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HSBC Holdings plc (HBC)

Q3 2011 Earnings Call

November 09, 2011 6:00 am ET

Executives

Stuart T. Gulliver - Group Chief Executive Officer, Chairman of The Group Management Board, Member of Management Board and Executive Director

Iain James Mackay - Former Chief Financial Officer and Member of Executive Committee

Analysts

Sally Ng - China International Capital Corporation Limited, Research Division

Arturo de Frias Marques - Evolution Securities Limited, Research Division

Raul Sinha - JP Morgan Chase & Co, Research Division

Michael Helsby - BofA Merrill Lynch, Research Division

Ian Gordon - Exane BNP Paribas, Research Division

Alastair Ryan - UBS Investment Bank, Research Division

Alistair Scarff - BofA Merrill Lynch, Research Division

Rohith Chandra-Rajan - Barclays Capital, Research Division

Robert Law - Nomura Securities Co. Ltd., Research Division

Steven Hayne - Morgan Stanley, Research Division

Thomas Rayner - Exane BNP Paribas, Research Division

Ronit Ghose - Citigroup Inc, Research Division

Christopher Wheeler - Mediobanca Securities, Research Division

Michael Trippitt - Oriel Securities Ltd., Research Division

Ian Smillie - RBS Research

Presentation

Operator

This conference call and subsequent discussion may contain certain forward-looking statements with respect to the financial condition, results of operations and business of the group. These forward-looking statements represent the group's expectations or beliefs concerning future events, involve known and unknown risks and uncertainty that could cause actual results, performance or events to differ materially from those expressed or implied in such statements.

Additional detailed information concerning important factors that could cause actual results to differ materially is available in the HSBC Holdings plc 2011 Interim Management Statements. Past performance cannot be relied on as a guide to future performance.

The HSBC Holdings plc Interim Management Statements, HSBC Finance Corporation and HSBC USA, Inc. Third Quarter 2011 Results Conference Call with investor and analyst will begin in 10 minutes. The host for today's call is Group Chief Executive, Stuart Gulliver. Mr. Gulliver will make some brief introductory remarks following which, there will be an opportunity for questions and answers. [Operator Instructions]

Good afternoon, ladies and gentlemen, and welcome to the HSBC Holdings plc Interim Management Statement, HSBC Finance Corporation and HSBC USA, Inc. Third Quarter 2011 Results Conference Call with Investors and Analysts. For your information, this call is being recorded. And at this time, I'd like to turn the call over to your host today, Mr. Stuart Gulliver, Group Chief Executive.

Stuart T. Gulliver

Thanks very much. So welcome, everybody, to this call. I have Iain Mackay with me here today. We're both in Hong Kong. Though we'll give you a quick overview of the results and then, obviously, go to questions.

So as you've seen, our reported profit before tax for the third quarter was USD $7.2 billion, which gives us a year-to-date of USD $18.6 billion, as of which, of course, include around USD $4 billion of movements in the credit spread on the fair value of RM debt. So clearly, therefore, meaningless. Therefore, if we switch the underlying numbers, which is clearly how we all judge the bank, it gives us a bit of a clearer picture of what's going on.

The underlying profit before tax in the third quarter is USD $3 billion, which is down $1.6 billion on the same period in 2010. And the underlying PBT for the year-to-date was $14.4 billion, which is down $300 million on 2010. And as you all know, because we all work in the same industry, the industry's faced significant headwinds during the third quarter, not least the eurozone, which has impacted our performance.

In fact, there's 3 main factors, which have impacted our underlying profit before tax in the third quarter. First, the eurozone uncertainty, which hit revenues in Global Banking and Markets through the rates and credit line. Secondly, adverse movements in non-qualifying hedges, reflecting a decrease in long-term U.S. interest rates impacted our U.S. run-off book and our U.K. holding company. Our loan impairment charges also increased mainly in the run-off portfolio in North America, although on a year-to-date basis, loan impairment charges are still lower than 2010.

Now these factors were also partially offset by increased revenues in most markets in Commercial Banking, which, if you recall, is a business where we have been investing. And notwithstanding the difficult conditions in Europe, in the year-to-date a number of our Global Banking and Markets businesses have made good progress. Actually, revenue in 6 out of the 8 business lines in Global Banking and Markets, which you can see in detail, I think, on Page 23 or thereabouts of the IMS statement, are actually substantially up, so 17% increase in foreign exchange, within which Hong Kong's up 30%, the Rest of Asia-Pacific's up 40%, Latin America's up 50% and North America's up over 35%.

Our Equity business is actually up 45% year-on-year, and Payments and Cash Management is up 35%, with particularly strong results in the Rest of Asia-Pacific. The important thing is these are the areas we've been investing in. And if you recall, this was partly why we had expense increases in Global Banking and Markets in previous quarters and negative draws. So it's pleasing to see that we're starting to see some returns on the investments we've made in that business.

Now obviously, we've increased focus on strategy during this period. We substantially upped the pace of change, and we've made real progress in implementing what we outlined to you back in May, and I think it's important that I update you on these now. First, under the 5 filters heading, we've announced 14 transactions year-to-date, 11 since the 30th of June, including the disposal of our U.S. Cards business and 195 branches in upstate New York. These transactions, all 14, could release over $40 billion of risk-weighted assets and affect 14,000 employees, of which actually more than 13,000 will transfer to the new acquirers. We will redeploy the capital when it's released to fast-growing markets.

Second, expenses. Actually, the cost efficiency ratio worsened in the third quarter, but this time it was due to lower revenues. But what's important is we've actually begun to turn the corner on costs. Operating expenses and FTEs fell since the previous quarter, and headcounts now decreased by 5,000 since the peak in the first quarter of 2011.

And then thirdly, growth. We continue to invest for growth in faster-growing markets. We've increased revenues in Asia and Latin America, noticeably Brazil, versus the third quarter of 2010. And year-to-date, we've made good progress in repositioning Retail Banking Wealth Management, and we've grown revenue from our Wealth Management products mainly in Asia. We've also expanded CMB in most markets, with overall revenues up 15% year-to-date versus 2010, within which Asia's up 25%. Latin America's up 35% and the draws are positive.

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