Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's HSBC Q2 Fixed Income Results Conference Call. At this time, all participants are in a listen-only mode. There'll be some opening remarks, followed by a question and answer session. At which time, if you wish to ask a question, you will need to press star one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Faisal Yousaf, Group Treasurer. Thank you, Sharon. Hi, everyone. This is Faisal Yousaf. I'm joined today by Richard O'Connor, our Head of Investor Relations, and Greg Case, Head of Debt Investor Relations, together with Richard Boyd, Head of Capital. I joined HSBC in March after about nine years at UBS. I know a few of you. Looking forward to meeting the rest of you, hopefully in person, soon in the future. On my first few months at HSBC, I have found the organization to be full of opportunities. We have a tremendous franchise, and that is also true in the financial resources space, which is kind of the bread and butter of what we do in treasury. We have a very strong set of resources, and one of the key opportunities for us in the future is to look at how we optimize across all of those. I'm sure you would have spent the last few days going through our results. What I thought of doing today is just giving you a very high-level introduction and then going straight to Q&A. I'm not going to refer to any of the slides. Today, I'll speak a little bit about the quarter, our strategic delivery, and our financial resources. First, on the quarter, as you saw, we generated pre-tax profit of $5.1 billion for the quarter, $4 billion up year-on-year, and that included a release of $300 million of ECLs, taking the year-to-date ECL release to $700 million. As a reminder, we still retain about $2.4 billion of the ECLs we had built out during the post-COVID period. Second, in terms of strategy, we are making very good progress across all the four priorities that Noel has set, which is a reminder, they were to focus, to digitize, to energize, and to transition. You will see in the announcement from Monday pages across all four. We're very, very happy on how that is progressing. Alongside that, we are well on track to meet the financial resource commitments that we had made, including our reductions of cost and RWA programs. In terms of financial resources, first starting with balance sheets. We have increased our loans by about 2% for the quarter, both on the side of mortgages and on the back of trade finance balances, and our deposits have gone up by about 1% in the quarter. In terms of capital, we continue to have a very strong capital position. Our CET1 ratio of 15.6%. We have declared an interim dividend of $0.07 per share for the first half of the year, we remain very comfortably above MDA of about 4.7 percentage points. In terms of liquidity, we also have a very strong liquidity position. We have about $850 billion of HQLA across the group. You would have seen that we have announced a technical adjustment in our calculation of our LCR that is taking our LCR to 134%, which is about a 10% adjustment. Basically reflects a new methodology that better captures transferability challenges of liquidity across the group. Just to stress, that still represents significant surplus liquidity across the group. We have over $200 billion of surplus requirement across the different entities of the group. Finally, to talk about funding. In terms of AT1, you would have seen us in the market issuing about $2 billion of AT1 in year to date. We have also redeemed $2 billion, That is in line with the guidance that we have provided in broadly expect to issue for refinancing mainly. We have no additional plans for AT1 at the moment. Tier 1, likewise, we have very limited interest in that instrument for the moment, You shouldn't expect us to be anytime soon in the market. In the MREL space, our guidance for the year is $15 billion, as it was at the beginning of the year. You would have seen us issuing about $7 billion of MREL instrument during the last six months, You would have seen as well that we have started to venture in some of the locations that we haven't tapped in the past. We had inaugural transactions in both Hong Kong dollars and in CNY. Diversification is something that we deliberately will continue to pursue by trying to take a little bit of pressure off the most natural markets, in particular the dollar markets, where the majority of the demand is out there too. Depending on market conditions, we would continue to look at other places for us to diversify our funding sources from. That takes our MREL ratio to 30.6%, significantly above our 28% or so requirement that we have. Finally, from an OpCo perspective. Subsidiaries have very little funding needs and OpCo issuance will continue to be relatively rare. Just to wrap it up before we open for questions, we feel that this was another solid quarter, good earnings diversification across the group, and perhaps more importantly, making very strategic progress on all our medium-term goals. On that note, Sharon, we can open up for questions. Thank you. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Please stand by while we compile the Q&A queue. This will only take a few moments. If you wish to cancel your request, please press star and two. Once again, please press star and one if you wish to ask a question. Your first question today comes from the line of Lee Street from Citigroup. Please go ahead. Your line is open. Hello. Good afternoon. Thank you. Thank you very much for taking my questions. I've got a couple for you, please. Firstly, I guess, as new treasury, you talk about there's lots of opportunities. Just any thoughts on what maybe HSBC could do to make it a bit more efficient or what potentially might change or be different under your stewardship? Secondly, obviously, in your Pillar 3 capital instrument disclosures, you've got quite a few instruments that only work as capital till June of 2025. Just any thoughts on, to what extent are they a sort of serious impediment to resolution after June of 2025, and are there any easy fixes to get around that? Finally, I suppose on a sort of similar vein or similar theme, you've got quite a lot of operating company or HSBC Bank PLC Tier 2 paper. I think I'm correct in stating that obviously that won't work for MREL after this year-end, but obviously still works as Tier 2 from a capital perspective. Just any thoughts around how efficient that is for you as a sort of form of capital instrument as one looks ahead? They would be my three questions. Thank you very much. Th\ank you. Thanks very much, Lee. From an opportunities perspective, when you look across all the financial resources, capital, liquidity, funding, and also NII, what you can see is that historically HSBC has had significant surpluses across all the metrics. What we're trying to do is to make sure that the financial resources are fully deployed and aligned with our strategy. We are putting a strong spotlight on each of the resources, and we are looking asymmetrically as having too little resources or too much resources and trying to have the best deployment for all of those. I can give you example if you're interested in each of those, one that perhaps is most obvious is on the liquidity side. As I mentioned, we have $200 billion plus of surplus liquidity across the group. A lot of that liquidity is not necessarily a bad thing if you kind of receive surplus deposits and those deposits are not costing you, it's not necessarily a bad thing. What happens is those deposits in some entities generate capital requirements if those entities are leverage constrained. In other entities, you have MREL requirements that are also driven by leverage requirements. There is a cost to those deposits even if they come at zero. What we're doing is we're putting a spotlight on all the resources. We're making sure that those are priced adequately to each of the businesses and each of the clients that are sourcing them. Then we're trying to find the best way of aligning them to the strategy of the group. On your second question on, let's call them legacy instrument and resolution. I mean, this space is, of course, extremely complicated, and the way I would describe it is there are three dimensions that have to be taken into account simultaneously. One is the regulatory dimension. You would have seen, of course, comments by the Bank of England and PRA about it. We are in communication with them. Obviously cannot comment on the private discussion, but that is an ongoing communication. I would stress that this is not a space that from a regulatory perspective is black and white necessarily. Remember that when those instruments were issued, they were fully compliant, and somehow the rules are changing. That is a discussion we're having with our supervisor and our regulator. Second, there is, of course, the practicality dimension. We need to see what is the practicality of potentially affecting those instruments. The most challenging example, perhaps, is the New York law instrument, where there isn't a magical solution that we have found about them. There are practical considerations that are perhaps challenging for us to affect those instruments. Finally, are the economics of these transactions. Some of those economics are relatively easy for you from the outside to understand. I mean, clearly, we have a fiduciary duty to our shareholders, and we will look to act economically over time. Some of the dynamics perhaps are a bit more difficult to observe externally, because depending on whether we have or not hedged those instruments, whether to the extent that we have hedged those or hedge accounted or not, the economics for us internally may not necessarily be the ones that you're expecting externally. Long story short, you have almost a triangle with those three dimensions, and depending on that, we are looking at what to do. I can't comment on the discussions we're having with the supervisor and regulator. You will see us making a statement June next year when the public will make a self-assessment on resolvability coming October. On your third question, yes, I guess at the moment that an instrument stops qualifying from a regulatory perspective, and it changes, if you want, in the stack, of course, the economics of that instrument change. To the extent that you had an instrument that was more junior that drops from the stack, you need to look at the pricing of that instrument in the context of replacement, more senior instruments. That will be taken into account together with the practicality of potentially affecting that instrument in the market at all times. Okay, that's helpful. Just one quick follow-up there. You suggested on the Obviously, the discussions with the PRA, they're ongoing, they're private. I fully understand. Did you say the first that we would hear back would be June next year? Would you expect to, for example, in your Pillar 3 capital instruments disclose at the year-end to disclose the ultimate treatment and the like then? Just because my understanding was this all needed to be wrapped up by the year-end when the grandfathering period ends. What's your best guess, or that you can give us on when you first might be communicating back to us on all of this? The official timeline is as follows. We need to make a self-assessment on our resolution by 1 of October. That assessment is made public by both us and the Bank of England by June next year. To the extent that it's something material in the interim, according to our disclosure obligation, of course, we would make that public. Okay. That's very clear. I'll leave the floor to someone else. Thank you. Cheers. Thanks, Lee. Thank you. Your next question comes from the line of Violetta Baraboi from Société Générale. Please go ahead. Your line is open. Hi. Good afternoon, gentlemen. Thank you very much for having this call. Three questions on my side, if I may. The first one would be on the China/Hong Kong political situation. Has there been any commercial impact? We haven't heard anything about it on the equity call, and there've been things in the press about state-owned companies reducing activity with HSBC. If you could give us a bit of color on that. The second question is about NPL ratio. Currently, we have it at 1.8% in Stage 3, and it's unchanged year to date. Do you think that they've already peaked? If not, when do you think this ratio might peak, and how far are we away from that peak currently? The third question is about Stage 2 NPLs. They're still quite elevated at 15% of the book. We've seen with other banks that most of them have seen reductions in Stage 2. For some, there have been significant reductions. Therefore, the question stands is, are we going to slowly track back to 2019 levels at around 7%-8%, or do you think it's going to stay elevated for a while? Yes. That's it on my side. Thank you very much. Thanks, Violetta. It's Richard O'Connor. I'll start with all three and let Carlo chip in. On the first one, the China/Hong Kong political situation, clearly nothing much to say. You've seen the Hong Kong and China results for the last 12, 18 months. They've been highly respectable. We've at least maintained market share, had yet another good mortgage performance based on trade performance, taking market share in Hong Kong. Ditto in mainland China. Good growth in the book there. Heavy investments in the wealth business, showing early signs of bearing fruit. We've got nearly thousands of clients in China. We're not going to comment on any individual one of them, be them state-owned or other. We've won a very good pipeline of deals and transactions, including from the government in terms of bond issuance in China. We've also won licenses, our fintech license, the first foreign fintech license. We're obviously looking to expand particularly that wealth franchise, as we said, into five more cities. Results are very solid. Customer engagement very strong. Very resilient results. Economically, you can see that Hong Kong, China continue to perform well despite obviously near-term challenges from COVID in China. We've seen them last week, unfortunately, and hopefully that situation improves. We continue to invest heavily and the business continues to perform well. We've obviously wanted to perform even better. That's why we're investing more heavily in the business, and those investments are showing good signs of traction. We strive for very good relationships with the regulating governments at all levels in China and have very good engagement with them. On the 1.8% in Stage 3, I'll give you two contradictory answers. Look, you saw that the Stage 3 charges in Q2 were very, very low. In fact, they were zero above that $400 million recovery. We don't think you should expect that every quarter, as we said to the equity analysts. You do sometimes get a bit of bumpiness in our Stage 3 charges and indeed our safety balances. With that, obviously you've seen that Stage 3 NPL being broadly stable, and ultimately not a lot in the pipeline. With the comment that it can be volatile, we're hopeful as economies improve, that over the next 12, 18 months, you do see those saftey balances come down. Again, with the proviso that at the early stage of economic cycle, sometimes you get some late-stage impairments as economies start to come out of difficult economic situations. I'll just give you one example. Obviously, in the U.K. we're seeing people coming off furlough. Companies are starting to pay down particularly government debt. There's still some uncertainties out there, but generally, you're seeing Stage 2 NPLs very stable, and we're hopeful they can nudge down from what's already quite a respectable level over the coming quarters. I'll just correct your language on Stage 2. It's not Stage 2 NPL, it's Stage 2 balances, which, as you say, are quite high at 15% of the book. They did come down slightly in Q2. Again, we would expect that to continue as we would expect the economy to recover over the coming quarters on a like-to-like basis, because we certainly do have quite a lot of overlays when we look at Stage 2 balances. I personally wouldn't compare each bank by bank. Look at the trends, look at the commentary, and look at the overall condition of the book, and the condition of our book is good. It's been very, very solid through the last 12, 18 months, and we expect that to continue. Net, we expect the Stage 2 overlays to reduce. Each bank has a slightly different methodology, and we think our Stage 2 overlays to get to that 15% are higher than some of our peer banks. Understood. Thank you very much. Thank you. Your next question comes from the line of Corinne Cunningham from Autonomous. Please go ahead. Your line is open. Afternoon, everyone. Just a quick one from me. On MREL, do you think the CRR leverage requirement is going to drop out of your requirements? Do you think it's going to stop being a binding requirement? I guess with the focus more on RWAs. We've seen that with a couple of other significant U.K. banks. Just wondered if that was happening the same with yourselves. Thank you. Hi. Thanks for the question, Corinne. The MREL requirements for us as you saw is the most binding of three dimensions, the RWA, the leverage requirements or the sum of the parts. At the moment, and for the foreseeable future, we see both the leverage requirement and the sum of the part being kind of equally binding. If you decompose the sum of the parts, components as well, but you will see that in each of different resolution groups, leverage tends also to be one of the important drivers. Even if you got to a position where leverage in aggregate didn't become binding, it might be binding in the sum of the parts bottom-up calculation. You almost need to do the calculation bottom-up and then trying to figure out what it is. When you are at the margin of where we are, that sum of the parts or leverage is the most binding, then perhaps there is a little bit of stickiness to the calculation. As we said, we're guiding that the current requirement is about, in RWA terms, around 28%. Thank you. Given that you issue all of your MREL from the holding company anyway, would it just be easier to become single point of entry, or are there other technical reasons why you stick with the multiple point of entry? Well, easy to become single point of entry, it depends on what you mean by easy. Let me step back. We like to call ourselves an MPE-plus group. What that basically means is that the group issues MREL top-down and distributes to the entity, but de facto, we have three resolution groups. At least in theory, that could be advantageous from a resolution perspective because it gives our supervisor an optionality that perhaps other groups do not have. The optionality is to either hold the group together or to resolve it as three separate groups. At least at the beginning, in that hypothetical resolution weekend on the day, I think to holding the groups together has a big advantage because you preserve value, you avoid chaos, it's better from a systemic perspective and from a market-wide impact perspective. It buys you time to allow you to then to extract the most value to the group and to minimize the impact that it may have into the system. In terms of if that is the starting point, the question is, what is the advantage of this advantage in going either SPE or purely MP, if any? Do remember that there are a lot of parties involved in this discussion. There are interests in each of the different regions. At the moment, we have a situation where potentially everyone has the best possible solution because there is optionality. Obviously, we continuously review this together with the college supervisors. As I said, at the moment, we are an MPE-plus for the reasons that I mentioned. Thanks very much. Your next question comes from the line of Tom Jenkins from Jefferies. Please go ahead. Your line is open. Thank you. Good afternoon, chaps. Good afternoon, everybody. I've got one question and I suppose one point of order. I'll start with the question, and then go to the point of order. As usual, Lee and Corin have nicked my best questions, unfortunately. Obviously, trigger-happy on star one. There was one I still had, which was, you're obviously in the process of divesting some chunks of business in France and in the U.S. Obviously, not the equity of the entities, more the assets or the branches or whatever you want to call it. There is debt left in those entities that either looks redundant from a regulatory perspective or expensive from a capital utility perspective. I was just wondering, I'll leave it open-ended. What's your thinking on those debts? Your point of order is, and I think probably everyone on this call will agree, and I hope they do, is that we are very blessed in the U.K. to have fantastic IR people on the fixed income side. I just want to say, and I hope I embarrass him terribly, but I just want to say that Greg is one of the very better ones. Invoking the Olympic spirit, I'm not going to give him the gold medal necessarily, but he's definitely on the podium. For the question, I'd appreciate an answer. I was going to say, first of all, on your last question, Tom, it's a bit early for the bonus season. If you and Greg have had a discussion offline, maybe you should have waited another call for doing that. Thank you, we appreciate that. On your question in terms of disposal, obviously what we do is we look at the balances that are being transferred and the resulting effects, right? You just need to look at what is being transferred. In the case of the U.S., we are disposing about $3 billion of loans and about $10 billion of deposits with $1.8 billion of RWAs. From specifics, that means that basically all else equal, there is an $8 billion funding gap that needs to be compensated for. It's not exactly like that because there are surpluses and the requirements are different, but that is high level the way to look at it. In the case of France, it's actually quite balanced. Customer lending is $25.5 billion and deposit $22.4 billion. The way it happens is you look at what is being transferred, you look at the resulting effects on all the financial resources, plus also on the economics of your natural hedging that you had in place, and then you kind of rebalance. There isn't anything meaningful coming out of both of them. There isn't anything significant from a debt holder perspective to mention. The only thing I would point out that it would be our intention to try to move the covered bond programs to the buyers in France. That requires consent of the bondholders. Except for that, it should not be a major issue from a liabilities perspective. I don't know, Richard, if there is anything else you want to say. No. I wouldn't say much. Just say, Tom, you need to look what's left. We will retain substantial wholesale businesses in both and in the U.S., a medium-sized but highly interconnected wealth business, which will still hold the majority of the deposits by value, because they are obviously the higher value customers. I think you need to look at it in context of the entity or entities concerned. The fact is, A, it's good news that we are exiting these mass retail operations, but we're not exiting France and the U.S. We made substantial economies. We invest heavily in both. It's very strong connectivity with the rest of the group, a very strong multinational business, wholesale and markets business in both. Obviously, Paris being the center of our Eurozone activities, and U.S. being the biggest capital market in the world. I think you need to look in the context of the total balance sheet in both. As Faisal said, these are not meaningful transactions from just a pure balance sheet loan deposit RWA. They are meaningful in terms of the profit and loss of both entities. I would look at it from a P&L and return perspective rather than a sort of a funding perspective, although clearly you need to look at both. Well, no, in that case, Richard and Faisal Yousaf, thank you. That's very helpful. If that's the case, one, if you're looking at it from a P&L perspective, again, I do not know how you've hedged or hedge against sort of various bonds, if I'm looking at a sort of, whatever, 75-year, 80-year bond that I've got to pay seven and change percent on for almost minimal capital, I'm just wondering what the purpose of that would be in the U.S. Yeah. For example. Just for example. The only other mention to think about is, of course, the value of focus in the strategy, right? Obviously focusing on our strength and trying to avoid dilution of management in areas that are perhaps less kind of in line with our strategic, there is an additional value. Yeah, the point you make is a valid one. We look at that, and of course, as we rebalance, we take it into account. Yeah. I'll bring what Faisal Yousaf said about looking at our capital security, including legacy capital securities, that those points remain valid here as much as anywhere else. Okay. Chaps, thanks very much indeed. Thanks, Tom. Thank you. Have a lovely afternoon. Thank you. We will take our last question from the line of Alvaro Ruiz from Morgan Stanley. Please go ahead, your line is open. Hello guys. Thank you very much for taking my call. I have a very specific question and it's about the discourse issued from the Hong Kong Bank. As per your Pillar 3, the security is not eligible anymore after January, and reading all your disclosures, this bank has a lot of liquidity and cheap liquidity. I just want to have some sense about the economics about not redeeming the security. The more information, the better, but I know that you cannot disclose that much. Thank you very much. Hi, Alvaro. Thanks for the question. You answered a question for me. We cannot quite disclose name specifics. What are the things that I could say that are helpful? I think the first thing is just to restate what you said, the security locally doesn't have regulatory eligibility. Of course, going back to what I was saying earlier, the economics of the security have to be assessed against the replacement cost of a more senior note and hence a cheaper note. Having said that, the spreads on those securities are relatively cheap. It gives you long-term optionality. The way to think about it is, to the point you're making, you assess the surplus liquidity you have, you assess what are the additional kind of expectations you have in time, you try to project that, and then you decide whether there is a need for the security or indeed there is a value in keeping it. I'm afraid that's all I can say, but I think from your question, I think the components that you're raising are the right ones to consider. Just to confirm, you look the security independent from the other securities issued out of the non-ring-fenced bank? Broadly, yes. We look at each of the entities. MREL is pooled down from the top, from the entity. The entity will have a requirement, and that requirement triggers a demand from the holding company, and the holding company will put it down. You start at the entity and the requirements of the entity to evaluate the need and the economics indeed. Sorry, just look, if securities are not MREL eligible, then it's just pure funding. Do you just compare it with the cost of deposits or am I missing something? No, those are the right components. Okay. Thank you very much. Thanks, Alvaro. Thank you. I will now hand the call back for any closing remarks. Well, thank you very much for joining. Hopefully this Q&A was useful. If you have any more questions, please reach out to Greg, Richard, and the IR team, and hopefully everyone will have a good end of the summer. Thanks very much. Thank you. That does conclude our conference for today. Thank you for participating. You may all disconnect.