HSBC Holdings plc - Shareholder/Analyst Call

 |  About: HSBC Holdings PLC (HSBC)
by: SA Transcripts


Good morning, ladies and gentlemen, and welcome to the HSBC Asia Investor Conference Call. For you information, this conference is being recorded. At this time, I will hand the call over to your host, Peter Wong, Chief Executive, Asia-Pacific.

Peter Wong

Good morning, afternoon or evening, wherever you are in the world. My name is Peter Wong. I'm HSBC Chief Executive for Asia-Pacific, and I'd like to welcome you to this analyst and investor webcast on our strategy in the Asia-Pacific region. We're going to split this webcast into 2 sections. We'll start with a presentation from me, based on slides which we will be able to see on your screens, and then we'll break for questions and answers.

Before we begin, please note this cautionary information about forward-looking statements. My plan for today's presentation is to explore 4 main topics. First, I'll cover a subject dominating the headlines, the macroeconomic outlook, and explain how that's shaping the management team's thinking. Second, I'll update you on our progress so far this year. Third, I'll talk about our strategy and how we aim to meet the goals we set out in May. And fourth, I'll highlight the key markets in Asia that will drive our growth over the next 4 to 5 years. Once we've been through all that, I'll be joined by some Asia-Pacific colleagues for the Q&A session.

So starting with the economic backdrop. It is clear that these are challenging times in the developed world. We believe weaker Western demand will diminish trade and will probably lead to a global slowdown next year. There's still a lot of anxiety about the strength and unity of the Eurozone, and recent U.S. data indicate the government will have to work hard to prevent unemployment from rising.

Political and economic uncertainty is deepening a sense of social dissatisfaction and powerlessness, a feeling that's triggered unrest ranging from the Occupy movement to full-scale rioting. Unsurprisingly, the uncertainty is having a direct impact on financial markets, making it harder to increase revenue and making regulators extremely cautious about capital and liquidity.

Fortunately, Asia is providing some relief with respectable levels of GDP growth. Though these numbers could drop quickly if conditions in the U.S. and Europe worsen, the current outlook gives us confidence that intra-regional trade will provide a buffer against the global slowdown.

In contrast to the West, most Asian countries have the fiscal strength to implement stimulus policies if the slowdown does turn out to be sharper than we expect. We forecast China will achieve a soft landing as inflationary pressures ease and as domestic demand supports economic activity. Nevertheless, high inflation rates do mean we must be vigilant on cost. Staying alert to the risk of sudden deterioration in our Asian markets, we must manage our business with caution.

Looking just at the Asia-Pacific region, our profits for the first 9 months of the year rose 17% to USD $10.1 billion. We achieved a healthy loan growth during the first half and began managing down the pace of growth in the second half in response to global market volatility. Strong sales of Wealth Management products in Hong Kong boosted fee income, as did higher trade volumes. Our associates continue to play a very positive role, and our interest income benefited from balance sheet growth in both loans and deposits. I'll highlight China and Singapore as significant contributors in this area.

Taking the third quarter in isolation, though, we did start to feel some effects of the global slowdown. Loan demand decelerated in several of our markets. The loan impairment charges crept up from the very low space [ph] in Hong Kong. These charges, combined with high costs attributable to wage inflation and investment in the front-line staff, pushed Hong Kong pretax profit lower than in the third quarter of 2010.

Overall, I believe our regional results show we are on the right track to achieve the goals we set out at our Strategy Day in May. We said then that we'd defend our leadership position in Hong Kong while building scale in the key markets of China, India, Singapore, Indonesia, Malaysia and Australia. We're doing exactly that and we're investing in Taiwan and Vietnam to benefit from their growth and their synergies with mainland China.

In the next slide, I'll show you how we are progressing in our strategic objectives to build quality assets in our key markets and how to grow non-interest income with cross sales initiatives. We'll look at how we are attracting liabilities, especially in Hong Kong, to fund loan growth to cross-sell within Wealth Management and to capture interest rate rises. We'll explore the direction we are taking to cement our role as the leading international bank for cross-border connectivity and for expertise in the RMB. Then I'll highlight our efforts to increase efficiencies within our far-flung organization so that we meet our target of a 3.4% to 4.2% return on risk-weighted assets.

This slide shows how HSBC is working to increase customer loans and funding across the world, and you can see that Asia has set the pace for growth in loans and advances during the first half of 2011. In case you're wondering why I'm using first half numbers, it's because I can only give you third quarter or 9 months data where they have been disclosed to our recent result announcement.

As I mentioned earlier, while we did see a slowing of loan growth in the third quarter, we continue to seek opportunity to expand our balance sheet. To illustrate how we are taking a cautious approach to loan growth, I'd like you to look at the middle left-hand side of the slide. Here, we can see that gross customer loans grow by 12.4% on a reported basis in the first half.

Just above that, you can see the risk-weighted assets increased at a lesser rate of 8.5%. The contrast even more visible in the Hong Kong figures, while lending climbed 13.2% and risk-weighted asset rose by 3.6%. What this shows is that we are keeping a very close eye on the credit quality and that we are being rigorous in our approvals processes. Commercial lending rose 18.3% or 3x the increase in loans to the property sector, and much of this additional commercial lending was in the form of short-term self-liquidating trade finance.

On the right-hand side of the slide, you can see that our loan impairment charges and impaired loans remained low in absolute terms during the first half. Looking at the third quarter, loan impairment charges in a little bit more detail. You can see they fell year-on-year in the rest of Asia-Pacific.

In Hong Kong, there was an increase compared with the third quarter of 2010. This does not indicate any systemic issues though, as it was due to provisions we took for an individual credit in the commercial bank, lower recoveries than in the previous period and higher collective provisions due to increased loan balances.

While we continue to work to keep impaired loans at low levels, I think it's important to take Hong Kong numbers in context. Even with that rise, Hong Kong LIC were 0.28% of average customer loans on an annualized basis. The total for Asia-Pacific was less than 1/3 of a percent and declined versus the third quarter of 2010 as we managed down our unsecured loan book in India and reduce risk in our global banking and markets businesses.

While we had a good first half in terms of net interest income, driven by 2010 loan growth and interest rate hikes in some territories, we remain focused on fee income and other sources of non-interest revenue. A concerted effort to cross-sell across businesses and across borders helped us boost net fee income by 17.2% in the first 6 months.

We're particularly successful in cross-sales within our corporate relationships, notably in trade, ForEx, payment and insurance. The right-hand side of the slide lists the major products and services from which we derived higher fee income and which we'll continue to promote as we enter what will probably be a period of slowing loan demand. Loans and fee income contributed to a 10% increase in total Asia income for the third quarter, which translates into a 13% rise for the 9-month period.

Before we move on to look at some of the priority [ph] markets, I'd like to summarize the 3 building blocks of our growth strategy over the coming years. First, we're going to expand our balance sheet with liability across sales in Deposits in Wealth Management, and with asset growth of higher-quality borrowers. A tighter credit environment and rising interest rates designed to combat inflation are already enabling us to reprice some assets to improve margins. Second, we believe any slowdown in intercontinental trade-related fee earnings will be offset by our efforts to develop other sources of noninterest income, such as growing intra-Asian trade. For this reason, we can sustain the momentum built up this year into 2012. Third, we'll focus on increasing revenue from private Asian markets that are either sustained the through downturns by domestic consumption, as in the case of China and India, or by their positions as regional hubs, as in the case of Hong Kong and Singapore.

Many of you have heard our group CEO Stuart Gulliver speaking at our Strategy Day in May. He said then that Hong Kong is absolutely core to our business and is a market in which we'll defend our leadership status with energy. For this reason, it's encouraging to see in the 9-months results that higher cost due to wage inflation and increased headcount were more than offset by income generated from loan growth, Wealth Management sales and trade-related fees.

While we think trade will dip, we anticipate that consumer spending will help sustain growth in Hong Kong's economy. This will be domestic spending supported by higher wages and inflation, and imported spending by tourists from mainland China.

That said, wage inflation and investment to support higher business volumes did have a detrimental impact on our cost efficiency ratio. I'll come back to our global program to improve cost efficiency in a minute.

In the rest of Asia-Pacific, we had a good 9 months, with profit rising by 31% on growth in all our major markets. In particular, I draw your attention to the bar chart showing 171% increase in organic profit before tax from mainland China during the first half.

Going forward, we'll continue to leverage our global network to attract Commercial Banking business, and we'll seek to expand in Wealth Management, a business that showed good growth potential in the 9-month results. Success in these areas will yield greater benefits widening interest spreads and faster loan growth.

As in Hong Kong, we have to deal with inflationary pressures. Even so, I'm delighted to say that we managed to lower our cost efficiency ratio despite the challenging environment in many Asia-Pacific countries.

Though we are performing particularly well in China, as you saw in the last slide, we cannot be complacent in a market that's becoming increasingly competitive. To capture the opportunities that China offers, we're investing heavily to sustain our position as a leading foreign bank. We now have 126 outlets in 29 cities and we are cooperating closely with our local strategic partners by using our network to help Chinese companies reach out to the world and to help foreign companies reach into China.

Our strength in Hong Kong is proving invaluable as we build a proposition based on connectivity, because it is clear the economies of Hong Kong and mainland China are becoming increasingly intertwined. We see, for example, that most IPOs in Hong Kong are by Chinese companies. Many of our customers in Hong Kong are from the mainland and vice versa. Put together, our footprint on the mainland and our capacity to deliver products and services across a global network is a strong platform for growth.

Corporate connectivity is similarly at the heart of our proposition for India, where we've set ourselves the goal of building a USD $1 billion business within 4 years. We'll diversify from our strong franchises in Global Banking and Markets and Commercial Banking by spending our retail network and Wealth Management distribution capabilities. Our network of 152 offices in 60 cities gives us the capacity to reach customers inside India, and we'll be increasing our efforts to connect the Indian diaspora to opportunities in their homeland.

Here, you'll see I have put together the strategies for our other target markets. In Singapore, we are working to build a $1 billion business within 5 years. Of Asia's 3 major financial centers, Hong Kong, Shanghai and Singapore, we see Singapore as the hub for Private Banking and Wealth Management. It's also a leading center for foreign exchange and trade, so we are enlarging our dealing capacity on the ground.

We're the largest foreign bank in Malaysia and Indonesia, where, if you factor in bank economy, we have 185 outlets across the country. Both our major markets for our Amanah Islamic Finance business, and we are aiming for a USD $1 billion business in the 2 countries combined within 4 years.

Taiwan and Vietnam have different economic profiles, but in both of these countries, we see scope to win business from affluent, internationally-minded individuals and the top tier of commercial enterprises. We're aiming for significant profit growth from Taiwan and Vietnam combined over the medium term.

In Vietnam, our Global Banking and Markets business will be at the forefront of our efforts, while Taiwan is a key part of our Greater China strategy. Taiwan's economic cooperation framework agreement with China is a positive development for cross-border trade, and we expect capital flows will increase as policies governing the RMB are relaxed.

This is a sample of our Asian bond league table rankings to give you a sense of our Global Banking and Markets leadership, and our ability to conduct global customers with Asian investors. Clearly, this is a business of vital importance to our non-interest income and we'll continue to ensure that our Commercial Banking and Global Banking and Markets teams worked together closely.

Although I picked Hong Kong RMB bond market for the first table on the last slide, I think it's worth clarifying our objectives when it comes to the Chinese currency. To start with, there's no doubt that the offshore RMB markets in Hong Kong presents us with tremendous opportunities in our heartland.

We've built a leadership position in offshore RMB bonds with a 22.6% market share at the end of the third quarter. I could also highlight our role in the first offshore RMB equity IPO, the strength of our RMB deposits and that we were the first foreign bank to offer an RMB card to corporate customers.

While Hong Kong remains the preeminent offshore center for the RMB, the currency is being internationalized at a faster pace than many expected. We believe we are at the beginning of what will be a transformation of the RMB into a currency of global trade, investment and reserves. So we are positioning HSBC to be at the forefront of this change.

We made RMB Retail Services available in 11 Asian markets and trade services available in more than 50 countries across the globe. As a result of this investment in connectivity, we've been able to settle RMB trade for customers as far from Hong Kong as Canada, Turkey and Ireland.

What I find particularly exciting about the RMB is its potential to open up trade, particularly with Asia, in the same way that wide acceptance of the dollar has helped businesses connect across markets and lower transaction costs.

I think the best proof that we have the right strategy for connectivity and the RMB comes in our cross-border referrals. Between Hong Kong and China, our corporate and premium referrals rose by about 50% in the first of the year. Only with a footprint as extensive as ours can we bridge continents, whether it's helping a mainland Chinese company issue shares in Hong Kong, a German company invest in India, or a Middle Eastern investor sell Australian assets. Only with a universal model like ours can we meet the totality of our customer financial needs, whether it's helping a mid-cap company issue bond for the first time or high net worth investor hedges positions with derivatives.

Before I wrap up, I'd like to say a few words about our cost efficiency goals and the challenging steps we're taking to get HSBC into shape for the next phase of growth. Early in the year, Stuart set out our goal for the HSBC Group to achieve USD $2.5 billion to USD $3.5 billion of sustainable cost savings in 3 years. He said this would involve a gross reduction of about 30,000 positions across the group, cuts that would focus on back-office support and management delivering in head offices.

As I said, these reductions will be partially offset by front office hiring to support growth markets. Asia contains many such growth markets, so we'll need more revenue-generating positions, but we still see potential to improve our customer service by reducing bureaucracy and by implementing consistent business models.

The Asia-Pacific region already has a cost efficiency ratio in our target range of 48% to 52%, but this doesn't mean we can be complacent. In Hong Kong, the ratio has been rising and it's higher than the target range in the rest of Asia-Pacific. We have inefficiencies to eliminate. We have inflationary pressures to manage, and we have to achieve positive jaws across all global businesses and countries. These goals are high on the regional management team's list of priorities.

In conclusion, we believe Asia's emerging markets will grow at a reduced but encouraging rate through 2012. We expect a soft landing in China, the region's economic engine. Despite considerable political, economic and regulatory uncertainty, HSBC is well positioned to grow lending and generate higher fee income in Asia. We had a solid first 9 months of the year, and we have set out challenging but achievable plans to increase revenue and control costs going forward.

Thanks for your attention. I'll stop now so those of you with us in real time can ask the top team some questions.

Question-and-Answer Session

Peter Wong

We're joined for this question and answer session by Sarah Legg, CFO for the region; and by our business head, Robin Phillips and Gordon French from Global Banking and Markets; Lucy Chang [ph] from Retail Banking and Wealth Management; and Noel Quinn from Commercial Banking. Thank you, operator. We are now ready to take questions.


[Operator Instructions] We'll now take our first question from Anton Quadchuck [ph] from UBS.

Unknown Analyst

Basically just trying to square off this characterization of your appetite versus the third quarter call a couple of weeks ago. I think we may have come away from the Q3 call with a sense that Stuart and the board were quite concerned about pullback of other banks in Asia, the dislocation that that was going to create. And it certainly sounds that you're much more focused on continuing to grow the business, and therefore, presumably you've got an appetite to pick up opportunities that are left for you by people pulling back. So just trying to circle between the 2 things and get a sense of do you have market share ambitions, do you have funds that you're looking to put to work with existing clients or new clients to the degree that other people leave? Or are you concerned that this justification [ph] that maybe draw a thumb's eye [ph] crisis elsewhere is something that by in itself the dominant issue for you?

Peter Wong

What I would like to say, first of all, is about the macroeconomic situation. First of all, Asia is not dislocated from the rest of the world. So what's happening in Europe and what's happening in the U.S. will impact Asia. About a few weeks ago, I had a round of calls with my CEOs in Asia-Pacific, and together with them are the economists. And without exception, most of the economies in Asia-Pacific have the sort of like reduced their GDP growth forecast. So it is going to be a challenging -- it's going to be a challenging situation, especially if you look at the electronics industries in Singapore. It's already having negative growth. But all that said, the growth opportunities is still in Asia-Pacific and we're going to try to go after that. But we're going to go after it in a way that is going to be -- we're going to try to grow quality assets. And as we have identified in our strategy, we have grown -- we grew quality assets in 2010 by 40% in loans and advances. And also in the first half of this year, we grew by about 11% to 12%. So what we're going to do is that -- utilizing these opportunities, we've grown the fee-based by -- fee income by 17.2%. This is according to our strategy, and we will continue that strategy because we have a huge customer base and we will work the customer base a lot harder. So as far as opportunities in Asia are concerned, first of all, there are offsetting dynamics. On one hand, you may say that there are some banks that are pulling out of Asia-Pacific, but I think that the American banks will continue to grow in Asia-Pacific. And at the same time, because of what's going on in Europe and the United States, it has impacted Asia, and therefore, the loan demand will be tempered a bit. So I think that they're offsetting factors, but we are, to a certain extent, we are still looking for -- we are looking for opportunities to grow. Let me give the stage to Noel Quinn, the head of Commercial Banking in the region, and he can shed some light on the commercial world.

Noel Quinn

Okay. Thank you, Peter. We are seeing some early evidence of European institutions maybe tempering their appetite for certain types of lending, syndicated deals and maybe rolling over, and some appetites in trade finance. We see that as an opportunity for ourselves to increase our penetration of our important client base. We are still planning for growth in our trade-related assets throughout Asia-Pacific. And I would also say and echo Peter's comments that there is still good liquidity supply in Asia from, certainly, Asia financial institutions and the U.S. So I don't see any evidence at this stage of a liquidity crunch such as you may have seen in 2008, 2009 impacting trade finance. What I see in terms of trade activity at the moment is there is some adjustment of orders taking place, some early signs of that, from buyers in, particularly Europe, more so than in the U.S. But it is adjustment rather than a sudden halt to activity as we may have seen or as we did see in 2008, 2009 as people take on board the tightening economy in Europe and other parts of the world.


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

Rohith Chandra-Rajan - Barclays Capital, Research Division

Just summing actually along similar lines. Just really thinking about your risk appetite, again, and what we've see in loan growth so far this year and also in the third quarter. I mean the third quarter, we obviously saw Hong Kong decline a little bit and a very specific issue I guess around trade finance there, which I guess is a little bit further to run. But interested in your comments about risk appetite in different countries around the region, and also interesting to see your property-related lending kind of grew 6% year-on-year, so how you're thinking about property markets also around the region.

Peter Wong

As far as our risk appetite is concerned, we will continue to capitalize on opportunities, but we're going to do it in a more cautious way. We're going to make sure we grow quality assets. And especially in view of the fact that there will be new regulations coming out, including Basel III. The treatment of capital for risk-weighted assets will be different. And so what we're going to be doing is that we will continue to go after opportunities, but we're going to do it in a little bit more cautious way. As far as the trade finance is concerned, the trade finance is a very important product for us and we will continue to look for opportunities in that area. And I'll get Noel to say a little bit more about that on the trade finance. And as far as property is concerned, we do see a little bit of slowdown in terms of property in Hong Kong. I think the property prices have gone down anywhere between 5% to 10%. And we also see a bit of a slowdown in the property sector in China. But I think that it is important for us to note a couple of things in Asia-Pacific. First of all, when we look at risk in the property sector, we should differentiate between end users' risk and also developers' risk, okay. But as far as Asia is concerned, the Asian mentality is that after they have acquired a property, it's very seldom that they would just throw away the property or default or whatever. It is very -- it is not in the culture. If you look back in 2000 -- if you look back in the early 2001, '02 and '03, you can see that although Hong Kong property prices have dropped by 70%, the default rate is actually very, very small. So I think that it's important to understand the Asian culture in terms of owning properties. As far as developers' risks are concerned, that will depend on what other developers have the financial strength to hold on to some of the properties that they have. So I would probably say that as far as properties are concerned, I think people are taking a more cautious outlook in terms of what's happening because we have gone through quite a property boom. So I think that it's only natural that we have certain amount of adjustment. And I think that at this point in time, the adjustment is really not that big. So I am still very optimistic about the property sector. And I think that all the governments in Asia-Pacific, they are all very -- they are well aware of the importance of the property sector, and especially Hong Kong and China and so forth. I think that the regulators are taking steps against any potential downfall of the property sector. Noel?

Noel Quinn

I think on trade, I think the 1 big feature that we're seeing developed in Asia is intra-Asia trade. It isn't just trade between Asia, the U.S. and Europe. So for example, we're seeing significant growth in activity between China and Bangladesh, Sri Lanka, Vietnam and India, as well. So although we're not decoupled totally from what's happening elsewhere in the world, we do have -- we are seeing a lot of activity in that direction. And in terms of property financing for commercial real estate in Hong Kong, we have very good, safe loan-to-value ratios that give us a lot of protection in terms of that lending. There is no doubt that the appetite for new lending and commercial real estate in Hong Kong and China has slowed. But we had already anticipated some early in the year, and most of our balance sheet growth has come from trade-related assets over the last year rather than commercial real estate lending.


Our next question today comes from Sally Ng from CIC.

Sally Ng - China International Capital Corporation Limited, Research Division

Just on 2 quick questions. If I look at your geographical PBT update for the first half, if I annualize that and look at your exploration of PBT in the next 5 years, it seems like you're factoring pretty modest growth in India and Singapore, but for Malaysia and Indonesia, it seems to factoring in pretty strong CAGR of about 20% per annum in PBT. So just wondering is there any further implicit messages behind a relative conservatism in India and Singapore versus the relative optimism in Malaysia and Indonesia? And second quick question is we have heard from one of your major peers that the RMB LDLs [ph] in Hong Kong has been rising quite sharply in the last couple of months. I'm just wondering whether you're seeing the same thing. And if so, what will be the reason behind that, and if that's going to help your margins, as well, since this is supposedly a higher-price loan product?

Peter Wong

On the geographical piece, I think that as far as India is concerned, we're saying that the $1 billion is going to be in the next 3 to 4 years, definitely, and it's not going to be in the 5-year range. And as -- also, as far as Singapore is concerned, it is Singapore. We identify it as one of the financial center, one of the 3 financial center in Asia-Pacific. There's Shanghai, Hong Kong and Singapore. Singapore is a trade hub and also is the largest foreign exchange center in Asia-Pacific, slightly ahead of Hong Kong. And at the same time is a wealth management hub. So our PBT aspiration for Singapore should be high. As far as Malaysia and Indonesia is concerned, we are seeing -- we are putting in place all the infrastructure. As far as Indonesia is concerned, as you remember, we acquired bank economy and then it has taken some time for us to come up with a strategy for bank economy, as well as our own branch over there. So going forward, we're envisioning that the 2 entities would work well together, and also there will be strong aspiration in terms of the CMB in Commercial Bank area. As far as Malaysia, it's the same story. I think that right now, we're putting in place everything that we need and also I think there will be opportunities in the Commercial Bank area. As far as RMB in Hong Kong. Actually, the RMB deposit growth has slowed a bit. The reason being that in the first half of this year, the RMB has grown quite a bit, up to about $600 billion or something, and then slowed down ever since. And then what's happening is that the -- because of the continued accumulation of RMB in Hong Kong and there's no investment outlet, therefore, everybody's just sitting on RMB. So what China has done is basically allow more issuance of bonds in Hong Kong in order to pick some of the liquidity, RMB liquidity, back into China so that not all the RMB would sit in Hong Kong. And also at the same time, they will -- China has also allowed the boring of RMB in Hong Kong and directly remitting it back into China. In the past, as you know, that you probably have to do a syndicated loan in Hong Kong, and you probably have to do a syndicated loan in Hong Kong, and then remit it into China and then turn it into RMB and then for investment. With the new rules coming out, they will allow more direct remittance of RMB from Hong Kong into China. This is very significant, because it actually means that this opening of the capital account. I'll get Gordon French in from our Global Markets to comment on this also. Gordon?

Unknown Executive

What we've seen is great growth in the debt capital market side of the business, as Peter said, and we've been able to take advantage of this quite substantially. So as was mentioned earlier in the numbers, we're #1 in market share in the debt capital market space for dim sum with more than a 22% market share .#2 is about 11% or just under 12%. So we have a leadership position there. We have a leadership position in the foreign exchange business in CNH, and obviously, what we're seeing is increased turnover in the trade business, which means that we expect to see further activity there, which is driving some of the P&L increases that we've seen built in Hong Kong and China around the CNH business and in the CNH space. We do expect more product growth so expect more activity again in FX forwards and the hedging instruments, given that there has been an increase in the uptake of both CNH used for trade finance, but also for those investors coming to town, as Peter says, who are going to raise money here look to take it on shore for use in their activities for operating capital; or for the Chinese customers coming to Hong Kong to raise money in Hong Kong and bring back onshore to China.


Our next question today comes from Ian Gordon from Evolution Securities.

Ian Gordon - Evolution Securities Limited, Research Division

I have 2 questions, both specifically on Hong Kong, please. Peter, in your opening remarks, you referenced fall-in [ph] margins has modestly declined in the first half, whereas as far hoping to see some assets with expansion going forward. Just add a little bit of color in terms of the product driver.

Douglas Jardine Flint

Ian, can you repeat your question? It did not -- the voice line did not come over clearly.

Ian Gordon - Evolution Securities Limited, Research Division

Could you, just in terms of the Hong Kong margin evolution, you referenced the fall-in margin in the first half. Looking forward, you are hoping to see some asset spread expansion. Can you just provide a little color on the drivers of that, either by product or whether it's a mix of it? And then secondly, in terms of loan growth, obviously, the pace of loan growth across Hong Kong and the rest of Asia slowed materially in the first half relative to the accelerated pace we had seen. Given that you have cited reduced loan demands plus your own quarters' risk appetite, is it conceivable that in Hong Kong we could see loan growth producing to low single digits as a percentage growth? Or would you be confident enough to rule [ph] out a reversion to the flat loan book which we saw at the bottom of the crisis?

Peter Wong

As far as the margin is concerned, what we are witnessing in Hong Kong is the following. And there is, to a certain extent, there's a bit of a liquidity squeeze in a market because, first of all, there's a procurement of loan growth in China, and therefore, there's a lot of borrowing from China. And so the deposit is basically going -- the loans is going into China and therefore, lowering the deposit base in Hong Kong. And secondly, also because of the U.S. has already declared that it's going to be a weak U.S. dollar policy continue to be -- the interest rate continue to be low. And therefore, there's also certain money conversion of Hong Kong dollar deposits into foreign currency such as RMB or maybe Australian dollar from time to time and also Singapore, and also Singapore dollars. And if you can see, also in Hong Kong, that some of the banks on a retail basis, they are quoting about a 2% interest rate to attract deposits. And so that's way, way higher than the interbank market and therefore, that means that going into the future, there has to be there has to be a widening of -- there's a price increase in terms of loans. And I'll get Gordon to comment on that a little bit more. And as far as the risk appetite in Hong Kong is concerned, our appetite is important. Basically, first of all, it depends on the demand. And secondly also, it depends on the quality. If there's quality loan growth, we'll go after it. But at this point in time, I think it's because that the in the last couple of months, well, not even couple, just last month-and-a-half or so, the situation in Europe has deteriorated quite a bit, and therefore, it has dampened the appetite of a lot of the corporates. People are suddenly -- the company is suddenly holding on to their plans and taking a wait-and-see attitude. I think we can probably witness that around Asia-Pacific. But at this point in time, as you can see that we still have pretty good loan growth in the first half of the year, and then on a total year basis, we'll still be very healthy. And we will maintain the -- we will continue to maintain good quality loan growth as you can see from our loan impairment charges, and also the growth of risk-weighted assets. But as far as our appetite is concerned, if there is demand out there, then we do have the appetite. I'll get Gordon to comment a little bit more.

Unknown Executive

On RMB, we actually have still seen some growth even though we've seen some volatility, obviously, in the exchange rate with a smaller version. In recent weeks, the U.S. dollars and greater demand for U.S. dollars. But at the end of September, the depo market was up to $620 billion in Hong Kong, which is up 97% year-to-date. So we actually believe that there will be -- continue to be growth there that's going to be short-term volatility based on the risk in Euro sovereign debt and Euro sovereign markets. But in the medium term, we see further growth in that market that provides us with more opportunities, as I said earlier, for wealth products and both hedging products as well.

Peter Wong

I'll get Sarah to comment on the margin.

Sarah C. Legg

Your question was about half-on-half, with the half year 2011. In Hong Kong, there was a small reduction in the net interest margin of 3 basis points in the bank and 2 basis points in our subsidiary in Hang Seng. That was generally the headwind that we're seeing in the high-volume mortgages year-on-year in the trade-related lending, which continue to be concerned in terms of spreads. That was offset by a mix change, as well, as we grew the loan book. So by moving from low-yielding financial investments into customer advances.


Our next question today comes from Jason Napier from Deutsche Bank.

Jason Napier - Deutsche Bank AG, Research Division

Two quick questions, if I might, please. The first on credit quality evolution in the third quarter. I appreciate that the loan loss charges in Hong Kong and other APR remain extremely low. But in both cases, they're up sort of very markedly in percentage terms sequentially. So I wonder whether you wouldn't mind just giving us additional color on the drivers of that, and whether we should interpret that as the beginning of a trend, given some of the comments you've made around knock-on [ph] impact of European weakness and the like. And then the second question comes around reports that emerged last week that HSBC were looking to exit some of the smaller markets in Asia, perhaps countries like Bangladesh. And whether or not you like to comment specifically on that is not sort of the focus of the question. Really what I'm interested in is what the upside is to the business of exiting countries that in the medium term absolutely do have growth that are viewed as attractive by some of your international peers? And I just wonder why, on the EM side, especially for smaller businesses like those, it makes sense to exit where some medium-term optionality has got to be attractive. It's not going to be doing anything on the capital or liquidity side that's meaningful at a group level. So I wonder whether you wouldn't mind just talking about country plans in Asia and whether we are likely to see a number of countries sort of shed?

Peter Wong

Jason, okay. On the credit quality, I will lay it for you this way. There's no systemic issues that we have seen in the credit. There are some credit hits here and there, for example in Australia and so forth, there's some credit hits because of the linkages in the Middle East and so forth. But we don't see any systemic issues coming out from the portfolio. As far as HSBC exiting from various countries and so forth, I think that on strategy there, we've already talked about. We can evaluate country on a 5-filter -- using the 5 filter. And that is the, especially on the return equity, by business by country, and return on the cost income ratio and also strategic importance and so forth. There are some businesses we may elect to exit or sell in Asia Pacific at this point in time, but these are businesses that we will consider as not strategic and won't have the potential to give us huge profits going forward. Because your question -- you alluded to the fact that there are some -- it may be short term that the short-term -- there may be no short-term profit but longer-term opportunities. But the -- our evaluation will be based on the fact that the short term profit is not there. Even on the longer-term basis, we did not see a lot of opportunities. So it's based on a 5-filter process [ph]. And then what that will do is that if we do exit from the businesses, what that would do is that it will reduce our cost base. And it does not have a lot of impact on the revenue side, but it will reduce our cost base. And also because of the fact that the Hong Kong is supporting a lot of these countries, so reducing the business at the southern [ph] countries will also reduce the cost base in Hong Kong.

Jason Napier - Deutsche Bank AG, Research Division

So just to be clear, one of the sort of key elements of the 5 filter has got to be whether the business has any prospect of being material in HSBC sense. It's not just about the ROE in and of itself being good. It's about whether the dollar millions is likely to show up on a -- when you look at it from a group standpoint. Is that right?

Peter Wong

That's correct. Materiality is also one of the key factors. So therefore, it's not going to be -- this is also a factor that we have a lot of interest in. So that's one of the factors that we do pay a lot of attention to.


Our next question today comes from Steven Hayne from Morgan Stanley.

Steven Hayne - Morgan Stanley, Research Division

So my question comes back to some of your outlook comments in relation to your objectives. We've already discussed Singapore and Malaysia, et cetera. To be clear, when I was writing it down, like India, I wrote down that your medium term was within 4 years. In Singapore, I think you said within 5 years. Malaysia, Singapore I think you said within 4 years. I'm just wondering -- and also you obviously, haven't given any sort of guidance on where you see Hong Kong more medium term. I was wondering if you're able to give some further term outlook on Hong Kong in particular. We talked about slightly lower volume growth and we talked about the margin in the second half. I'm wondering if you can piece that together in terms of with the lower volume and lower margin potentially going into next year what that might mean. And should I just take, to be simple, sort of all these targets to be sort of 2014 or 2015?

Peter Wong

As far as the other -- as far as the rest of Asia is concerned, that India is like about 3 to 4 years, and Singapore is within 5 years. And then Malaysia, Indonesia taken together is also between 4 to 5 years, so just to set it straight. As far as Hong Kong is concerned, I don't think we have given out anything in the past. But what I can continue to say is that the Hong Kong will -- definitely, Hong Kong -- the way we should look at Hong Kong is not in isolation, because we need to look at the Hong Kong in terms of how we can group together with China. Because a lot of the syndication facilities raised in Hong Kong are basically for investment in China. And we are, at this point in time, having a number of initiatives growing the referrals from China into Hong Kong. For both Hong Kong, and we have also stated that the Hong Kong is going to be our key market and it's one of our leading market and we will use our energy to defend that leadership. And also, and as far as Hang Seng is concerned, Hang Seng will continue -- also Hang Seng will continue to grow. So our strategy is actually quite simple. Hong Kong will continue. We'll put a lot of focus to maintain our leadership in Hong Kong in most of the product areas. And as far as the rest of Asia-Pacific is concerned, we will continue to focus on the 6 key markets. That's Malaysia, Indonesia, Singapore, China, India and Australia, and the 2 strategic markets, which is Vietnam and Taiwan. So if you look at the rest of Asia-Pacific, the growth in these countries in terms of PBT in the first half is also quite -- I'll probably say I'm encouraged by the growth. As far as Hong Kong is concerned, the base is big and I think that the importance of Hong Kong, whether Hong Kong continues to grow, it's also based on how China is going to move forward. As long as China is going to have GDP in excess of 8%, then Hong Kong would be in a pretty good position. But as China continues to curtail growth due to battle inflation, then I think the Hong Kong growth will also be impacted.


We will now take our next question from Raul Sinha from JPMorgan.

Raul Sinha - JP Morgan Chase & Co, Research Division

Can I just ask about your appetite for lending and risk on unsecured lending and particularly SMEs, as well? Do you see any contagion impact on asset quality for these 2 particular product categories due to the global sort of slowdown that we've talked about today?

Peter Wong

Okay. I'll get Noel to answer this question. Noel?

Noel Quinn

Firstly, we don't adopt a uniform, universal approach in every market in Asia. We serve 8 markets and we really focus on 3 primary customer segments, Corporate Banking, and then Business Banking Upper and Business Banking Mass. And the way I'd term Business Banking Mass is the S of SME, and Business Banking Upper is the M of SME, with Corporate Banking, then, above it. So I think it would be unwise to take a absolutely uniform approach in all markets because market opportunity is very different. And again, that comes back to Peter's comment on 5 filters. You address the market opportunity that you think you can best serve, both strategically and from a return point of view. Our focus in most markets is more on the corporate end and the Business Banking Upper. Clearly, in Hong Kong we have a very dominant position in SME banking. And I think if you look at market statistics, we have somewhere between a 30% and 35% market share of the SME market here in Hong Kong. So we see more of our opportunity in corporate and upper end of SME banking outside of Hong Kong. Are we are a big unsecured lender in the SME marketplace? No, we're not. We tend to be more of a secured lender. Hence, our strong returns on relatively low LICs, and I wouldn't see that particularly changing going forward.

Raul Sinha - JP Morgan Chase & Co, Research Division

And any comments you would make on unsecured personal lending across your market? I notice that you're lagging behind. You have reduced lending in India, for example, on the unsecured side.

Unknown Executive

Similar to Noel, we don't have across-the-board strategies for unsecure lending. We will look at it market-by-market. India and Indonesia, we have been coming out from the unwinding of our consumer finance bulk. So for both of the markets, we are now gradually going back into the market and book some new unsecure lending now, but at a very cautious pace. Other places like Singapore, Malaysia, Hong Kong and Australia, we have been observing pretty healthy growth in terms of the unsecured lending.


We'll now take our next question from Alistair Scarff from Bank of America Merrill Lynch.

Alistair Scarff - BofA Merrill Lynch, Research Division

Just a very quick question if I can. Looking at your Wealth Management business, looking at how transferable is your products you develop in Singapore and Hong Kong across the rest of the business, particularly in China and your focus markets in Asia?

Unknown Executive

Sure. In terms of the manufacturing capability, I think we are highly transferable. We have our in-house insurance manufacturing, so a majority pass off of our insurance product. We have been doing it in-house and manage it out from our regional hub in Hong Kong. And for other products like FX and structure products, we have been working really closely with Gordon's area in the Global Banking and Market. So again, that capability, I think, is highly transferable across the region. In the Asset Management area, we have been launching, in fact, quite a number of global products like World Selection, which not only demonstrate the regional transferability, but also the global ability for us to actually roll out things across the world. So I think that is one of the key strengths that we have in HSBC in terms of growing our Wealth Management revenue in the midst of the low interest rate environment.

Alistair Scarff - BofA Merrill Lynch, Research Division

And if I could just have a quick follow-up question. In terms of your recent momentum of your sales, could you comment firstly on the pace on, say, a third quarter versus second and third quarter? Is that a slowing pace, an accelerating pace or steady? And what other products that are typically getting the highest demand at this stage?

Unknown Executive

I think if you specifically look at Hong Kong, which is our biggest market, the third quarter obviously, has been also affected by the macroeconomic sentiment. So we are seeing, comparing to first and second quarter, a slowing down in terms of the Wealth Management sales. But we are seeing consumer behavior actually shifting between different products so that they can still try to earn some returns from their deposits. We have been seeing a growth in the FX income, so showing that customer is shifting to portfolio to foreign currency and other areas like insurance. We also have quite good sales in the third quarter. So general momentum is slowing down as compared to first and second, but we are seeing some shifting in customer portfolio.


We will now take our last question today from Tom Rayner from Exane.

Thomas Rayner - Exane BNP Paribas, Research Division

Just 3 quick ones please. Just the first on the renminbi business. We hear a lot about your ambitions to be or remain the leading international bank for renminbi. I just wonder if you could try and put some sense of materiality around that in terms of profits, both today and what to expect over the next sort of 5 to 10 years as that market continues to develop. Second question just on your confidence over the softer landing in China. If things were to be a little bit worse, could you just give us a sense of how that might affect your businesses both in Hong Kong and across the sort of rest of Asia region? And then finally, just on deposits, just wondering why you're really looking to grow deposit balances given the surplus deposits you have in the region. Would you not be better off just trying to recycle those deposits into Wealth Management products or into customer loan opportunities rather than actually competing with other banks to grow the deposit base?

Peter Wong

Let me answer the third part first. Regarding deposits, it depends on -- it also depends on what type of deposits, because you have some currency. For example, the Hong Kong dollar is kind of tight, and to a certain extent, U.S. dollar is also kind of tight in the region. So growing the deposit has 3 -- basically 3 uses. One is for to fund the loan growth. Second, you can only sell, cross-sell investment products into your deposit base when you have more deposits. And third, if the U.S. rate is the interest rates, and we have our biggest deposit base in Hong Kong and that will benefit us. And as you can see, in the rest of Asia Pacific, some of the countries have already raised the interest and therefore, we have benefited. So getting the deposits have basically 3 objectives. As far as RMB business is concerned, this is still -- I'll probably say this is still in an early, early stage because RMB, to a certain extent, does not have a lot of investment outlet. And what we are able to do at this point in time is that we have trade settlement in RMB in more than 50 countries. So as RMB continue to be internationalized and also as RMB -- 1 day within 5 years [indiscernible] RMB becomes an inflatable currency as [indiscernible] management fee, then we already have all these countries or trade settlement in RMB set up in all these countries. Now versus that of the Chinese banks, as far as the Chinese banks are concerned, they are -- to some extent, they have a huge balance sheet and lots of branches and so forth. We're not going to -- we won't be able to compete with them in that area. But as far as international connectivity is concerned, that will be our strength. We're able to take companies out of China going into other markets. And if they do trade and so forth, then we are set up to capture the opportunity. Probably it would not take a lot of -- I probably would not put a lot of emphasis on profits at this point in time but because the profits, the revenue from RMB is not going to be huge. It's all about, at this point, trying setting up the infrastructure and being the leading bank in this area. And as a matter of fact, what we are seeing right now is that in China, many companies, because of the 12 5-year plan, these companies are based on the -- China's policy of trying to move overseas and we are capturing quite a bit of market share in that area because of our international connectivity. And I'll get Gordon to comment a little bit more. And also as far as [indiscernible] in China, we are -- I have visited China in about, no less than 4x in the last 1.5 months. And each time I've come to see the regulators, some of the senior officials in China and so forth. They are absolutely confident in terms of having a soft landing in China. And you can actually see that what they are doing in terms of curtailing loan growth and so forth is taking -- the inflation is coming down and they're already talking a little bit about relaxing lending again, and we have seen some evidence of that. And then also in terms of the NPLs, it's actually most of the banks and also the partners, the Bank of Communications and so forth, the bad debt situation is less than 1% of the average loan. And I think that there's a lot of noise out there about the provincial lending and also the shadow banking lending. And as far as I understand, the provisional lending is about RMB 10.7 trillion. And within that RMB 10.7 trillion, probably about 70% of those can be serviced by the infrastructure -- cash flow from the infrastructure projects. And another 20%, 25% of those have a little bit of issue, that is to a certain extent -- let's say if the monthly repayment, it's about $100, they can probably service about $70 to $80, and then the rest of the 5% has a little bit of a problem. So it's not the RMB 10.7 trillion, if you take all that into account. It's actually a pretty small number. As far as shadow banking is concerned, what we are -- what the information that we have gathered is that there will be between RMB 3 trillion to RMB 4 trillion to begin with, and now it's actually lower after certain investigation and so forth. It's actually anywhere around RMB 1 trillion to RMB 1.5 trillion. So it's not RMB 3 trillion to RMB 4 trillion. It's actually RMB 1 billion to RMB 1.5 trillion. So the issues, we see a lot of press, we see a lot of media on this. And I think that as far as the media is concerned, we should temper the -- we should dampen the sensationalism a bit. So as far as the our businesses, I'll get Gordon to talk a little bit more.

Unknown Executive

Yes. As Peter said, we're spending a lot of time and effort on building the kit. Working on the planning and the infrastructure. We talked about our positioning in dim sum [ph], and it also is the leading market maker in CNH FX, which is obviously very important to us given that our plan is to be the leading international bank for trade and connecting customers worldwide. So though the markets are active at the moment. We expect them to be a lot more active. Peter mentioned the potential internationalization of the RMB and it becoming a reserve currency at some point. So a lot of time and effort going into these areas, both including products, hedging products, FX, Wealth Management, dim sum [ph] obviously, across the [indiscernible] whereby we expect not only to be making meaningful sums in the near term. But obviously, in the medium-to-longer term, very material amounts of money from these activities as a whole.

Peter Wong

All right. Thank you very much for joining. And I just want to say something in conclusion. We believe that Asia's emerging markets will grow at a reduced but encouraging rate through 2012. We expect a soft landing for China, the region's economic engine. And despite political -- continual political, economic and regulatory uncertainty, HSBC is well positioned to grow lending and generate higher fee income in Asia. We had a solid first 9 months of the year and we have set out challenging but achievable plans to increase revenue and control costs going forward. So ladies and gentlemen, thank you very much.


That concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

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