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Executives

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

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

Analysts

Chintan Joshi - Nomura Securities Co. Ltd., Research Division

Chirantan Barua - Sanford C. Bernstein & Co., LLC., Research Division

Raul Sinha - JP Morgan Chase & Co, Research Division

Ronit Ghose - Citigroup Inc, Research Division

Alastair Ryan - BofA Merrill Lynch, Research Division

Rohith Chandra-Rajan - Barclays Capital, Research Division

Thomas Rayner - Exane BNP Paribas, Research Division

Ian Gordon - Investec Securities (UK), Research Division

Alistair Scarff - BofA Merrill Lynch, Research Division

John-Paul Crutchley - UBS Investment Bank, Research Division

Michael Trippitt - Numis Securities Ltd., Research Division

Christopher Wheeler - Mediobanca Securities, Research Division

HSBC Holdings (HBC) Q3 2013 Interim Management Statement Call November 4, 2013 6:00 AM ET

Operator

Good morning, ladies and gentlemen, and welcome to the Investors and Analysts Conference Call for HSBC Holdings plc's Interim Management Statement for Third Quarter 2013. For your information, this conference is being recorded.

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

Stuart Thomson Gulliver

Thanks very much. Welcome, everyone. Iain MacKay is with me today. We're going to give you a quick overview and then take questions.

So our reported profit before tax is USD 4.5 billion on the third quarter, up 30% on the same period in 2012. Now this includes adverse fair value movement on own debt of $575 million compared with adverse movements of $1.7 billion in the same period in 2012. Our underlying profit was $5.1 billion, an increase of 10%. Now you may find it helpful to look at Page 4 of the IMS where we set out the items we include in our reported and underlying numbers. Those figures do include notable items, including a charge of $428 million for U.K. customer redress and a charge of $158 million for restructuring.

Our revenue was stable in the third quarter compared to 2012, which reflects a mixed global economic picture and set against the backdrop of our continuing implementation of Global Standards and ongoing regulatory uncertainty.

Now our home markets of the U.K. and Hong Kong, where we have material market share, which drives the performance of the firm, contributed more than half of the group's underlying profit before tax in the third quarter and year-to-date. Hong Kong performed well, with good revenue growth in Retail Banking and Wealth Management, Commercial Banking and Global Banking and Markets. Hong Kong continues to benefit from its close economic relationship with mainland China. In the U.K., we saw revenue growth in Global Banking and Markets and in Commercial Banking and also growth in our residential mortgage book. We remain well positioned to capitalize on improving macroeconomic conditions in both these markets, where we expect GDP to be higher in 2014 than it is in 2013.

Global Banking and Markets performed resiliently notwithstanding a challenging environment for this activity over recent months. This relative performance was good because we have a distinctive business model with broad international focus, emphasis on customer connectivity and balance sheet strength.

Our loan impairment charges were down on the same quarter in 2012, driven largely by a reduction in North America from the continued runoff of our U.S. legacy portfolio. The ongoing recovery of the U.S. housing market and increased investor appetite may provide further opportunities to accelerate the runoff of our CML portfolio in the months to come. Our continued focus on cost management generated a further $400 million of sustainable cost savings in the third quarter of 2013, which helped us to reduce our underlying cost efficiency ratio to 57% from 62.5%.

For the year-to-date, reported profit was $18.6 billion, a 15% increase on the same period in 2012. Underlying profit was $18.1 billion, a 34% increase on 2012. And we grew underlying revenue 9% faster than costs in the first 9 months of the year, giving us 9% positive jaws. We've also made further progress towards simplifying and restructuring HSBC, in particular through the recent completion of the sale of our Panama business in October.

Our capital position strengthened during the quarter with an improvement in the core tier 1 ratio to 13.3%, and our estimated CRD IV end point basis common equity tier 1 ratio also improved to 10.6% from 10.1%. Now there continues to be significant regulatory uncertainty on the horizon.

On outlook, we see some signs of a broadening recovery around the world. Indications are that the economy in mainland China is stabilizing, and this has positive implications for Hong Kong and the Rest of Asia-Pacific. We believe the U.S. will continue to grow, albeit at a low rate by historical standards; as well the U.K., which will outperform the Eurozone. We expect GDP growth in Latin America to remain slow, although we expect the Mexican economy to strengthen in 2014.

Our forecasts for global growth remain constant at 2% in '13 and 2.6% in '14. And against this backdrop, we remain focused on delivering organic growth, streamlining the businesses, implementing global standards and so supporting a progressive dividend.

Iain will now talk through the financial performance in some detail. Iain?

Iain James MacKay

Thanks, Stuart. Stuart has outlined the overall results, so I'll take a closer look at a few key points. Reported profit before tax for the third quarter was $4.5 billion, up $1 billion from the third quarter of 2012, with $1.2 billion relating to lower adverse movements in the fair value of own debt. Reported profit before tax for the year-to-date was $18.6 billion, up $2.4 billion from the prior year period, with $3.3 billion relating to lower adverse movements on the fair value of our own debt and $1.5 billion from the nonrecurrence of provisions for fines and penalties recorded in 2012. This was partially offset by $3.2 billion in lower gains on business disposals.

Underlying profit before tax for the third quarter was $5.1 billion, up $500 million on the third quarter of 2012. And underlying PBT for the year-to-date was $18.1 billion, up $4.6 billion on the prior year period.

I'll cover the key drivers behind this performance in more detail now. Underlying revenue was broadly flat for the quarter and $1.1 billion higher for the year-to-date compared with the same periods in 2012. For the third quarter of 2013, underlying revenue was affected by an adverse debit valuation adjustment of $151 million in Global Banking and Markets. Excluding this item, the revenue performance in the third quarter was as follows: Global Banking and Markets produced a resilient performance with marginally higher revenues against the backdrop of the recent challenging environment. We grew revenues in Commercial Banking, primarily from our home markets of Hong Kong and the United Kingdom. By contrast, revenue in Retail Banking and Wealth Management decreased primarily due to continued runoff of our U.S. CML portfolio and a fall in insurance revenues. These factors were partly offset by higher net interest income in Hong Kong. Global Private Banking revenues also fell, reflect a -- reflecting lower net interest income.

Turning to year-to-date revenue performance. There were a number of items affecting underlying revenue. These included favorable movements in the non-qualifying hedges of $461 million compared to adverse movements of $365 million in the prior year, a net gain recognized in completion of the sale of our remaining investment in Ping An of $553 million, foreign exchange gains on sterling debt issued by HSBC Holdings of $442 million, a favorable debit valuation adjustment of a $300 million in Global Banking and Markets, a loss following the write-off of goodwill relating to our Global Private Bank business in Monaco of $279 million and a loss of $138 million in the sale of an HFC Bank U.K-secured loan portfolio.

Excluding these items, the year-to-date revenue performance was as follows. In global banking and markets, revenue increased marginally with growth in the majority of our customer-facing businesses. Revenue increased notably from Financing and Equity Capital Markets, credit and equities. This was partly offset by lower revenue in Rates and Balance Sheet Management. Commercial Banking was also marginally higher. As with third quarter '13, this was driven by performance in our home markets.

Revenues decreased in Retail Bank Wealth Management due to U.S. CML runoff portfolio, but the revenue grew in the rest of Retail Bank Wealth Management, driven notably by strong performance in Hong Kong.

Global Private Banking revenue decreased due to lower net interest income, as mentioned earlier, and the adverse impact for net new money as we continued to reposition the business's client base.

Turning to loan impairment charges, which were down $64 million in the quarter and $1.3 billion lower year-to-date on an underlying basis. Firstly, in the quarter, North America was $400 million lower, primarily in our CML portfolio, reflecting an improved housing market, lower lending balances and reduced new impaired loans and lower delinquency levels. This was partly offset by $100 million of higher charges in Europe, reflecting higher specific customer impairments in Global Banking and Markets; and $100 million of higher impairment charges in Latin America due primarily to specific exposures in Mexico and Brazil. The increase in Mexico reflected the deterioration in the recoverability on exposures to homebuilder loans. And in Brazil, it was across a small number of corporate exposures.

In the year-to-date, North America was $1.6 billion lower. Again, this was mainly driven by our CML portfolio rundown. This was partly offset by Latin America where impairment charges were $400 million higher, principally due to higher specific and collective impairments in Mexico and impairment model changes for restructured loan accounts and portfolios in retail bank Wealth Management and Business Banking in Commercial Banking.

Looking at costs now. Underlying operating expenses for both the third quarter and year-to-date were lower than the comparable periods in 2012. However, in both cases, this includes the impact of several notable items. In the third quarter, these included U.K. customer redress provisions of $428 million compared with $353 million in the third quarter of 2012, and restructuring costs for $158 million compared with $97 million in the same period last year. For the year-to-date, notable items included U.K. customer redress provisions of $840 million compared with $1.7 billion in the prior year, and restructuring costs of $396 million compared with $660 million in 2012.

We also note the non-recurrence of provisions for fines and penalties, which were $800 million in the third quarter of last year and $1.5 billion for the year-to-date in 2012.

Excluding these items, operating expenses for the quarter were $300 million higher in the year-to-date due to a number of key items. In particular, we increased the spend and investment on strategic initiatives, along with risk and compliance. Wage inflation was also a factor. And there was an increase in the provision in respect of regulatory investigations in our Global Private Bank. These were partly offset by additional sustainable savings of $400 million.

For the year-to-date, operating expenses were $600 million higher due to the following key factors: again, increased spend and investment in strategic initiatives, together with risk and compliance; and the provision in respect of regulatory investigations in Global Private Banking. Additionally, there were higher litigation- and regulatory-related costs, including the Thema International Fund Plc settlement, which related to the Madoff cases; and a customer remediation provision that related to our former U.S. Cards business. These were partly offset by additional sustainable saves of $1.2 billion.

Our underlying cost efficiency ratio improved to 57% for the first 9 months compared to 62.5% in the prior year period. We clearly remained focused on strict cost control and driving sustainable cost savings through our organizational effectiveness program.

I should also remind you that our year-to-date costs do not include the bank levy, which we estimate to be around $900 million, and this is certainly worth taking into account as you update your cost estimates through the end of the year.

Turning to the capital position. Our core tier 1 capital ratio strengthened to 13.3% from 12.7% at the half year. This was principally driven by capital generation and foreign exchange movements. The estimated common equity tier 1 ratio, after planned management actions, increased to 10.6% from 10.1% at the half year. And as Stuart mentioned earlier, our capital position continues to be influenced by ongoing regulatory uncertainty.

Now let me hand it back to Stuart.

Stuart Thomson Gulliver

Thanks, Iain.

We'll now take questions, and the operator will explain the procedure and then introduce the first question. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We will now take our first question today from Chintan Joshi of Nomura.

Chintan Joshi - Nomura Securities Co. Ltd., Research Division

My first question is around capital, and second, around costs. On capital, we've had quite a bit of discussion around the CRD IV consultation paper. Some of your peers have guided us to higher minimum requirements. RBS said 12%, another bank informally has been guiding 11.5%. And that's led to speculation on what minimum ratios might be for U.K. banks. Can I have your view on that topic? And then I've got another one on cost.

Iain James MacKay

Yes, Chintan, thanks. On the capital front, my -- I think the situation with respect to a clearer understanding of the framework going forward remains as unclear as it did when CPO 5 13 [ph] came out. There are still a lot of moving parts in this equation, as I think probably everybody on this telephone call knows. We set our guidance around common equity tier 1 ratio end point at above 10% back in May. We certainly think above 10% continues to be relevant. But I think what the third quarter demonstrates, that as we work through some of the implementation items coming out of CRD IV, lots of pluses and minuses that tend to net out, and therefore, what you saw happen in Basel 2.5 ratio and the Basel III ratio generally reflected performance of the business, so capital generation and foreign exchange movements. There's more ground to be covered, but I think what we clearly demonstrate is the ability to generate capital. I think, from a dividend prospect perspective, clearly, we continue to be very confident in our ability to support a progressive dividend based on the 3 key strategic priorities that we've got. And as we learn more about the capital framework, we'll certainly inform the marketplace. I think it's entirely possible that, as the U.K. implements CRD IV, that we may get -- guided to a higher point. But I think, at this stage in the game, there's simply far too much uncertainty to conclude as to where that might be.

Chintan Joshi - Nomura Securities Co. Ltd., Research Division

And on costs, if I look at consensus with regard to flat costs year-on-year into 2014, obviously I'm not expecting you to comment on consensus, but would you be able to offset wage inflation next year if you saw a kind of revenue environment at a sluggish pace?

Stuart Thomson Gulliver

No, I don't think so. I think you have to accept the fact that there's probably a 2% type of cost increase, which there has been for the last 3 years. So no, I don't think you can assume that we can offset in a sluggish revenue environment the actual cost to run the firm.

Iain James MacKay

I think, as we talked about back in May, we've got a sustainable saves target for '14, '15, '16. And we've got a lot of work to continue to do in the organizational effectiveness, but those inflationary pressures come through virtually every market in which we operate around the world.

Operator

Our next question today comes from Chira Barua of Sanford Bernstein.

Chirantan Barua - Sanford C. Bernstein & Co., LLC., Research Division

I have a question on the U.K. and 2 on Hong Kong, please. The first, on the U.K., sir, you mentioned that the outlook for next year looks very positive, so would you be willing to put on risk and grow book faster than the market, as you've done in the last 2 years? Or are you stepping down? So that's on the U.K. And 2 on Hong Kong: Again, you're positive on the Hong Kong, but monthly home sales now are at 2008 levels, so do you see it flattish for the next half before it picks up? And the other thing, on risk-weighted assets, I see a sharp migration upwards from quality. It would be great if you can explain what that risk-weighted asset impact is coming from.

Stuart Thomson Gulliver

So looking at the U.K., as you can see, we have actually taken -- or as you were saying, we have actually taken market share over the last couple of years, both in mortgages and also in the kind of international tranche of the Commercial Banking business. Now actually, the rate at which we can take market share in the U.K. has declined most recently because of the Funding for Lending Scheme. So what the other banks have done is drawn down the Funding for Lending Scheme. And actually, rather than use it to actually fund SMEs, they've used it actually to drive back into the mortgage market. So the Funding for Lending Scheme has somewhat skewed the landscape and also somewhat sort of depressed returns. So what I would actually say is, yes, we will continue to grow risk in the U.K., but our ability to actually materially drive into that is somewhat constrained by the fact that the weaker U.K. banks, i.e. those that are owned by the state, have been able to take advantage of the Funding for Lending Scheme. But yes, I would expect to be taking additional risk. I actually kind of think this: So the harder piece, as I say, to get further growth in is actually Retail Banking and Wealth Management because of the impacts of the mortgage market. But in Commercial Banking, it's not because we have a unique geographic footprint. We're in 80 countries outside of the U.K. No one else has that geographical reach. And as U.K. companies looking to trade with the rest of the world build out, we should be able to take a material share in that. And then the third thing, I think, you can start to see is that there's a -- in debt capital markets and foreign exchange, and actually increasingly now also in equity capital markets, and it's always been the case in lending, we're very much closing the gap, or have closed the gap on BarCap. So there is also -- not in the pure investment banking, we don't have a big derivative business. But actually, in traded liquid markets, if you look at market share in things like DCM and in foreign exchange and lending, there's a gap close there. So yes, we will be putting on risk in the U.K., but you just need to be mindful of the fact that the landscape isn't quite as black and white as it was. On Hong Kong, yes, monthly home sales, because of the various activities or actions that the government have taken, are kind of down at 2008 levels. And that has had an impact, clearly, on volumes going through, although actually, margins have crept up a little. I don't think that this will get a great deal worse from here. So I actually think that the mortgage home -- mortgage market place in Hong Kong is, more or less at the kind of volumes that we're going to see. Because you probably saw that a number of the developers have started to discount in order to effectively get inventory starting to move. And there is still evidence of those big developers still essentially looking at new land banks and starting to discount and move inventory off of their books. So I don't think that Hong Kong stepped down again from the contraction that we've seen as a result of government activities. And I'm going to pass the RWA question to Iain, who's got an instant answer.

Iain James MacKay

Who knows. So on the book quality front, did you -- maybe it's the way you're reading the chart. Did you say that you saw a decline in book quality? Because I see exactly the opposite.

Stuart Thomson Gulliver

RWAs are going down because the book quality is improving.

Iain James MacKay

So book -- and the main drivers for that is there's really increased exposure to better credit quality within the European business, largely in institutional and the corporate space. That contributes certainly the lion's share. Notwithstanding the shenanigans in the U.S. around default, there was actually an upgrade of U.S. sovereign risk in the quarter, which reflected another -- the other most significant part of the decrease. And then overall, we saw that somewhat offset by a downgrade of the HK sovereign -- of the Hong Kong sovereign risk. But in the round, we saw credit quality improvements coming through the book, driven mostly by the European books of business.

Chirantan Barua - Sanford C. Bernstein & Co., LLC., Research Division

Iain, I was referring to the Hong Kong bit. Okay, so that was from the sovereign downgrade.

Iain James MacKay

Yes, it was. That's right.

Chirantan Barua - Sanford C. Bernstein & Co., LLC., Research Division

Okay, perfect. It's the only Hong Kong bit that I was -- okay.

Stuart Thomson Gulliver

Don't forget, the U.K. regulator looks at non-EEA sovereigns with a 45% LGD.

Operator

Our next question today comes from Raul Sinha from JPMorgan.

Raul Sinha - JP Morgan Chase & Co, Research Division

So if I can have 2 quickly, please, as well. Firstly, if I can invite you to comment a little bit on your outlook statement. It seems uncharacteristically positive, especially around trade finance and transaction banking. Should we sort of start to expect a pickup in volumes, and maybe even revenue growth in Rest of Asia, which has been sluggish for you this year? And then I've got a second one, on RWAs.

Stuart Thomson Gulliver

I don't think you can necessarily take the broad comments about a broad recovery as being specific on trade finance. I mean, what you have seen and what we have seen is volumes pickup in trade finance, but margins actually still remained depressed on a year ago. So margins in trade finance are kind of about 30, 33 basis points lower, but volumes are double-digit up, sort of 20-plus percent up. Now whether there's a turn in margins, I think it's too soon to call, actually. But volumes, yes, we are seeing growth in volumes. And actually, the anecdotal evidence that will kind of support that, that Maersk, the shipping company, also made a comment in the FT a little while back saying -- calling the kind of bottom of the trade cycle. But there's no evidence yet of margins coming through. We're optimistic that China will have a soft landing. We were of this view at the half year where, if you recall, obviously because there was a kind of sharp selloff in the emerging markets, people were of the view that China was going to have a hard landing and the whole EM story was turning over. Actually, what we've seen in the meantime, obviously, is China probably accelerate reform. And it'd be interesting to see what the third party plenum, starting on the 9th of November, shows in terms of fiscal and financial market reform. But China is probably going to have 7.8% GDP growth for this year, we think, 7.4% for next. That supports the Rest of Asia-Pacific. I think Japanese QE also supports Asia Pacific because it tends to finance the Japanese supply chain. So that also will support Malaysia, the Philippines, Thailand, countries such as that. And so Asia Pacific looks reasonably good. The Middle East actually remains strong, apart from, obviously, the political risk around Egypt. Which, again, hasn't really manifested itself in a particular economic slowdown. So if you look across to Latin America, yes, Brazil is reasonably weak, but we didn't see a significant deterioration in credit quality there. There was obviously a change to book in the second quarter, some small specifics in the third quarter. And then most of the rest of the LICs in Mexico was kind of the homebuilders, within Mexico and the homebuilders. If you come across to India -- and again going back to Brazil, we don't have exposure to the big idiosyncratic global banking credits that are the ones that people are particularly concerned about. Now that doesn't mean that, if I'm wrong and actually the outlook deteriorates, there may not be a worsening of credit into the names we are exposed to. But we do see a pickup in economic activity. If China's 7.5% GDP growth, the Rest of Asia-Pacific is fine. If the U.S. is coming along at the rates we think it is, that supports the U.S. and Canada. Actually, the U.K. is emerging with quite strong GDP growth. And actually, between Hong Kong and the U.K., that's over 50% of HSBC's PBT sitting in countries where GDP growth will be higher 2014 and 2013. So whether it's uncharacteristic, it's -- I think the outlook is broadly constructive.

Raul Sinha - JP Morgan Chase & Co, Research Division

Maybe the second one, probably for Iain, actually, on market RWA. On Page 16, you show $8.7 billion decline in the quarter, down to movement in risk levels. I was just wondering if this is seasonal. Or does it reflect derisking in Q3? Or should we sort of expect this to be a permanent step down in your market RWA going forward?

Iain James MacKay

No, it's really just a expression of changing positions and construct within the trading book. I think you're going to see seasonalities throughout the Global Banking and Markets business. And you sort of see that first half stronger; second half, a little bit of repositioning. And that's really what you see going on both within market risk and also the kind of party credit risk within Global Banking and Markets. So I wouldn't read any more into it in terms of some repositioning and seasonality.

Operator

Our next question today comes from Ronit Ghose from Citi.

Ronit Ghose - Citigroup Inc, Research Division

It's Ronit from Citi. Just a couple of questions on these product areas. On the global -- on what a lot of other banks call transaction service or transaction banking, so your PCM business, security services, if I put them all together, you look like you're running up year-on-year 7%, 8%. And I know you don't want to make a big deal of a pickup in trade finance, but compared to peers like the JPMorgans or the Standard Chartereds, you've been doing a lot better this year. What do you attribute this? Is this basically market share gains? Is it volumes? Why are you doing better in the whole kind of trade and cash area than peers? That's my first question. The second question is more specific on Q3. Foreign exchange had quite a sharp downturn after a couple of very good quarters. If you can give any more color, is that on the institutional side, or the -- or is it course [ph] on the corporate side that you've seen a slowdown? And my final question is on the U.S. CCAR process. You're going to be involved in that. Is there anything kind of surprising that's come out from what you heard on Friday about the CCAR process versus your expectations?

Stuart Thomson Gulliver

Okay, let's start with foreign exchange. So foreign exchange is primarily because we have an extremely strong second quarter, and it contains actually very strong revenues in FX options. In the third quarter, although there was obviously some reasonably big moves in emerging markets, actually, vols generally fell. The REN [ph] vol fell from something like 17.9% to about 10.5% or thereabouts second to third quarter. So actually, what we have was exceptional FX option revenues in the second quarter, which then normalized in the third quarter. So in a way, you could look at it as -- bear in mind this is a big corporate client book, but a lot of corporate hedging went through in the second quarter which, once it was done, wasn't repeated in the third quarter. And the reason you can kind of see that is if you look at year-to-date FX revenues versus -- 3Q '12 versus 3Q '13, 3Q '13 is only about 5% below 3Q '12. So actually, year-to-date, it's tracking the same as last year. The second quarter, third quarter effect in '13 is more that we have an exceptionally strong second quarter and the third quarter is kind of normalized. And actually, October would indicate that it's kind of more moving back to the way the first half was rather than -- not the second quarter, but the first half in total was in terms of sort of monthly contribution running through in October. On the trade finance piece, we focused hugely on this throughout the financial crisis because, throughout the financial crisis, we found that a large number of European banks pulled out of these type of businesses, particularly in Asia Pacific and the Middle East. And in essence, we were able to both take market share with local, local clients but also with the very big multinational corporations, be able to offer them payments and cash management in 60, 70 countries. If you think about it, there's probably only 2 or 3 banks now that have the global network to be able to do this. And in fact, no one -- if you put it in another way, no one would ever again be able to create from scratch an HSBC or a Citibank or Standard Chartered, for that matter, i.e. someone in 80, 100 countries because, actually, the regulatory environment will never do that. So therefore, there's a limited number of banks sharing that wallet, and therefore, in a way, there's better pricing power than there was 5 or 6 years ago. And so I can't comment on how any one specifically has done other than ourselves. But this is a very deliberate push that we've made. And we've also -- we've made it both in Global Banking and Markets and in Commercial Banking, and we've also got much closer collaboration now running between Global Banking and Markets and Commercial Banking, really from kind of 2011 onwards, than we had before. So the Commercial Banking piece gets access to, frankly, a more sophisticated product suite, and the more sophisticated product suite gets access to a client base that historically was probably doing its business with our competition. So it's a combination of collaboration, deliberate positioning and then, I think, quite significant advantages. And again, if you look at the -- from the advantage point, if you look at the trade finance, trade finance is in dollars. There is now no interbank lending market. So unless you've got a dollar deposit base -- or put it differently, if you've got a dollar deposit base, you have a huge competitive advantage in pricing in trade finance because you have to go and borrow the dollars from someone else. You're probably now doing it on a repo basis because there really isn't a clean interbank lending market anymore because, post LTRO, no bank's got any unencumbered assets. And if you look at the way Cyprus went down, if you lend to a bank, you're -- as another bank, you're absolutely at the end of the creditor waterfall. So our deposit base, $1.3 trillion of deposits, same thing applies for StanChart, same thing applies for Citibank, gives us a really big pricing advantage in trade finance.

Iain James MacKay

CCAR, Ronit, really nothing new coming out of this for us. And we've now known for over a year that we were going to be one of the CCAR banks. We will, like the other major U.S. banks, be required to submit our fiscal plans on the 6th of January next year. This is the first time that we will be submitting under the CCAR, which as I'm sure you're aware, is a fairly intensive analysis and stress testing of the capital management and capital planning processes. In the U.S., we prepare that at the Hana, so that's the U.S. consolidated entities level. And then within that, the HBOS, which is our U.S. bank, is subject to specific stress testing with the OCC. But look, we've got strong capital resources at a U.S. consolidated and at a U.S. bank level. And we're sort of working through the final phases of implementation. As you've probably noticed, there's -- as the other large U.S. banks have implemented, they usually received some fairly active feedback from the Fed on how they might improve their process. And we continue to be engaged very actively with the Fed as we work through to implementation to ensure that we do absolutely the best we can in meeting those requirements.

Ronit Ghose - Citigroup Inc, Research Division

Can I just have a very quick follow-on? Stuart, you said that October for FX was similar run rate for the first half. Can I be cheeky and ask if that's true for global markets overall?

Stuart Thomson Gulliver

I think, if you took the 9 months, first 9 months, divide it by 9, October is about there.

Operator

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

Alastair Ryan - BofA Merrill Lynch, Research Division

I'm just trying to do the "volume times margin" thing and then supplementary on the share buybacks. The commentary on margin is suitably HSBC, in a way. It's sort of gone down, but there are some things better and some things worse. It feels like you've got Balance Sheet Management in a very conservative place at present, so there shouldn't be a lot further downside for the revenues there. Is that an assumption? And second, if your outlook is more positive, as you highlighted, is it reasonable to assume then that translates into more than marginal volume growth, which is the commentary for the third quarter? So just trying to work through the general direction of those, I know there's a lot of moving parts. And then on the buyback, would we have expected you to comment on that in this statement if there hadn't been any change? I suppose that's just a semantics point but clearly feeding back to the capital discussion, which is something that everyone finds very hard to calibrate. I mean, not -- clearly not your fault, but regulators have done this to us all.

Stuart Thomson Gulliver

Yes, on Balance Sheet Management, this year will be $2.75 billion to $3 billion. Next year, it'll be $2.5 billion to $3 billion. You're right, rates are at incredibly low levels, curves are steeper than they were. So BSM at one point, remember, we thought might be $2 billion, $2.5 billion. It's better than that because there have been some steepness in the curves. And also, we've sold some positions and realized some gains because, actually, with rates at 3 50 year lows, we think they're likely to go up. And that means at the short end at some point in time, maybe a couple of years out, but fairly obviously so. And I'll let Iain comment on the rest.

Iain James MacKay

If look at it from a margin perspective, Alastair, I'd -- why make it simple for all you guys, but we are large and complex. We've got a bit of moving parts going on from a net interest margin perspective. Overall, sort of 9 months versus 9 months at a group level, excluding the impact of the disposition of the cards business in North America, because that clearly had a very marked impact year-over-year because it was a high-NIM business, we're down about 9 basis points overall year-over-year for the group. If you track back the last 2 or 3 quarters, we're sort of steady, stable as she goes, slight improvements at the same level of analysis from a net interest margin perspective. Now when you look at what's driving that, we've got a little bit of margin improvement coming through the U.K. businesses. We're pretty much steady as she goes within Hong Kong. And certainly, also as we -- and as Stuart commented earlier, we saw some deterioration coming out of the second half really at -- well, in the second quarter out of our net interest margin. There's evidence to suggest, although it's probably pretty early, that we're seeing net interest margin stabilize within the Asian markets. North America, pretty steady, but it's been clearly impacted by the disposition of the cards business. Middle East, very steady as she goes. We probably lost about 8 to 9 basis points across the year within the Middle East, and that's largely reflected with what you see going on in the Egyptian business. And then in Latin America, we've actually been very steady to slight improvement from a NIM perspective, but it's very slight, it's about 5 basis points. So overall, I would describe net interest margin coming into the -- coming through the third quarter as being fairly steady.

Alastair Ryan - BofA Merrill Lynch, Research Division

And just on whether the outlook...

Stuart Thomson Gulliver

On buyback, yes, I don't think we would have commented. I mean, what we basically set at the May Investor Day is that we'll put through the AGM next year a resolution to be able to sterilize the scrip dividend, and nothing changed in that regard. So in May next year, we'll put a resolution through the AGM, and hopefully, the shareholders will approve it. Thereafter, we'll then need to decide on the circumstances that exist at that point in terms of where the PRA and other regulatory regimes require our capital to be, combined with whatever the macroeconomic situation is at the time, combined with specific approval that we would need from the PRA before doing anything such as actually sterilizing the scrip. So I don't think, even if there hadn't been consultancy papers per -- set out and the RBS comments they made in their results, we wouldn't really have been commenting on the sterilization of the scrip. It's a kind of process that we'll put in place. The comment about when we activate it will depend on circumstances in the future. What is quite clear, though, is that our ability to maintain a progressive dividend is proven by the fact that, in this quarter, we had $2.6 billion of retained earnings after paying a dividend, which together with some foreign exchange translations, enabled us to improve the CET 1 CRD IV from 10.1% to 10.6%.

Operator

Our next question today comes from Rohith Chandra-Rajan from Barclays.

Rohith Chandra-Rajan - Barclays Capital, Research Division

I've got a couple, actually, one on constant coming back to sort of capital and dividends as well. Just in terms of the quarter-on-quarter cost progression, once you take out the sort of the one-offs in terms of restructuring and also the conduct-related issues in the U.K., it looks like underlying cost growth is something like 4% quarter-on-quarter. GBM looks very well controlled with a pretty stable 51% cost-income ratio, so inflation seems to be the in non-GBM type businesses. I was just wondering if you could sort of quantify the compliance spend in the quarter and how we think about that going forward. And then also, within the private bank, the cost of the regulatory investigations, are they meaningful? Are they one-off in the quarter? So really, just how to think about the cost progression from here.

Iain James MacKay

Well, let me take the last statement on Private Bank. This relates to the U.S. Department of Justice and the Swiss government debate over tax transparency for U.S. persons having their accounts in Switzerland. You have seen that agreements were reached between the Swiss and U.S. governments in exchange for information. You'll have seen a few other settlements by Swiss banks in the mix there. And we're part of that, we're part of that investigative process. And really, just based on those intergovernmental agreements and some of the other settlements, we've made a provision for where we think we might come out on that, but it's very early days in terms of how that proceeds. But I think we've taken a fairly prudent position on that one. When you talk more widely on the costs, we don't specifically go through what the incremental compliance cost is quarter-over-quarter. But clearly, what we have done over the course of the last 2.5, 3 years is invest significantly in both the -- in the process, the technology and the number of people and the expertise that we've got within that compliance base. So the cost overall has certainly stepped up somewhere between $400 million to $500 million on an annual run rate basis with respect to incremental compliance investment capability, and that is a step up in the cost base of the firm. Now some of that, we have clearly funded through the sustainable saves that we are realizing within the organization. But I mean, that gives you a general guidance as to what we see going on within the compliance step-up. Now within that mix, we've obviously got the Monitor that joined us at the end of July. We're going to have him with us for the next 4 to 5 years, certainly through until the end of December 2017. And there is -- he's get about 200 staff on-board now, we expect, and probably to about a total of about 220. And that's going to, again, incur a fairly substantial operating cost for us over the next 5 years that clearly falls within that compliance bucket. But I think this particular quarter and year-over-year, the main features within the cost base is the elimination of the fines and penalties that we accrued last year in the U.S., and basically halving the cost of U.K. redress notwithstanding the fact that U.K. redress is a little bit higher than the third quarter than it was in the previous quarters this year.

Rohith Chandra-Rajan - Barclays Capital, Research Division

And then just coming back on the capital scrip dividend question. I guess Alastair asked about the buyback. Just in terms of when you sort of putting the capital generation together with the regulatory uncertainty, just how you're thinking about the dividend payout going into year-end relative to the 40% to 60% range that you targeted and sort of previous indications that the payout might be stepping-up.

Iain James MacKay

I mean, we -- I'll use one word, which really bores you and irritates you, which is called "progressively." But I mean we -- what we see is strong profit generation coming out of the day-to-day operations of the group. We've paid 3 interim dividends of $0.10 a piece this year, which is up on $0.09 a piece each of last year. We'll reflect on the overall profitability for the year, and the capital position of the year, when we get to the time to discuss with the board the fourth interim dividend. But the view certainly is that we've -- we're demonstrating all the necessary capability to continue to progress our dividend through the fourth interim of this year and into next year.

Operator

Our next question today comes from Tom Rayner from Exane BNP Paribas.

Thomas Rayner - Exane BNP Paribas, Research Division

Can I have 3 questions, please? Just on the trade margins, Stuart, you mentioned that sort of trend on a year ago. Could you just tell us what it's been in the last couple of quarters? Trying to get a feel for whether you've seen stabilization yet, I know that you might not see margins going up, but I mean, have they even stabilized? That's my first question. Second, just looking at the U.S. runoff P&L, the revenue in the third quarter seems to be quite high relative to previous quarters, particularly when you adjust for the sort of non-qualifying hedges. I was wondering, what's going on in the revenue there? And just a final one, I've seen the text in your release on sort of CRD IV talking about you might not need as much mitigation on the material financial holdings, but also some concern over the sort of RTS on own funds. I was wondering if you could update us on what those 2 issues mean for the ratio going forward.

Stuart Thomson Gulliver

So I'll do the trade, and then I'll pass the other 2 to Iain, wisely. Actually, the trade margins haven't deteriorated. So if I look at sort of -- I mean, there's a lot -- actually, there's a very, very modest further deterioration, if you look over the third quarter versus the second, but I'm talking about maybe 4 basis points, whereas if you look 12 months on 12 months, it's about 30. So the further small deterioration -- so what you could probably say is the rate of decline in the margin has slowed. But I don't think that we could honestly say it's bottomed out, and we certainly couldn't say it's going back up.

Iain James MacKay

So Tom, I think, on U.S. revenues, what you're probably seeing is that, in previous quarters, we'd incurred not-insignificant losses in the disposition of the non-real estate and defaulted loans within the U.S. runoff portfolio. And in the third quarter, that was a fairly clean business. Although we had certainly dispositions of defaulted loans, we'd basically done it at book value so that we come out of those fairly clean and, at the same time, releasing fairly significant amounts of capital and RWA from the disposition of those. So as opposed to necessarily getting a ramp-up in revenues, it was more a factor of not having negative items in this period versus the preceding quarters. And that's on the revenue line. And then when you reflect just overall on the performance of that runoff portfolio, Loan impairment charges coming down significantly, and continued work by Irene and Pat Burke and the team on the cost base just continuing to progressively move that business back to more of a breakeven proposition for us, which clearly then helps the rest of the U.S. business performance shine through a little bit more.

Thomas Rayner - Exane BNP Paribas, Research Division

And might, just looking at it -- sorry, what I was going to say is, if Q3 is pretty reflective -- it looks like maybe better than breakeven. I mean, it's $100 million of profit in the quarter, and it sounds as if there's not too many distortions to that number.

Iain James MacKay

I would say it's a -- I mean, literally, when you look at disposals that we did of defaulted mortgage paper in the quarter, they literally came out pretty much in the wash against book value. We've got a program that the team is working on for really the first, second quarter of next year, which is again fairly substantial dispositions of defaulted paper. And the pricing on that, at the moment, looks fairly attractive. The big question, again really in this book, Tom, comes back to loan impairment charges. So provided the employment position in the U.S. holds up and continues to improve marginally, I think that's going to then be reflected on housing values in the U.S. Taking those 2 factors together, it's going to help our loan impairment charge performance. But the trends that we see in terms of impaired loans, new delinquencies, underlying property values, it all tends to be progressively positive. So to see breakeven coming through this book is not beyond one's imagination, to be perfectly honest. And that would be, clearly, enormously encouraging for the team that's been working pretty hard at this for about 5 or 6 years now, okay? On the capital own funds implementing -- call it Regulatory Technical Standards coming out of the EBA, there's just 1 or 2 of them which are worded in a way, and the PRA is pretty tuned into this, that in actual fact, if strictly applied as they seem to be drafted, would suggest a look-through to, if you like, cross-holdings in financial institutions, which could have a fairly penal effect on deductions to capital. Now it's really uncertainty around certain aspects of interpretation, or more so application, of those standards as they continue to be consulted upon and then reviewed by the various national regulatory authorities and get finalized. So really, all we can say is we just don't know how it's going to turn out at this point.

Thomas Rayner - Exane BNP Paribas, Research Division

I mean, any sense of materiality if it turned out worse case?

Iain James MacKay

We -- it's just -- well, it could be really quite material. But I think, again, the proposed standard is written in such a way that it's sort of beggars belief that, that's actually how the EBA would intend...

Stuart Thomson Gulliver

It would also be fair to say that if it was interpreted in the most conservative way, the impact across all of the European banks would be colossal. This is not an HSBC-specific issue. So what Iain is not saying is it's material to us and no one else. It's one of those, if you interpret it that way, then the European banking system needs to raise trillions of capital. So what we expect, and this indeed is what the PRA expect, is that literal interpretation will not turn out to be the way that particular rule is meant to be interpreted.

Operator

Our next question today comes from Ian Gordon from Investec.

Ian Gordon - Investec Securities (UK), Research Division

Can I just have 2 quick follow-ups, please? Firstly, on costs. I know you've probably done it to death, but just in terms of the comment in the ninth bullet on Page 3, could you give me a bit of color on the higher investment expenditure in Q3? And then within your comments on litigation, you referenced some reserving in relation to Private Banking. But unless I misheard, you're not referencing any reserving for any other litigation issues. And then a quick second question. On revenues, obviously, I'm encouraged by the improved balance sheet footings. Just on net interest margin, you've given us lots of color, but could you possibly give me just the unadjusted Q3 NIM number, please?

Iain James MacKay

The unadjusted Q3 NIM number, yes, the...

Ian Gordon - Investec Securities (UK), Research Division

Yes, at a group level.

Iain James MacKay

It's 2 22. Yes, in terms of the investment numbers, Ian, again, across growth, across compliance, across simplification of the business, quarter-on-quarter, there's a fairly consistent step-up across each of those 3 categories, which runs the better part of a couple hundred million dollars. And it varies quarter-to-quarter in terms of which specific areas are focused on, and tends to be driven by the stage of implementation of various projects within the firm. But what we saw in the third quarter is not necessarily significantly ahead of what we've seen fairly consistently over the last few quarters in terms of rhythm around investment, okay? Sorry, what -- you had another question, Ian. What was that?

Ian Gordon - Investec Securities (UK), Research Division

Just in terms of any reserving for litigation. You mentioned...

Stuart Thomson Gulliver

Yes, whether there's any litigation other than the private bank, no there isn't.

Iain James MacKay

Yes. The other thing, that obviously the news broke during the quarter, was the decision in the U.S. around the Jaffe case, which is an 11-year-old securities, SEC securities, case that was actually started against Household before we acquired it. The decision, there was a partial decision against us in that. We know that, that decision's been made. We are now in a position to go ahead and appeal that decision. We would have been prevented from doing so up to the point of a decision. That's now been handed down, so we'll go ahead and appeal this case. Counsel believe that we've got a very strong argument both in terms of technical merits from a procedural standpoint, as well as the actual factual merits of the case. So although we've got a small provision against this case, we do not intend to strengthen that provision simply because of the strength of the case we've got. So it'll appeal, and as to when this case will ultimately be resolved, knowing the U.S. court system, your guess is probably as good as mine.

Stuart Thomson Gulliver

But it's basically all of this process is set out in Note 24 to the Interim. And if you wondered, nothing's really changed. We set out what would happen in the event that the judgment that has been passed would be passed, so we just move to the next stage of it.

Iain James MacKay

If you want a detailed update, it's in the HBIO 10-Q for this quarter where we've just updated around some of the facts of the legal decision.

Operator

Our next question today comes from Alistair Scarff from Merrill Lynch.

Alistair Scarff - BofA Merrill Lynch, Research Division

Just a quick one in terms of your capital, again. It's mainly dealing with the FX movements that we've seen in recent times. Part of the capital increase, as you attributed, was to FX movements. Under what scenario are you looking at there? As -- if we were to see a further strengthening of the dollar, for example, would that improvement that you're seeing in the capital position begin to unwind? How do we -- how should we be thinking of FX within the context of your capital?

Iain James MacKay

As you will probably have observed, if you track back over the quarters, Alistair, we've had foreign exchange impact coming through our capital ratios. It obviously impacts both the equity, because we've got a net investment in subsidiaries around the world denominated in foreign currencies, as we have risk-weighted assets denominated in foreign currencies around the world. We saw, we've seen, generally speaking, deteriorating impact from foreign exchange over the course of recent quarters. We'll have reasonably pleasant surprise to see some strengthening from foreign exchange in the current quarter, mostly against sterling and the euro. Obviously, other main capital exposures that we've got are either U.S. dollar or U.S.-pegged currencies. So the view of the euro and sterling against the U.S. dollar goes, than so, generally speaking, will our experience of volatility within our capital ratios coming from foreign exchange. But you will have seen this coming through every quarter to a greater or lesser extent.

Alistair Scarff - BofA Merrill Lynch, Research Division

So we have observed that. But from a -- if we were just to play this out further, I'm just trying to get some sense of how the bank is positioning it. Is there any sense, in your mind at least, of how the bank will try and ameliorate any issue in terms of, say, a dollar strengthening of significant magnitude or, conversely, sterling increase in magnitude? Any thought on that?

Iain James MacKay

So generally speaking -- more than generally speaking, as a rule, we normally do not hedge our net investment in foreign currencies in our subsidiaries. We tend to protect ourself from the foreign currency fluctuations by trying to match the balance sheet, and currency and maturity within those balance sheets, on an asset-and-liability basis. But clearly, the net investment in that subsidiary represents a foreign currency exposure to us. And that's just a foreign currency, if you like, volatility that we handle quarter-to-quarter.

Operator

Our next mission today comes from John-Paul Crutchley from UBS.

John-Paul Crutchley - UBS Investment Bank, Research Division

Mostly have been today. Just 2 quick ones, if I can. Firstly, Stuart, I'm just wondering if you can just mention the Rates business in the -- in GBM, which contrary to the experience of most of your peers, appear to have had a very good quarter. I'm just wondering if that was just a bounce back from weak earlier in the year, or if there's anything we should be aware of behind that. And secondly, I just wonder if you could just say a few words on the Private Banking business, where clearly there's been distortions through, a, litigation charges which were asked [ph], and indeed, it looks like a bit of business repositioning, too. Just to help us understand what's going on in that business.

Stuart Thomson Gulliver

Sure. There are 3 things going on through the private bank. Number one, there's a repositioning of the business, which has some impact on AUMs and revenues. Secondly, we wrote off the goodwill of the Monaco business at the point that we were reviewing whether to keep it or not. We subsequently decided to keep it, but we didn't write it back up. And the third thing is the legal provision that Iain talked about in respect of litigation that we face in respect of U.S. citizens with accounts in Switzerland. So there are 3 things running through it, 2 of which, if you like, are -- one-offs is the wrong way to describe them, but are exceptional items: the litigation provision and the treatment of goodwill. The repositioning of the business is clearly a go-forward impact. But they, the 3 of them together, explain basically the material changes year-on-year, of which the provision and the goodwill are by far and away the biggest impacts, actually, not the revenue change. And then the Rates business, I mean, basically, the significant sort of improvement in the Rates business, if you look at it year-on-year, it is still down actually versus last year. It's actually about USD 400 million down versus last year because, yes, last year had the enormous impact of the LTRO, which caused all credit spreads to tighten up, which of course didn't come through in 2013. But quarter-on-quarter, you're right, it hasn't fallen as much as other people's have, and that reflects, I think, really 2 things. One, that we have a substantial, you might -- high-yield emerging market business, which, okay, there was some volatility in places like India and in Asia Pacific, but nevertheless, the DCM pipeline remained quite solid. Secondly, we've built up really quite a substantial European Rates business, both in terms of sovereign and supranationals, where again the volumes remained really reasonably constant. So if you look at kind of primary market league tables, you'll see that, actually, we've taken quite significant year-on-year gains in market share. So -- and then the thing that really is absent, which explains probably why other people had a worse time, is we don't have a big U.S. Treasury platform. So we don't have U.S. Treasury, U.S. munis, et cetera. So the impact on -- are we tapering QE? What's that do to the U.S. Treasury market? We kind of get second order by U.S. dollar-denominated emerging market risk and euro govi curves and the gilt curve not directly through the U.S. Treasury piece. So there's an absence of negatives, as well as the presence of positives.

Operator

Our next question comes from Michael Trippitt from Numis Securities Ltd.

Michael Trippitt - Numis Securities Ltd., Research Division

Two questions. One actually just follows on from what you said, Stuart. Just looking across the APR and Hong Kong numbers, it kind of feels like you've -- any concerns over EM worries in the third quarter, prospects of tapering, et cetera, you seem to have sort of shrugged them off quite well. I just wondered, is there anything in the country detail, particularly of APR, that you would highlight or that we would see in full year numbers when they come through?

Stuart Thomson Gulliver

I mean, if you look across Asia Pacific, the 2 countries that have got, if you like, the weakest macro, are India and Indonesia. So undoubtedly our Indian numbers will be down year-on-year, but actually, we don't, at this moment in time, have concerns about potential idiosyncratic, large loan impairment charges. Our Indian book was positioned quite conservatively a couple or 3 years ago, so we're not concerned that we have some exposure to the weaker Indian credits. And in Indonesia, again, the same would be true, that we're not particularly exposed to the sort of weaker ones. And so therefore, to be honest, I don't think there is. Those are the 2 that I would pick out, most of all. I mean, if you look across India...

Iain James MacKay

Down slightly.

Stuart Thomson Gulliver

We're down slightly.

Iain James MacKay

Indonesia, we're flat.

Stuart Thomson Gulliver

Indonesia, we're kind of flat.

Iain James MacKay

Australia is actually quite a good deal stronger.

Stuart Thomson Gulliver

Australia is up. So to be honest -- not hugely. I fact, if you -- if I just run through a list of countries that are up '12 versus '13: Hong Kong is up, U.K. is up, Australia is up, mainland China is up, Singapore is up, France is up. Saudi Arabia is, U.A.E. is, U.S.A. is and Argentina is. So it's not across-the-board down at all. And then the ones that are down are India and Indonesia and Malaysia and Taiwan, Vietnam, but -- Turkey, Egypt, Canada, Brazil, Mexico. So it's quite broadly dispersed. So there isn't, if you like, within Asia Pacific, a particular thing that worries us, and of course the macroeconomics in these countries are quite different than '97, '98.

Michael Trippitt - Numis Securities Ltd., Research Division

Okay, great. Just a very quick follow-up on -- encouraged by your comments on the sort of acceleration or potential acceleration on the CML book. Is that, I mean, is -- presumably, that's just overall a house price improvement that's driving that?

Stuart Thomson Gulliver

Yes, it is. I mean, basically, the improvement in house prices and then essentially liquidity coming back onto the investor side. Compared to this time last year, the book's $10 billion lower. And therefore, the book is $34 billion. It was $44 billion this time a year ago. We think that there's more that we can get out into next year. I think that probably by 2016 or thereabouts, the book will probably reach an equilibrium level, unless there's a sharp deterioration in the property market. And that equilibrium level will probably be a book that's got a very high running yield that is current. And then we'll need to make a decision about whether we actually run it for yield or we sell that off as well. So yes, it's all about 2 things, really: there are investors looking to buy these assets; and these assets are starting to move up. So people are wanting to jump on the bandwagon. And the point for us is, does this release risk-weighted assets at a loss which is greater in terms of capital creation than the loss itself? Because these are 300%, 400% risk weighted. So it's a very simple piece of math for us. So you've got this kind of -- and most of the people buying these are not banks, so if we can release capital and generate more capital than we're writing down by taking a loss versus where we've got it marked, we'll do it. And actually, what we've found is that most of these that we've managed to get rid of are really close to our marks, so there have been no incremental losses. Which explains why, when we were answering a question earlier about the profitability of the U.S., it's actually sort of starting to get to a point where the U.S. is running at a breakeven or slightly positive level as we accelerate the book down.

Operator

We will take our last question today from Christopher Wheeler from Mediobanca.

Christopher Wheeler - Mediobanca Securities, Research Division

Two quick questions. The first one, really, I asked you, I think, Stuart, in the summer whether you were sort of 85% or 90% through the disposal process. I wonder if you'll just sort of confirm that still, because I think what I'm hearing is you may be revisiting certain businesses and just reviewing their place in the group. Asset Management perhaps being one example where you may be looking to, whether you want to be involved in that on a day-to-day basis. And the second question, which I've asked most management of investment banks in the last 3 weeks, has been on the longer-term outlook and your view on tapering. The U.S. banks sort of rather said it was manageable. And the Europeans have said, "We're going to have to look at it closely." And then finally, Antony Jenkins said fixed income revenues are going down, when he spoke on Thursday, and that's as a whole. How are you thinking about that, particularly given that you have such a different footprint, as you've shown in these results? Are you concerned about the outlook for the liquidity that's being sucked out of the market when tapering starts? Or again, do you think that you can comfortably manage it?

Stuart Thomson Gulliver

Okay, so on disposals, we're still about 80% to 90% done, and we're not selling Asset Management. So there is -- Asset Management, it's not going to be sold. It's not for sale. It's a key part of the Wealth Management proposition of the group, both for Retail Banking and also for private banking. On tapering, the impact for us on tapering is much more what it does to, if you like, hot money flows that have gone into Asia Pacific and into Latin America and into the Middle East and Near East. And I think they've all come out. So I actually think what's that, basically behind rather a rough reception to our half year results, reflects the market reacting to the removal of, if you like, hot money or whatever cliché you want to use to describe it, or money that's gone into equity markets and bond markets rather than into FDI, coming out of various emerging markets. Beyond that, the impact on us is actually on deposit rates, which is incredibly positive because as rates go back up, clearly, we'll start to earn much more on the $1.3 trillion of deposits which will come through in CMB in Commercial Banking and Retail Banking and Wealth Management. And actually, if we get a steeper curve with that, which I think we will, so as the short end goes up, I think the long end goes up by more, that will create curvature which will also drive Balance Sheet Management. So I actually think the removal of QE actually helps a bank that's actually deposit funded. Or put it another way around, the reason why interest rates went so low was to help banks that were inter-bank or wholesale funded, because they generally were the ones that were incredibly weak and most threatened by the credit crisis. So rates were taken to 0 to help them borrow cheaply, to keep them solvent. Those banks that have substantial deposit bases, like ourselves, lost $3 billion to $4 billion of net interest margin, actually, as deposit rates went to 0. So actually, the end of QE and tapering, I think, is mutual for Global Banking and Markets because any impact on the fixed income market, I think the EM piece has gone through, but will be offset by probably positive BSM. For the group overall, it's positive because of what we can drive off deposit rates.

Okay, thanks very much, everyone who's joined the call, very much appreciate your support for HSBC and your interest in us. Thank you.

Operator

Thank you, ladies and gentlemen. That concludes the call for the HSBC Holdings plc Interim Management Statement for Third Quarter 2013. You may now disconnect.

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