in this regard and have the capacity to grow the businesses and grow the dividends in the form of greater share for the shareholders.

Talking about the earnings split. This is just a quick recap of what Stuart talked about if you like the mechanism in terms of investing, in terms of risk-weighted asset capacity, capital and investment and capability of the regions, the global businesses within those regions. But the construct within -- under which we've operated for many, many years is that the dividends -- after self-capitalization and meeting local regulatory requirements, dividends come back to the parent company, they come to Holdings plc, and the decisions are made there around investment and around distribution to shareholders, clearly, under delegated authority from the Holdings' board for the group. But this just lays out the mechanisms that will continue to operate and really the shape of how we see that earnings split progress over the coming years.

Now on a financial sense, if I were to present one slide, this would probably be it. This is really what it all boils down too. The capital-generating ability of the group has remained strong over the last 2 years. We really see little -- in terms of what we can see out there and what we can't control, we believe this will continue to be the case. We continue to focus on the run-off and management of our legacy portfolios, but really, what this is about is deploying capital, so by deploying capital in 2 key areas, a clear focus on putting capital capacity, risk-weighted assets and investments in terms of capabilities in our businesses around driving organic growth. That's what the business is here to do. It's aligned to the strategy, it's going to be consistent with our risk appetite, and it's going to be value-accretive for the group. That's the first priority for us as a group in terms of deploying capital capacity.

When you move beyond that, a secondary item, not an and/or, but it's an and, is increasing the share for share for shareholders principally through increasing the dividend payout, with a focus on the higher end of the range around the dividend payout ratio. Again, we've made progress on that over the course of the last couple of years. And conditions permitting, we will absolutely continue to do so over the coming years. To drive a little higher degree of optionality and create a fueled [ph] term to this year, we've done a good deal of work in discussion with the regulators, as well as with the board, about creating the capacity to do buybacks. This just got to be at the right time and under the right conditions as much for the shareholders as for -- if you like a reflection on any regulatory constraint that we may have, so I think clearly moving towards this certainly no earlier than 2014 but hopefully being able to launch this in 2014 with the right sign-off from our regulators, which again, with capital strength, is not necessarily something that, I think, will be a significant obstacle. But also ensuring that the shareholders provide the approval for us to do so is something that we can consider when the conditions are right. And I would say this, we can do that better, but it's unlikely before 2014.

So to be clear, our focus is on investing in global businesses. That's what it's about. But it's also about increasing returns to shareholders.

With that, I'll hand it back to Stuart.

Gulliver Stuart Thomson

Thank you. Okay. So let me just recap and also formulate how I think the group looks by 2016. So as Iain has said, first priority is organic growth, investments that are aligned to the strategy, consistent with our risk appetite, value-accretive for the group. So by the end of 2016, we see a group in which CMB will represent 30% to 40% of total PBT; RBWM and GBM, 25% to 35% each; and the Private Bank, less than 5%.

The money will be made in the following geographies. So you recall, we define the 2 home and 20 priority markets. By 2016, those home and priority markets will contribute 90% to 95% of group PBT. And if you look on the y-axis, the faster-growing regions will contribute 70% to 80% of group PBT. So a prior slide sets out what we see the mix has been by global business. This slide sets out where the mix would be by geography and then the split between, obviously, the developed world and the emerging markets.

So just to recap, and let me close by recapping. I think we're not even halfway through unlocking the value within HSBC. Our strategy does remain unchanged because we think it's working. We have focus and we have management grip. There are 3 priorities going forward: grow both the business and dividends; implement Global Standards; streamline our processes and procedures. And we're setting the following targets: an ROE, of 12% to 15%; cost efficiency ratio of mid-50s, with positive Jaws; an additional $2 billion to $3 billion sustainable saves, as anyone thinks the focus is coming off the costs is not; common equity tier 1 ratio of at least 10%; the AD ratio cap unchanged at 90%; and progressive dividends and share buybacks, as Iain has said, subject to regulatory approval and shareholder approval.

And now we're very happy to take questions. What we've got in terms of time is an hour for the side for questions. And then actually, when we finish the questions, you're then more than welcome to stay and have lunch with us or, at the very least, mingle with the group management board because all of the senior executives are actually in the audience. So let's open up the floor to questions, and I'll go back to sit with the guys.

Question-and-Answer Session

Gulliver Stuart Thomson

So let's just go about row by row yourself.

Manus Costello - Autonomous Research LLP

Manus Costello from Autonomus. Could I just ask for a couple of points of clarity on the capital return to shareholders, should we regard the script utilization as kind of business as usual going forward and share buybacks as being incremental to that or you're using share buybacks to include script neutralization.

Gulliver Stuart Thomson

I think it's the second but clearly this doesn't start in 2014, so talking about '14 to '16 anyway not -- and it clearly is subject to PRA approval and [indiscernible] but we would need to, in each case, look at the macro backdrop but I think what you should see it as is a general move towards considering share buybacks within which, the script dividend is part of it.

Manus Costello - Autonomous Research LLP

And secondly, if I look at your slides on potential revenue growth in the regions and I look at your allocation of capital and the allocation of the ROE growth metrics, it looks to me like you're still targeting potentially sort of 9 -- 8%, 9% top line growth. Is that about right? As your -- what you think the run rate would be given the markets you're in? Just to follow up with that, would that also be a rate for RWA growth as well?

Gulliver Stuart Thomson

I mean the capital generation supports RWA growth at that type of number. Clearly, it may not be the case if GDP growth supports that type of number and yes, that is what's implied within that deployment. That's the key variable. If we continue to have GDP growth that's flattened out by OE, then we won't get those RWAs to work and that will get solved in terms of dividend, but yes, that is what sits under those numbers. Actually, just go for it.

Thomas Rayner - Exane BNP Paribas, Research Division

Tom Rayner from Exane BNP Paribas. Two questions please. The first one, the cost income target and the second one on the script dividend please. I'm just really struggling a little bit to understand why you have set a cost income target in the mid-50s. Obviously, there's a lot more cost savings coming through. You're increasing the savings every time you sort of report to us and it seems to suggest that if revenue were to recover, your target would imply you have to ramp up investment to an extent or perhaps, it seems to suggest that you don't have much confidence you are going to see any revenue growth going forward because with the sort of cost savings, you would've thought the cost outlook looked fairly flat. So I was wondering if you could maybe explain a little bit more then I have a second please on the script.

Iain James MacKay

Good question, Tom. I'll go back to my comments. This is about trying to strike the right balance between recognizing if you like the changing -- the ground moving below your feet from a macroeconomic background and that's marked market-by-market. We're operating in 80 markets around the world, many of which offer fairly attractive growth opportunities but nonetheless in a competitive environment. Whilst at the same time recognizing that we have continued investment to do around deploying global standards, around business capabilities, some of the things that both Stuart and Sean had talked about earlier this morning and bouncing that with discipline from a cost management standpoint. So the key focus here is driving positive jaws. The CER is clearly an important one, mid-50s is mid-50s, don't read too much into it.

Gulliver Stuart Thomson

Yes. And don't use 55 and back so for revenue reduction. Yes. It's set at mid-50s to mean...

Iain James MacKay

Mid-50s. As opposed to meaning 55 because if we meant 55, we would've said 55. So it's frankly just to create the right -- the operating metric around positive jaws, it's to drive the right discipline, whilst creating -- it's like flexibility around the balance of macroeconomic change and investment requirements.

Thomas Rayner - Exane BNP Paribas, Research Division

Just on the second question I mean the pie chart on Slide 19 and pasted on Slide 75, seems to very strongly say that dividends will only be paid after the free cash flow that you generate in a specific year. So you're always going to retain enough earnings to fund the RWA growth. So it does look, this share buyback is the only tool that you're giving yourselves to manage any surplus capital. I just wondered if you could comment on what your strategy will be and how will you time that. What sort of size do you think will be possible, does the share price at that time matter. I just wonder if you could just add a bit of color please to buybacks.

Iain James MacKay

If I go back to dividend, to start with, again, that's a representation that it's not intended to take any particular given year's earnings and divvy it up with that degree of rigidity. What we distribute dividends out of is distributable reserves and within the organization, we maintain very robust distributable reserves. The propensity to increase the dividend will be determined: one, by profitability of the organization and the line of sight of continued profitability of the organization; two, the regulatory framework and developing certainty around that over the coming months; and three, the desire to drive growth in the dividends but we shouldn't necessarily be view this in a constructive restrictions within, in the profitability revenue in any given year, recognizing the dividends are distributed from distributable reserves, which are very healthy within the group.

Michael Helsby - BofA Merrill Lynch, Research Division

It's Michael Helsby from Merrill Lynch.

Iain James MacKay

[indiscernible] and getting hold of that microphone now, Michael.

Michael Helsby - BofA Merrill Lynch, Research Division

No worries. Two questions if I can. Firstly on the U.S. I don't know if I'm the only one but whenever I get to that section of the model and when you go through the retail and the GBM and the commercial, I just completely get lost.

Iain James MacKay

This would be your model, wouldn't it?

Michael Helsby - BofA Merrill Lynch, Research Division

Yes. Obviously you know what was going on.

Iain James MacKay

Normally.

Gulliver Stuart Thomson

That's great in our model. [indiscernible] around that.

Iain James MacKay

We should share it with you some time, maybe not.

Michael Helsby - BofA Merrill Lynch, Research Division

So I mean clearly I was wondering if you could give us an update...

Iain James MacKay

Yes.

Michael Helsby - BofA Merrill Lynch, Research Division

On how you think about -- because you haven't really talked about the U.S. from a revenue point of view, touch on costs and what the AML sanctions are have done in terms of execution of your strategy. So could you just touch on that strategy and particularly from a revenue point of view in both the retail, commercial and in GBM.

Gulliver Stuart Thomson

So in the U.S., we have clearly a legacy business, household, which is in. That legacy business has a residual book, which we gave some detail on in one of the slides, which we think will be down to $20 billion by 2016. Separately there has always been a bank in the United States and clearly that's the focus business going forward. Between transmitting the rundown of the consumer finance business and bringing the bank back up, we have an infrastructure that is outsized for the bank because the infrastructure exist to support a very big consumer finance business and the bank. That's what Sean's talking about when he says that Irene and the team will take USD 800 million out of the U.S. cost base over a 3-year period. A chunk of that comes from reduction in the amount of consultants that we're using in order to deal with the cease-and-desist orders, a chunk of that comes from effectively running down both the household business. Then some of it comes from the type of sustainable sales activities that are outlined. So of the $800 million, $400 million of it is part of the -- $400 million goes into the sustainable sales target of $2 billion to $3 billion, $400 million of it represents the end of TSAs, the end of consultants, the transition of the business. From a revenue point of view, the focus effectively will be on Commercial Banking and on Global Banking and Markets. The Commercial Banking piece is effectively a build and that build is taking place primarily in different parts of the United States and the historical Marine Midland territory. The historical Marine Midland territory is the Northeast and kind of up in the New York State, which clearly does not have to use revenue growth so that was a build out on the West Coast, which is clearly Pacific trade across the Asia Pacific and there's a build out in the kind of oil and gas sectors and actually that business will be very much about the renaissance of the manufacturing industry in the United States, which we think will take place because of cheap oil and gas with what's going on in Dakota. Although banking markets business has been consistently profitable for a number of years and that business really reflects a cross-border strategy, which is about bringing Asia Pacific, Middle East, European issuers to U.S. investors and vice versa, and is the leg of our global foreign exchange business, which remains a very profitable business. So what you get in the U.S. is over the next 3 years is, a significant reduction in cost, as we shrink in outside infrastructure to fit effectively what will be a global banking markets and Commercial Banking business. There is a retail banking strategy that really sits around premier mass affluence but provides significant funding through the branch network and through the deposit base for the loan book of CMB and global banking to markets but if you look at where the P&L will come from, it's probably likely to be 40% from Global Banking and Markets, it's probably likely to be -- actually it's very likely 50% from Global Banking and Markets, probably 30% from CMB and 20% from retail banking wealth management. The retail banking and wealth management in this construct being the conventional retail banking wealth management you get from a bank as opposed to the consumer finance business, which is absolutely run there.

Michael Helsby - BofA Merrill Lynch, Research Division

I've got a second question. Just before I move on to that, I noticed from your targets, the sort of reverse out of your return on risk-weighted asset for 2016, you did spot an 8% ROE if you take the midrange. Is that because of the dilution from the consumer finance book and if it is, what would it be ex that?

Gulliver Stuart Thomson

Run me through that one again, Michael.

Michael Helsby - BofA Merrill Lynch, Research Division

U.S. return -- return on risk weighted asset...

Gulliver Stuart Thomson

The U.S.? No, it is. They're a nice piece, yes.

Michael Helsby - BofA Merrill Lynch, Research Division

So it's just the consumer finance book?

Iain James MacKay

That's the principal driver.

Gulliver Stuart Thomson

Yes. So if we didn't have those, it would hit the target.

Michael Helsby - BofA Merrill Lynch, Research Division

Okay. And then just finally, if I remember back in May of '11, you were cautioning us at that time about taking the current rate of impairments outside of the U.S. and thinking about those going forward when you hit your ROE target and it was all very revenue-driven obviously with cost containment. Clearly since then, the bad debt has improved quite dramatically so I was wondering if you could share with us what your thoughts are today on that outlook and how you think of that from a return on risk-weighted assets perspective.

Gulliver Stuart Thomson

I'll start and I think actually Iain can jump in on this. We've actually spent a lot of time in the last 2.5 years derisking the firm. So we very consciously have run down the ABS book, very consciously ran down the household book and very consciously switched from clean lending to secure lending in our RBWM businesses around the world and our CMB business around the world. So the big growth in CMBS, trade, which effectively is self liquidating. So we've actually, unlike some of our competitors, consciously derisked the firm over this period of time. So though impairment charges aren't something that just happens to us, they're actually an output of a series -- are actually quite precise management actions that have taken place. So one has to clearly remain cautious on the loan impairment charges but there is nothing that we see at the moment beyond the cyclical uptrend that undoubtedly will happen during any business cycle. There's not a specific idiosyncratic risk that will affect the collectives and on the idiosyncratic, that is kind of case-by-case but there's nothing we're looking at the moment that will give us undue cause for concern.

Iain James MacKay

I think if you focus specifically on the U.S., Mike, I mean and I didn't Pat Burke who manages the CML rundown of both years so he'll jump in if there's more time to hear but there's been, I think, an incredibly robust focus and success in terms of managing down the CML portfolio over the last few years. This nascent and sort of keeping along economic recovery, if that's what we call in the U.S., which is beginning to show up in some improvements in property market prices, improving employment is probably the biggest factor impacting performance and performance in our book, all of those factors bode reasonably well for continued stability and as we continue to run down this book, clearly the quantum of loan impairment charges should continue to improve but I think it's fair to say, we've seen very substantial, if you like, step function changes in that over the course of the last 18 months, I wouldn't read a great deal more in terms of seeing the same magnitude of step function. There's a rhythm that needs to come through this book. It's affected to some degree by continually prolonged foreclosure cycles, which impacts a certain degree of performance. But as long as we keep seeing this sort of creeping along improvement in the unemployment rates and property prices in the U.S. and nothing crazy blows up in Washington D.C. from a federal government perspective then I think we've got a reasonably steady shape to it. Also bear in mind, that we sold the card business. So there's a step jump impact in terms of the number of the card business. Are there anymore? Can we go to this side of the room?

Raul Sinha - JP Morgan Chase & Co, Research Division

It's Raul Sinha form JPMorgan please. Can I have 2 to start with? Firstly, one of the ways you could use your excess capital would be to accelerate the run off of non-core assets and obviously, you said that you want to keep things on a capital-accretive basis. Even if it is not capital accretive in terms of acceleration of run off, it could be ROE accretive for the group overall. So have you already considered that in your plans?

Gulliver Stuart Thomson

We've -- certainly, for the ABS book, the FSA ABS book, absolutely that's the way we're looking at it. For the household portfolio, we set out that, we reckoned we can do about 7.5 of sales but over the period and about 13 of write offs and actually sort of just rundown of the book to get it down to 20. We're unlikely to be able to go beyond the 7.5, that's the rate at which we think we can parcel up and sell portfolios of loans, unless of course the property market rallies incredibly and these assets changes substantially. The other thing to just bear in mind is once the book hits 20 billion, it's a book of 20 billion of performing loans, that probably has a yield of 8%. So probably at that point in time, there's no fully provided accentuates, it's provided probably not a bad asset actually to have, quite honestly. So one shouldn't lose sight of that either in terms of this analysis but in the ABS AFS, yes, and that's absolutely how we run it.

Raul Sinha - JP Morgan Chase & Co, Research Division

Right. And just as a follow-up on all the questions about the buybacks, obviously you're at 10.1% fully loaded BASEL III today. You said you organically obviously generate 60 basis points or more and that probably drives your rises in the DPS but on top of that, you will have gained from the Panama sale coming in Q3, you will have -- potentially you talked about industrial bank today and maybe you will sell other assets over time, so should we think about those gains being used to effectively buy back the stock with the DPS rises in line with the EPS or is that just a sort of general...

Gulliver Stuart Thomson

No, that's a general -- and you shouldn't think of that as being a specific linkage of cash flow in terms of source and use of funds, no. Those type of gains will be put into the overall mix in terms of determining dividends at the end of the year. I wouldn't make linkage of disposals to buy back.

Unknown Analyst

Can I go to U.S. runoff again? If you think about that on an off-base currently about 1.5 billion a quarter, you've got kind of 15 quarters until 2016, that would give me 22.5 billion. So already 41 is below 20, less you've identified sales, and there'll be more sales that you'll identify down the line. So just wondering about how do you get to 20 billion? What is changing in this calculation.

Gulliver Stuart Thomson

I'm going to ask Pat who's sitting about 3 feet from here, to answer your question.

Patrick J. Burke

Sure. I think probably what you're saying is, as Iain's described already and Stuart's mentioned that we don't have as much delinquency and ultimately, charge off, in the book that we had in the historic quarters. So in fact, the book is becoming stickier, it's not charging off as heavily as it did before. And the sequence of that really is delinquency improve first and that happened in the middle of last year and then we see in the housing market recover really just starting since the fall of last year and both of those just caused a longer, if you will, maturity in the book.

Unknown Analyst

And then if I move on to capital, the greater than 10%, we've had -- one of your peers say 10.5, where do you think the cushion needs to be, I mean we have a lot of clarity just now but you've been traditionally a conservative group. What would you think the buffer would be?

Iain James MacKay

Above 10%.

Gulliver Stuart Thomson

Above 10%.

Unknown Analyst

I knew that was coming.

Iain James MacKay

You've got to allow us a few of those answers, right?

Arturo de Frias Marques - Grupo Santander, Research Division

It's Arturo de Frias from Santander. Two questions as well, please. First of all on the cost income in some of the geographies. There are clearly 2 geographies that are under-performing the group and the rest in terms of cost income right now, which are the U.S. and Europe. You have already given some color, some additional cost cutting and even a cost income target for the U.S., which is highly appreciated but you haven't said anything new about Europe. So my question will be where do you think the cost income of Europe should be? I know you tend to argue that there's a lot of central costs, some headquarter costs in Europe but still, probably in the drive of $2 billion to $3 billion of additional cost sales, we would expect the cost income of Europe to fall as well and I would like to know more or less where. And the second question is I just would like to make sure that I understood what you said in terms of what would happen to your new ROE targets if regulators decide that the correct figure is not above 10 but 12. Do you stick to the target, and if yes, how do you think you will be able to reach at plus 2 15% ROE target with let's say a 12% core Tier 1 ratio?

Gulliver Stuart Thomson

On the cost efficiency ratio for Europe, seating in the European numbers is the entire group head office for the group, is the old fact finds from last year, is the bank levy and is the U.K. customer redress. So absent those, the U.K. cost efficiency ratio is about 54, 55, which actually is reasonable. In Europe, first quarter '13 was about 65 on an underlying basis, including the group cost, so just think compared to most European banks -- so if you think about what bank levy's probably going to be and M&S, probably here given that it's based in a year-end balance sheet, bank levy for 2013's probably going to be in the 800 million range. The operating costs for the holding company, for the group infrastructure runs about 300 million, 400 million per quarter and that sort of gets you through to certain other bits and pieces coming through to the European numbers but then it sort of gets you what the underlying operations of what sits in Europe. We've clearly got some fairly high-cost jurisdictions like France and Germany sitting within Europe and then when you compare our CVRs within those environments to the peer group, again, we're pretty well-positioned against that and certainly within the U.K. bank, I think we're quite well positioned from a cost efficiency perspective but the U.K. bank in particular has shown incredible propensity to manage a very, very stable cost base over the course of the last 4 or 5 years and I'm actually done banking [indiscernible] In fact, Sean is the COO of the U.K. bank, which is why I promoted him to be the group's COO because the U.K. bank actually was way ahead of everyone else in terms of managing its cost base. So it's 54 for the U.K. bank, within those numbers. The actual distortion we've got running through is because of everything we just outlined.

Iain James MacKay

On your second point, our own capital, if we see a common equity Tier 1 12% then I think all through it clearly it becomes a little bit more difficult because the businesses would literally need to be delivering at the top end of the return in risk-weighted asset ranges that we've shown you today, then the lower end of that return on equity could still be achieved but you've got to be operating at the top end of that. You start moving common equity Tier 1 ratios above that then I think we need to probably start revisiting.

Gulliver Stuart Thomson

What would happen is we run everything back to the 6 filters and make the necessary decisions, is clear what will happen. We've got actually people obviously dialed into this. So if I can take a question from the phone lines, please.

Operator

Our next question today comes from Steven Chan from Citic Securities.

Steven Chan - Citic Securities Co., Ltd., Research Division

Just a simple question. When you formed your target on your return on risk-weighted asset, what sort of growth on your risk-weighted asset you have assumed by setting a target for 2016?

Iain James MacKay

I mean the focus around growth and risk-weighted assets is marginal improving returns. So when we look at incremental investment opportunity across the global businesses and regions, it's at incrementally improving returns to that which the business is currently doing. I mean clearly we've got businesses that are operating within the range of return on risk-weighted assets that we've got but we have others that clearly are not there. So we have to continue to churn capital through those portfolios to higher returning assets and certainly as we do incremental investment that focuses at return on risk-weighted assets that is in or above the range that we're currently operating in.

Gulliver Stuart Thomson

There's a tremendous focus and our process in place to ensure that incremental net new business is not written at diluted levels and has to be written at the return on risk-weighted asset level so that will not create a dilution.

Gulliver Stuart Thomson

So we move back in to the room. Michael?

Michael Trippitt - Numis Securities Ltd., Research Division

It's Mike Trippitt of Numis. Three quick questions if possible. Just in terms of the slide on Page 45 where you talked about the sort of RWA growth, do you see that RWA growth for example in the faster growing regions, will be funded internally from capital generation or do you see a movement in capital from the more mature markets into faster growing and do you see any sort of regulatory problems in actually doing that?

Gulliver Stuart Thomson

Don't forget the model we've shown you is the capital comes back to the center and gets redeployed. So necessarily, there effectively is a shift taking place.

Michael Trippitt - Numis Securities Ltd., Research Division

But do you see a regulatory...

Gulliver Stuart Thomson

No, because clearly, we're at a level of capital within each of the operating entities to be able to effectively deploy the surfaces at sort of the holding company level to generate marginal incremental growth in the subsidiaries.

Iain James MacKay

So in determining dividend policy for our subsidiaries, it takes into consideration self capitalization and growth prospects over the short term so in any of the -- all of the subsidiaries are separately capitalized, they maintain capital, adequacy at or above the levels that are required locally and when it comes to dividends, it's got a prospect of future growth, as well as obviously maximizing, maintaining that capital at the center of the group.

Michael Trippitt - Numis Securities Ltd., Research Division

Could you give an idea of what, in your assumptions on the increase in returns, what tailwind affect you're assuming from rising rates and also...

Iain James MacKay

Absolutely 0.

Gulliver Stuart Thomson

Zero.

Gulliver Stuart Thomson

Zero. We're assuming the Q [ph] defers any rate rises beyond this period of 2014 to '16. So there's no lift in this from the deposit base.

Michael Trippitt - Numis Securities Ltd., Research Division

And finally, just headwinds from increased inflation. I was surprised that the 0.6 was as low as it was last year I just wondered if you could give a feel of...

Gulliver Stuart Thomson

On emerging markets, it was kind of more like 2%, 3% actually of inflation pressure, which we kind of see as being around that mark again. Do you want to just hand them the mic?

Gary Greenwood - Shore Capital Group Ltd., Research Division

It's Gary Greenwood of Shore Capital. I just had 2 general questions. The first on the strategic targets. I was just trying to understand the nature of the bordering debates around those targets and the sort of pushback that you may or may not have had. And the second question was on the culture. Because clearly changing the culture is a key part of your strategy and I was wondering what you're up to in your mind, in terms of transforming the culture and what else needs to be done?

Gulliver Stuart Thomson

I think that -- taking the second one first. I think the programs in place to change to culture are what is required but I think to change a culture, it takes 7 years or longer. Because I think that what you need to do is almost see out a generation who don't believe or sign up for that cultural change. I don't think we need to do anything more than the programs we already have in place. The actual answer is to intensely stick to them and stubbornly stick to them and eventually, you out loss those kind of corporate deserters who don't get it, quite honestly I think it's more complicated than that. In terms of bordering debates, clearly this was debated at before and I might actually ask Douglas to describe the bordering debate. We've actually got some of the non-exec directors at the back of the room. So maybe Douglas, you could just take a few of these, if you would.

Douglas Jardine Flint

Sure. I mean there was, as you would imagine, a very strong debate starting in January when we did the strategy off-site and I think the encouragement, not the encouragement -- the mandate from the board but to management was put down what you honestly believe the outlook is going to be for the year -- the period 2014 to '16 and then we'll challenge the individual, this is our -- in terms of deployment in capital returns in cost but there's no point in trying to stick to metrics that nobody believes they're achievable to do just because they're consistent with the past or they're on a trend that some people might project. Honestly, project what you think is right in relation to the risk profile, the risk appetite that the board has given you and we had a strong debate, actually mostly around the cost side in terms of whether more could be done and making sure that there was no constraint on the continuing investment and commitment to all the cultural change programs that Stuart's talked about and indeed to the investment and control, internal audit and all the compliance and from natural [indiscernible] stuff, put all that together, you come to something that management felt comfortable with and the board felt comfortable with. I mean this is a plan absolutely endorsed and supported by the board and I think it's a challenging plan.

Andrew P. Coombs - Citigroup Inc, Research Division

This is Andrew Coombs from Citi. I have 2 questions one just a very simple quick question point of clarification, when you talked about the timing of sterilizing script you get from 2014, assuming that means sterilizing the 2013 script dividend paid in 2014 rather than 2014.

Gulliver Stuart Thomson

The plan is 2014 to '16 so within 2014 and we will need to run through an AGM in 2014. So it's post the AGM .

Andrew P. Coombs - Citigroup Inc, Research Division

And second, just in terms of come back to cost income and more specifically the retail and wealth cost income. We've talked a bit about U.S. and Europe but even when you look at Lat Am, rest of Asia Pac, the cost income there is obviously elevating the high 60s that would drive on the mid-50s, [indiscernible] you said and I know you talked to this on the presentation about how the bulk of International Commercial Banking revenues are based in the city clusters but for you that's not quite the same extent to the retail revenues. So just interested to know what your thoughts are outside of the U.K. and Hong Kong but clearly you do have significant scale I know you have closed certain areas. There's a greater focus on premier elsewhere but have you considered anything more radical in terms of restructuring in the Lat Am, rest of Asia Pac areas?

Gulliver Stuart Thomson

No, we haven't because I think we're a big believer that we've still got to sort of have our disposal to deploy, which is actually to drive the cost down on those businesses because as I said again, this is the thing that has been ran in the most local, local way. So short of saying, multiple Internet offerings, multiple duplication of systems, et cetera and actually the 2 and 20 countries are already level-focused. It's a premier mass affluent offering. It's skewed towards wealth but where we can drive the cost efficiency ratio down is not by, frankly, exiting those businesses but by actually getting the cost base down. A chunk of this reengineering and streamlining that Sean's talking about will directly come out of John Flint's business in terms of RBWN. So it's hard outside the firm to imagine the cost inefficiencies of allowing completely separate Retail Banking businesses to go out of separate systems platforms that don't talk to one another, et cetera, et cetera and actually, the cost opportunity of actually getting common target business models with common platforms. Can we move far to the back?

Gurpreet Singh Sahi - Goldman Sachs Group Inc., Research Division

Gurpreet Sahi from Goldman Sachs. Two questions, please. Firstly, you've effectively raised your expected cost income and your core Tier 1 ratio, could you reiterate your ROE target? I'm wondering is the missing link simply lower credit cost because of derisking of the group or am I missing something else? And then secondly, on the strategy to upstream capital to the group from the subs I guess as I understand it historically, your FX risk to your capital ratio was effectively managed by matching the local capital and the risk-weighted assets. So I'm wondering if there's a change in your approach to managing that FX risk.

Gulliver Stuart Thomson

There's no change in the approach to the FX risk and actually what we're describing has been in place actually for some time. We take the capital out and then recycle it back in. So actually, that's the way frankly the dividend that's paid to the external shareholders has funded clearly the dividend up from the operating companies to the holding company and pay that out to shareholders and that if there's leftover, we would then redeploy, what we're saying the way we redeploy it, we'll have to systematically manage in a very intense focus fashion from the center. The reason why we're comfortable to sit the 12 to 15 ROE and remember, we actually hit it in the first quarter, is because it's mostly the drag of the underlying businesses, so the legacy businesses they're on run off. It's the run-off portfolio. It's 170 billion of RWAs that generate nothing of legacy books, that's the big drag. And let's say if we were to walk away from the 12 to 15, by 2016 we would've missed it the other direction because the legacy books would've run down.

Unknown Analyst

Andy Chan [ph] Actually I just want to go back to Slides 44 and 45 and kind of just talking about the capital upstreaming or sort of forced dividend policy from the South. Where does that start, or I mean -- I think you've said that you could actually force capital to be upstream from the lower-performing divisions and then moving to Slide 45, if that's so, why doesn't that chart show almost all of the sort of discussion of RWA growth going to our own CMB division in faster-growing regions?

Gulliver Stuart Thomson

Look, actually our own CMB division makes a great profit in some of the mature regions as well, is the honest answer. I mean the U.K.'s CMB business is a fantastic business, a fantastic returns where we've set these international trade finance portfolios to lend, to trade business, it's got great returns on it but the U.K. number is a sort of a customer redress in the bank levy. And so if you dig down, the CMB business in the U.K., the CMB's business will be build down in the U.S. actually also have great returns, so and the reason it's skewed towards the [indiscernible] for that reason.

Iain James MacKay

On capital flows, Andy, I mean what we've described here is nothing new. This is how the group has worked for many, many years. We're organized principally across bank subsidiaries operating in our main markets. Those bank subsidiaries are in a vast majority of cases locally by deleted meeting local liquidity and capital standards. Where those businesses self capitalize create capacity, that those dividends, come up to the group and there's pretty strict policy around that. If people don't want to submit their surplus capital to us, They've got to a make a very clear explanation, a compelling case as to why they don't and that will be based on regulatory changes or very compelling case around growth. If they can't make those 2 cases, the dividend's come to be paid to the company and then redistributed in the mechanism that Stuart's described earlier and that's been the case for many, many years. I think one of the things that we obviously are very conscious of of at the moment is just the changing regulatory scheme here. The model that we've got works really well. There are those that think this model is probably the way you want to go forward but what you've got to be concerned about and just keep a very close eye on is that we don't get capital vulcanized because people will start kind of do the ring fencing and say I'm going to take care of my economy and be done with the rest of the world. That's not that clear [ph] outside the U.S. and the U.K. at the moment.

Operator

Our next question today comes from John Caparico [ph] from Standard Chartered Bank.

Unknown Analyst

This is about really the trade-off between risk and growth. Stuart's talked a number of times over the past few calls about derisking the business and that's been very impressive and you can see it very clearly in the run off portfolios and the sale of the businesses. The question really is about the sort of underlying growth of HSBC. You talked a couple of times about how there's been a shift in the portfolio from higher risk toward lower risk assets, secured portfolios, trade finance and so forth. The question is, how do you think about kind of when you set your risk targets, how do you articulate that and how do you think through the trade-offs between how much growth you want to sacrifice to meet those risk targets and specifically, how you view it as you kind of derisk over the past couple of years, how much do you think that you've sacrificed new growth for that?

Gulliver Stuart Thomson

I don't think we sacrificed much growth, actually. I think what we've done is reduced our loan impairment charges and I think the PBT has actually benefited for it, quite honestly. And I wouldn't overdo the lack of growth. If you look at Slide 34, you can see quite clearly where we have substantial loan growth in the emerging markets. This is where we're showing total loan growth in the countries, that are listed there of 24% outperforming GDP 2x but that loan growth is in secured lending, it's not in clean lending. And in essence, yes, we as a group management board, do the math to make sure that actually the numbers that we're setting out can be achieved with the risk appetite that we've described because clearly, there's no point in us embarking upon sending out instructions to everybody if actually the outcome's going to clearly miss all the targets we've set here today. So the thing is, the firm is now run by a group management that really has 20 people on it that represents all the functions, all the regions and all the global businesses around 1 table everyone that's required to basically run HSBC and execute the strategy and actually, we do a lot of analytics around this. So the 6 filters and so on is just the tip of a framework where we've kind of actually worked it through. It starts with a risk appetite statement that the board actually puts in place and the board thinks through effectively what risks it wants to take and actually looks at various stress tests which do include geopolitical events and bird flu and all sorts of things and to make sure that we've put all of our eggs in one basket, we are diversified. That risk appetite then defines the credit risk and the market risk limits delegated by the board to me and then I own and delegate to the group management board members. So there's a very, kind of distinct organized, framework in which this is constructed. This is an output of quite a lot of input and analytics.

Unknown Analyst

Sure, I don't question it now, I think that's quite clear. And I recognize also that there's been pretty good asset growth but there has been some sacrifice in margins and to what extent that might sort of trace back to your change in risk appetite.

Gulliver Stuart Thomson

No, sorry -- the compression in margins, it does partly reflect the fact that we went from clean lending to secured. Obviously, that happens at low margins but what I'm saying is the kind of test to whether this is being sensible over the last several years will be, what's your PBT? So what's your risk-adjusted returns after you've taken account of your loan impairment charges and your bad debt write-offs, what's the bottom line and so far, for this last point of the cycle, what we've done makes sense. Now we clearly will adjust our appetite in terms of the balance as we see the economic cycle move through but I think that so far, we're quite pleased with the fact that we de-risked in this way.

Chris Manners - Morgan Stanley, Research Division

It's Chris Manners from Morgan Stanley. Two questions if I may. The first one is when you come to think about your targets over the next few years, I know you're saying that you're expecting 0 benefit from rising rates but what is your sort of baseline assumption for the net interest margin from current run rate? So I guess, you're sort of seeing the derisking of the book, with some competition reemerging, some of the more appealing markets that you've been talking about and secondly is on the AD ratio, down 73%. I mean should we be able to expect that to trend up from here?

Gulliver Stuart Thomson

So on the AD ratio now I think that, that 90 was clearly a cap, it's a different type of target than the others and we're comfortable with the fact that the AD ratio's actually gone down during the last 2 or 3 years. It partly reflects a positive selection on the part of depositors to actually move to HSBC. There has clearly been an inflow of funding to HSBC. And of course, because we sold certain businesses as well, the assets side moved. So the AD ratio is both a deposit inflow and a change in associate with the balance sheet. I personally think that it's a huge strength to run with an AD ratio frankly of around circa 75. So we could have mid-70s as a sort of a description of this going forward but we would never ever want to have this group wholesale funded, ever. It is absolutely a core principle of probably starting about 1866 but this firm -- I tell you for this, it certainly was at least 33 years old because that's how long I've been with the firm and I was -- I went into the training room very early on and I was told this, as something that was part of the folklore and the way the firm ran itself 33 years ago. So that's never going to change. So I don't see that. On net interest margin and spreads, there has been compression, actually particularly from U.S. banks entering trade finances and some of the European banks coming back to the trade finance. What you also have to bear in mind though, is there's no kind of magic formula to this, these banks must be lending at rates that are generating a return on equity below their cost of equity. So this kind of spread compression doesn't go on forever. They themselves have an investor community, analysts to talk to and they'll be trying to explain why they've grown their trade finance business but actually at ROEs below their cost of equity. So actually, the phenomenon may well continue for the balance of this year but I would doubt if we will continue beyond that, quite honestly.

Iain James MacKay

If I'd just add a little bit of the nitty gritty around that, Chris. I mean the big move on net interest margins for this group over the last 12 months was the disposition of the cards and retails service business in the U.S. That was a high-yielding business, risk-adjusted actually that was a well performing business as well but at a NIM level, that was really the big driver. If you take that out of the equation, notwithstanding the fact we have seen a little bit of pressure in some of markets over the last quarter or so, NIMs have remained very, very stable.

Chris Manners - Morgan Stanley, Research Division

So your sort of planning assumption when you develop your target is a stable-ish NIM from here then?

Gulliver Stuart Thomson

Yes.

Iain James MacKay

Yes. For most of the markets here,

Gulliver Stuart Thomson

Yes. At group level, yes.

Christopher Wheeler - Mediobanca Securities, Research Division

Chris Wheeler from Mediobanca. I could ask 3 questions, the first one, sorry to get back to the dividend, but obviously you're setting quite a target in terms of your payout ratio and I suppose the one concern is that the markets may turn down again at same stage in the future and obviously cutting the dividend is always unexpected. Presumably that in your thinking on this and also your thinking of what your investors prefer, you will also be thinking about special dividends occasionally a lot -- so does it just make life too complicated?

Gulliver Stuart Thomson

I've spoken to 3 of the top 5 investors who have indicated they would not want a special dividend. Their view is that actually there's sufficient growth opportunities around in HSBC that they would prefer us to grow the balance sheet and grow the dividends by that way and therefore, to have an increase in the progressive dividend coming through in terms of the normal dividend. They feel a special dividend would add nothing to the share price whatsoever and we'd have to be in a world that was massively ex growth before we were kind of looking to do that. So I've gone and had that conversation already, actually, frankly in forming up the remarks we have here about share buybacks is actually after talking to 3 of the very big shareholders.

Christopher Wheeler - Mediobanca Securities, Research Division

The second question really is that twice during morning, you've talked about in-market acquisitions, which was intriguing. My question is clearly, you said that you'll comply to the 6 filters in doing any deal whatsoever.

Gulliver Stuart Thomson

Absolutely.

Christopher Wheeler - Mediobanca Securities, Research Division

And but I suppose what I really want to know is you didn't seem referring to sort of the things in the Middle East or North Africa, something a bit larger. The question is would you be willing to defer some of your targets for longer-term growth perhaps, if you did such a deal or would you just be not willing to do that and give up at all.

Gulliver Stuart Thomson

No, we just wouldn't be willing to do it. What I think is hard to question is the ability of the management team of HSBC to manage organic growth within the firm and actually what is questionable is the ability of HSBC historically to manage very large acquisitions. Therefore, I would not want to postpone any of these targets to make a large acquisition at all and the 6 filters are there for a really good reason. So we will be incredibly disciplined about it.

Christopher Wheeler - Mediobanca Securities, Research Division

The final question really is on a small part of the business but an interesting one in private banking. I mean 49% of your private banking earnings last year came out of Europe and it sounds to me like you've been very clear on what you think about part of the Swiss business and also I see that means why we saw [indiscernible] Monaco last night coming out on the wires. Are we seeing a business where we're going to see quite a marked step down in earnings in perhaps, the short term as you build your new model of being very much aligned to the Commercial Banking business as a result of that?

Gulliver Stuart Thomson

I think it's important on the Swiss piece to understand that what we need to do is reposition it. We're not going to exit the Swiss private banking business. We're not going to sell the Swiss private bank. We need to reshape certain parts of it and certain parts therefore are the business that we acquired from Republic, it doesn't fit with effectively a private bank that needs to be kind of emerging market focused and focused alongside our Commercial Banking business but it's a restructuring, not an exit of the business. We remain absolutely committed to private banking, including our Swiss private banks. We're crystal clear on this regard. In terms of earnings and so on, yes, it is possibly the case that there will be a modest dip in private banking earnings as we restructure it but the private banking business is, makes a PBT of about USD 1 billion. So it's not really going to kind of significantly drive the valuation of the firm but it would be true to say that we would expect a little bit of a kind of J curve effect as we run through a restructuring but I stress, it's a restructuring, we're not disposing the private banking. It would be absurd to do so. We are operating in countries that have phenomenal wealth creation so therefore, it's a kind of call service to be able to offer.

Operator

There are no questions on the phone lines.

Gulliver Stuart Thomson

Michael?

Michael Helsby - BofA Merrill Lynch, Research Division

It's Michael Helsby again. I've just got a follow up on cost actually. Sean, you highlighted a few industries that you've clearly looked at that demonstrated very strong, absolute cost reduction. And I think despite taking out 3.3 billion of costs, if you sort of look at 2011 and look at where we are today for many different reasons, I think cost, ex notable items and ex disposals, et cetera, actually higher today than what they were when you started this program. So again, clearly there's a lot of things going on. You talked about the risk framework from compliance, et cetera. I was just wondering if you could help us think about what you consider to be the base level of cost growth that sits within HSBC. That's before any sort of revenue-performance related but when you look at the inflation, you look at the investment that you need to make, ex the cost savings, what that base level of cost growth is.

Gulliver Stuart Thomson

Iain?

Iain James MacKay

I wouldn't necessarily talk about a base level of cost growth. So we're made up of businesses, 4 global businesses, 80 markets, 6 regions and the dynamics are different by market but I think what we've provided some guidance and insight around and what we continue to do to the IMS, the interim report and the annual report is where do we see cost running at the moment based on what we see, where we see cost running on a quarterly basis and that's sort of in the high 8s, low 9s on a quarterly basis and then really what the cost base is going to be in [indiscernible] is continue to drive sustainable saves, the focus of why we do that is fund investment, deal with inflationary pressures, that's really what the focus is here. Positive jaws, right. It's going by definition, Michael, it's going to be different by global business, by region, based on circumstances we're dealing with, based on the state of the restructuring in the businesses. Stuart talked earlier about the degree of restructuring we still need to do within the Retail Banking and Wealth Management and that's not to suggest that's the only place we need to do it but this is a composite of many -- sorry John, keep picking on you, it's a composite of a lot of different elements. But I think at a group level, at the high 8s, low 9s, and then we'll continue to kind of feed you information about what are the moth balls [ph] that come to you about that, whether it's customer redress, whether it's paying penalties and trying to make clarity about that and I think as we move forward here, we'll hopefully continue giving more detail about where we're investing and what kind of feedback, or what pay back we're getting on that as well.

Sabine Bauer - Fitch Ratings Ltd.

My name is Sabine Bauer from Fitch ratings. I have a question on the strategy for the Hong Kong and Shanghai Bank. You mentioned a little bit on the new business generations related to China but I was interested in learning more about the Hong Kong businesses, the domestic business. Is there significant growth coming from that area with Hang Seng Bank being part of your network and then a bit broader on the faster growing markets, you mentioned that a couple of times but can you give us more detail on which faster growing markets in Asia Pacific would be on the focus to meet these targets and in particular then further away how is the Asia Pacific region will be complemented by Latin America?

Gulliver Stuart Thomson

Well, Hong Kong's underlying profit before tax growth in the first quarter was 14.4%. So we continue to have a terrific business in Hong Kong, that continues to grow substantially. The underlying revenue growth of about 9.3%, 9.5% was well spread across all the global businesses but was led by Global Banking and Markets. Actually, we continue to have an excellent business in Hong Kong, as this Hang Seng that is incredibly well managed and we continue to see Hong Kong's growth frankly in the RMB internationalizes as one of increased opportunity. I think the internationalization of the RMB will actually benefit Hong Kong, it won't be negative for Hong Kong. The Hong Kong business continues to absolutely be the jewel in the crown for HSBC and as I said earlier, I think what happens over the next kind of 3 to 5 years is a much more open boarder between Hong Kong and Guangdong will create further opportunities to grow a kind of economic corridor and a econovation, I might ask Peter who's actually sitting in the front row here just to talk a little bit about sort of the growth opportunities he sees specifically in Hong Kong and then I'll talk about rest of Asia-Pacific.

Sabine Bauer - Fitch Ratings Ltd.

One question, how much of the Hong Kong business is actually related to China?

Peter Wong

I think that we should look at Hong Kong as -- when you look at the strategy of Hong Kong, you should also include China because a lot of the activities in Hong Kong, especially the fundraising activities from the businesses, they're actually investing in China. And to a certain extent, we can also see that China is using Hong Kong as a pilot for our RMB internationalization. So a lot of products from China, specially on R&D, is coming to Hong Kong especially on debt, especially on trade and that will continue to grow. China at this point in time is #1 in export and #2 in import and a lot of the trade in terms of R&D, using RMB as settlement it was like about 3% about 2 years ago and now it's up to 12% and Hong Kong is taking a big part of it. So there will be lots of opportunities regarding the RMB.

Gulliver Stuart Thomson

If you look at the rest of Asia Pacific, I mean back in May of '11, we said that we reckon we can make $1 billion out of Singapore in 5 years' time, from 2011 to '16. $1 billion out of India and $1 billion out of Malaysia or Indonesia. So if you look at the end of 2012, India was $810 million, Singapore was at $700 million and Malaysia and Indonesia combined were at $900 million, so pretty advanced towards hitting those $1 billion target. They're very important countries. The GDP growth we think will be 3% to 5%. The demographics are incredibly powerful and we have superb market positions in all of them. And you've seen -- you see a little bit of on the reported level of slowing in Rest of Asia-Pacific but the part of those numbers are distorted by big changes going on in disposals through those rest of Asia Pacific numbers in 2011, 2012 on an underlying basis, the ROP, Rest of Asia-Pacific numbers are actually very, very strong. Underlying first quarter PVT in Rest of Asia-Pacific if you strip out industrial bank gain disposals and the sale of the balance of Ping An was broadly unchanged versus the first quarter of '12 and the lending in RBWN and CMB have both increased. So we're very constructive about that opportunity for HSBC. We've got time for a couple of more questions and then we should kind of break into a more informal part, please.

Manus Costello - Autonomous Research LLP

It's Manus Costello again from Autonomous. Can I maybe ask lightly [indiscernible] touch by asking a question on regulation. The number for the U.K. bank levy you just gave, Iain, was quite a bit of ahead of where consensus has you I think for 2013 and I just wondered is there anything you can do to mitigate that for balance sheet perspective to your end and for Stuart and Douglas, is there anything you can do to mitigate it politically because it strikes me that the group is being disproportionately hit because I suspect you're not benefiting much from the lower U.K. corporate tax rate, but you are being hit as that levy rises.

Iain James MacKay

We did mention that $800 million by the way, at the time that we put the full year results out in 2012 and it's a function of the increasing rate. What we have done over the last 2 years is an enormous amount of work of just really -- on the detailed rules part of the challenge with the bank, well, there's multiple challenges in the bank levy but in its application, one of the challenges is, it's incredibly detailed. It's far too complex in its application but we've got a gentleman working in our tax team who probably understands this better than anybody, he has worked with our regional teams or balance sheet management teams around really -- not changing the shape of the balance sheet but understanding what counts and what doesn't count and making sure that we take the full benefit of applying the rules accurately and appropriately and that actually has realized some benefits for us over the '11 and '12 period. What drives the change for 2013, nothing other than the rate increase, that's really what it is based on our outlook balance sheet on the influencing aspects perhaps, Douglas if you could add any comments there?

Gulliver Stuart Thomson

I think both Douglas and I have had all of the conversations that we could possibly have with all of the people we could have them with and I believe that there will be no change at all this side of the general election. We've got time for one last one. If there aren't, thank you very much for your interest and attention. The schedule now is basically, the whole senior management team are here. We will also be serving refreshments, lunch, on the floor where some of you would have had coffee before starting this. And basically everybody's at your disposal until kind of 1:30 or thereabouts. The 3 of us have to go into a press call and then we'll join everyone. Thank you.

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Source: HSBC Holdings plc - Special Call

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