HSBC Holdings' (HSBC) CEO Stuart Gulliver on Q4 2015 Results - Earnings Call Transcript

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HSBC Holdings PLC (NYSE:HSBC)

Q4 2015 Earnings Conference Call

February 22, 2016, 03:15 ET

Executives

Douglas Flint - Group Chairman

Stuart Gulliver - Group Chief Executive

Iain Mackay - Group Finance Director

Analysts

Chintan Joshi - Nomura

Alastair Ryan - Bank of America Merrill Lynch

Raul Sinha - JPMorgan

Ronit Ghose - Citi

Chirantan Barua - Bernstein

Martin Leitgeb - Goldman Sachs

David Lock - Deutsche Bank Research

Tom Rayner - Exane BNP Paribas

Manus Costello - Autonomous Research

Chris Manners - Morgan Stanley

Michael Helsby - Bank of America Merrill Lynch

Operator

Welcome to the Investor and Analyst Conference Call for HSBC Holdings PLC's Earnings Release For Fourth Quarter 2015. For your information, this conference is being recorded. At this time, I will hand the call over to your host, Mr. Douglas Flint, Group Chairman.

Douglas Flint

Good afternoon from Hong Kong, good morning to everyone in London and welcome to the 2015 HSBC annual results call. I'm Douglas Flint, Group Chairman and with me are Stuart Gulliver, the Group Chief Executive and Iain Mackay, the Group Finance Director. Before we start, I'd like to say a word on behalf of the Board.

HSBC's performance in 2015 was broadly satisfactory against the backdrop of seismic shifts in global economic conditions. Given the uncertain revenue environment and the considerable reshaping necessitated by regulatory changes, it is notable that our three major businesses all generated higher global revenues.

Stuart and his team have made good progress in executing the plans outlined at our Investor Day and the signs are positive that we're building a solid platform for the future. There's still a great deal left to do to adapt HSBC to new operating conditions and the Board maintains close scrutiny on progress in implementing the actions that management outlined last June. Nonetheless, we're satisfied that we enter 2016 with a clear strategy and with much of the Group's required reshaping completed or underway.

Sound management of capital, accelerated run-off of legacy books, shrinking the balance sheet in areas that can no longer support expanded capital requirements, together with other RWA initiatives, allowed the Board to approve a fourth interim dividend of $0.21 a share. This took dividends per ordinary share in respect of the year to $0.51 which is $0.01 higher than last year.

I'll now hand over to Stuart to talk through the key points before Iain takes a more detailed look at performance. Stuart.

Stuart Gulliver

Thanks, Douglas. Our performance in 2015 demonstrated the fundamental strength of our business. Targeted investment, prudent lending and our diversified universal banking business model, helped us to grow revenue in difficult conditions, while simultaneously reducing risk-weighted assets.

The Group revenue on an adjusted basis, global banking markets performed strongly and commercial banking grew steadily in spite of slower trade. Principal retail banking and wealth management also grew, providing a strong wealth management performance in the first half. Our adjusted operating expenses increased as we continued to strengthen our compliance capability while also investing for growth. However, the combination of strict cost management and the cost reduction programs that we started in the middle of the year helped us to keep second-half costs flat relative to the first half, excluding the bank levy.

Loan impairment charges were up by $553 million in 2015 due to an increase in the fourth quarter, but remains generally low. This demonstrates again our prudent approach to lending and the benefit of our de-risking measures since 2011. Our strong capital generation enabled us to increase the dividend while further strengthening the common equity Tier 1 ratio to 11.9%.

We've made a good start implementing the actions that we announced back in June 2015. We're already 45% of the way towards our targeted reduction in Group risk-weighted assets and we have launched all of our initiatives to reduce costs. The investment we've made in strengthening our businesses in Asia helped us to grow revenue faster than GDP in seven out of eight of our priority Asian markets.

We've agreed to sell our business in Brazil and that deal remains on track. However, we do not now intend to sell our Turkish business. After our investor update in June, we received a number of offers for the business in Turkey, none of which would have been in the best interests of shareholders. We therefore decided to retain and restructure our Turkish operations, maintaining our wholesale business and refocusing our retail network. This will provide better value for shareholders and continue to allow our clients to capitalize on our international footprint.

There's still a lot to do, but HSBC is better balanced, better connected and better placed to capitalize on higher-return businesses than it was 12 months ago.

Iain will now talk you through the numbers.

Iain Mackay

Thanks, Stuart. Looking quickly at some key metrics for 2015, the reported return on average ordinary shareholders' equity was 7.2%, the reported return on average tangible equity was 8.1% and on an adjusted basis, we had negative jaws of 3.7%.

Jaws for 2015 were significantly affected by difficult revenue conditions in the second half of the year. Adjusted revenue grew by 4.5% in the first half of the year, but fell by 2.7% in the second. This left adjusted revenue growth of 1% for the year against adjusted cost growth of 4.7%. It's worth noting that the increase in adjusted operating expenses included a significant rise in the bank levy of $358 million. This slide takes us from reported to adjusted.

Reported profit before tax for the fourth quarter includes a negative $773 million charge for fair value losses on our own debt relating to credit spread and nearly $2 billion of other significant items. These include $743 million of costs to achieve in relation to our strategic actions; $337 million related to UK customer redress, mainly PPI; a charge of $370 million related to legal matters; a loss of $214 million on the sale of CML assets in the United States; and $186 million adverse debit valuation adjustment on derivative contracts. Adjusting for these items leaves an adjusted profit before tax of $1.9 billion for the fourth quarter.

Bear in mind from next year that one item that will fall into this category will be the accounting loss on the Brazil transaction. We achieved a valuation of 1.8 times book on the Brazil business and will recognize an accounting gain on the sale before recycling of approximately $2.6 billion of foreign exchange reserves. However, once these reserves have been recycled, it will result in an accounting loss before tax of $1.8 billion.

On closing the transaction, there will be an estimated $33 billion reduction in risk-weighted assets and a positive pro-forma impact on our common equity Tier 1 ratio of around 60 basis points. We don't treat the bank levy as a significant item as it's a recurring cost.

You'll find more details on these adjustments in the appendix. We'll focus on adjusted numbers for the remainder of the presentation. The drop in fourth quarter's profits was mainly driven by higher loan impairment charges. Loan impairment charges were up $634 million on the fourth quarter of 2014. I'll go into that in detail on the next slide. Revenue grew in all three of our main global business. Global bank and markets revenue was up 16% on last year's fourth quarter and principal retail banking and wealth management and commercial banking were up by 3% and 1% respectively.

Group revenue was down 1% overall. The growth in revenue in the quarter came from other which was down by $536 million or 31%. This was mainly due to two things. In the fourth quarter of 2015, other included losses from hedging and effectiveness compared with gains in the previous year. Also in the fourth quarter of 2015, there was a gain from disposal of gilts relating to intra-Group funding which didn't recur in 2015.

Operating expenses were up 2% in Q4 2014, but this was entirely due to the bank levy. Excluding the bank levy, costs were lower than last year's fourth quarter. This is an important accomplishment, but it's also worth noting that our second-half costs were in line with our first-half costs.

On this slide, we break down loan impairment charges between personal, wholesale and other credit risk divisions. Before we get into detail of the fourth quarter, it's worth noting the loan impairment charges were up for the full year from $3.2 billion to $3.7 billion. The main driver was an increase in charges in personal lending of $341 million, mainly in Brazil and the United Arab Emirates. It also reflected lower net releases and available-for-sale debt securities. Charges in wholesale lending reduced by $123 million across the year.

There was an overall increase in loan impairment charges in the fourth quarter of 2015. The biggest single factor here was an increase in specific and collective charges in the oil and gas sector. I'll cover that in detail shortly. The charge in the fourth quarter also included specific charges related to a number of unconnected local factors in a range of countries and individual sectors.

We took just over $400 million of loan impairment charges in relation to oil and gas sector in the fourth quarter. Most of that charge was collectively assessed, reflecting our expectation that energy prices will stay low throughout 2016. We've modeled this to a price of $30 a barrel. In all, the sector accounted for approximately $500 million of loan impairment charges in 2015. At year end, our overall oil and gas exposure was $29 billion which represents 2% of the wholesale drawn risk exposures. This is a $5 billion reduction versus the prior year.

Credit quality in the book remains robust. 95% of our exposures are rated as credit risk rating 1 to 6. Nevertheless, we continue to monitor this sector closely and will look to manage down exposures further where appropriate.

Lastly on this topic, four points worth nothing. First, the increase from the third to fourth quarter was not caused by a deterioration in Asia and China, but a number of idiosyncratic issues in a range of regions, countries and sectors. Second, loan impairment charges for 2015 remain low compared to previous years.

Third, our coverage and our wholesale lending for 2015, that is impairment allowances as a proportion of impaired loans, is in line with recent historical average and fourth, as you can see, our lending portfolio is well diversified by both geography and sector.

Turning to full year, adjusted profit before tax fell by $1.6 billion or 7% in 2015. This was mainly due to higher operating expenses. As you can see, there is a good balance between our global businesses in terms of the contribution to Group PBT. We've purposely managed the business to ensure diversity is an antidote to volatility and this remains the focus for our strategy. Over the last few years, our global businesses have worked in a complementary fashion with their value an important dynamic.

Regionally, the lion's share of our profits derived from Asia which reflects our advantages in the region as well as the opportunity for growth that we see there. On a regional basis, profit before tax was up slightly in Asia and Latin America, but fell in Europe, North America and Middle East and North Africa. The decrease in profit before tax was largest in Europe. Revenue growth of $136 million was overtaken by a cost increase of $1.2 billion. Excluding the bank levy, costs in Europe rose by $853 million from investment in regulatory programs, compliance and staff costs. These also include headquarter costs.

In North America, there was a reduction in profit before tax from the continued wind-down of our U.S. CML portfolio, as well as higher loan impairment charges in the principal U.S. business and in Canada. Revenue increased across all of our businesses in Middle East and North Africa and costs increased by broadly the same amount. Loan impairment charges of $299 million in 2015 versus the release of $4 million in 2014, was the main driver in reduced profits for the year.

Profit before tax in Asia was $167 million higher, as revenue grew in all four global businesses. Global banking and markets was the star performer with revenue increase of $369 million. Commercial banking was up by $219 million, while retail banking and wealth management rose $278 million following a strong first-half performance.

Some of this growth was offset by a $742 million increase in costs, particularly from wage inflation and investment in regulatory programs and compliance, as well as investment to support business growth. Latin America PBT was up by $93 million due to higher revenue and lower loan impairment charges.

Looking at revenue in more detail, adjusted revenue rose by 1% thanks to growth in our three main global businesses. Global banking and markets performed well with increases in all but one of our client-facing businesses. Equities and foreign exchange grew especially strong, as increased volatility resulted in higher client activity. This was achieved whilst simultaneously reducing risk-weighted assets in global banking and markets.

Commercial banking revenue grew by 3%, with strong performances from credit and lending and payments in cash management. Most of this growth came from Hong Kong and the UK. Principal retail banking and wealth management grew by 2%, helped by a strong increase in investment distribution revenue in Hong Kong in the first half of the year.

Wealth management revenue in Europe also grew by 21%. Global private banking revenue fell by 6% as we continued to de-risk the business, although revenue increased in Asia due to higher client activity in the first half. Other revenue included the themes for the fourth quarter are explained in slide 5, as well as a reduction in the dividend from the partial sale of our holding in industrial bank.

Adjusted operating expenses were $1.6 billion or 5% higher than in 2014. This was due to wage inflation in Latin America and Asia, continued recruitment support business growth and investment in regulatory programs and compliance. The bank levy was also $358 million higher than in 2014.

Looking at costs on a half-by-half basis, you can clearly see the impact of the actions we've taken to manage down costs. All of our cost reduction programs are now underway and our FTE numbers are back to the level it was in 2014. While this shows good early progress, we'll continue making costs savings through 2016 and 2017 to offset both inflation and investment in business growth. There's still a great deal to do in this area.

This slide shows our end of 2017 cost target rebased to account for currency translation and the sale of Brazil. And as Stuart mentioned earlier, we're retaining our Turkish business. We've adjusted for this in the rebased target which is now $30.5 billion.

Turning to capital, the Group's common equity Tier 1 ratio is 11.9% on December 31 compared with 11.8% at the end of the third quarter. Continuing progress in risk-weighted asset reductions in the fourth quarter enabled us to grow our common equity Tier 1 ratio. This ratio increased by 80 basis points over the course of the year as a result of capital generation from profits net of dividends and risk-weighted asset initiatives. We'll come back to risk-weighted asset initiatives shortly.

This next slide shows our Group return metrics. The return on average ordinary shareholders' equity for the year was 7.2%. This is marginally down from last year's 7.3% due in part to the high bank levy. The reported return on risk-weighted assets was 1.6% compared to 1.5% in 2014. It's worth remembering that the risk-weighted asset figure is an average of recent quarters and doesn't yet truly reflect the full benefits of our risk-weighted asset reduction program. We continue to work towards an adjusted return on risk-weighted assets of greater than 2.3% by 2017.

With that, I'll hand back to Stuart.

Stuart Gulliver

Thanks. This slide provides a summary of our progress in the eight months since our investor update. There's a lot still to do to hit our targets, but we've made a good start. We're going to cover risk-weighted asset reductions and revenue growth from our international network on the next two slides, so I'm going to concentrate on the other actions here on this one.

We've reduced our footprint to make the Bank simpler and leaner. We're now present in 71 countries and territories, down from 88 when this team took over in 2011. The agreement to sell our Brazil business to Banco Bradesco has received central bank approval and awaits approval from the Competition Commission. We also have regulatory approval to retain a small presence in Brazil to serve our large corporate clients.

Our U.S. and Mexico businesses remain a work in progress. We grew revenue in both businesses in 2015, in part from better collaboration between global businesses and an increase in revenue of more than 30% from cross-border business across NAFTA.

Retail banking and wealth management in Mexico also grew by 7% on an adjusted basis and we grew market share in cards, mortgages and personal loans. We also improved cost efficiency in the principal U.S. business by consolidating data centers and moving to lower-cost office locations.

As Iain has already said, we've made good progress in operating expenses. A lot of what we've done so far actually reflects very tight cost management. All of our cost programs are now underway and you'll see the impact coming through in the next few quarters.

We're gaining momentum in our Asian businesses and we've achieved growth in excess of GDP in seven out of eight priority markets in Asia; and since the start of 2015, we've advised on four of the five largest M&A deals out of Hong Kong and China. We were the lead adviser on ChemChina's $43 billion acquisition of Syngenta which was the largest outbound M&A deal coming out of China. We also acted as financial adviser on the restructuring of Cheung Kong and Hutchison Whampoa, the largest deal ever concluded in Hong Kong and the largest Asia Pacific deal since 2001. We also retained our leadership position in Asian debt capital markets and entered the top three for Asian M&A for the first time.

We continue to invest in the Pearl River Delta to build a scalable business and capture growth. As we reported at Q3, the majority-owned securities joint venture that we agreed will allow us to engage in the full spectrum of securities business in the country. We expect regulatory approval this year.

Our enhanced capabilities in ASEAN helped to drive revenue growth of 5% year on year; and our asset management business in Asia continues to grow and we increased assets under management in Asia by 13% in 2015. Finally, we extended our leadership position in renminbi business and grew revenue by 3% in 2015.

Turning next to RWAs, reducing our risk-weighted assets is vital to achieving a better return for shareholders at our investor update, we set a target to reduce the Group's risk-weighted assets by $290 billion by the end of 2017, roughly one-half of which was to come from global banking and markets. The chart on the top right of the page shows this target adjusted for the latest foreign exchange rates. This gives us a rebased target of $275 billion.

We recognized another $34 billion of risk-weighted asset reductions in the fourth quarter which took the total reduction for 2015 to $124 billion, nearly 60% of which came from global banking and markets. This takes us around 45% of the way towards our target. And excluding CML reduction, there was very little impact on revenue.

The savings included the continued reduction in global banking and markets legacy credit and the U.S. run-off portfolios which together reduced risk-weighted assets by $30 billion. A further $12 billion came from the disposal of our shareholding in industrial bank. Our refined RWA calculations process improvements and exposure reductions in global banking and markets and commercial banking, contributed an additional $80 billion in savings.

We're currently ahead of where we expected to be at this point. We continue to focus on optimizing our capital and we're confident of hitting the overall target. We're also working to grow revenue from our international network faster than GDP. This slide shows not only our progress, but also how important our network is as a generator of growth. The investments that we've made have helped to increase revenue from international clients by 5% in 2015.

Our transaction banking products capture value from trading capital flows and are, therefore, central to our strategy. We increased transaction banking revenue by 4% in 2015, helped by strong performances in payments and cash management and in foreign exchange. Payments and cash management also increased average deposits by 8% in 2015.

Security services which plays an important role in our renminbi business, grew by 7% and global trade and receivables finance revenue dropped by just 1%, despite a decline in commodity prices and slower world trade.

We also increased synergies by around $600 million or 6%, including a 7% increase in revenue from the sale of payments and cash management products to global banking and markets customers. The overall business synergy revenues were equivalent to one-fifth of total revenues for the Group in 2015. The growth from our international network, therefore, continues to be a significant point of strength.

Now let me turn to our outlook and I'd like to leave you with five key points. Firstly, the current economic environment is creating a great deal of uncertainty, but this is a strong and robust business. We're a well-capitalized and a highly liquid bank, with an advances-to-deposit ratio of 72% and a leverage ratio of over 5%. We're diversified and balanced, with a track record of resilience and a history of stable earnings.

Second, economic growth remains robust in a number of markets and there are actually plenty of revenue opportunities available to us, particularly in the areas that we've been targeting for growth.

To give you a few examples, the Juncker plan in Europe and the Belt and Road initiatives in China will boost infrastructure financing. Major trade agreements like the Trans-Pacific Partnership should offer stimulus to trade. And the COP21 agreement in Paris will lead to a major expansion of the green bond market, in which we're already a market leader. Because of that, we will continue to invest to grow the business. Third, we're concentrating on achieving our cost target of $4.5 billion to $5 billion of cost savings and we remain totally focused on achieving our 2014 run rate by the end of 2017. Fourth, here at HSBC, we have already completed most of our restructuring. We have a clear strategy and our overriding priority is the delivery of our nine remaining strategic actions.

And finally, as we've said before, prospective dividend growth remains dependent upon the long term overall profitability of the Group and on delivering further release and less efficiently deployed capital. Actions to address these points are core elements of the investor update provided last June.

Now the balance sheet strength that I've described enables us to manage the business for the long term in accordance with our strategy. In the meantime, our diversified universal banking model, low earnings volatility and strong capital generation, give us strength and resilience that will stand us in good stead.

We'll now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. We will take our first question today from Chintan Joshi from Nomura. Your line is now open.

Chintan Joshi

I had a few. Can I start with revenues? I see that your underlying revenue is $57.8 billion for 2015. What I was hoping to get from you was an underlying base by excluding all the things that you're running off. So percentile of KGBM, CML, CMB; all the items that are going to be out by 2017, what is the revenue contribution from that? I get roughly a number of about $52 billion from all those items, including [indiscernible]. Just wanted to get into the right postcode, that's the first one. Shall I take it one at a time?

Stuart Gulliver

Yes. I think so.

Iain Mackay

That's probably better, Chintan. I think there's -- as you can imagine, there's quite a few moving parts in that. So if you think about the CML impact, there's about a $300 million down every year as we run this portfolio off and if you look back over the last two or three years, that's pretty much the ballpark.

We can certainly give you the base numbers around the revenue generation of CML. I think it's probably better that we do that, either offline or we'll do some prep around that so that we can share it with all of you at the analyst's call next Monday. The other obvious thing that's in there is Brazil and I think you've already got the Brazilian numbers but we'll gladly share them with you again. And then the last significant item is the legacy run-off within global banking and markets.

Those are the three key elements in terms of focus around dispositions of businesses as well as run-off of legacy business. So we'll do a short three-liner for you on that one and share it with everybody next Monday at the analyst's meeting. Okay?

Chintan Joshi

The second one was on RWA. So your target is now $275 billion, but it does not include the sale of Turkey now. So I'm guessing you've got $13 billion odd from somewhere else because you haven't changed that RWA run-off target. I was just wondering what that would be.

And also, you grew RWAs by $35 billion because of business growth, say your slides. Is that the kind of run rate we should expect in this kind of market; i.e., if macro doesn't change, is that what we should be expecting?

Iain Mackay

So on the $13 billion as it related to Turkey, you're absolutely right, Chintan. We're committed to $290 billion, $275 billion on a constant currency basis. As you can imagine, as the teams dig into the various aspects of capital allocation within the Group, we're finding some incremental opportunities to economize in that regard. So we're fairly confident that we'll hit the $275 billion, excluding the fact that we've -- that we're retaining the Turkish business.

In terms of redeployment of this, I think as you can probably anticipate, looking at overall levels of activity in the fourth quarter, I think one of the things that will remain constant within HSBC is the risk appetite for the Group and credit underwriting standards and market risk appetite within the Group.

So as we release this capital which we're very confident in terms of accomplishing, the rate in which we redeploy which by the way informs the very reason for taking these risk-weighted assets out, is to redeploy it into business that generates profits at and above the level, the hurdle rates that we've set for our global businesses that takes us back to achieving that return on equity of greater than 10%. What we're not going to do is redeploy capital that does not hit those thresholds.

So although we had $35 billion back in the fourth quarter which was encouraging, I don't think we're going to sit here and predict for you a particular growth rate on a quarter-by quarter basis, because it will absolutely be informed by a propensity to write business that triangulates back the return on equity that we've set for the Group.

Chintan Joshi

And final one on costs, costs grew 5% on a constant currency adjusted basis. You've obviously got -- given us a goalpost for thinking about 2017/2018. I was wondering if you could help us think about the underlying cost run rate for 2016. Should we expect all these measures that are coming about to help your run rate in 2016 itself or are there regulatory cost headwinds that will offset those and it's difficult to model 2017 improvement?

Iain Mackay

So I think, Chintan, what we've said previously on this which remains consistent today, is that we've got continuing investment lined up across what we've got to do in regulatory programs and compliance. There's still a lot of work for us to do in that regard. Part of that obviously fits into continued deployment of what we need to do in global standards. And also, we will absolutely see the benefit of the savings programs that we've got underway.

We do expect to see incremental costs coming through in 2016, as we said before and we'll start seeing the accomplishment of that exit rate coming through certainly we expect in the latter part of 2016, but more emphatically in 2017.

And what we're going to try and do and certainly to [indiscernible] over the last couple of quarters in this regard, is provide you with sufficient disclosures that you understand the investments we're making, if you like, the cost to achieve the actual money we're spending on achieving those outcomes, the investment that we're making in those programs; and then, obviously, getting to the underlying run-the-Bank and change-the-Bank costs that sit there.

So certainly, as we look at the run-the-Bank costs on a quarter-to quarter basis, we would certainly expect to see some of the benefits coming through in 2016, but I'd simply caveat that by the continued investment in global standards and other regulatory programs and compliance.

Operator

Our next question today comes from Alastair Ryan from Bank of America. Your line is now open.

Alastair Ryan

Two related questions, please. The net interest margin shaded down by the looks of it in the fourth quarter and clearly, the environment is becoming less helpful with rates everywhere under pressure. Your previous sense that the margin had pretty much stabilized, is that still valid? It feels like [indiscernible] conditions have deteriorated.

And secondly, on deposits, another good deposit performance which is something that HSBC always does well. But if rates stay this low, is there a portion of the deposit base that doesn't work for you anymore? I know it's not at all natural for you to start pushing away deposits, but is there a stage, is there a point in the rate cycle at which it becomes necessary to do that? Thank you.

Iain Mackay

Net interest margin remains very, very stable in the fourth quarter and on a year-to-date basis. We certainly -- I think going back and reviewing commentary on this over probably the last six or seven quarters, we certainly saw a good deal of net interest margin deterioration in the latter part of 2013 and the first part of 2014.

But certainly, since the fourth quarter of 2014 through to today, net interest margin at a Group level remains very, very stable and when you go through the major operating subsidiaries of the Group, it's equally the case.

So if we look at NIM on an overall Group basis in the fourth quarter, it came off 3 basis points in total and a part of that was driven frankly by comparative factors over the previous year as it relates to currency translation and tax accrual release in the U.S. But when you look at the individual businesses that contributed to that 3 bps deterioration, 2 bps were in Europe, principally in the UK on the UK mortgage book where we've certainly seen some margin compression overall; and then secondly on North America which is principally in the deposit side.

So overall, net interest margin very, very stable; a little bit of competitive pressure coming through mortgage book in the United Kingdom and then the deposit base in the U.S. Sorry. One of the other contributors to that is further deterioration in CML in the U.S. and that's just the natural run-off of the portfolio there.

Stuart Gulliver

Then you were asking about is there a point at which we would turn away deposits. It obviously [indiscernible] depends on which currency we're talking about and, therefore which interest rate we're talking about. We continue to operate in a number of countries where actually interest rates are actually very positive, so it isn't as acute as it might be for some of our competitors. But in those currencies and this is particularly the euro, we obviously have started with banks and non-bank financial institutions to discourage them to deposit with us.

Iain Mackay

There's one other aspect to this which is an important one, Alistair which when you look at overall balance sheet optimization, one of the questions I expect that one of you will ask, either over the duration of this call or next week, is around issuance of total loss-absorbing capacity instruments.

And given that we have a significant program of issuance to do for compliance in that regard, again, layering in exactly Stuart's comment, we're going to look across the balance sheets of the Group and look at where in actual fact the deployment of that total loss-absorbing capacity into that business is a better funding mechanism for some of that business than deposits. And accordingly, that would inform some of our actions with respect to deposits in some of those jurisdictions.

So there's the introduction of another moving part in this equation and that is trying to ensure that we come up with a reasonably efficient deployment of TLAC to the various operations of the Group.

Stuart Gulliver

Because the plan is to issue TLAC at the holding company level and then stream it down into the operating subsidiary balance sheets.

Operator

Our next question today comes from the line Raul Sinha from JPMorgan. Your line is now open.

Raul Sinha

If I can have two questions, please, the first one, just to continue on the revenue point. I think Iain mentioned in his prepared comments that your revenue at a Group level on an adjusted basis was down about 2.5% in the second half of the year and most of the revenue growth that you saw last year actually came in the first half, 4.7% which was actually quite a support to market backdrop.

In the context of that and given that you've seen a little bit of a downtick in the second half of the year, I was wondering if you can talk about your start to the year and how Q1 seems to have evolved given it appears quite slow to us in the markets we look at. And also secondly, within that, just your confidence around the cost measures that you have previously outlined. Do you still think that you will be able to deliver positive jaws as we move through this year given the revenue environment that we're in? That's the first question. The second one I've got on BoCom if you want it now or I can wait.

Iain Mackay

No. Fire away. Give it to us now, Raul.

Raul Sinha

On BoCom, I can see the value in use has gone up to $17 billion now and your carrying value is $15 billion, whereas obviously, the fair value of the market price is just below $10 billion. I was just wondering if you could talk to us a little bit about how much further you think the value in use can continue to rise and if at some point you think you will be hitting the point at which you might have to reverse the contribution.

Iain Mackay

So on the revenue front, if we look at the first six or seven weeks of activity in 2016, broadly speaking, commercial banking pretty supported, pretty well supported; reasonably optimistic outlook in many of the markets. It's obviously -- I think the outlook, if you like the overall environment, is probably a bit doom and gloomish, but when you look at the numbers coming through, reasonably constructive on the CMB front; reasonably constructive on retail bank, wealth management.

Certainly, in the wealth management front in Asia, it's certainly a little bit slower than it was in the first quarter of last year, but again, reasonably constructive. And I think, as you would fully expect, in global banking and markets, given some of the activity we've seen in the marketplace, the markets business has been certainly facing some headwinds in January and the first couple of weeks of February.

Global banking broadly speaking as expected. But I think in the round, I certainly wouldn't like to try and project out the whole year based on the first six or seven weeks of trade. But certainly, CMB and retail bank, wealth management and global banking, broadly speaking, fairly supportive.

In terms of that informing cost actions, where we're very, very focused as a team, is hitting $4.5 billion to $5 billion of cost saves and the exit run rate that we set for 2017. As you can probably imagine, to take $4.5 billion to $5 billion of costs out of the business in 2.5 years is a significant undertaking.

There are a lot of programs up and running. As you can certainly see from our fourth quarter and second-half numbers, we're getting traction on those numbers. I think it's actually the first second half where we've seen costs in line with the first half for as long as I've been doing this CFO job and it's the first time in the fourth quarter we've actually seen lower costs than we've seen in the third quarter for quite some time. So that's encouraging, but clearly a lot more to do.

In terms of that resulting in positive jaws, if there's a reasonably supportive revenue environment then that gets us there. If the revenue environment is pretty hard for the rest of the year, then I think it really becomes a question of managing this business for the long term and making sure that we continue to invest in the revenue-generating capabilities and make sure that we've got the capability to meet our regulatory and compliance obligations in an efficient manner.

So first task, get the $4.5 billion/$5 billion out. As part of that, hit the 2017 exit rate equal to the 1400 run rate. And then, all being well, a reasonably supportive revenue environment should see us to positive jaws.

So again, too early in the year for us to lay that out super clearly for you and hopefully, by the time we get to the first half, we'll be able to have a more robust conversation around exactly what the year holds against that particular metric.

Iain Mackay

On BoCom, driver of the change in the value in use, one of the things that BoCom is moving towards is the implementation of internal ratings-based models for the evaluation of regulatory capital and that is one of the inputs to this kind of cash flow value in use model. And that reduces, if you like, the RWA concentration intensity and that is one of the key factors that resulted to an uptick in terms of the overall value in use for the Group, so if you like, a reduction in the capital carrying costs.

The other consideration which is probably more important, is our carrying value continues to increase as we recognize our share of net assets as BoCom continues to be accounted for under the equity method of accounting within the business. I think what I can say categorically is, based on how this business is treated for regulatory capital purposes, regardless of whether or not we continue to recognize a share of earnings through the equity method of accounting or not, there is absolutely no impact on the capital of the Group.

The risk-weighted assets associated with BoCom are consolidated on a proportional basis for regulatory capital purposes and we recognize the cash dividend which is not particularly significant that we received from BoCom, as part of the reduction in carrying value.

So in terms of having any reduction in the recognition of our share of net assets from BoCom, will not have an adverse effect on how the capital weighting is considered within the Group and it has no impact on cash flows either.

So although it's something that we're monitoring closely, I think perhaps value of use, although it is highly relevant, how the carrying value progresses is probably the thing that is more likely to determine whether or not we recognize an impairment on this, whether that's in 2016 or a later time.

Raul Sinha

And the fair value has got no bearing, Iain, on either of those numbers?

Iain Mackay

It really doesn't. It's obviously got a bearing in terms of being an indicator that we have to consider when it comes to testing this impairment. Where the market is value sitting up around $1,700 billion we clearly wouldn't be having this consideration, but because it is where it is, we assess this investment for impairment on a quarterly basis.

And the methodology which we've used in this regard is highly consistent, otherwise, as you can imagine, Raul, we revisit the assumptions and the quantification and parameters for those assumptions on a quarterly basis and round them by reference to external benchmarks. This is clearly a cash flow model that is built internally but the inputs to it are validated based on external benchmarks.

Operator

The next question today comes from the line of Ronit Ghose from Citigroup. Your line is now open.

Ronit Ghose

I had three questions I wanted to ask. The first one's on Brazil. You sounded very confident that the deal, the transaction, is on track. I was just wondering if you could give us some color on closing times, given the antitrust investigation. Originally, you'd been hoping for I think Q1, but officially, you were saying first half. Is this still a first half close or could this slip into second half? That's my first question.

My second question is thank you very much for the greater disclosure on commodities, but I was just wondering if you could share some more on the oil and gas exposure, particularly slide 7. Most of your exposure, 95% of your exposure you put into the six rating buckets. Can you give us any further granularity of how much would be, say, investment grade versus sub-investment grade or how much would be in the higher CRR numbers?

The third question is, given the news on Friday in the UK about the coming Brexit referendum, is that material enough to reopen the head office domicile question?

Stuart Gulliver

Okay. So Brazil, basically, the timetable is broadly in line with the guidance we provided when we announced; and, yes, we still think that this transaction will close in the first half of this year, so by June 30.

On the oil and gas stuff, I'll kick off and Iain might want to jump in, but what I can tell you is 50% of our exposure is to national oil companies. So state-owned oil companies is 50% of the number you're looking at. 18% is to the integrated oil companies, so the big oil majors; 13% to the independents, 9% to oil services, 5% infrastructure and 4% to traders and 1% to refiners. So it's a pretty strong book, actually.

Iain Mackay

Yes. I think the only thing I'd add a little bit there, if you think about breaking it down into external ratings, we've got almost 60% of the book is high investment grades, so AAA at one end of that scale down to BBB minus. And then we've got about 35%/36% of the book that is B plus, BB plus to B. So when we think about it in that context, we've got pretty high ratings from an overall credit quality perspective for more than 90% of the book.

Stuart Gulliver

And remember as well, the loan impairment charges that we raised were mostly collective loan impairment charges, so they're anticipating a worsening in the portfolio. They are not specific to individual credits.

Iain Mackay

And we've -- in terms of how we've taken that, dare I call it -- well, I'd better not call it a general provision, but an incurred but not reported provision, against that $30 per barrel is across -- is booked into legal entities and businesses where we have, obviously, oil and gas exposure. So the principal areas there are United States, Canada, the United Kingdom and Indonesia and then Middle East, North Africa.

Ronit Ghose

So the generic provisions are across all the legal entities but the individual provisions will be largely North America focused?

Iain Mackay

No. Actually, individual provisions, so the individually-assessed credits against which we've taken provisions over the year as a whole as well as in the fourth quarter, have sat within Indonesia, the United Kingdom, the U.S., Canada and the Middle East.

Douglas Flint

On Brexit, I think when we had the opportunity to respond to that question last week, we indicated that while our own economic research is very clear that Britain's better position is to be within a reformed Europe and, therefore, we support Britain staying within Europe, it had very little impact on the domicile of the holding company. So it wouldn't reopen the debate.

It's an issue potentially for the ring-fenced Bank, depending on what would happen if Britain were to vote -- the non ring-fenced Bank, sorry; depending on whether Britain were to vote to leave. But it doesn't have an impact on the domicile decision.

And remember. The holding company has a very, very major -- two very major subsidiaries prospectively in the UK but also a very major subsidiary in France, so we already have a very major operation within the eurozone. So it could have an impact on the non ring-fenced Bank but it would not reopen the domicile decision.

Ronit Ghose

So, nothing for the holding company but maybe some GBM jobs moved.

Stuart Gulliver

Yes. Again, it would depend, to be honest, on what the various terms were of the UK leaving, if indeed the referendum was for the UK to leave; so to what extent passporting details were negotiated. Obviously, that itself will probably take some time to do, so there would a period of uncertainty which almost inevitably means that those activities which are regulated under a European umbrella would probably have to relocate to a Continental European location which in our instance would be Paris.

But as I say, it's -- that we'd need to foot out when we know what the actual facts are but, as Douglas says, this has no impact on the domicile of the holding company. It's very specifically about the non ring-fenced Bank and the detail of that we'd need to wait and see about what actually the terms were of any exit, if indeed an exit was to come about.

Operator

The next question today comes from the line of Chirantan Barua from Sanford Bernstein. Your line is now open.

Chirantan Barua

Just two quick questions, one on dividends, the dividend guidance is pretty clear. You've said progressive, but at the same time, there's a complication in terms of capital release from the oil-yielding assets and non-strategic assets and your long term profitability.

If you do the simple math, it almost seems like if you were to give a progressive dividend, market conditions have to change significantly; otherwise, you'd end up being out of capital. Can you help me just understand how you're thinking about the 2016 dividend right now, given the current marketing conditions? Or is progressive much more longer term that you're looking at?

Iain Mackay

So, Chira, I think again, as the words in both the Chairman's statement as well as what we've told you today, we've always viewed dividends in the longer term context and it's informed by obviously the capital strength which comes from profit generation as well as the efficient management of our capital, around which we've seen a lot of very focused activity over the course of the last couple of quarters. And it's obviously informed by the profitability that we can generate on a year-by-year basis, but that profitability simply informs the strength of our capital base overall.

So when you then think about the risk-weighted assets that we're releasing in underperforming businesses, I'll go back to one of my earlier answers that the extent to which we redeploy that will be informed by our ability to redeploy it in business that generates profits consistent with the thresholds that we've set by global business, by line of business, that takes us back to improving return on equity above 10%.

If in actual fact we find ourselves in an environment for some period of time that the ability to redeploy that capital profitably is muted to some degree, then, yes, we will end up with higher capital ratios and conceivably capital ratios that are well beyond that which we would reasonably require in any regulatory environment. And if in fact at that point we find ourselves paying a progressive dividend out of capital resources, then we would pay our dividend out of capital resources.

So if we operate in that environment to sustain a higher payout ratio, it's not necessarily something that would concern me. If we were in an environment where we were reinvesting that capital, then clearly, we would want to see the rate at which we pay our dividends to fall back into the region of that 40% to 60% payout ratio.

But this is a long term view. We're not informing capital payments -- sorry, dividend payments, in any given year based exclusively on what would happen in that year and I think certainly what we've done in the last two years informs exactly that.

Chirantan Barua

And to that extent, the whole draft capital thing in the U.S., given the DFAST/CCAR last year, how should we think about capital coming back from the U.S.? Because that's been dead capital for some time now.

Iain Mackay

When we look at this and just as we talk about capital efficiency across the whole of the Group, certainly, there are fairly significant goals in place for Pat Burke and the U.S. team, we see -- having passed CCAR as a big positive. But when you then go back to the strategic actions, one of the strategic actions is improving the profitability of our NAFTA businesses and two of our least well performing businesses in terms of profit generation is the U.S. and Mexico and informing the strategic action.

So one of the things that we believe we've got to do, not only to convince ourselves that we should be taking capital and dividends out of the U.S. but to convince our regulators, is to not only address some of the compliance concerns that we have in the U.S., so we've got a number of consent decrees in place that are well publicized, we've got very specific actions in place to get those resolved and out of the way over the course of next 12 to 18 months; we believe that's an important obstacle to cross.

And then in the same timeframe is to improve the overall sustainability, diversification of profits within the U.S. business, obviously continue to be successful in passing the CCAR tests set by the Federal Reserve board and on the back of that create the basis in which to be able to extract capital, dividends, from the U.S. if not in 2017, certainly in 2018.

Chirantan Barua

Just one more question, a brief outlook on Hong Kong. House prices have started to roll off. I've seen loan growth being sluggish; risk still very, very low numbers historically. So how should we think about Hong Kong this year across all the business groups?

Stuart Gulliver

I think we're looking for Hong Kong GDP to be about 2%/2.2%/2.3% growth this year which is still reasonable. Consumer spending growth is slowing. The labor market is actually quite tight. Obviously, there's an impact on Hong Kong from less tourism from Mainland China.

The property market here historically has phenomenal volatility but very low default rates. The banking system is very heavily capitalized. The loan to value of our book is very, very conservative. So sitting here, we don't have elevated concerns about LICs from residential real-estate lending here in Hong Kong.

Iain Mackay

On page 8, Chira, we've provided in a couple of little callout boxes a little bit more detail on the Hong Kong mortgage group. There's $61 billion there; LTV ratio currently 29.3%. Buy to let within that portfolio is 15%. Defaults/delinquencies within that book are absolutely rock bottom, virtually zero.

So overall, that book continues to be in pretty good shape. And in terms of residential rentals, the market is holding up reasonably well.

Chirantan Barua

And you're not worried about commercial banking? Their impairments are almost zero?

Iain Mackay

Very, very low; very diversified; not necessarily unwritten in specific development properties, but underwritten giving a clear view to the wider resources of the sponsoring organization and again organizations in Hong Kong that this Bank has operated with for decades in many instances and have a longstanding relationship. So again, it is a well underwritten, well collateralized book of business and well diversified across different sectors of commercial real estate.

Operator

The next question today comes from the line of Martin Leitgeb from Goldman Sachs. Your line is now open.

Martin Leitgeb

Two follow-up questions from me, please, one on loan growth or revenues and one on capital. Firstly, on loan growth, could you confirm on a currency, on a constant currency basis what loan growth was for the Bank as a whole in the fourth quarter? And I was wondering if you could give us a steer on how we should think of loan growth in the core franchise; so retail banking, wealth management and commercial banking over the next one or two years. Should we assume that loan growth here will be roughly in line with GDP? Or should we assume that the redeployment plans you mentioned earlier could weight a little bit more on that?

The second one on capital. I think in the annual report you state that you expect -- or the FPC has guided that the Pillar 2A buffer could reduce once the other main efficiencies are corrected. Could you give us a steer on how much your market risk-weighted assets would increase according to the final draft of the fundamental review of the trading book paper from the Basel Committee, just to get a sense on how much the impact here could be on Pillar 2A? And would you expect that change to happen only in 2019 or would that be a gradually phased-in change? Thank you.

Iain Mackay

So loan growth in the -- overall in the fourth quarter was about $8 billion. That was mostly within the European business and in North America with slight decline in Asia, mostly in large accounts within commercial banking and GB&M, that being actually consistently the case in terms of growth as well as reductions. But the net in the books was $8 billion in the fourth quarter, so a little bit underneath 1% overall.

In terms of that necessarily being a reflection of what we would anticipate being able to do, I go back on earlier comments on revenue. I think it's probably a little bit too early in the day to read too much into what that may mean for the year as a whole.

On fundamental review of the trading book, I think at this stage you're going to get the same answer from me as you did at the third quarter. Although there is a range of possible outcomes, where we might fall within that range of outcomes remains still really quite uncertain.

I think were we as an organization to be successful in accomplishing an internal market's assessment view on every desk within the Bank and that all of those models could be implemented and approved by the PRA on a timely basis, then at least based on the most recent outcome, the likely impact is something that we would feel very confident about being able to manage within our risk-weighted asset savings targets. It's certainly what's at front of mind from Samir's perspective. Were the standardized approach to be applied across the book, then the range of possible outcomes becomes much, much wider.

So I think until we're further down this path and until we've had the opportunity to do frankly a much more granular analysis of the book with a much more clearer representation from Basel as to what the final outcomes are, I'm afraid you're going to have to wait for a bit more detail on that one.

Operator

The next question today comes from the line of David Lock from Deutsche Bank. Your line is now open.

David Lock

Three questions from me, please. The first one is coming back on the cost reduction in revenue into play. If we do see a structurally lower revenue environment, I'm just wondering if you see any ability to be able to revisit the cost targets going on particularly within the investment bank. Clearly, if the revenue weakness is more concentrated there, then is there any cost effects that we can expect to come through from there?

The second question is on the risk-weighted assets reduction that you've done in the GBM. I think I'm right in remembering back to the June presentation that you said around $400 million in revenue would be impacted from the RWA reductions that you were targeting; and, obviously, you've achieved a lot of that this year. So I just wondered if you could update on the run rate impact on revenues from those risk-weighted asset reductions.

The third one, impairments in Brazil, you called out, I think, $0.1 billion impairments that you took in Brazil on the slide. So I was just wondering if any of those relate to the ongoing Brazilian business that you're going to be retaining in that geography. Thank you.

Iain Mackay

So I'll take those in reverse order. The Brazil impairments, the step-up there was mostly on the personal book which is going. So in terms of what we're impairing large corporates, the answer is, no. In terms of the RWA--

Stuart Gulliver

$400 million of revenue.

Iain Mackay

The RWA $400 million impact, I think where Samir came out when we were talking about this back in June was probably about a $400 million impact, excluding legacy and that remains a reasonably consistent view on a run-rate basis. So on a total annualized basis which Samir was getting at, is that he would expect to see $400 million coming out of the run rate of global banking and markets.

And certainly, based on what we've been able to accomplish in the second half of the year, excluding legacy exits, then that number remains reasonably consistent at this point in time. Should it change as we work through this environment, we'll obviously keep you posted, but I think Samir is still confident of it falling within that range.

Stuart Gulliver

And I think you can roughly pro-rata it. So the amount of RWAs he's taken out as a percentage of the total he's going to take out which we communicated last June, you can apply across the $400 million.

Iain Mackay

The jaws number, same answer as before, David. We've got very clear programs in place and good traction in getting $4.5 billion/$5 billion out of the cost base, tracking very much towards achieving that 2017 exit run rate to the equivalent of our 2014 run rate. If there's a reasonably supportive revenue environment, then I think that provides us with some encouragement around hitting the positive jaws number.

But I think what we very much look at is the importance of continuing to invest, not only in the growth capability, but also the regulatory compliance and global standards capability of the firm in the longer term.

So although we will absolutely respond, as we have through the third and fourth quarters, to short term pressures in terms of cutting back on things like T&E and just the very short-cycle expenses which we can sink our teeth into, structurally which is the focus of a great many of the programs that we're focused on, it goes to the long term efficiency and productivity of the organization.

So I think it's a little bit too early for us in the course of 2016 to be going back to teams and saying, right, let's tee up another big slug, because we've already got a big target in front of us that the teams are focused on.

Stuart Gulliver

Yes. We're already committed to cut a little over 15% of our total cost base and it's too early. We're in -- we haven't finished the second month of the year. So we need to see whether this trend deepens and if it does, then we'll respond at the half year, but we're committed to take out a very large chunk of our cost base and we'll do that. And we're absolutely committed to do that and as I say, if we need to revisit, it's not yet.

Operator

The next question today comes from the line of Tom Rayner from Exane. Your line is now open.

Tom Rayner

Could I have a couple of questions, please, just the first one maybe going back to the progressive dividend policy? And then, I have a second question on TLAC, because I know Iain would have been disappointed to have gone through the whole call without one.

Stuart Gulliver

So we thought -- we did think it would be you, actually and Russell Picot has actually won the sweepstake.

Tom Rayner

Well done, Russell. Yes. Just on the progressive dividend policy, I just wanted to push you a little bit more on the commitment here, because obviously, capital build has slowed a little bit in the second half. We've still got potential RWA inflation, IFRS 9 to absorb. There are earnings pressures out there, not least TLAC which maybe we'll come on to.

And the payout ratio on a statutory basis is 78% and it could go higher because if BoCom was derecognized. And again, I hear what you say about the lack of any cash or capital impact. But again, it could cosmetically go higher.

So I was just wondering just how important is progressive dividend policy too, because you mentioned in one of your answers, I think, that if you were investing in profitable growth, maybe you would bring that payout ratio back down again. So I just wondered if I could just test you a little bit more on your commitment there. And then I have a second one on TLAC itself, please.

Iain Mackay

I hate to disappoint, Tom, but I really don't have a great deal to add to the answer that I gave your colleague about 15 minutes ago. The progressive dividend is and always has been, a long term view on the dividend paying capability of the Firm.

And I think the last two years of our actions have demonstrated that short term volatility in the profitability of the Firm and as you know the volatility of profits within this Firm is fairly low anyway, has not informed our actions with respect to either keeping the dividend flat or in actual fact cutting the dividend, principally on the basis that we see good capital generation.

So if you think about our capital position for the moment, we're sitting at the 11.9% endpoint, well above where we need to be at an endpoint. On the closure of the Brazilian transaction, we'll add some 60 basis points to our common equity Tier 1 ratio.

So let's say that puts us at 12.5% before we count any capital generation from the first half of the year's operations. We've set ourselves a target which, certainly based on everything we see coming through the regulatory framework at this point as continuing to be appropriate, if I can get common equity Tier 1 ratio between 12% and 13%.

Continued capital generation, even at a slightly slower rate than we've been able to accomplish, whether it's in 2015 or 2014, will see us above the half point, the midway point, the 12% to 13% range, we would expect during the course of 2016.

And then I think where we're with dividends will absolutely be informed not only by the profits of 2016, but also the profits in the context of the overall capital position of the Group, as well as the outlook for profit generation and growth over the coming 12 to 24-month period. It is a long term view. The dividend is clearly extremely important to the shareholders.

And notwithstanding the cosmetics, I get your point around BoCom. If you took out $2 billion worth of reported earnings which by the way is on an after-tax basis as reported, you're taking about 10% of the Group's earnings out so you would see DPS as a percentage of EPS going up in that respect. But then that again takes us back to what we're focused on strategically which are actions that improve the earnings of the organization sustainably, so hitting the EPS number.

But if we're in a low reinvestment cycle, to have a higher payout ratio for some period of time is not going to trouble us provided we continue to generate capital from the operations that we conduct and from improving the allocation of capital of which obviously is a very sharp focus, not only within the industry, but very specifically within HSBC.

Tom Rayner

Just on TLAC, did I see a figure somewhere that your issuance requirement is $60 billion to $80 billion over the next two or three years? I think that was on one of your slides.

Stuart Gulliver

That's the gross number; that's a gross number, Tom. It's much smaller.

Tom Rayner

Okay. Yes, because I saw that you put the redemptions number in as well which I guess is indicating that the net issuance requirement is quite small. But I guess one of the things we've seen in recent weeks is quite a big widening in spreads between HoldCo debt and OpCo debt and I guess that reflects the market's concerns about bail-in and whether that's sustained or not remains to be seen.

But I think we have seen for most banks quite a big widening there. So I was wondering if you could us any indication of what sort of cost implications meeting that TLAC requirement would have for HSBC. I don't know if you can scale it any way.

Iain Mackay

Yes. At the risk of stating the obvious, right now wouldn't necessarily be our preferred time to be in the market issuing large amounts of debt. I think what was encouraging over the course of last week is that we saw the spreads tightening again across three, five, seven and 10-year maturities in senior debt for ourselves and to a slightly lesser degree in Tier 2s.

I think the AT1 market is deeply dysfunctional right now so I wouldn't have any anticipation of us trying to do any AT1 for the obvious reasons that I'd like to see a little bit of structural stability come into that market and people get their heads around what those instruments actually mean from an investor's perspective. We won't go back and revisit my less than entirely complimentary remarks about AT1s from two or three years ago.

From a TLAC perspective, it's senior debt. So our expectation is that probably over the course of the next few weeks we'll investigate going out into the market with some senior debt to meet our TLAC requirements. We still price broadly speaking inside or very much in line with the best of our peer group in this category. Were we to issue today, it would obviously be a little bit more expensive than it was going back a couple of months. And again, it's kind of going to be informed by our ratings and our ratings again pretty much sit at the top of the pile.

But timing, I think the interesting challenge around TLAC is timing. While the regulators hold everybody's feet to the fire, to the 2019 compliance date which is something the industry has consistently and repeatedly challenged, the regulatory authorities around the world and the industry's ability to hit that mark in an orderly manner by January 1, 2019, I think given some disruption in the market over the course of the last few weeks, will no doubt continue to be in the discussion with regulators. But if we have to go at higher rates then, obviously, there's going to be a slightly higher cost for us.

What I can say is as we build this requirement, our end state, if we end up at the top end of that range of $80 billion gross issuance, we would expect the net interest income effect on the P&L to be somewhere in the range of $800 million.

So that is obviously a little bit higher than earlier estimates of costs that I gave to you at the third quarter.

Operator

The next question today comes from the line of Manus Costello from Autonomous. Your line is now open.

Manus Costello

I actually wanted to follow up on the TLAC question as well, please, so I don't know if Russell wins twice on that. I just wanted to see if you've changed your approach to resolution, because when we talked about this previously, you were talking very much along the lines of MPE. But the way you talk about this now, like issuance coming out of HoldCo and down-streaming capital seems much more SPE driven.

So I wondered if that was one of the changes of approach which has led to this increase in guidance from, I think, $200 million to $300 million of impact up to $800 million of impact. And then I had just a second question on GBM, please.

Iain Mackay

So on TLAC, no. There's -- doing single point of issuance and single point of resolution are two entirely different things. So our ability to issue out of the holding company and then push that down to the appropriate subsidiaries such that need TLAC regulatory requirements, are quite distinct.

I think in the short term, one of the reasons that we're doing it out of the holding company as opposed to intermediate holding companies is the U.S., the Fed's proposal on TLAC, where their proposal which we provided a comment letter to the Fed in the deadlines required, would require all of the debt to be issued internally.

And so as a purely practical matter, as we start the issuance of these instruments in the marketplace which again, as I say, is senior debt with some modifications, we're doing it out of the HoldCo until there is greater regulatory clarity around exactly how the international community wants to go at this.

The SSB has said intermediate holding companies. So for us, that would have been broadly speaking one in Europe/Asia, one in the United States. The Fed comes out and says, no; it's all got to be done through the parent company.

So there's a very practical reason, Manus, behind why we're doing it out of the holding company, at least as a starting point. And I think to set a reasonable expectation, at least through 2016, any TLAC issuance will be done out of the holding company and then downstream. But that in and of itself, in our view, doesn't necessarily put multiple point of entry at risk.

I think a wider question which may challenge the multiple point of entry resolution approach is exactly the Federal Reserve's proposals around TLAC. If everything has got to be done out of that -- as a parent company and that is the level at which you're going to push losses back to as opposed to recognize losses at the intermediate holding company or the operating company, then I think that may conceptually be a challenge to single point -- to multiple point of entry resolution.

But I think we've still got quite a lot of work to do with our regulators as an industry -- this is not unique to HSBC but as an industry -- we've still got a bit of work to do in this regard. And on the quantum, the original estimates that we provided back in June were based on how it would impact the three principal operating subsidiaries of the Group, not the Group as a whole.

When we updated you at the third quarter, we provided an estimate for TLAC issuance for the Group as a whole and that's when we provided the $60 billion to $80 billion overall issuance and a cost in the region of $500 million to $600 million. The step-up that we've provided here is the $500 million to $600 million versus the $200 million to $300 million. Okay?

Manus Costello

My second question is on GBM. I just wanted to ask about returns in GBM because you seemed quite pleased with the performance of GBM. You referred to it as the star performer. But if I look across the year, client-facing and BSM is doing a return on risk-weighted assets of 1.8% and a lot of that is being generated by BSM, I would guess. And I think you're targeting 2.7% on that metric.

I wondered. What are you going to see to drive that further? Because you're more than halfway through the RWA reduction now, I believe. How are you thinking about that return on risk-weighted asset metric for GBM, because it doesn't seem to be --? It seems to be a long way from target.

Iain Mackay

Yes. So we hit 2% this year in client-facing business for global banking and markets. You're absolutely right. The threshold for global banking and markets is -- our target, rather, is 2.7%. The focus of RWA reduction, about -- of a total of $290 billion, $275 billion in constant currency, but $135 billion to $140 billion of that is targeted within global banking and markets. That includes some of the legacy credit. And very reason we're targeting that is that it is low-returning business within the global banking and the global markets businesses.

So although a great deal has been accomplished by Samir and the team in this regard in 2015, there is still a long way to go. But to be clear, the business that Samir now writes is set at the threshold that he needs to generate and consequently, that has got to work its way through the book. So you're right, Manus. There's still a lot of work to do in this business but we're making good progress.

Operator

The next question today comes from the line of Chris Manners from Morgan Stanley. Your line is now open.

Chris Manners

I had three questions, if I may. The first one was on PPI. Obviously, total recognized costs is up to $4.7 billion now; $0.5 billion charge for 2015. Just trying to work out does that take into account Plevin and the consultation? And should we expect that to be the last from PPI? I know there is uncertainty around that, but is that your best guess or should we be expecting more charges in future quarters?

The second point was FX. Obviously, the dollar's strengthened quite a bit. Is it possible just to give us an impact if the dollar stayed where it is versus all of the other currencies, how much of a revenue drag that would be? Obviously, the dollar's been strong this year.

And the last point was just on capital. Obviously, Pillar 2A was meant to come down but it's gone up to 1.3% now. Countercyclical work has come in. Obviously, you're still confident about your 12% to 13% CT1 ratio. Just trying to work out. You're saying you're going to be at 12.5% pro forma. What happens when you get to that 12.5% and you still keep building capital because you keep making profits and running things down?

Iain Mackay

So I think I answered your last question already, Chris. If we find ourselves in the position with capital surplus to our requirements, then I think that's going to be reflected in the payout that we see coming through dividends. We'll deal with that issue when we get to that point.

I think our preference would be to see a good balance between obviously meeting our capital requirements, having a very constructive market environment into which we can reinvest some of the capital that we're generating from the business, while continuing to pursue a progressive dividend policy for our shareholders. So I think I've probably answered your last question in that regard.

And to be clear, at this point, the countercyclical buffer impact on HSBC is extremely muted. We've got an application of our small countercyclical buffer which we do know will grow, in Hong Kong, but that is factored into our exposures for the Hong Kong business. We've got a small countercyclical buffer applying to our Scandinavian exposures of which we have very, very little, but that's factored into our capital numbers at this point in time. And the Pillar 2A is very much where we expect Pillar 2A to be at this time.

I think as we work through 2016 with the PRA, we'll submit our internal capital adequacy assessment process at the end of first quarter. Our regulators will sit down and look at that from a set standpoint and probably sometime during the second half come back to us with whatever their assessment is of Pillar 2A. We would expect some indication then about what the PRA buffer may hold for us as well. So we'll learn more about that in the second half of the year. Going to PPI, we have factored in -- sorry?

Chris Manners

Sorry. What I was going to say is, if you have a progressive dividend policy and you find you have a little bit more capital than you need and not that many opportunities to grow, you don't want to grow your dividend because then you get stuck with that higher level. But say if the capital ratio gets above 13% and you want -- 13% is your ceiling, you don't want to increase the dividend because then you're forced to keep that progressive, but you just end up with a little bit too much capital. How do you think about managing that outcome?

Iain Mackay

Well, there are other aspects that we could certainly consider. It would depend on what our capital position is attributable to. So we have in the past talked about doing buybacks. I think if we were to launch a buyback program, we'd want to launch something that we could reasonably sustain.

And again, that's a fine judgment. That's a little bit in the margin of where we would find ourselves, Chris. But frankly, if I found myself in that position, I'd find it a fairly high quality problem to be dealing with.

From a PPI perspective, we certainly have considered the impact of the FCA consultation in terms of trying to bring this issue to a close by the spring of 2018 and we've included our consideration of the impact of Plevin in the same provisions.

So as you'd probably observed, over the preceding several quarters, our provisions for PPI had started to diminish quite considerably. So in the fourth quarter, we took an informed view, certainly based on our own operational data of how this could be brought to resolution in April of 2018 or spring of 2018, as it relates to both PPI and the possible implications of Plevin and have made provision accordingly.

If FCA guidance is in line with the consultation, then we'd like to think we won't have much more in the way of significant provisions for PPI, but we obviously need to get the final outcome of the FCA consultation and we'll take it from there.

On FX, I'm just trying to figure out how to give you the FX impact on the revenues for 2016 without telling you my budgeted number for 2016 revenues.

Chris Manners

Or a guess at what the foreign currency translation will be.

Iain Mackay

Or a guess, but what I can tell you which I'm sure won't necessarily satisfy you normally -- enormously, but if I give you impact on our 2015 revenues of foreign exchange, the impact on revenue of FX was negative $4.8 billion.

Chris Manners

So that's how much 2015 defined versus 2014.

Iain Mackay

That was 2015 versus 2014.

Chris Manners

Yes.

Iain Mackay

4.775 billion to be precise.

Chris Manners

And how do we think about carrying that forward? Because presumably, there will be still a headwind.

Iain Mackay

That sounds like a fine mathematical problem until you sit down and think about it, but I'm--

Chris Manners

I'm going to try and work it out.

Iain Mackay

The only way I'd give you that number is give you my budgeted revenues and I'm sorry to tell you, but I'm not going to do that.

Operator

Thank you, Mr. Gulliver. We will take our last question today from Michael Helsby from Bank of America. Your line is now open.

Michael Helsby

So I've just got two questions, if I may. First just on the shape of the yield curve, I think at the time of your strategic review, you commented that you'd allowed for the then shape of the curve within your 2017 revenue outlook to get to your ROE. It feels like there's been a big flattening of the curve since then, so I was wondering if you'd done the math that if you marked it to market today, what would that do to your revenue expectation that you set out embedded at the strategy day. So that's question one.

And just on question two, thanks for your comments on the dividends, Iain. The focus has been on dividend increases, but given your stock's yielding well over 8% on the dividends that you've released today, it does feel like the market's worrying that you're going to cut your dividend, not grow it.

So probably a better question to ask given where your share price is what scenario you need to see for you to be recommending a dividend cut, not keeping it flat or growing it. Thank you.

Iain Mackay

So I guess in the last scenario, it would be a scenario that nobody on this telephone call would particularly look forward to seeing. Right?

So when was the last time that the Group cut the dividend? That was 2009 and that was in conjunction with the rights issue on the back of what was a clearly well-developed financial crisis and certainly something idiosyncratic to HSBC were significant losses coming through a subprime portfolio in the United States. To put that in context, our United States' subprime exposure at the end of 2007 was $160 billion plus. We have no other single exposure in the Group that is even close to that in 2015, none.

Now is it an interesting economic environment which we're operating in? Absolutely. But I think at the moment, all of you and a great many other commentators, are trying to figure out the fundamental economics against market -- against some of the market volatility that we're seeing today.

So if you think about China, we continue to see growth rates north of 6.5%. We continue to see a pretty supportive environment for some aspects of growth within the vast majority of our Asian markets. I think there's one or two which are probably a little bit difficult in terms of reliance on commodities. You don't need to be a super geo-politic follower or economic follower to figure out which those might be.

Clearly, we've got a very, very close eye on oil and gas exposures and the countries in which those oil exposures sit in terms of longer term first and second order possible impacts. But notwithstanding what is a slightly slower start to the year, I think we've got to remain reasonably optimistic about the range of opportunities that are open to us and Stuart talked about some of those in some detail.

So again, we take a long term view these days and one of the key today is the profitability that we generate in a year. We cannot -- you can't live in isolation off the capital base so you've got to continue to generate capital from the profits that we generate as a Group. And a great many, in fact the majority of the strategic actions that we laid out last June and that we're focused on and delivering against, are about improving the profitability of the Group and creating opportunities for the revenue base to support that profitability.

On the interest rate impact, that's an interesting way of asking the same question as Chris did, so well done. What I can say is what we looked at in terms of planning from an interest income perspective is that we pushed the curve that we were looking at as we were doing our plans in the third and fourth quarter out 12 months.

Okay? So to put that in the baldest possible terms, we did not factor in significant U.S. dollar or sterling rate increases in 2016.

Michael Helsby

Okay. So you would have about $1 billion or so of positive benefit that probably has disappeared.

Iain Mackay

Our expectation on rate increases is somewhat bearish. But that's the environment in which we've operated now for five years.

Stuart Gulliver

Thank you very much. Thanks. That brings the call to an end. Thanks very much indeed.

Operator

Thank you, ladies and gentlemen. That concludes the call for the HSBC Holdings Plc annual results 2015. You may now disconnect.

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