HSBC Holdings PLC
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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 Q3 2022 Results. For your information, this conference is being recorded.
At this time, I'll hand the call over to your host, Mr. Noel Quinn, Group Chief Executive. You may begin, sir.
Thank you, and good morning in London, good afternoon in Hong Kong. Thank you for joining our third quarter results call. Ewen is going to lead the financial presentation, but I want to start by first talking about the leadership changes we've also announced.
We've now spent nearly 3 years transforming HSBC, and while there's still work to do, we are now in a much better place to accelerate our financial performance and deliver stronger returns. As we approach the end of our 3-year transformation program, myself and the Board have taken the opportunity to review the composition of the GEC, with an eye to long-term succession planning. As a result, we have today announced that Georges Elhedery will take over as Group Chief Financial Officer on the 1st of January 2023. And Greg Guyett will take on the role of CEO of GB&M permanently effective immediately. Ewen will, therefore, step down as Group CFO on the 31st of December and will leave the bank in April 2023.
I want to put on record my thanks to Ewen for everything he's done during his time with us. He played a key part in creating and executing our transformation and growth agenda over the last 4 years. He helped steer HSBC through the COVID pandemic. He's been fundamental in reshaping our portfolio globally, improving our capital efficiency and embedding disciplined cost management across the organization. He has also driven the transformation agenda within the finance function, reshaping its strategic direction, encouraging innovation and building the team's engagement levels. He's been a great professional, has contributed much to the bank, and I wish him the very best for his future career.
I want to emphasize, we remain absolutely committed to delivering our strategy and the 2023 targets we announced with our Q2 results. There is no change to my commitment as a consequence of these people moves.
Turning to Q3. I'm pleased with our third quarter performance. All regions performed well, with particularly good performances in the U.K., the Middle East and Southeast Asia. We delivered a double-digit return on tangible equity for the 9-month period, excluding significant items. And we remain on track to achieve our financial targets in 2022 and 2023. We've also kept a tight grip on costs and are driving greater efficiencies across the organization. Clearly, this is important in an unpredictable and challenging external environment. But it's also a sign that our digitization strategy is working. Our work to structurally reposition the business and invest in areas of growth continues to gain traction.
We are in a much better position at the start of the new interest rate cycle as a result of the actions we have taken on capital efficiency, portfolio rationalization, organic revenue generation and cost control. We can also see in wealth, for example, that we're building a strong earnings platform for the future. Over the last 12 months, we attracted $91 billion of net new invested assets, with $32 billion in the third quarter alone. Clearly, I expect you to ask about M&A activity when we get to the Q&A section of today's call. As a result, we've given some more information about our Canada business in the appendix.
I'll now hand over to Ewen to take you through the details.
Thanks, Noel, and good morning or afternoon all. As Noel said, these are a good set of results, reported pretax profits in the quarter of $3.1 billion. While down on last year's third quarter, this was due to the $2.4 billion revenue impairment associated with the disposal of our French retail bank.
Adjusted pretax profits in the quarter increased by $1 billion or 18% to $6.5 billion, reflecting a strong net interest income performance of $8.6 billion. That's up $2 billion on last year's third quarter.
We had higher ECLs this quarter, $1.1 billion or 43 basis points. This primarily reflects increased economic uncertainty in the U.K., together with further provisioning for our China commercial real estate portfolio.
Operating expenses are up 1% year-to-date against the same period last year and up 5% on last year's third quarter due to higher technology investment and different timings for our variable pay accrual. We remain on track to deliver broadly stable costs this year.
Our core Tier 1 ratio was down 20 basis points to 13.4%, including an around 30-basis-point impact from the loss on the French retail bank disposal. We continue to expect to be at the bottom end of our 14% to 14.5% target core Tier 1 range during the first half of 2023.
At our second quarter results, Noel and I said our current strategy is the best and safest way to improve returns, with strong revenue growth driven by rising rates and volumes and tight cost discipline. With these results, our strategy remains firmly on track, good underlying growth across all of our businesses, with operating costs remaining broadly stable year-to-date and an annualized reported return on tangible equity of 9.2%.
Adjusted revenue was up $3.1 billion or 28% as the positive impact of rate rises, which reflected in our strong net interest income performance and noninterest income of $5.7 billion was up $600 million or 13% on last year's third quarter despite a $400 million insurance markets impact charge in the quarter. ECLs were $1.1 billion net charge compared to a net release of $600 million in last year's third quarter. We now expect an ECL charge of around 30 basis points for this year.
Lending was down 2% on the second quarter and deposits down 1% but excluding the impact of the reclassification of the French retail bank as held for sale, lending and deposits were both up $5 billion. Our tangible net asset value per share of $7.13 was down $0.35 on the second quarter due to negative FX and adverse fair value movements.
Turning to Slide 4. We're seeing good organic growth across all of our global businesses as well as the benefit of rising rates. Wealth and Personal Banking revenue was up 25%, with a good Personal Banking performance. Personal Banking revenues were up $1.4 billion on the third quarter last year due to higher rates and balance sheet growth.
There was a good underlying performance in wealth due to the strong insurance and private banking performance. While revenue is down 9% or $200 million due to adverse market impacts in insurance of $400 million, we remain very confident in the growth of our wealth franchise. We had $91 million of net new invested assets in the last 12 months, including almost $32 billion in this quarter. So our investment is building a strong future earnings platform.
Commercial Banking revenue was up 40%, with Global Payments Solutions, formerly known as GLCM, benefiting from higher rates, together with continued strong underlying growth.
Global Banking and Markets revenue was up 16%. Market and Securities Services revenue was up 20% due to market volatility, and Global Payments Services Solutions in global banking, up 100%, partly offset by lower Capital Markets & Advisory activity.
On Slide 5, net interest income was $8.6 billion, up $2 billion versus last year's third quarter. This was primarily driven by higher rates and was strong across all regions and businesses. On rates, the net interest margin was 157 basis points, up 22 basis points on the second quarter, putting us back at prepandemic levels. We now expect net interest income of around $32 billion for this year and at least $36 billion in 2023 compared to the previous $37 billion guidance.
Relative to the second quarter, we are upgrading our assumptions on a like-for-like 2023 revenues by around $1.5 billion on a constant currency basis, including $1.2 billion for FX movements and at least $1.3 billion of planned higher cost of funding for the trading book, with this benefit being reflected in higher trading income in noninterest income and is dollar for dollar with lower net interest income. In addition, given the unprecedented speed of interest rate rises we've been seeing this year, we believe we're being cautious on our planning assumptions across deposit betas, deposit migration and asset margins from here.
The FX movements have a similar impact on costs, with 2021 adjusted operating costs of $32 billion translating to around $30 billion using year-to-date average FX rates and around $29 billion if you were to use September average rates. Given the slower growth we now foresee, we now expect low single-digit lending growth in both 2022 and 2023 before returning to previous expectations of mid-single-digit growth from 2024 onwards.
On the next slide, noninterest income was $5.7 billion, up 13% against last year's third quarter. Net fee income was down 11%. The decline in fees was largely due to lower Capital Markets & Advisory levels in Global Banking and Markets and lower equity market activity in Hong Kong in Wealth and Personal Banking. Flow fees in Global Payments Solutions were up 18% in Commercial Banking and up 8% in Global Banking and Markets. Other income was up 49%, including another strong FX performance in the quarter.
On the next slide, we've reported a net charge of $1.1 billion or 43% of ECLs in the quarter. This included $600 million of modeled Stage 1 and 2 provisions and overlays, $400 million of Stage 3 loans and $100 million of write-offs. There was a $300 million charge in the U.K., including $200 million of additional allowances for heightened economic uncertainty. $400 million also relates to the Mainland China commercial real estate market, around 2/3 of which are Stage 1 and 2 provisions and the remaining third are Stage 3. The overall quality of our loan book remains good. Stage 3 loans, as a percentage of total customer loans, are stable at 1.8%.
In terms of outlook, we expect an ECL charge of around 30 basis points for this year. And for 2023, we now expect ECLs to be at the higher end of our 30- to 40-basis-point planning range but with a higher degree of volatility around this guidance given the uncertain market outlook.
Turning to Slide 8. We've had 3 quarters now of relatively stable costs year-to-date, and we continue to expect costs to be broadly stable on last year. Within that, third quarter adjusted operating costs were 5% up on the same period last year driven by continued investment in technology and timing differences in the variable pay accrual versus the third quarter of 2021. We made a further $600 million of cost program savings during the third quarter, with cost to achieve spend of around $700 million.
The formal 3-year program ends this year. We now expect to spend between $6.5 billion and $7 billion, slightly lower than our original $7 billion CTA target. But the expected cost savings from the program remain unchanged at around $5.5 billion by the end of this year, rising to around $6.5 billion of cost savings by the end of 2023 We continue to target around 2% adjusted cost growth for 2023, with an ongoing focus on active cost management to mitigate inflationary pressures.
Turning to capital on Slide 9. Our core Tier 1 ratio was 13.4%, down 20 basis points on the second quarter. This includes the sale of our French retail banking operations, which had an impact of around 30 basis points and further negative reserve movements through other comprehensive income due to higher rates.
Reported risk-weighted assets were down $23 billion on the second quarter, principally to FX movements. And we've now achieved our year-end ambition of at least $120 billion of cumulative RWA sales, with modest further saves still expected in the fourth quarter. We expect core Tier 1s to now recover strongly in the fourth quarter, back towards 14%. This reflects a number of factors, including the formulaic impact of how our dividend is accrued during the year. We accrue at the top end of our payout range, so we have already accrued $0.28 year-to-date and additional capital management actions we've been taking to offset the negative OCI movements.
Please remember that this is not guidance of our full year 2022 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. We continue to expect to move back to the bottom end of our 14% to 14.5% target core Tier 1 range during the first half of 2023 and to consider buybacks from the second half of 2023 onwards.
So in summary, these were a good set of results, good earnings diversity across the group, growth in all of our business lines and continued strong control on operating costs. Despite a weakening credit outlook, our credit quality remains strong. For 2023, we're upgrading like-for-like revenue assumptions. We continue to target around -- adjusted cost growth of around 2%. And we expect to be at the bottom end of our target core Tier 1 range in the first half of 2023. Finally, after another quarter of good progress, we remain confident of delivering our targeted 12-plus percent return on tangible equity in 2023 and beyond. We expect a 50% dividend payout ratio for both 2023 and 2024, supplemented by active capital management to surplus capital beyond this.
We've included a slide on Canada in the appendix, so you can see the shape of the business and the tangible equity within it. We've also included slides on mainly China commercial real estate and the Hong Kong loan book.
With that, Elmer, if we could please open up for questions.
[Operator Instructions] Our first question is from the line of Mr. Omar Keenan from Crédit Suisse.
Best of luck for the future, Ewen. Could I please ask a question on capital planning and on the provision scenarios? So just on capital planning, could you give an update on where HSBC is on the tactical RWA measures that are meant to get the core Tier 1 ratio up to above 14%? It would just be good to have an idea of that. And just given the focus on real estate prices in the U.K. and Hong Kong and Mainland China, would it be possible to give a sensitivity in terms of RWA migration to lower real estate prices in 2023? For example, what sort of 10% to 15% across the board reduction in real estate prices would mean for RWAs?
And my other question on asset quality. Could you give a little bit more color on the guidance for full year '23? I guess there's a lot of moving parts between Stage 3 and moving towards a downside or downside 2 scenario. So when you're thinking about the FY '23 guidance being at essentially 40 basis points, what sort of assumptions are in there?
Ewen, do you want to pick up those points directly? And Omar, thank you for your questions.
Look, on capital planning, I guess, yes, various parts to that. I mean, firstly, I touched on when I spoke about the technical nature of how we accrue dividends during the year. So we've accrued $0.28 so far this year. So there will be very limited drag in Q4 from dividend accrual.
Secondly, yes, we've largely completed the $120 billion program that we committed to. I think there'll be a bit of a carry through into Q4 of a few billion. And on top of that, going back to Q1, we did implement a series of other sort of tactical measures to support the core Tier 1 given the movements we were seeing driven by the OCI losses and the impact that was having on capital. We're already seeing some of that benefit come through the Q3 results, and there'll be incremental benefits in Q4.
But I would say that we -- yes, you should see material improvement in the core Tier 1 ratio in the fourth quarter. And then we'll be back at the bottom end of the core Tier 1 range by the middle of next year, which also then supports the buyback comments for the second half of 2023 because, at that point, with a 12% plus return on tangible equity and a 50% payout ratio, we've signaled that we expect low single-digit loan growth next year. That means the business at that point is very capital-accumulative.
On the second question on the real estate crisis, look, I don't have to hand what the 15% impact would be on ratings migration across the book. But yes, perhaps I can get you to follow up with the IR team afterwards. There is quite a bit of detail in the Pillar 3 documents that I think they can help you sort of sift through to try and estimate what that impact may be.
And then on asset quality for 2023. Well, look, firstly, I think we do expect on the China commercial real estate book to continue to see some losses coming through that portfolio through '23. It still feels like we've got some ways to go before we're going to get to stability and improvement in the China property markets. For the U.K., probably the market with the biggest delta around it for us at the moment is the U.K. Yes, we have already, in some ways, front-end loaded potential Stage 3 losses for 2023 with the forward economic guidance adjustments that we've made during the third quarter.
And above and beyond that, look, I think we're just being reasonably prudent with the guidance at the moment. We didn't say 40 basis points. We said to the higher end of 30 to 40 basis points. I think when we look at consensus, it's sitting at slightly higher than 40 basis points at the moment, but we're not really trying to change that guidance.
But when you think about the world next year, I think it's also important to recognize that places like Hong Kong and China are likely to have better economic performances in '23 and in '22. So for us, when you think about our business mix, we have got a blend of some parts of the world seeing improved economic performance next year.
I don't know, Noel, if you want to add any other comments on.
I'll just reiterate the fact that despite the guidance to say, at the top end of the 30, 40 basis points, we're still committed to the delivering 12% plus RoTE. So it's affordable within the RoTE guidance we've given you. And we are building Stage 1 and Stage 2 provisions now in anticipation of potential losses turning into Stage 3 losses in 2023. So we've taken a prudent position on balance sheet positioning as well.
Our next question is from Rob Noble from Deutsche Bank.
I was wondering if we can just walk through the NII guidance. So you're saying the $37 billion has gone down $1.2 billion for FX. My understanding of the trading book funding cost, because that was already within your previous NII sensitivity, so rates have gone up, and I would have assumed that your NII should have gone up by more than what you're guiding to. So the $36 billion looks quite low to me. So I was wondering if you could walk us through your thoughts on that one, please.
Yes, sure. I'll do my best. Look, on the NII guidance, and yes, there's a sort of -- the technical side to the guidance is on the walk from the second quarter. Yes, firstly, as you've noted, we've had FX -- adverse FX movements of $1.2 billion. And our planning assumption is that rate moves will increase the cost of funding in the trading book by at least $1.3 billion. Yes, the cost of funding will be a drag on net interest income, but we'll have a dollar-for-dollar improvement in trading income and noninterest income. So relative to the second quarter, we think we're guiding like-for-like revenue guidance up by at least $1.5 billion, even though the net interest income guidance is down by $1 billion.
Look, on the nontechnical side, we think net interest income assumptions at the moment are cautious. Yes, I think increasingly, the interest rate sensitivity tables that we show you are less helpful because they are based on a 50% deposit beta. Given the relatively unprecedented speed in rate rises that we've seen relative to recent history, I think we are being deliberately cautious in key assumptions. We're assuming, in that guidance, very high deposit betas, elevated levels of migration out of noninterest-bearing current accounts and contraction of asset margins in some areas.
Yes, we'll obviously see how this plays out in the coming quarters. But I would say at the moment, we are trying to be deliberately cautious in that guidance. And I would note that, like-for-like, we have increased the guidance by around $1.5 billion.
And just for clarity, the cost of funding the trading book was inherent in the Q2 numbers, but that cost has increased by $1.3 billion. So we said increase on Q2, and it's an offset between NII and non-NII. So although the cost on NII is higher by $1.3 billion, the benefit reemerges in the non-NII. That $1.3 billion reemerges.
Okay. And the other thing is just also to note, which was in my comments, but if people missed it, was that FX impact will also have a corresponding impact on operating expenses. The 2021 costs were $32 billion. That translates to $30 billion on average FX rate year-to-date and $29 billion if we were to use September averages. So I do think where consensus is sitting at the moment looks too high relative to those numbers.
Just a follow up on the NII bit. So the trading book funding costs go up, but you've effectively assumed that the banking book doesn't benefit at all from incremental rate rises that you've assumed in Q4. Is that right?
Yes. Implicitly, in those assumptions, I think that's broadly correct. But as I say, I think within our planning assumptions at the moment, very cautious assumptions across deposit betas, deposit migration and asset margins. And I think, again, that answer is more nuanced if you go to the individual legal entity level. I think probably in Hong Kong, we are getting towards [ peaking them ] during the fourth quarter, I think. In some of the other markets, I still think there's further expansion of NIM.
Our next question is from Joseph Dickerson from Jefferies.
Ewen, you cited a weakening credit outlook. Could you just discuss for us -- help us dimension a little bit a couple of things in terms of -- for instance, how a strengthening dollar plays on credit cost in your Asia footprint? And then relatedly, if I look, the Hong Kong interbank liquidity is down to about HKD 100 billion, and the HKMA has been active in defending the PEG. It's not a zero chance that the peg could break. And I guess what would be the consequences for the bank in that event from a -- particularly from a credit standpoint? If you could help us think through those 2 dimensions, that would be helpful.
I think let me take the second question first, if I can. And then Ewen, you take the first.
We do not believe there is any risk to the peg at all. We believe the peg -- the HKMA have sufficient capabilities to defend the peg, and that's not a scenario that we envisage.
Yes. On the first part of the question, Joe, that -- yes, we don't think that when we look across the portfolio in Asia, there's any meaningful impact from stronger U.S. dollar apart from potentially in smaller markets, for example, in Sri Lanka, but I mean that's not all dollar-related. But at a sort of big macro level, we don't think the strength in the dollar has a material impact on us as we look out on credit quality across the region.
Our next question is from the line of Fahed Kunwar from Redburn.
Good luck, Ewen, with your future career. Just a couple of questions from me. The first one was just back on impairments. I'm sure it's pretty my understanding, but when you look at the $300 million CRE overlay and the $200 million U.K. overlay, if I look at your overall coverage ratio on your loans to customers, it's pretty much flat at 1.1%, which is about the same as 2Q and FY '21. And I would have expected that to go up if a lot of the provisions you're taking are just reserves rather than treating underlying delinquency. So why hasn't that coverage ratio stepped up? Are there other moving parts, obviously, maybe write-offs, some underlying delinquencies? That would be my first question.
And my second question, just following on from an earlier question. When you talk about your greater-than-14% guidance on CET1 from first half '23, have you factored in potential risk migration from higher loan losses falling CRE within that? Or if we saw increased migration, would that be a risk to that greater-than-14% CET1 guidance from 1 half '23?
Yes. Fahed, on the second question, yes, we've clearly factored in a view on what the economic outlook is and what the impact on ratings migration would be as a result of that. And you can see what our assumptions are on the macro outlook from our IFRS 9 scenarios. So yes, clearly, within that, in some markets, there is an element of ratings migration that we've built into our RWA forecast and capital forecast.
The -- on the -- on your question on impairments, I mean, I guess, it's hard to answer the question on a macro level. On the commercial real estate portfolio and China, we have definitely increased the level of overall provisioning against that portfolio. The -- yes, the -- and then on the U.K., again, I'm sort of struggling to get my head around the sort of takeoff of the provisions we had at the beginning of the year because of COVID and the putting back on provisions that we're now putting back on, I think, net-net, we put more on in the U.K. than we took off at the start of the year. So -- but look, I'll get the IR team to follow up with you on the specifics. But I think on the 2 portfolios that we're sort of most focused on at the moment, provisioning levels are higher than where they were at the beginning of the year.
And I think there are some currency impacts on the balance sheet as well. But the IR team can follow up on that.
Our next question is from Yafei Tian from Citi.
Ewen, all the best to your future career. And I have 2 questions. The first one is just to follow up on that revenue and cost guidance, making sure I heard it correctly. So assuming constant currency revenue is $1.5 billion higher and, I guess, cost guidance hasn't really moved 2% inflation, does that imply, on a preprovision basis, you're guiding for $1.5 billion higher of PPOP? So that is the first one.
And then second question is around the exit of Canada business. Compared to many other markets that HSBC is exiting, Canada is actually quite profitable market with mid-teens ROE. So just wanted to understand what is the rationale for that exit? And as -- strategically, as you look at the footprint of HSBC, are there any further markets that you are reviewing at the moment?
Ewen, do you want to take the first one, I'll take the second?
Yes. So look, thanks, you've got our guidance exactly spot on, i.e., on a constant currency basis, revenue is up $1.5 billion, no change in the cost guidance. So on a preprovision level, the -- there should be a $1.5 billion increase. And if you think about the guidance that we've given today on ECLs that even after ECLs, there still should be a net improvement on our guidance on a pretax basis.
Thank you. And on Canada, let me explain some of the rationale as to why we're considering alternative options on Canada. Firstly, you're absolutely correct. The business has performed well and is performing well, with a return on capital above our cost of capital and a very strong recovery post COVID. The team have done an extremely good job.
Rationale for considering alternative options are as follows. First, our market share in Canada is around about 3%. And second, it's largely a domestic business. The international connectivity between our Canadian business, particularly in wholesale banking and supply chain finance is less internationally connected than many other markets that we operate in. And then thirdly, we've had strong interest in our business from the point of view of other banks looking to buy it. We clearly have to consider, on behalf of all shareholders, is the value that they would attribute to that business significantly greater than the value of holding our profit stream within HSBC. And we're testing that at this point in time by looking at the strategic options.
Our assessment is there is a reasonable probability that the value will be significantly accretive. And therefore, it's right that we consider that option. Particularly strategically, as I said, our market share is in the 2% category, and the international connectivity of that business is relatively low. So that's why we've given serious thought to an alternative strategy for Canada. But I reemphasize the management team in Canada have done an excellent job.
Then you asked me the question on do I consider that same evaluation for other markets. And clearly, we always look, as a management team, on the performance of our businesses, the value in our hands relative to the value in others and also the strategic importance. So we do that. But at the moment, we're only looking at commencing a process on Canada.
And I can probably anticipate your second question. So let me deal with that now on Mexico. And if I do the same analysis on Mexico, I start with a market share analysis where, depending on the product line, our customer segment, we have somewhere between a 7% and 10% market share of the business in Mexico. So almost stronger market share position. We have strong growth being achieved in our Mexican business at the moment with significant upside potential. I think that's particularly true as we believe that as an international bank in Mexico relative to other competitors, our position as an international bank is being enhanced.
Thirdly, we believe that the supply chain interconnectivity between Mexico, the rest of the world and the U.S. will actually increase in volume of business and business opportunity because it is an important manufacturing base into the U.S. And that's at the core of what we do. And we have a very strong market share position in retail banking in Mexico, with strong interconnectivity between retail and corporate banking in Mexico as a result of the payroll services. And therefore -- and we also believe that we've got strong shareholder value accretion potential by holding our business in Mexico.
So we're not going through a similar process on Mexico. We think we'll -- we have good opportunities to continue to grow that business. It's starting from a stronger position, and it's not my intention to sell Mexico. So hopefully, that was a reasonably comprehensive answer. As and when we make a final decision on Canada, we will update you on the outcome of that process. Thank you.
Our next question is from Tom Rayner from Numis.
Could I just ask on the cost target for next year, please, the 2% in 2023? Because I think one appreciates it's a pretty tough target given the inflationary environment. Ewen, I think you've said in your chat at the start that it's going to need active cost savings to deliver. Now you pointed out Ewen was fairly key in terms of the cost transformation and installing disciplined cost management. So I guess my question is now that the CFO is leaving, is there a risk that hitting the target may become more dependent on paying back investment rather than finding additional cost savings?
I can get -- I can respond to that very categorically. There will be no easing at all in our cost discipline. I'm absolutely committed to that cost target. Ewen has done a tremendous job on driving cost discipline into the bank, but I share that agenda, and I'm committed to that agenda. As we said in the past, we've got a headline target of 2%, around 2%. We know that that's challenging in a high-inflation environment. But we also know we've got cost savings coming through next year from the transformation program we've already embarked upon. And that's the equivalent of 3%. It's about $1 billion of flow-through savings.
We also know we're identifying additional cost savings opportunities through further simplification, further digitization and further organizational change, and that can add to that 5% underlying capacity to pay. So I'm not going to pretend, in a high-inflation environment, the 2% is easy, but I'm also going to be remain absolutely committed to delivering that.
I thank Ewen for all of the great work he's done on instilling those disciplines in the bank. But I will make sure those disciplines remain and are committed for the future. So there's no weakening in that target.
Okay. Okay. And best wishes, Ewen, in whatever you do next.
Thank you, Tom.
Our next question is from Manus Costello from Autonomous.
I actually just had a couple. Just to triple clarify on the cost target for next year, the base off which the north to 2% growth comes from is the $29 billion FX-adjusted, not the $30 billion that you have as a year-to-date FX average rate. Is that correct?
Yes. The only caution I would put around that, Manus, is that exchange rate is bouncing around. So that was true at the end of September. Whether it remains true by the end of the year, we'll see.
But it's on an FX-adjusted basis.
But the thesis is correct. We're not trying to play games with FX and setting that target.
Yes. No, it wasn't entirely clear from the release this morning, given the way you've given the $30 billion number that the $29 million is the current starting point.
My second question is actually about the commercial real estate outlook in China. When I look at your disclosures, you're taking much higher impairment on your Hong Kong book exposures, in your Mainland book exposures. Are the additional $400 million of impairment you've taken this quarter mostly related to Hong Kong book? And why is Hong Kong so much worse? Is there a risk that, that Hong Kong book could really accelerate away from you? You've taken about 8% or 9% so far of the bookers impairment. Could that be materially higher if there's some kind of structural problem with your lending agreements in Hong Kong?
Yes, well, it's booked in Hong Kong. It's the offshore component of the China commercial real estate portfolio, Manus. So yes, we've got just under $20 billion of exposure. Just over $7 billion of that is onshore, and just over $12 billion of it is offshore. The offshore book is definitely weaker than the onshore book. Yes, the -- so I would say, if you look at the substandard, we've provided disclosure on substandard and impaired, which is about 35% from memory at midyear on the offshore book and about 3% on the onshore book. So you can see in that very, very different asset quality considerations.
Yes, a lot of the policy support that's going through in China is definitely providing a lot of support for the onshore portfolio, providing a lot of liquidity support for the onshore portfolio. And in some cases, it's a question of whether that liquidity for regulatory reasons can be used to support the offshore book. So we do expect there to be further provisioning against the offshore book. But yes, to keep that in context, $12 billion is on a $1 trillion loan portfolio. So it's just over 1% of total exposure we have as a bank.
But Noel, I don't know if you've got other comments?
I think it's a fair assessment. The offshore book has a different risk profile to the onshore. But our clients and our onshore portfolio is a relatively high-quality Tier 1, Tier 2 city-orientated book. But what we've got to work out is how the policy measures benefit not just the onshore business but the offshore. And that's still an evolving picture. And therefore, we've got to keep that under close review.
Should we consider the offshore book at this point to be essentially unsecured if they're not able to get access to any of the liquidity measures and the questions over collateral? Is it effectively an unsecured that you've got offshore on that?
Relative to the onshore book, it is less secure than the onshore book, so that is a fair assessment. But is it fair to say that the onshore policy measures will not benefit the offshore book? No, that's not a fair statement. I think we have to see, on a client-by-client basis, how much of the onshore liquidity support can then support that company's ability to service the offshore book. So I wouldn't have a complete separation between on and offshore. It will be client-by-client dependent.
Yes. Manus, I wouldn't describe it as unsecured. Yes, the onshore book is typically secured against specific properties. The offshore book has, yes, less specific security, but there is security underpinning that portfolio. But yes, it's not secured, and it's definitely not unsecured. It sits somewhere between those 2.
Next question is from the line of Martin Leitgeb from Goldman Sachs.
Ewen, let me echo, first of all, earlier comments, and thank Ewen for the good collaboration over the years and all your patience with our questions.
If I could just have 2, 1 on pass-throughs and 1 on asset quality. I was just wondering in terms of pass-throughs, earlier comments were on pass-throughs being more benign compared to assumptions you have made earlier in the year. I was just wondering, have you seen any meaningful signs of attrition in your core markets, Hong Kong and U.K. ring-fenced bank, in terms of CASA accounts or current accounts into higher-yielding accounts? Is it something which has started to trend higher and could imply higher pass-throughs going forward?
And secondly, on asset quality, I was just wondering what are the main ramifications you think higher mortgage rates in the U.K. will have? I think, most recently, mortgage rates headline have increased to a level of around 6%. And I was just wondering from the U.K. business perspective, what are the main implications of mortgage rates at such a level?
Noel, do you want me to go?
Yes, please, Ewen.
So on -- look, on the pass-through levels, Martin, they have been, I guess, below expectations so far. But I think they have been rising. And as I said, in our guidance, we've made some reasonably conservative assumptions and cautious assumptions on where deposit betas go to from here. But implied in that comment is materially higher than 50% to what we've seen to date and, again, hence, why I would caution on the -- on using net interest rate sensitivity tables at this point because they're based on a 50% deposit beta, which, I think, are becoming increasingly less relevant as we get to higher rates.
We haven't seen any material attrition. Where we are seeing is migration out of noninterest-bearing current accounts and savings accounts, and yes, we're starting to see that trend now in Hong Kong pick up a bit given where rates are. But again, just as a reminder, typically, if you looked in previous cycles, our extent of deposit migration out of noninterest-bearing current accounts has been well below sector averages in Hong Kong.
On asset quality, again, the book in the U.K. is typically a mix of 2-year and 5-year fixed. So yes, the impact of that -- of those higher rates will take time to roll through the book. Yes, they are typically stressed when we put them on to rates of up to 7%. So yes, and if you -- you can look at our IFRS 9 modeling and look at the downside 1 and 2 scenarios if you want to look at the potential sensitivity we have to higher provisioning levels, if you want to take some more adverse scenarios on the outlook for the U.K. But we think as we sit today, yes, we're not complacent about it, but we think, yes, for most of our customers, those higher rates are affordable given on the stress analysis we put on when those loans were put on.
Our next question is from Raul Sinha from JPMorgan.
My best wishes to Ewen as well. Noel, if I can start with a follow-up on your commentary around Canada and Mexico. I'm just trying to understand your reaction function to any incoming capital proceeds that you might generate from M&A. How would you think about capital deployment if you were to reach a position in excess? Would you consider further acquisitions? I think that's one of the comments you've made publicly. Or should we expect that the majority of capital that is generated from these disposals should be returned to shareholders? And the reason I ask for this is, I think, historically, HSBC has linked various share buybacks to specific disposals. And so I was just wondering whether you might be willing to link any subsequent disposal-generated capital proceeds to a direct share buyback.
And I guess the second question I have is remaining on Wealth Management. I was just wondering, obviously, we've been expecting a recovery in wealth in Asia for a while, and things are obviously still challenging on the ground. I was wondering if you could update us in terms of your thoughts around how much -- how the business is positioned going forward and whether or not you see any structural challenges arising from recent developments in terms of wealth growth.
Thank you. Thanks, Raul. Let me deal with Canada item first. Look, it's still very early in the process on Canada. So I don't want to be too definitive on use of proceeds. But clearly, there would be an expectation -- an element of -- a significant element of the proceeds there is. I don't want to hang on to excess capital. So as we get back into our target range of 14% to 14.5%, which we're going to do without the benefit of Canada, and then if we were to load a Canada disposal in on top of that, you would clearly have excess capital sit into the group.
Now it would be reasonable to assume that we may retain some of that capital to fund future growth that would emerge in 2024 and beyond. But a good proportion of that capital would be available for distribution. I don't want to give too much guidance on that at this stage. Let us get through the process on Canada. But I have no intention to hang on to excess capital over and above our target range unless we see good opportunities for profitable growth. So I think it would be a reasonable expectation to expect some distribution of that capital back to shareholders in some form.
On Wealth Management, I think on Asia, we're seeing the Hong Kong market reopening. Activity levels domestically are increasing. We're seeing the Hong Kong market reopen internationally. So I think the prospects are far better for 2023 than they have been throughout 2022. So I would expect activity levels to increase. But what you'll also hopefully see is a more stabilization in the equity markets. So the investment environment has not been very supportive, particularly in Asia, even though at the same time as the activity levels have been suppressed. I think if we start to see a stabilization of the market, there'd be an increased appetite to use alternative investment products.
And what I referenced in my opening comments is we're building the platform for future earnings growth from wealth by continuing to accumulate net new assets. And as we talked about in the last 12 months, we've accumulated $91 billion of net new assets. That $91 billion, given the suppressed market situation and investment appetite at the moment, is not yet producing good earnings, but it will do in the future. That is a platform for future wealth earnings that we're continuing to accumulate.
And I liken it to what we did in the deposit book. We still accumulated deposits from good operating accounts, particularly in wholesale banking and retail banking, noninterest-bearing operating accounts. And we did that during the times when they weren't earning a revenue stream. And now we're getting the benefit of that. And that's exactly what we're now doing on wealth. We're continuing to expand customer acquisition, asset acquisition in order to build a platform for future wealth revenue growth. Thank you.
We have time for one more question from Aman Rakkar from Barclays.
Ewen, I just wanted to say congratulations and look forward to hearing what you do next. Can I just squeeze in 2 questions, please? Sorry to come back to net interest income. But the guide for next year, I am really struggling to make sense or -- I do appreciate there's a greater than symbol that's sitting in front of that guidance. But if I was just to mechanically take your $32 billion guide this year, the Q4 exit NIM run rate or NII run rate annualizes at around $36 billion for next year. So I mean you're basically assuming absolutely no incremental rate benefit in your next year. The assumptions that must sit behind that must be extremely conservative. I appreciate you're talking about betas above 50%. Can you please -- can you help us just understand a bit more exactly if there's something we're missing and the extent to which those numbers are conservative?
And then secondly, I wondered, actually, if you had an update for us on the impact of IFRS 17 on your P&L. I'm mindful that we're some kind of 2 months away actually from the implementation of it. You've given us some guidance before. Could you help us understand the kind of the impact on NII fees and costs? The reason I'm asking is because your fee income performance, your noninterest income performance in Q3 is actually quite robust. If I add back in the $600 million of mark-to-market negative that you had, you're actually annualizing at quite a healthy clip. I need to understand how much I should be taking off that for IFRS 17 to work out if consensus next year is in the right place. Anything you can help us with there would be really appreciated.
Yes. Well, to start with IFRS 17. Look, I appreciate that we're sort of in an awkward phase at the moment with some of you modeling IFRS 17 numbers in terms of your forecast and some of you is still on IFRS 4. And yes, we're not able to -- and we're giving our guidance at the moment based on IFRS 4 rather than IFRS 17. So look, I think we are going to be in that sort of unsatisfactory position for a few quarters as we work to give you a sort of IFRS 17-adjusted view of the world in the coming quarters.
But just to repeat, what we said a couple of quarters ago, we expect reported earnings to be down by around 2/3. I think as part of that, you need to adjust out the impact of MCU. And we expect TNAV to be down around $3 billion and that the net impact on RoTE as a result of that to be relatively de minimis. So I think, yes, the latest internal numbers we're looking at is around 10 basis points of impact on '23 RoTE, but those numbers are still sort of being worked on.
So look, I appreciate it's an unsatisfactory position for all of you. We are working as hard as we can to get to a position where we can provide you clarity or better clarity, and when we can, we'll update the market.
Just on the comments on the maths of 4 times 9 to get to $36 billion, I think you do need to add the $1.3 billion on top of that for the switch into trading income. That is an uplift in the guidance that we're giving and an addition to that annualized rate of $36 billion. So I think we would say $37.3 billion plays $36 billion in your maths.
And then I sort of revert back to the conservatism or caution on other assumptions we're making. And yes, the reason for that is just we genuinely think we are facing a relatively unprecedented period given the sharpness of rate rises that we've seen. And we are generally trying to be cautious on giving you guidance over the next couple of quarters. But if we find going into Q4 that our assumptions can be upgraded, I'm sure Georges and Noel will be talking to you about that at full year results.
Would you be tempted to kind of guide for your expectations for noninterest income next year based on your current understanding of the momentum?
Look, at some point, I think we'll be accused to providing a profit warning when we're giving you guidance on net interest income, noninterest income and costs and the [indiscernible]. So we allow you to at least model on one of those items.
But I mean joking aside, if you think about the trends and noninterest income this year, I mean, I think, you do need to add back about $1 billion like-for-like on insurance MCU. Yes, I think some of the other line items when you go through it, some have clearly benefited this year. Some have significantly underperformed. When you go through the Global Banking and Markets' P&L, there's a lot of pluses and minuses in performance this year. I think we've talked about wealth and the depressed conditions for wealth this year. But even just on a pure technical basis, I think you need to add $1 billion back for the insurance MCU.
Yes. And I think if you look at the underlying fee growth, I mean -- or the non-NII, we've seen very strong Global Markets performance in the volatile markets. We've seen suppressed event-based fees because of the low activity in M&A and capital markets. We can each have a view as to whether some of that event activity will come back next year. But there's a probability that there's an element of that going to be coming back next year.
And you're going to have a continuation of good fee growth on GLCM or Global Payments Solutions in both CMB and GB&M. I don't see that trend declining. I see that trend continuing of good fee generation there. And as I said earlier, my expectation is there'll be an opportunity for some growth in our fees around Wealth Management as both activities and markets start to pick up and investment starts to flow back into alternative asset classes.
So -- but it's unpredictable at this stage. We'll have to see how next year goes. But I think there are some elements of our fee performance that are going to be enduring.
With that, if I can just share some closing remarks, I'd appreciate it. Firstly, thank you very much for joining the call today and your questions. To close, just a few summary comments.
We had another good quarter, with underlying growth in all businesses, positive impact of rate rises and continued tight cost control. We remain on track to hit all of our financial targets, including a RoTE of at least 12% from 2023 onwards. I want to reassure you, there will be no change in our strategy or our commitment to cost discipline as a consequence of the people changes we've announced today.
I want to reiterate my thanks to Ewen for all that he's done for the bank over the past 4 years and the support he's given to both myself personally, as I entered the CEO role and the advice and guidance he gave me, and also the support he's given to the wider team within HSBC. And I welcome Georges into the new role on the 1st of January and ask for your support and assistance in Georges taking on that new role, and I wish him all the best in that regard.
Thank you. I'll speak to you again with our full year 2022 results, if not before. Have a good morning or afternoon.
Thank you, ladies and gentlemen. That concludes the call for the HSBC Holdings plc Q3 2022 Results. You may now disconnect. Thank you very much.