HSBC Holdings Earnings Call INSIGHTS: The White Paper, Cost Development

On Monday, HSBC Holdings PLC ADR (NYSE:HBC) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

The White Paper

Alastair Ryan – UBS: Two things if I may, first, whether the Mansion House speech and the White Paper at the end of June have given you enough clarity to start using some of what’s now a very strong capital base and $150 billion of cash on hand that you’ve built up? Second, within GBM, clearly very good BSM figure whether I could invite you to update your guidance on that, and secondly on the $50 billion of RWAs in the legacy portfolios, how quickly we should anticipate those going away? I know, there’s a value versus hanging around trade off, but clearly you’ve quite a P&L to absorb exit costs and what’s a fairly material drag on that division?

Stuart Gulliver – Group Chief Executive: Sure, look on the White Paper, I think you can see that we’ve briskly grown our loan book in the U.K. both SMEs and in terms of U.K. mortgage lending, so we have an 11% share of new mortgages in the first half of this year versus the 6% overall market share and our lending to SMEs is also moving up briskly year-on-year. So you can see capital deployment taking place within the U.K., but obviously that $150 billion represents a capacity that is clearly not fully used, because we would be running at a much lower number, but it doesn’t really reflect a – what it reflects to be honest Alastair is the risk aversion towards other banks rather than a risk aversion to lending business to businesses generally. That risk aversion to lending to other banks comes about because the interbank market is a clean market and there are very few unencumbered assets now amongst weaker banks, partly exaggerated or amplified by LTRO and positive preference in certain countries, so therefore we end up with a very large deposit base, and a imbalance between our risk appetite and the amount of money we have to deploy, so in terms of white papers in the market settling down, yes, we have capacity to lend to corporate, but I wouldn’t look at that whole $150 billion because by definition that’s part of our liquidity, and a large chunk of that won’t eventually be lent into illiquid assets. But you can see growth in balance sheet, and in lending in the U.K. in the first half versus last year in all of the numbers. I mean, the thing we would say on the white paper is that, generally speaking we obviously would support better regulation and the whole reform agenda. Actually we completely recognize that U.K. is going to proceed with ring fending, it will be a drag on the position of the U.K. and global markets, but we think white paper was constructive for us, it was particularly helpful in terms of the definition of PLAC, and the fact that it may not be necessary to apply PLAC to our non-U.K. operations, and we’re working on the assumption that this will all go through and we’ll need to create a ring fence and non-ring fence bank. As to the United States RWAs of $50 billion, I mean, we’ve done a bit of work, we’ve had BlackRock, Inc. to look at the books, and the disposals of those are as you say a mathematical equation as indeed they are for the assistant conduits. I think that you need to look at this run-off over a couple of years, I don’t think it’s going to be shorter than that, unless we see a strong recovery in the markets, which I don’t foresee at this moment in time. I don’t know whether Ian you might want to add anything in terms of time tables?

Iain MacKay – Group Finance Director: No. Certainly, also I mean what remains tied up in risk weighted assets on the CML portfolio is about $130 billion, and as Stuart mentioned, we’ve done a lot of work in terms of preparing to try and accelerate the exit of that through dispositions. That work has gone reasonably well. Hopefully, we’ll be able to give you a little bit more information as we get into third and fourth quarters. But the intent is clear that we recognize that we’ve got the capital and the income statement to support that. So the focus is finding transactions which make some economic sense to us. But the process both for the book in the United States and the existing conduits here in the U.K. have started, and teams of people are in place, and the work streams are live.

Alastair Ryan – UBS: Then on the BSM?

Stuart Gulliver – Group Chief Executive: On the BSM, yeah, I think that probably guidance in the kind of, yeah, 3.4% to 3.8% type of range for the full year.

Cost Development

Chintan Joshi – Nomura: My first question is on your cost. Clearly, the underlying cost development has been quite good. I’m wondering about half-on-half cost developments on an underlying basis. In the past, you have said that you want to avoid seasonal blips in second half, so should we expect somewhat even distribution of cost in H2 relative to H1? And I have another question on ROE.

Iain MacKay – Group Finance Director: Okay. Well, Chintan, let me take your first question on the cost. I mean, if you take a look at the slide on Page 11, I think that probably best describes to you what we’re trying to do here. I mean, our focus is very much is on – is driving some productivity in our cost base. We’ve realized significant sustainable saves. You saw the second half of last year what we were able to do. We’ve got a very robust pipeline of sustainable saves, both for the remainder of this year and into next year, that we are going to deliver against. So, the focus is on driving that stability within the cost base and the predictability within that cost base. It goes without saying that we’ve got notable items, which are significant. It would be really nice to work through those over the course of the next few quarters and stop talking about them, but the focus here is clear and what we accomplished in the second half of 2011 will be a focus of attention for the second half of 2012.

Chintan Joshi – Nomura: So should I take that you’re trying to manage the business at a run rate of something like $9 billion on an underlying basis?

Iain MacKay – Group Finance Director: We’re trying to manage the business towards positive jaws, which we have got on an underlying basis with 8.7% positive jaws in the first half, and in terms of the overall cost the focus is on achieving sustainable saves that we’ve set out and hitting that target around the cost efficiency ratio of 48 to 52, and therefore our actions on a month by month, quarter by quarter basis will be dictated by what we need to accomplish that.

Chintan Joshi – Nomura: My question on ROE is you stated that you hope to achieve your targeted ROE next year. Would that be on a stated basis or on an adjusted basis and if it is the latter then what adjustments would you make?

Stuart Gulliver – Group Chief Executive: I think again, I’d guide you to the chart that we’ve got around, I think its Page 17, which sort of guides you to what we’ve got propensity to do in existing businesses and recognizing that we’ve got some fairly significant restructuring to do and are doing in European and U.S. businesses. The number that we’ve shown you for the first half is on a reported basis, that’s how ROE goes and that’s the basis in which we would intent to continue to deliver ROE numbers, but clearly there are significant items that come through and we’ll provide you with information about those that you can make the necessary adjustments yourself, but we’re going to deliver ROE in a reported basis.

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