HSBC Holdings PLC
LSE:HSBA
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HSBC Holdings PLC
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Good morning, ladies and gentlemen, and welcome to the investor and analyst conference call for HSBC Holdings plc's earnings release for 3Q 2021. For your information, this conference is being recorded. At this time, I will hand the call over to your host, Mr. Noel Quinn, Group Chief Executive.
Thank you. Good morning or afternoon, wherever you are. Ewen is going to take the bulk of the call today, and he will do that in the future Q1 and Q3 announcements. For today, though, let me start by saying that I'm really pleased with our third quarter performance. We've had a strong quarter of profit generation across all regions, supported by another quarter of net ECL releases. But most pleasing is the underlying revenue growth we're now seeing across the business. We feel that we're turning the corner on revenue after absorbing interest rate impacts over the last few quarters. We've got strong fee growth in all businesses. [Technical Difficulty] in Global Banking and Markets, revenue is starting to stabilize, and that's against the backdrop of a large managed reduction in risk-weighted assets and lending balances, as we indicated back in February 2020. In terms of customer behavior, we've seen a strong deposit performance without any material drawdown on the liquidity that we built up over the last 2 years. The lending market was softer than we anticipated in the quarter, particularly in corporate loans. But the pipelines that we built up position us well for when companies start investing in both the recovery and the low-carbon transition. Our capital, as our revenue starts to normalize -- sorry, on capital, as our revenue starts to normalize, we've also looked to normalize our capital position. Capital returns to shareholders will be a big component of this, and I'm pleased to announce a share buyback of $2 billion, which we expect to start shortly. On our strategy, we're executing with exactly the kind of pace I promised in February. We've made some important announcements in the quarter, including the acquisition of AXA Singapore. This complements our existing Singapore business very well and accelerates the build-out of our product and distribution capabilities in one of the world's most important wealth markets. Pre COP26, we've been working incredibly hard with clients, governments and our industry peers on accelerating the low-carbon transition. We're working with a range of partners to find new ways to open the sustainable finance market for projects and investors. Four nights ago, we announced the pioneering partnership with Temasek to create a debt financing platform for sustainable infrastructure in Southeast Asia, which I believe provides an important model for others to follow. This is just one of a number of sustainability partnerships that we hope to announce in the coming weeks, and I look forward to updating you on those shortly. In terms of the financial industry's contribution, the Task Force of International Banks that I've been privileged to chair over the recent months just released a guide for banks on setting and delivering net-zero targets. This is an unprecedented collaboration that makes an important contribution to help all banks operationalize the targets they've set and, importantly, to bring consistency and coherence for our customers, regulators and investors. I'm really excited about the months ahead. There's real dynamism and optimism within the business, and we're focused on delivering growth in the areas we've targeted. With the added benefit of interest rate rises on the horizon, we're in a strong position moving into 2022. With that, I'll hand over to Ewen to take you through the details.
Thanks, Noel, and good morning or afternoon all. We had another good quarter, reported pretax profits of $5.4 billion, up 76% on last year's third quarter with an annualized return on tangible equity of 9.1% for the year-to-date. Adjusted revenues were down 1% on last year's third quarter, but up 1%, excluding certain volatile item with a welcome return to more consistent top line growth across most of our business lines. Expected credit losses were $659 million net release, our third quarter in a row of net releases with net releases for the year-to-date of some $1.4 billion. We still retain 31% of Stage 1 and 2 ECL reserve build-out we made in 2020. Operating expenses were broadly stable. Increases in investment in technology spend were offset by the impact of our cost-saving initiatives. But due to some inflationary pressures, ongoing investment into growth and additional costs due to the impact and timing of recently announced M&A activity, we now expect our adjusted costs for 2021 and 2022 to remain broadly stable at around $32 billion, excluding the U.K. bank levy. Lending balances were down by $6 billion or 1%. This was due to the repayment of $14 billion of short-term IPA lending in Hong Kong. Stripping out the impact of the IPA loans, lending grew by $8 billion or 3% annualized during the quarter with further good growth in mortgage lending and trade finance. Our core Tier 1 ratio was up 30 basis points at 15.9%, primarily due to a reduction in risk-weighted assets. We now intend to reach our target for core Tier 1 of 14% to 14.5% by the end of 2022. This will reflect a combination of some regulatory-driven RWA impacts, balance sheet growth and capital return. Today's $2 billion buyback announcement is part of this commitment to accelerate the normalization of our core Tier 1 position. Our tangible net asset value per share of $7.81 was unchanged on the second quarter. Turning to Slide 4. We're seeing good signs of growth returning across our global businesses. In Wealth and Personal Banking, we've continued to grow Asian net new money in private banking and asset management. We've increased the value of new business and insurance by 59% year-on-year. We've hired 450 new wealth planners in Pinnacle, our new Chinese insurance venture. We've kept our U.K. flow market share comfortably above our stock share, and we've made good progress on new customer acquisition. In Commercial Banking, we're seeing encouraging trends in global trade with good market share growth in key markets such as Hong Kong and Singapore, and we've maintained a strong business pipeline with $64 billion of new approved limits. In Global Banking and Markets, we saw more stable revenue compared to a strong performance in the third quarter last year with good revenue growth in both security services and equities, and GB&M's performance was achieved despite a 7% reduction in risk-weighted assets year-on-year. Looking geographically. In Asia, we're seeing strong underlying revenue trends. Excluding insurance market impacts, revenues were up 7% quarter-on-quarter and 5% year-on-year. And in the U.K. ring-fenced bank, revenues were up 2% quarter-on-quarter and 6% year-on-year with fee income up 25% over the third quarter last year. Finally, and importantly, we're delivering on our goal to be a leader in the transition to net zero. We've helped issue $170 billion of green bonds year-to-date, including leading on a number of pioneering green bond offerings such as the first U.K. Green Gilt. And we're making good progress against the commitments we made in our AGM special resolution in May. Turning to Slide 5 and looking at third quarter adjusted revenues as a whole. In Wealth and Personal Banking, headline revenues were down 3% on a year ago, but excluding market -- insurance market impacts, Wealth Management revenues grew by $145 million or 7%. This was mainly due to higher fee income and asset management and private banking, together with insurance sales growth. Personal Banking revenues fell by $31 million due to the continuing impact of low interest rates on deposit margins. Commercial banking revenues were 4% higher, driven by higher fee income across all products and growth in trade lending and deposit balances. In Global Banking and Markets, revenues were down 3%. This was due to slower customer activity in fixed income markets versus a strong third quarter last year. However, equities benefited from both higher client activity and volatility in Asia, and security services grew through higher fee income and assets under custody. Slide 6 shows the revenue trend quarter-on-quarter with growth in all 3 global businesses, excluding insurance market impacts. This has been driven by a combination of more stable net interest income, together with good fee income growth across all our businesses, up 10% year-on-year. We're increasingly confident that we're turning the corner on revenue growth. Commercial Banking has grown, Wealth and Personal Banking has grown in Wealth Management and stabilizing in Retail Banking. And Global Banking and Markets is close to that inflection point now that the bulk of its planned RWA reductions in the business are now complete. With the expectation of policy rates from 2022 onwards, we're now confident in seeing sustained revenue growth this coming year and beyond, which, together with strong cost control, will help drive a sustained improvement in core returns and operating draws. On Slide 7, net interest income was $6.6 billion, up 2% against the third quarter of 2020 on a reported basis and broadly stable compared with the second quarter of 2021. On rates, the net interest margin was 119 basis points, down 1 basis point on the second quarter, primarily reflecting changes in balance sheet mix and continued weakness in the HIBOR. Lending volumes were down in the quarter, but excluding the repayment of IPA loans, lending grew by $8 billion with continued good loan growth in mortgages in Hong Kong and the U.K., together with the ongoing growth in our global trade franchise. For 2022, with our net interest margin stabilizing, policy rate rises on the horizon and loan growth building, we're increasingly confident on the outlook for net interest income. On the next slide, we reported a net release of $659 million of ECLs in the quarter compared with an $823 million charge in the third quarter of 2020. The net release was across all our global businesses, reflecting a more stable economic outlook, together with Stage 3 charges that remained very low. Despite the net releases, we continue to retain a conservative outlook on risk, we still hold $1.2 billion or 31% of our 2020 COVID-19 uplift to Stage 1 and 2 ECL reserves. For the full year, we now expect net releases to be broadly in line with the net release in the first 9 months with perhaps a very modest net release in the fourth quarter after Stage 3 charges. For 2022, we continue to expect the ECL charge for the full year to be lower than our medium-term through the cycle planning range of 30 to 40 basis points with more modest ECL releases expected to continue into the first half of 2022, albeit with an expected net charge after Stage 3 impairments. Turning to Slide 9. Third quarter adjusted operating costs were broadly stable on the same period of last year, a $263 million increase in technology spending and a $340 million increase in investment and other costs were offset by a further $600 million of cost program savings compared with the prior year with an associated cost to achieve $400 million. To date, our cost programs have achieved savings of $2.6 billion relative to our end 2022 target of at least $5 billion in cost savings, and cumulative cost-to-achieve spend to date has been $3.1 billion with an intention to still spend $7 billion through the end of 2022. In terms of outlook, with some inflationary and performance-related pay pressures, ongoing investment spend and additional costs due to the impact and timing of recently announced acquisitions and disposals, we now expect 2021 and 2022 adjusted costs, excluding the U.K. bank levy, to be around $32 billion. This is relative to our previous FX-adjusted guidance of $31.3 billion for 2022, which included the bank levy. Turning to capital on Slide 10. Our core Tier 1 ratio was 15.9%, up 30 basis points in the quarter. This reflected a decrease in risk-weighted assets from lower short-term lending, favorable asset quality movements and FX, partially offset by a decrease in CET1, including around $1.7 billion for foreseeable dividends. Excluding FX movements, risk-weighted assets fell by $14.4 billion in the third quarter, driven by lower short-term IPO loan exposures in Hong Kong and positive movements in asset quality. In the third quarter, we made a regulatory deduction of 20 basis points for foreseeable dividends in the quarter. This was based on 47.5% of our third quarter EPS of $0.18, which is the midpoint of our 40% to 55% target payout ratio. The dividend accrual for 2021 so far is $3.8 billion after payment of the $0.07 per share interim dividend. Please remember that this is not guidance of our full year 2021 dividend intentions. The dividend accrual is purely a formulaic calculation that will true up at the full year based upon the results and outlook at the time. When thinking about the payout ratio for 2021, we'll attach a much lower weight to unusually low ECLs as part of our EPS this year, together with a desire to see higher dividends per share in 2022 relative to 2021. We intend to normalize our core Tier 1 ratio over the coming quarters to be back within our 14% to 14.5% target range by the end of 2022, driven by a combination of balance sheet growth, capital returns and regulatory impacts. Various things to note for your capital modeling through the end of 2022. We expect today's buyback announcement, the loss on sale of our French retail banking operations and the reversal of the current software capitalization effort to each impact our core Tier 1 ratio by around 25 basis points. And we also expect some $20 billion to $35 billion of regulatory-driven RWA uplifts in 2022. So in summary, this was another good quarter, good earnings diversity across the group, a broad-based return to top line growth in most of our businesses and continued strong control on costs. While the results were flattered by net ECL releases, we're happy to be turning the corner on revenue with robust lending platforms, growth in trade and mortgage balances and the likelihood of earlier pipeline rate rises than previously anticipated, we're increasingly confident on the revenue growth outlook for 2022.We've included a few IFRS 17 slides in the appendix. We intend to go through this in more detail on our follow-up call on Wednesday for sell-side analysts. Overall, we expect an initial downside adjustment to our insurance profits of around 2/3 and a smaller percentage adjustment to insurance's tangible equity. Importantly, there will be no significant impact on the group's regulatory capital, and there will be no impact on the dividend flows from our insurance businesses to the group. The slight inflationary cost pressures and the impact of IFRS 17 implementation, we remain confident in achieving returns at or above our cost of capital over the next 3 years, together with delivering attractive growth and attractive capital returns. Finally, we're looking to normalize our core Tier 1 ratio over the coming quarters, of which today's buyback announcement is an important first step. With that, Sharon, if we could please open up for questions.
[Operator Instructions] Your first question today comes from the line of Andrew Coombs from Citi.
I'll start with one on the buybacks and then one on costs. So when you come out and quantify the $2 billion-plus buyback, can you just give us the metrics that you're using to size that, how you're thinking about this buyback, but also buybacks going forward and basically the KPIs in your decision-making process and the magnitude of those? So that would be the first question. The second question is on the cost outlook, right? You've slightly changed your guidance and also the definition you're using, I think versus your old guidance, that's $1.5 billion. And then adjusting for the levy, it looks like you've taken up the cost outlook by about $800 million. So can you just give a breakdown of what the moving parts are in the increase? How much of it is due to the timing around the M&A and divestments versus how much is inflationary pressures and how much is higher compensation related to performance-related pay?
Yes. So look, on buybacks, Andy, as you would expect, it's part science. We -- our capital position is obviously in a much better place than we had anticipated at the start of the year when we had said no buybacks for this year. We've had a combination of much higher profitability than we expected because of lower -- much lower ECLs, net releases and slower cost to achieve being expensed through the P&L. And risk-weighted assets have also been lower than we anticipated, partly because of lower growth, but also because of lower credit rating migration. I think, yes, within today's announcement is a commitment to get back to 14% to 14.5% by the end of 2022. Yes, the -- we are committed to using excess capital if we can't find attractive organic and inorganic growth opportunities. We've previously talked on inorganic about wanting to spend up to $2 billion. In M&A, we've announced a deal in Singapore, AXA Singapore, for just over $500 million. So that will give you some color of the extent of M&A activity that you might see over the next year or so. I do think that, yes, we are likely to see, if we achieve what we think we'll achieve next year, some further buyback activity in '22. On costs, yes, I think your numbers are broadly right. If you add about $300 million for M&A, yes, in terms of the sort of roughly $0.5 billion in upwards pure cost, yes, the bulk of that is compensation related. And you're right, part of it is variable pay, but I would sort of put it all in the bucket of compensation costs being higher. Broadly, our total wage bill is about $19 billion out of the $32 billion of total costs. Yes. So if you've got, yes, $0.5 billion of incremental inflation on that, it's about $0.5 billion -- 2.5%, about $0.5 billion of extra compensation costs. Yes, whether you put it into fixed pay or variable pay, I think we are seeing sustained wage price pressure globally at the moment. But in terms of the incremental amount that we put into the variable pay pool this year, it's significantly more than offset by the increase in profitability that we've seen.
I mean if I could just add a comment on that. To the extent that we've topped up variable pay, it's partly because we've had a good trading performance this year. And clearly, we've given some indications in our view of trading performance next year being positive. And it would be right to have an appropriate level of variable pay at that point in time in the event that, that trading performance next year does not materialize, and we have some flexibility on the variable pay. But it's right to also signal that there is some fixed pay inflation pressures in the market generally within financial services at this point in time. So the extra top-up on cost is a combination of fixed pay and variable pay as a consequence of the external environment and the trading performance of the bank.
Yes. And I think the last thing, Noel, also that's important is we've made a very conscious decision not to cut back on investment despite that inflationary pressure in order to meet a self-imposed cost target.
Your next question comes from the line of Tom Rayner from Numis.
Yes. Two, please. Just a quick follow-up on costs and then one on revenue. You mentioned, Ewen, about $300 million of the increased guidance is M&A related. Can you give us a sort of estimate of how much that M&A activity might add to the revenue over the sort of next 2 to 3 years just to get a sense? And then just on revenue, clearly more positive on the revenue outlook. You've flagged a number of areas. You didn't really comment, I don't think, on the outlook for the net interest margins. I look at your consensus, and it only had an increase from Q3 right out to the end of 2020, so you have about 7 basis points. And if I just take your own rate sensitivity and sort of multiply it by what's being discounted by the market, there'd obviously be a multiple of 7 basis points. I wonder if you could comment on the outlook for NIM specifically, please.
Thanks. So on costs, look, in the near term, I think AXA Singapore will add about $300 million to revenues and $300 million to costs. Obviously, we would expect that friction to move over time, but if you plug in $300 million into '20 -- into '22 on the revenue side. On NIM, [indiscernible] and then forecast. But if you looked at current consensus, if you -- yes, it does look low relative to the consensus policy rate rises that we now see in the markets. Yes, just as a reminder, a bigger single sensitivity is the U.K., where a 25 basis point rise would add about $0.5 billion of income in the first year; and secondly, Hong Kong, and it does look like in the U.K., we will see 2, 3 rate rises between now and the end of '22 coming potentially as early as the next month or so. Hong Kong may be a bit slower. But one of the offsets to -- clear offsets to the guidance, what we're giving on cost today is the fact that we do think we're going to see earlier and stronger rate rises than we had previously anticipated. Yes, we lost about $7 billion over the last year -- 2 years or so as a result of the shift down on interest rates. So it's had a very, very material impact on us. And we do think with the policy rate outlook at the moment and consensus that we should start to claw back a meaningful amount of that in the next 2 to 3 years.
Your next question comes from the line of Raul Sinha from JPMorgan.
A couple of questions from my side. Maybe firstly, just staying on the revenue line. I just wanted to understand the pandemic impacts that's still washing through your various businesses and sort of holding back the revenue line. So I was wondering if you could comment on the wealth business in Hong Kong with -- in light of all the travel restrictions, how you think the performance in this quarter has been held back and how that might shift over the next year or so? And also in trade, obviously, you flagged a very strong improvement in trade balance. So there's a lot of uncertainty around, clearly, what's happening in global trade. So any thoughts on the outlook, that would be helpful. And then just a broader second question on China real estate. Thank you for the disclosure. I think we all get sort of your first order impacts and exposures are relatively limited. But I was wondering what you think about the second order impacts on your business in the Mainland, just given defaults have spread beyond sort of single name into quite a few developers now. So how do you see that impacting the rest of your book and the rest of your business?
Yes. So maybe I'll start off, and then Noel, you can add some comments then on trade and commercial real estate after I finish. Look, on Hong Kong and the border being shut, the -- I mean you can see some direct impacts on things like our insurance franchise. We're not as exposed, obviously, to others like Peru and AIA to the mainland Chinese insurance market, but it is a meaningful kicker to the performance of our insurance franchise in Hong Kong. Having said that, I think the value of new business in Q3 was in line with Q3 prepandemic. Yes, you can see certain sectors in Hong Kong continuing to suffer. Yes, the biggest border is the Hong Kong-Mainland China border rather than the international border for Hong Kong, given the prepandemic about 50 million Mainland Chinese were visiting Hong Kong in any given year. So we would expect as that border progressively reopens, and it's been much slower than we would have anticipated 6 or 9 months ago, that we will just see an incremental benefit coming through to the Hong Kong business. On trade, despite supply chain disruptions, I think we're pretty pleased with the recovery that we're seeing in that business. People are holding higher working capital balances at the moment, consistent with the uncertainty that exists in supply chains. But yes, we do view that as a temporary feature of the global economy at the moment and that we will get back to more normality and more sustained growth in '22. Yes. On the China real estate market, I mean we've just been through, as you would expect, a pretty intensive review of our Chinese real estate exposure, including the provisioning we brought against it. We're -- just to repeat what we said today, we've got no direct exposure to rateless borrowers. We're pretty comfortable with the exposure overall in aggregate. Commercial real -- our commercial real estate in China is less than $20 billion in the context of a $1 trillion loan portfolio. And I think the other thing you should read in [indiscernible] is the fact that we're doing the buyback today, and the size that we're doing it is that we're reasonably confident about where we're sitting in terms of our outlook. But Noel, I don't know whether you want to add anything.
Just ironically, on trade, there's a feature that the more uncertain global economics are is normally the time when trade finance is in demand because of uncertainty over the supply chain, the uncertainty over credit environment. So we've seen strong growth in trade balances. Part of that is a function of economic rebound. Part of that, I think, is a function of working capital cycles are longer today than they were pre-COVID and pre-pandemic because of the tensions in the supply chain and the bottlenecks. And part of that is people tend to use documentary credit more in uncertain times. They don't open an account, and therefore, they turn more to the financial services sector to finance trade in a structured manner rather than financing trade in an unstructured open account methodology. So i think there's a number of reasons. And then the fourth ingredient is, frankly, we are taking market share in trade in Asia, in particular, particularly in Hong Kong and Singapore. So those 4 dynamics, I think, are leading to very strong double-digit growth in trade. I think if you look at our trade balances from the end of last year to the end of September, we're up around about 18%, 20%. If you do a year-on-year comparison, September to September, I think we may be mid-20% growth in trade, particularly in Asia. So it's those 4 factors, I think, are playing into the trade performance. On China, the only other comment I'd make is, look, there is second order risk in whatever there's a market adjustment of that size taking place in a particular industry sector, and particularly one that's important is commercial real estate. I think we're pretty comfortable with our position, and we're staying very close to any potential second order risks. But I'll reinforce what Ewen said. We feel comfortable with our position in our bank in China is performing well. It had a good 9 months. And we're well-positioned on commercial real estate from a primary risk point of view. And we think we're well-positioned on any second order risk. But I'd be foolish if I said there was no second order risk. It potentially exists for all of us.
Can I just follow up on the trade margin? I don't know if you've seen a sort of shift in the trade margin within the business and if you expect that to shift going forward, given what we're seeing in terms of the global trade picture.
I'm not aware of any material shift in the margin. It's more of a volume game at the moment. But Ewen, is that your understanding?
Yes. Look, if anything, I think it's just picked up by a few basis points, but nothing material.
Your next question comes from the line of Manus Costello from Autonomous.
I wanted to follow up, actually, on those questions about the, hopefully, postpandemic reopening. You gave us some data in the second quarter about credit card balances growing, but I haven't seen it so far this quarter. I wonder if you could talk to us about what you're seeing in unsecured. And you mentioned within the NIM that there was a negative mix shift, which hurt the NIM. At what point will that mix shift change? So as unsecured consumer starts to grow, presumably you'd start to see a positive benefit. Any color you could provide around that would be appreciated.
Yes. I mean, firstly, on NIM, 2 things were going on, I think, to sort of push it down 5 basis points in the quarter. Firstly, was HIBOR drifted down by a couple of basis points over the quarter. We do hope we're now at the trough of that. But -- and there is a mix shift with both a higher propensity of mortgage, lower spread mortgage lending and the fact that we're continuing to increase our liquidity reserves at the moment. The unsecured was probably up about $1 billion underlying in the quarter for both across Hong Kong and U.K. and about half and half across the 3 markets. What we are seeing is credit card spending come back up closer to pre-pandemic levels. But what we're not seeing yet are the balances go up in line with that. I think that should happen over time. But at the moment, whether it's commercial customers or personal customers, and we're seeing the same thing in U.K. mortgages, for example, people are paying down debt when they can. And I think that's just a sign of confidence at the moment that we would expect to continue to improve as we continue to move away from the depths of COVID.
Your next question comes from the line of Yafei Tian from Citigroup.
I have a question around revenue. You gave a bit of color that quite a lot of the optimism is coming from the higher expected interest rate in some of your markets. Besides that interest rate shift, are there any organic growth that HSBC is gaining market share that you think that we're -- sell side is missing that could drive more consensus revenue upgrade from noninterest income?
Yes. I mean to be clear that we're not reliant on interest rate rises to underpin the business plan that we've got. The -- we're seeing -- with NIM stabilizing, we're probably going to see about 3% loan growth this year. We would expect mid-single-digit loan growth next year. So you would expect a healthy increase in net interest income next year with or without rate rises. We're seeing very good growth in fee income as we come out of COVID. I think it's up 10% year-on-year. So, yes, the core business at the moment is seeing very good, attractive growth. Interest rate rises will just come on top of that. And in terms of where we're growing, look, as Noel said earlier, we're taking share in trade. We're up a couple of percentage points of share over the last year, both in Hong Kong and Singapore. We're continuing to grow U.K. mortgage share above stock share. I think we were sort of about 1% ahead of stock share in the quarter. We're growing the private bank, I think, ahead of peers, particularly Credit Suisse in Asia at the moment. So most of our businesses, I think, are flat to gaining share.
Your next question comes from the line of Guy Stebbings from Exane BNP.
The first one was back on costs and then one on RWA. So on costs, and you briefly alluded to it before the previous question, the link with the interest rate outlook. I mean how much is the new guidance intertwined with market inflation and interest rate expectations? Or to put it another way, policy rates don't move higher in line with market expectations. Should we expect you to come in lower than that guidance? And then the second question on RWAs. Consensus is nearly $70 billion higher by the end of next year than where we sit today. I appreciate there's some regulatory headwinds on the horizon that you flagged, and you've now delivered a majority of the gross RWAs, so RWA says you'll guide to by the end of next year. But to market RWA expectations, I think $9 billion or $7 billion next year look a little too conservative, given the starting point and what you're seeing currently in terms of lack of credit migration.
Yes. Look, on costs, yes, they are connected, but not a direct line between the inflationary pressure that we're seeing coming through the cost structure and the fact that we expect to see earlier policy rate rises. To give everyone assurance, we are actively managing our cost base in line with what we previously thought. We're still committed to taking out $5 billion of costs over the period to the end of 2022, and we've done just over half of that so far. But on a $19 billion wage bill, look, if you see each percentage point is another $190 million of cost. Relative to where we were at the start of the year, we're definitely seeing more inflation. The offset for that should be policy rate rises coming earlier and stronger. And if they do, that will comfortably offset the inflationary pressure we're seeing on costs. But we are not going soft on costs just because we think that there is a potential of wage rises that, that's not how we're operating the business. On RWAs, yes, I mean I think we've given you pretty much all of the inputs to model. I guess we're more confident on the RWA growth outlook for -- lending growth outlook for next year than I think is currently in consensus. We've guided to mid-single-digit loan growth. Yes, the other thing that -- we've given you the impacts on regulatory capital. You can plug in your own numbers in terms of -- we've given your distribution policy on dividends. So the only things that you don't have is what the profitability is going to be next year, what buybacks we're going to do. And even on inorganic, we've tried to give you a steer as to what the total quantum of financial inorganic that we may do as well.
Your next question comes from the line of Omar Keenan from Credit Suisse.
I've got a few questions on rate sensitivity, please. I was hoping you could give some color around deposit betas in your rate sensitivity disclosure, especially for the U.K. and Hong Kong, given one of your peers reassessed the U.K. rate sensitivity based on a sort of more realistic assumption of what deposit betas are likely to be. And any color that you can give on the proportion of deposits that are contractually linked to market rates in both those markets would be very helpful.And the second part of my question on rate sensitivity is the other currencies figure of $1.5 billion. Could you perhaps just elaborate a little bit more about what the key sensitivities in terms of different currencies are there because it's about as big as the Hong Kong sensitivity?
Yes. So look, on rate sensitivity, I think you should assume for the first 1 or 2 interest rate rises, there will be a relatively low deposit feature on that and that we will try to capture a higher-than-average capture out of those rises. And I think over the longer term, typically, we work on the basis of about a 40% to 50% deposit beta. But in the very, very short term, with the first rate rise, I think it will be much lower than that. Yes. In terms of other currencies, Indian rupia, renminbi, various emerging market currencies of which Mexico is important, I'm sure if you follow up with the IR team, they can give you a fuller breakdown of that.
That's wonderful. And could I just check the published sensitivity? Is that based on 50%?
Yes. Well, it differs by product, by market, but roughly, yes.
Your next question comes from the line of Aman Rakkar from Barclays.
Just most of my questions have been asked, actually, but a couple of points of clarification. So thanks very much for the IFRS 17 disclosure on the insurance business. In terms of the 2/3 PBT impact that you kind of expect in 2023, I mean I guess that insurance profit that we would be making that adjustment to, are we talking -- is it around the kind of $1.5 billion hit that we should be looking for kind of reported PBT in '23? Any clarification there would be really helpful. And then just a second on the cost to achieve. I know you're sticking with the guidance of $7 billion, but it does imply that you're going to do a lot next year. I mean could you help us understand exactly why you've not been able to spend it so far and kind of what you are going to be doing this year with that?
Okay. So on PBT impacts, well, $1.5 billion, it obviously depends what your forecast is, but if that's 2/3 of the insurance profits in that year, then, yes, it's probably not wildly out of line with what we think. But just -- again, just to repeat on IFRS 17, there's no impact on dividend flow from the insurance companies to the group. There's no impact on group core Tier 1. The timing of earnings recognition has changed. So fundamental economics, we don't think, has changed. The other thing that -- on tangible equity, just been -- because I know a few people have been playing around with numbers today. We think there'll be about $3 billion, plus or minus, impact to tangible equity as a result of the shift. And the [indiscernible] then will be negative but minimal, and it's still tied in with our commitment to get back to cost capital returns. On CTA, I think -- we'll think we'll probably spend about another $1 billion or so in Q4, which leaves us about $3 billion or so to spend in '22. We did have a slower delivery this year. A big part of that was a lot of our change programs are being run in India, and they obviously had a pretty severe impact as a result of the pandemic, which meant that our hiring plans, particularly technology resources that we intended to bring on board, had been slower. So there's been about a 3-plus month delay to some major programs of work. And it's one of the reasons why, as a result of that, we expect cost to tick up in Q4 because we've got this ramp-up in investment coming into Q4.
Your next question comes from the line of Rob Noble from Deutsche Bank.
Can you talk us through how interest rates are actually hedged in the various markets, maybe the U.K., Hong Kong and U.S.? And then -- so will we actually see -- what sort of rates -- do you actually need insurance rates to go up in all of those countries? Or will you benefit from higher rates in the market in some and not others? And then secondly, just on the U.K., where do you see your front book mortgage margins are at the moment and in comparisons where they were -- where they are on the back book? And what do you think recent -- the increase in swaps, are they pushing rates up in the market in the U.K. now?
So on the hedging program, look, Hong Kong is very short-dated. Everything reprices typically in 1 to 3 months. The U.K., there is a 5-year rolling hedge that we have in place, consistent with most U.K. peers, I think, with an average duration then of about 2.5 years. The U.S. is slightly longer than the 5 years, albeit I think that will change once we divest ourselves out of the Retail Banking business. And it's not as material, obviously, as Hong Kong and U.K. Yes, if you look at the structure of our assets and liabilities, they do tend to be much more short-dated than the average peer, which is a combination of the impact of the short-dated nature of Hong Kong, but also, in the commercial space, our trade business is relatively short dated as well. So the second question was, Richard? So the second question...
Sorry, it was on -- from mortgage margins versus back book and where you think swap spreads will [indiscernible].
Front book margins are probably slightly below back book margins currently for the first time in quite a while. Yes, we have seen some margin pressure coming through the U.K. mortgage franchise. We do still think at current rates that we're writing business comfortably above the cost of capital, but there has been some margin contraction.
Your next question comes from the line of Ed Firth from KBW.
I'm sorry to go on about this interest rate sensitivity, but I guess it is quite crucial in terms of the outlook. But the bit I don't really understand is when I look at the currencies, if I look at your year 1 sensitivity, your sterling sensitivity is materially higher than your Hong Kong sensitivity. And yet your sterling is the bit that's hedged. The Hong Kong isn't. And yet the total balances in Hong Kong are, well, orders of magnitude similar, but I guess you spend a thing slightly higher in Hong Kong than they are in sterling. So I don't -- is it possible to help us a little bit on why you have this huge sensitivity in sterling and perhaps not so much in places like Hong Kong, which is short dated?
Yes. So look, I mean, firstly, in Hong Kong, remember that only around 50% of our deposit balances are Hong Kong dollars. So yes, there is an impact of particularly U.S. dollar book in Hong Kong, I think, in that interest rate sensitivity, which with the U.S. dollars about 40% -- yes, 80% of the 50%, that's not Hong Kong dollars. So yes, look, I'll need to get you a detailed answer out of our IR team, if you give them a call, but I assume our interest rate sensitivity analysis is correct.
I suspect it's about the assumptions. It's just -- I suppose the thing we're struggling with in all areas is trying to make sure that people can put any assumptions they like or whether it's actually going to happen, I guess, it's a key question.
Yes. that's fair. But I mean, we do take time to show that interest rate sensitivity, and it is supposed to be a helpful guidance.
Your next question comes from the line of Martin Leitgeb from Goldman Sachs.
Yes. Just a quick follow-up on structural hedging. One of your peers has announced its intention to deploy structural hedging a little bit more, just changing, I guess, some of the assumption on the stickiness of certain deposits. Is there a scope -- just based on your comments that Hong Kong is very short dated, 40% of Hong Kong deposits are in U.S. dollar would there be scope to reassess some of those deposits and take -- are you maybe similar to the U.K. that deposits are kind of behavior maturity of 5 years. And with that could this be a source for additional income going forward? And secondly, on capital, I mean, first of all, thank you for the 14% to 14.5% guidance now for FY '22. Just in terms of thinking about the quarter 1 trajectory and by the end of scope for capital return for HSBC going forward over the medium term, should we use this 14%, 14.5% as a kind of a range going forward? Or is there scope for capital to hedge even lower? I'm just trying to get if there's still capital inefficiencies within the group impacting this 14% to 14.5% range.
Yes. So in terms of Hong Kong, yes, I mean, part of the problem, Martin, as you know, it's a very short-dated book, both on the asset and liability side. So the choice that we have always made is not to run currency risk to extend duration that there is probably a low hundreds of millions of opportunity in the next few years through improved management of our liquidity book. We've recently hired, a few months ago, the group Treasurer out of UBS to come and run our treasury business. And so I think over the next 2 to 3 years, we've probably got a few hundred million dollars of upside in terms of how we're managing our global liquidity pool. On capital, I would use the 14.5% over the next few years. I think our aspiration is to run it towards the low end of that range if we can. As you think further out, there's obviously the impact of output floors and what that does and depending on where they are applied and the impact on capital positions of subsidiaries, et cetera, we're going to have to pay attention to. To get below 14%, I think we've got a big program of work to step up our capabilities and stress testing. I think our peak-to-trough fall and stress is still too high. But that will be a multiyear program of work to improve stress testing and then go after the sort of higher-risk stress areas of the bank where we're not getting remunerated appropriately. But for the purposes of the foreseeable future, I assume that 14% to 14.5% is where we're managing to. And if we can, we'll manage to the low end of that range.
We will now take our final question from the line of Joseph Dickerson from Jefferies.
Just on the cost versus benefit from rising rates. Can -- I guess you've made the point that you haven't lightened up on investment spend. Can we just -- should we therefore assume that the 90% or so of the rate sensitivity of whatever we might assume falls through to the bottom line? I guess what sort of quantum should we think about fall-through to the bottom line?
Well, I think the bulk of it, frankly, I mean, it depends what inflationary pressure you put on a $19 billion wage bill and a $32 billion total cost base. But -- yes, if -- relative to the previous guidance of flat cost, if you've got 1% to 2% inflation on that, that's $300 million to $600 million of incremental cost, which I think more than gets offset by the interest rate rises. I mean what we saw over the last year, there's -- the bulk of that we lost. We weren't able to offset with incremental cost savings. So I think we will keep cost control tight even if we see the benefit of the rate rises coming through.
Ewen, just to tie to it, the amount of revenue that dropped off the P&L last year as a consequence of rate reductions was...
$7 billion.
How much?
$7 billion.
Yes. That gives you a sense of typically of the upside sensitivity of rates for the downside that we experienced relative to a 1 or 2 percentage points movement in costs. It's a highly leveraged ratio on revenue to cost.
That was our final question. I will now hand back for closing remarks.
Just Noel?
Yes. Listen, thank you so much for your time today. A couple of closing comments from me. First of all, I'm pleased, as I said at the beginning, with the performance of the business, and I'm pleased to see good signs of growth -- organic growth in fee income, balanced growth, wealth management. So that's good. I think more to come on that front. We remain absolutely committed to driving out cost efficiencies, as we indicated in earlier this year. We acknowledge that there are some inflationary pressures through BP from good business performance and from underlying inflation. But we believe that there is offsetting revenue growth to compensate for that. And we remain committed to our return on capital target. So good progress, more still to do. We'll continue to transform the business, and we'll continue to grow the business. Thank you for your time.
Thanks, everyone.
Thank you, ladies and gentlemen. That concludes the call for the HSBC Holdings plc's earnings release for 3Q 2021. You may now disconnect.