HSBC Holdings plc (HSEA) Q1 2018 Earnings Call Transcript

HSBC Holdings plc (NYSE: HSEA)
Q1 2019 Earnings Call
May 3, 2019, 2:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

This presentation and subsequent discussion may contain certain forward-looking statements with respect to the financial condition, resource of operation, capital position, and business of the group. These forward-looking statements represent the group's expectations or beliefs concerning future events and involve known and unknown risks and uncertainties 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 our earnings release. Past performance cannot be relied on as a guide to future performance. This presentation contains non-GAAP financial information. Reconciliation of the difference between the non-GAAP financial measurements with the most direct comparable measures on the gap is provided in the earnings release available at www.hsbc.com.

The analysts and investor conference call for HSBC Holdings plc earnings release for 1Q 2019 will begin in two minutes. Following the presentation, there will be the opportunity to address questions to HSBC's Executive Directors. To ask a question today, please press * and 1.

Good morning, ladies and gentlemen and welcome to the investment analyst conference call for HSBC Holdings plc earnings release for 1Q 2019. For your information, this conference is being recorded today.

At this time, I will hand the call over to your host, Mr. Ewen Stevenson, Group Chief Financial Officer.

Ewen Stevenson -- Group Chief Financial Officer

Thanks, Sharon. It's Ewen here. Good morning, afternoon, whatever time zone you're in. Thanks a lot for taking the time to join the call. I was going to plan to speak for just over ten minutes and then there will be plenty of time for your questions at the end. You'll be able to find a full set of slides on the investor section of our website. Rather than running through that deck slide by slide, I'm just going to provide some overall comments on Q1 and then the slides are there to provide some additional detail for you.

On today's results, on the basis of the headline numbers, obviously, a very good quarter, a bottom line profit of $4.9 billion. Even if you ignore certain favorable items included in adjusted earnings, still a good quarter overall. On a reported basis, Q1 on Q1, revenue is up 5%, post-tax profits up $0.31, EPS up $0.06 to $0.21, and return on tangible equity up 220 basis points to 10.6%.

On an adjusted basis, revenues were up 9.2% and cost growth moderated to 3.2% this quarter. It meant that we had a very healthy adjusted jaws of a positive 6% in the quarter. On the balance sheet, we grew lending by 7% from Q1 2018. We grew deposits by 2%. Despite the 1.6% increase in RWAs this quarter, around a third of which came from the day one impact of IFRS 16, core tier 1 improved by 30 basis points to 14.3%. Fully diluted TNAV was $7.02. That's up $0.04 in the quarter.

Looking at the adjusted revenue in more detail, firstly by business line, in retail banking and wealth management, revenues were up 10% on Q1. This was underpinned by loan growth of 9%, notably in mortgages in the UK and Hong Kong. Wealth management revenues were up against a strong Q1 last year. Much of that growth came from insurance manufacturing, with revenues up 66%, in part benefiting from particularly strong equity markets this quarter.

In commercial banking, revenues were up 11% on Q1. That was underpinned by loan growth of 8%. We grew revenues across all major products and all regions with a particularly strong performance by global liquidity and cash management. We're also continuing to see decent revenue growth in global trade and receivables, finance on the back of higher margins in Asia and higher balances in the UK.

In global banking and markets, overall revenue growth was up a very credible 3%. Global banking and global markets revenues were softer, down 9% and 5%, respectively, but were more than off set by other business lines, particularly the strong performance of our transaction banking businesses, notably global liquidity and cash management and we did some positive valuation gains on CVA and FVA.

In global private banking, while revenues were down 4% on Q1 last year, this was mainly due to a repositioning of our US private banking franchise. We did attract $10 billion in net new money in the quarter with strong growth in Asia, particularly in Hong Kong.

Also, a word on corporate center, where revenues were up almost $200 million on Q1 last year, largely due to non-recurrence from a bond reclassification under IFRS 9 and favorable valuation differences on long-term debt and associated swaps.

On a geographic basis, we continued to see particularly good growth in Asia. Hong Kong revenues were up 8%, thanks in part to good loan growth. Ex-Hong Kong revenues in Asia were up 14%, albeit flattered by some favorable items but with robust underlying growth in mainland China and in the ASEAN region, notably in Vietnam and Singapore. Volumes were good in most Asian markets and we continue to see strong new business trends in insurance and private banking.

In the UK, growth slowed but was still up 5% Q1 on Q1. Retail banking and wealth management and commercial banking performed particularly well, delivering year on year loan growth of 10% and 7%, respectively.

And in Latin America, headline revenues were up 42%, in part due to $157 million in combined gains from the stake sales in two small card and payment businesses. You can find details on significant items and other items in the appendix of the presentation. If you adjust for those other items, we highlight in our adjusted revenues, you would have seen underlying revenue growth in the quarter of around 3% to 4%.

As you all know, we do have natural sensitivity in some of our revenue streams in global banking and markets. Around 30% of its revenues are more volatile quarter on quarter. In other parts of the group like our wealth and insurance manufacturing franchises, we have natural revenue volatility linked to the strengths and weaknesses of markets. Just as a reminder, a 10% uplift in equity markets equates to around $200 million of positive revenues in insurance manufacturing and a 10% decline around a $200 million loss in revenue.

Turning to net interest income and net interest margin, net interest income was up 5% year on year and down versus Q4 due to a two-day lower count in Q1, the impact of Argentinian hyper-inflation and the impact of IFRS 16. NIM was down 4 basis points in Q1 versus Q4 but down 2 basis points once you exclude the impact of Argentinian hyper-inflation and the impact of IFRS 16.

The other 2-basis point decline was largely driven by Hong Kong, which saw a lower one-month HIBOR, a Q1 average of around 130 basis points, which was an average of 30 basis points lower than Q4. I'd also note that one-month HIBOR is currently sitting at over 2%. As a reminder on HIBOR sensitivity, 100-basis point uplift in interest rates benefits net interest income by over $700 million, as disclosed in the relevant table in the full year 2018 results.

As we look forward, given underlying loan growth, we continue to expect modest net interest income growth in 2019. On operating costs, we're focused on slowing down the growth rate. As we said at the full year, the revenue outlook has become more uncertain since our strategy update last June. We recognize the need to show more cost discipline because of that.

We started this in Q4 last year, but please be patient. It won't happen overnight. Decisions on cost take time to be reflected into the P&L. Growth in adjusted operating cost was 3.2% over the quarter. This included around $100 million or 15% increase in investment spend through the P&L versus Q1 last year, the bulk of which was spent on enhancing digital capabilities across our global businesses.

Key investments to call out in the first quarter in IBWM were investing in a net global mobile platform, providing customers with a central hub for products and services. In commercial banking, we're making substantive ongoing investment into our global trade and cash management platforms and developing online platforms that will automate aspects of business banking, both in Hong Kong and the UK.

We remain committed to investing sensibly and sustainably and as we guided to at our strategy update last year, we expect to increase investment this year to around $5 billion with $1 billion spent in Q1. We will, however, continue to proactively manage investment in line with a more uncertain outlook. The majority of investment will continue to be on growth and technology, aligned to our strategic plans.

On credit, I would repeat what John and I said at the full year results in late February. Credit conditions remain relatively benign in most markets, but we remain vigilant on the UK, where we expect prevailing uncertainty, particularly around Brexit to continue impacting business and consumer confidence.

Overall credit costs were $585 million in Q1, some 24 basis points in an annualized basis with similar credit conditions to those seen in the latter half of last year if you exclude the additional UK overlays we took in Q4. We saw a few specific cases in commercial banking this quarter, mainly in the UK some recoveries in the prior quarter last year.

On the outlook for credit, our views remain unchanged. We expect credit costs to pick up this year and into 2020 and are comfortable with current consensus for this year. Just to remind you, the range of potential economic outcomes in the UK remain broad due to Brexit uncertainty and could either positively or negatively affect future provisioning trends.

Turning to core tier 1 and buybacks -- core equity tier 1 ratio improved by 30 basis points in the quarter to 14.3% with stronger profits and other favorable FX and reserve movements more than offsetting the impact of a $14.2 billion uplift in RWAs, of which $4.5 billion was from the day one impact of IFRS 16.

Continued strong loan growth will put pressure on gross RWA uplift, but the actions we are targeting to mitigate RWAs should help lower net growth to around 2% for full year 2019 if you were to exclude the IFRS 16 impacts I just talked about. We expect these mitigation actions to be heavily weighted toward the second half of the year.

We will take a decision on any full year 2019 buyback at the interim results in August. We remain committed to the discipline of script neutralization subject to regulatory approval and it remains a core plank of our capital management approach.

So, in summary, we had a good quarter, particularly set against the more challenging Q4 last year. We recognized the headline results are significantly flattered by some favorable items. But even ignoring those items, topline revenue growth continues to be solid and strongest in the areas we've targeted for growth, particularly Asia. We've moderated our cost growth relative to last year's run rate. Credit conditions continue to be relatively benign and we've just recorded a strong bottom line profit of $4.9 billion.

Return on tangible equity was up to 10.6%. EPS was up 40% to $0.21 and we've improved our core tier 1 ratio by 30 basis points. We're not planning on Q1 being repeatable for the full year, but we remain cautiously optimistic for 2019 and committed to meeting our return on tangible equity target in 2020.

On the outlook, we recognize that a combination of geopolitical outcomes, volatile interest rates, and the direction of markets could impact our results this year and into 2020. We remain alive to those risks and we'll continue to proactively manage costs and investment accordingly. So, we're happy with the quarter and the start we've made to the year. We've got a lot of work to do in order to be happy with the full year, but it does give us a very good base to build on. Our focus remains on executing the strategy we announced in June last year and meeting our financial targets that underpin that.

With that, I'll now open up to take questions. If I could now hand over to Sharon, please.

Questions and Answers:

Operator

Thank you, Mr. Stevenson. If you'd like to ask a question today, please press * and 1 on your telephone keypad. Please ensure that the mute function on your telephone is switched off. If you find your question has been answered, you may remove yourself from the queue by pressing the # key. Once again, to ask a question, please press *1. Please ensure that the mute function on your telephone is switched off. We will now take our first question from Chris Manners, Barclays. Your line is open.

Chris Manners -- Barclays -- Analyst

Hey, good morning, Ewen. Thanks for your opening remarks. Two questions, if I may -- the first one was about the buyback and the fact that you're going to take a decision at the half-year. Does that mean that you might not do the buyback and we should think about this phase in that you're going to neutralize script over the course of years and you want to manage the capital ratio more dynamically or is it just a formality rubber stamp approval?

Then the second question was on the NII and the net interest margin. I guess the net interest margin missed [inaudible] and people were looking for a little bit there. Maybe just zoom in on one part of it -- in the UK, you've actually managed to hold your net interest margin flat, but you've slowed your mortgage volume growth.

Can we ask just a little bit how you think about pricing there? Obviously, you've only got 5% risk weight density on that UK mortgage book. Risk weightings are going to be increasing. You've still got a lot of surplus liquidity. Maybe if you could talk us through on your thoughts on that dynamic of margin versus volume in the UK business. Thank you.

Ewen Stevenson -- Group Chief Financial Officer

Thanks. On the buyback, it's more the former than the latter. It's definitely not a signal of rubber-stamping buyback as part of Q2 results announcement. To give you some things to think about around our core tier 1, we obviously have a target of having our core tier 1 ratio above 14%. It was at 14% at year end. It benefited from some favorable FX and reserve movements to sit at 14.3% at the end of Q1.

Underlying that was about a 40-basis point core tier 1 underlying capital generation in the quarter. We're continuing to see very good topline loan growth, which is obviously putting pressure on upwards gross RWA increases. We've got a whole bunch of RWA mitigation actions that we're planning, some of which are things like model improvements.

Those model improvements are obviously sitting with regulators, some of which could be delayed in terms of timing and there's uncertainty around quantum and execution of some of those actions. We've also got Brexit uncertainty. So, John and I would just like to get to another quarter of data and then take a view with the benefit of sort of sitting toward the end of July on what the four-year outlook is for our capital base and take a decision then on buybacks.

If that were ultimately to mean there would be no buyback in 2019 if that was the decision at that point, then we're still committed to the underlying neutralization of script over time, but we take it as positive the fact that our core tier 1 went up 30 basis points in the quarter.

Chris Manners -- Barclays -- Analyst

So, if you could save 20-30 basis points by not neutralizing the script this year but that puts you in a more comfortable capital position, you might do it, but then if we look forward to '20 and '21, you would eventually neutralize it and get the share count back to where it was.

Ewen Stevenson -- Group Chief Financial Officer

Fundamentally, if we see the opportunities that continue to put on good loan growth, I think we're always going to take an opportunity to put on good loan growth if we think that's achieving returns above the cost of capital and in many parts of the world, we are seeing good loan growth that meet that criteria at the moment.

On the second question on NIM, I'm sure yours will be the first of a number of questions on the topic of NIM, but on the UK, we did take some pricing decision in Q4 to test pricing elasticity. As a result of that, we did see a slightly slower flow share in mortgages in Q1. It was about 7.1% flow share, still ahead of our stock share on 6.6%. That meant the NIM stayed stable at about 221 basis points.

But we remain committed to continuing to grow our UK mortgage book ahead of our stock share. Again, just to repeat, we've got a natural share on the liability side of low double-digits and therefore, with the stock shares sitting below 7%, we do see ample opportunity to growth that mortgage portfolio over the coming years.

Chris Manners -- Barclays -- Analyst

And on the point about only having a 5% risk weight on the UK mortgage book and the potential that you have that risk weight going up and would that change your return profile and some of your decision making or are you already pricing for that?

Ewen Stevenson -- Group Chief Financial Officer

Yeah. It's a bit of both. We're obviously going to price to the -- depending on the product and the duration of that product, we're obviously going to price with one eye in mind to Basel III reform coming down the track. But even today, if you were to fully load that into pricing, we still think that we're earning very attractive returns on our UK mortgage book and today, highly attractive returns.

Chris Manners -- Barclays -- Analyst

Understood. Thanks very much for the question.

Ewen Stevenson -- Group Chief Financial Officer

Chris, the other dynamic that everyone should obviously be alive to that has nothing to do with mortgage pricing is at some point, we need to refinance the term funding scheme. There was about $120 billion of GFS funding out on the market at the end of last year. We didn't take any of that, but we're obviously alive to the impact on deposit pricing that may see, which again, may have an influence where they will choose or otherwise to price mortgages in the coming periods.

Chris Manners -- Barclays -- Analyst

Okay. We could see a bit more firming and mortgage spreads, you think?

Ewen Stevenson -- Group Chief Financial Officer

Depending on what's happening on the deposit side, I think.

Operator

Thank you. Your next question comes from Tom Rayner from Numis. Your line is open.

Tom Rayner -- Numis -- Analyst

Good morning, Ewen. A couple things -- just one on the margin, looking at where consensus is currently expecting it to go. It looks like it's trending at 1.7% by 2021 versus 1.59%. I hear what you say about HIBOR having moved back up. You say the gap against dollar LIBOR has closed. I guess they're both helpful. Is that enough to offset some of the competitive pressures you're seeing from the deposit switching in Hong Kong and elsewhere? Are you comfortable with that consensus margin trajectory at the moment? I have a second one on costs, if you want me to do it now.

Ewen Stevenson -- Group Chief Financial Officer

I don't like forecasting NIM, but we just printed 1.59% in the quarter and consensus for the full year is sitting at 1.66%. Even if you factor in a more positive -- if you were to just assume that HIBOR stays where it is for the full year, I don't think that gets you back to 1.66% for the full year. So, we do expect some of that gap if HIBOR was to stay where it was to narrow.

I don't think that gets you back to where current consensus is, but equally, we think and we continue to see growth in average interest earning assets that's been consistently higher than where consensus has been. So, if you look at it on an aggregate net interest income basis, there's probably some gap to consensus today, but it's not as big purely by the NIM gap that we saw in Q1.

Tom Rayner -- Numis -- Analyst

I get that '19 consensus looks pretty tough, but I was just thinking 2021, it's not a lot of margin expansion over that sort of period. I just wondered if you still...

Ewen Stevenson -- Group Chief Financial Officer

If you predict policy rates $4 million over 2020 and 2021, Tom, I would happily -- interest rates are bubbling around so much. We would have expected going into the start of this year to have seen a rate rise in the US at a positive environment going in for 2020. That doesn't look to be the case anymore.

Tom Rayner -- Numis -- Analyst

Okay. Thank you. Just on cost -- you took $1 billion dollars in investment, I think, in Q1 and I think the target for the full year is $5 billion. Can you say anything about the phasing of the remaining $4 billion as we go through the year? Is this going to be evenly spread?

Ewen Stevenson -- Group Chief Financial Officer

Yeah. So, just on fixed cost, there was 3.2% adjusted cost growth in the quarter. I think that was slightly flattered because there was a back levy charge in Q1 of last year and there was also a very small impact of hyperinflation benefiting the numbers in Q1 of this year. If you were to back those two things out, that cost growth would have been about 3.8%.

Within that, there was about 15% growth in the P&L impact of investment toward the $1 billion or just under $1 billion. For the remaining period of the year, therefore, you should expect investment spend and the impact of that investment spend on the cost structure to increase, which will obviously put a bit of upward pressure on cost growth. I think therefore, the onus on us is to manage more actively the other part of the cost base more proactively over the remainder of the year. There will be a ramp up starting in Q2.

Tom Rayner -- Numis -- Analyst

Super. Thank you very much.

Operator

Our next question comes from the line of Fahed Kunwar from Redburn. Your line is open.

Fahed Kunwar -- Redburn -- Analyst

Good morning. Thanks for taking the questions. I just have two quick follow-ups to Tom's questions, to be honest. On the margins, I just want to understand when you say in 2020 when you expect the rate rise, that looks like unlikely now, if there are no rate rises going forward, should we still expect loan growth of 4%, NII growth of 5% as consensus in the sense that actually people still expect margin expansion. It feels like it's unlikely we're going to get margin expansion now going ahead without rising rates.

I completely appreciate volume growth could still meet your NII expectation on the margin side of things without rate rises. Is it too much to expect NII to be tracking ahead of loan growth? The second question was just on the capital, the movement in the fair value to comprehensive income. I think that's about a 10-basis point boost to capital. Is that a permanent change? Is there anything that means that would reverse over the course of the year? Just a bit more color on that would be grand.

Ewen Stevenson -- Group Chief Financial Officer

On the latter, no. IFS gains and cash flow hedging reserve movement, so, I don't think you should assume -- that swings around a bit. Hence, it's linked to the commentary on buybacks too. It's good that we got those benefits in Q1, but we're not -- they could swing around. On NIM, mathematically, what you say has to be right. I'm not going to build your models for you, but I just observe that we're far more sensitive to HIBOR than we are to US dollar rate impacts. So, that would be a bigger driver. The biggest single driver of net interest income growth in the coming years is driven by underlying volume growth.

Fahed Kunwar -- Redburn -- Analyst

That's great. Thank you very much.

Operator

Our next question comes from Guy Stebbings, BNP Paribas. Your line is open.

Guy Stebbings -- BNP Paribas -- Analyst

Good morning. Thanks for taking the question. Could I just come back to cost briefly and then I had a follow-up on RWAs? Thanks for the color so far. If we take the 3.8% underlying growth, should we be thinking of the phasing of the investment spend this year as putting incremental pressure on that figure or what are the actions you're sort of outlining should we see a significant offset to that? Are you able to give any color around some of those actions you're hoping to take? That was the first question.

Then on RWAs, thanks for the guidance for this year. As we look into next year, would you be able to give any guidance in terms of some of the regulatory drivers that the RWA movement is likely to come through over 2020-2021, etc.? Does that have any bearing in terms of size, timing of buybacks or can it be absorbed through the normal course of business? Thanks.

Ewen Stevenson -- Group Chief Financial Officer

So, on cost, we have natural inflation in our cost of around 3%. So, if we were to keep headcount flat and not change our approach to investment year on year, you would expect natural cost growth in the business of around 3%. The fact that we're spending more on investment adds about a percent or so on top of that in terms of additional cost growth, which gets you to around the 4% level that you saw in Q1 of this year, depending on the flex on that investment spend.

But the main priority, I think, is broadly to keep headcount relatively flat while we're continuing to put on volume growth. Therefore, the investments we're making should, in turn, drive productivity improvement, which allows us to continue to achieve that objective. So, I don't think we're talking about any significant cost program across the bank. What we're talking about is just sensible cost discipline.

What I looked at last year and the 5.6% increase in cost what we had, which was very much what we planned to do. We just had about a $1 billion revenue shortfall in November and December because the market impacts meant that we went from what was anticipated to be a positive jaws to negative. I just feel more comfortable trying to plan on the basis that we can manage costs below that sort of run rate that I just talked about.

On RWAs, putting Basel III reform to one side, I still think we're trying to manage toward about a 2% RWA growth in 2020. I know we talked about 1% to 2%. I'm comfortable at the higher end of the range, not the lower end of the range. I did talk about full-year results that we are anticipating some RWA impacts as a result of an expected decision on French mortgages, which is going to impact the whole sector which will be about $3 billion or $4 billion, I suspect, uplift in RWAs at some point.

Then on Basel III reform, I think we continue to be cautious on providing guidance until we've got a bit more clarity about the implementation of the rules and we've got an acute degree of complexity given that we're waiting on about 60 national regulators in terms of discretions. So, when we are comfortable with talking, we will talk, but I would just encourage everyone not to assume the answer is zero.

There clearly will be some impact because of Basel III reform and then we have to then work through what that would imply or otherwise for our core tier 1 targets as well and whether RWAs are going to go up in the absence of a change of the risk profile of the bank, whether we should also be rethinking what our core tier 1 target is as well.

Guy Stebbings -- BNP Paribas -- Analyst

Thank you very much.

Operator

Our next question comes from the line of Magdalena Stoklosa, Morgan Stanley. Your line is open.

Magdalena Stoklosa -- Morgan Stanley -- Managing Director

Hello. Good morning. Two questions on your balance sheet, but more on the underlying business -- on slides 12 and 13 when you showed the details of global retail and global commercial segments, the loans, of course, have outgrown deposits quite significantly year over year. I'm just wondering if you could give us a sense of how that relative growth, how much of it was just underlying business conditions versus your deliberate pricing strategy to drive one versus another? And two, how do you think this is likely to move forward? Let's just say 2019-2020.

Ewen Stevenson -- Group Chief Financial Officer

On the lending side, I don't think it's driven by any particular pricing strategy. In the ring fence banks in the UK, we clearly, as result of ring fencing, as we've talked about at full-year results ended up with an excess of deposits sitting in the ring fence bank and equally a liquidity shortfall sitting in the non-ring fence bank.

So, we also didn't have, going back a couple of years, a well-developed distribution channel through intermediary mortgages. We've now set that up. We used to have a very low market share in intermediary mortgages, which is about 70% of mortgage distribution in the UK. We just think, as I talked about earlier, if we've got a low-double-digit natural share of liabilities, we should have an asset side share that's substantially higher than where we sit today.

Asia has grown and we're just taking advantage of Asian growth. In context, if you were to look at our overall mainland Chinese market share, it's less than 0.2% or something. So, our ability to grow at sustainably high growth rates really comes back to your question on deposit growth, which is how can we fund that growth? We've got ample opportunity in Hong Kong and the surrounding region to grow lend.

On the deposit growth, some of that was deliberate. We do have some very large liquidity surpluses in some parts of the world, particularly Hong Kong and the UK. We've been taking advantage of those liquidity surpluses, deposit surpluses to grow loans rather than the need to grow deposits. That's clearly not a sustainable proposition over the long-term. So, you would expect over time to see deposit growth to begin to increase and that gap would narrow. And then Q1, there were just some one-offs in the commercial side that sort of impacted the headline deposit growth in some of the places, particularly Hong Kong.

Magdalena Stoklosa -- Morgan Stanley -- Managing Director

Just to follow-up on this one -- when you look at your underlying activity per segment, per kind of country, where do you actually see the loan growth delta to the upside? Where do you expect potential surprises? I suppose where do you see the relative strength?

Ewen Stevenson -- Group Chief Financial Officer

Well, if you break down our business by where are we at 10%+ market share in lending and deposits, UK, Mexico, and Hong Kong, Hong Kong, you would should expect our market share to broadly grow in line with the market, I think, between us and Hang Seng, we are already around 40% of mortgage origination. Is that going to change significantly on the upside? I don't think so.

In the UK, we do think we're underweight on the asset side and we do have the ability to grow. We do think on the commercial side, for example, in the UK with Brexit, that plays to our competitive strengths as corporates develop new international relationships. In Mexico, again, we should grow in line with the market. Every other place that we do business is different. Every other place that we do business, we have the ability to grow substantially higher than market growth rates if we choose to and we can fund that growth through deposit growth.

So, for example, in the US, the business plan is premised on us taking share off from a base of very low share. In Mainland China, our premise in the ASEAN region, same thing. In some of the markets we do business like Canada and Australia, where we're not part of the big incumbent banks there, we've been growing both businesses very nicely.

So, I think the answer is a very nuanced answer depending on which market we're in. In the established markets away from the UK where we are a part of the larger banks in those markets, our growth rate should be more in line with market. In those markets, UK and the other markets, we effectively have got significant upside to grow loan growth ahead of market growth rates.

Magdalena Stoklosa -- Morgan Stanley -- Managing Director

Thank you.

Operator

Our next question comes from the line of Jason Napier, UBS. Your line is open.

Jason Napier -- UBS -- Analyst

Good morning. Just one question and I wonder whether this links to your answer to the previous one. It's around the emphasis that we've heard in the past around positive jaws. In today's release, you obviously cite that you've had 6% jaws in Q1, but a big chunk of that obviously comes down market movements and so on.

I think John's emphasized that an organizational level, weaning yourself off restriction budgets and so on, you've lacked the discipline of positive jaws. I wonder if you can give us color on how do you deal with things like market moves when you think about these things? Isn't on the cost side emphasizing the longer-term growth of the organization kind of more important? Then just for clarity's sake, are you still committed to delivering positive jaws for the full year, excluding things like market moves? Thank you.

Ewen Stevenson -- Group Chief Financial Officer

Yeah. I think we've always committed to positive jaws. We haven't tried to get to an adjusted positive jaws within there. So, we certainly took the hit last year in Q4 when we, because of adverse market movements, we recorded a negative jaws rather than a positive jaws. But for us, the difficulty is there is no perfect -- there are imperfections with whatever we would communicate around cost targets to the markets.

Cost income jaws are imperfect because while we can control costs, we're obviously not fully in control, as you point out, of some of the revenue line items. There is market and interest rate sensitivity in our topline. That does mean that while we can have a base planning assumption and what our revenues are going to be for the year, things that sit entirely beyond management control such as what happened in November and December last year means that we need to manage to a gap to ensure that we would get to positive jaws.

Equally setting hard cost targets we don't think is right either because we can flex our cost base according to what the growth opportunity is. If we see growth opportunity, then we want to invest in that. So, managing to an absolute cost number to us doesn't make sense either. John's right. Jaws is a good discipline internally. It's not a perfect metric because we're not in total control of some of the revenue line items. It's a decent metric to manage to. But fundamentally, I'm managing both to jaws and to absolute cost growth personally.

Jason Napier -- UBS -- Analyst

Just to follow up on that, at your level and at John's level, the jaws thing sort of makes sense. How does that work at a global business level? What does it divulge to them in exactly the same way?

Ewen Stevenson -- Group Chief Financial Officer

It depends on the business. It depends where they are in terms of their own respective investment programs. For example, we're investing very heavily this year in an investment program in commercial. It may well be within commercial, you have negative jaws. We're comfortable with that because we know that elsewhere in the business, we're going to have positive jaws to offset that. So, the individual business level, each individual business is not held to positive jaws because we don't think that's the right thing to do. Where we've got an individual business that needs to invest for longer term value creation, we're not going to hold them to positive jaws.

Jason Napier -- UBS -- Analyst

Thank you very much. That's helpful.

Ewen Stevenson -- Group Chief Financial Officer

Your next question comes from the line of Alastair Ryan, Bank of America. Your line is open.

Alastair Ryan -- Bank of America Merrill Lynch -- Analyst

Thank you. Good morning, afternoon. Some helpful new disclosure you've given us the last couple quarters -- you've been around long enough now for us to start picking on you about it. The non-ring fence bank in Europe, I know you never really set the bank up for that, but they don't look like they're doing that well. They've got a lot of cost. I know the corporate center is in there but also, the corporate center is being revealed by the carving out the UK ring fence bank. Is that why you're looking at cost and the levers you're going to pull?

These are areas set up for almost a different HSBC that was more European, less Asian, I guess. If you see any revenue opportunities in Asia and it seems you're not going to be pulling to hard on the cost there, is that the right way to think about where the cost flex comes?

Ewen Stevenson -- Group Chief Financial Officer

If you look at how our capital is invested around the globe, some of the numbers are not perfect. Obviously, in places like Europe and the US, we absorb cost of relationship banking, where revenues are booked elsewhere on the planet. But even if you adjust for that, yeah, the US and Continental Europe are where we have our biggest strategic challenges at the moment in terms of returns.

So, yeah, those are two areas that we're more focused on how do we turn around those businesses, which is a mix of revenues, costs, and capital, frankly for both of those two businesses. So, the current performance of a non-ring fence bank is not good enough. We recognize that we need to improve it. It's not dissimilar to a situation, although the underlying business drivers are different to what we have in the US as well.

Alastair Ryan -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

Your next question comes from the line of Manus Costello, Autonomous. Your line is open.

Manus Costello -- Autonomous Research -- Analyst

Hi, I wanted to come back to HIBOR, please. I wanted to ask why it's so volatile. It's a bit of a naïve question, but if you can shed any light on that, it would be useful. Given the volatility over the last 12-18 months, is it changing the way you're approaching A&N in Hong Kong at all or should we still expect that same sensitivity to flow through? Obviously, it has a different impact if it's swinging around.

Ewen Stevenson -- Group Chief Financial Officer

I'm probably not the world's expert on HIBOR at this point, but my learning curve is rapidly improving. Basically, there are huge money flows, as my understanding, in and out of China, which just means that HIBOR swings around substantially even though it is linked somewhat to US dollar interest rates. Another feature of the Hong Kong market is on the asset side and the liability side, they all have repricing mechanisms typically around one and three months.

So, what you see within any given quarter is a very rapid translation that you wouldn't see in other markets between a change in the underlying interest rate curve into the underlying P&L. You can see that if you look in our full year disclosure, you look at the basis point sensitivity we show for 25 and 100 basis points shifts in interest rates. We have a far higher year one impact as a percentage of a five-year rolling impact than we would for other banks that I've seen.

Manus Costello -- Autonomous Research -- Analyst

Even if that's going to be much more volatile, you're happy taking that incremental volatility into NII?

Ewen Stevenson -- Group Chief Financial Officer

Well, yeah, you're talking about having to fundamentally change customer behavior in terms of the product offering. At the moment, can you do that, possibly, but it's very unusual to change customer behavior and customer preferences, particularly on the asset side for product. Depending on which market we are in the world, we tend to be a taker of the product preferences of customers in those markets.

On non-interest income, we are growing that substantially and we do see -- one of the features for us, we think, in Hong Kong is the substantial opportunity on the wealth side, both in terms of private banking, affluent banking, asset management on the insurance side, which should provide some offset to that. Do I think over the next couple of years we're going to see a fundamental shift in our interest rate sensitivity to Hong Kong? No.

Manus Costello -- Autonomous Research -- Analyst

Got it. Thank you.

Operator

Your next question comes from Joseph Dickerson from Jefferies. Your line is open.

Joseph Dickerson -- Jefferies -- Managing Director

Hi, Ewen. So much of this call has been focused on net interest income, but looking at the other half of your revenue base, there's a very interesting ongoing story in terms of ongoing liquidity, your global liquidity management revenues, which were particularly strong. I thought it was nice to see the chart looking at the funded assets that support those and those were only up 4%. So, I guess that seems like it's been a fairly sustainable business for you.

So, are these the types of growth rates that we can expect? I know you don't want anybody to annualize anything from Q1, but these have been consistently strong. What's driving that strength and can it continue? Also, on the non-interest income, I think you said in February you were above budget in the early stages of Q1.

If your peers are any read across, you probably have some ongoing momentum in the markets business in Q2. If you could comment on that, that would be great. Then the 4% increase in FTEs, what's that? Like 9,000+ new people year on year? Where are these FTEs going in terms of your business units and lines? That would be quite helpful. Thank you.

Ewen Stevenson -- Group Chief Financial Officer

Yeah. So, on GLCM, it's a mix of two things that are going on. One is we are taking share, particularly against western banks in Asia. We've seen in some cases some fairly significant market share gains. It is a business we've been investing in. It is a business we're very good at. Also, there is some benefit from higher interest rates coming through there. That interest rate benefit should begin to moderate over time, whether we can continue to achieve the strong share gains, we'll see. We do think that we are competitively advantaged.

On markets, I think I would just note that our business is not the same as some of the peers that have been reporting. Our bias is much more Asia instead of Europe rather than the US. I think some of the commentary has been recovery in US markets. You can see that, for example, in the US IPO markets, Hong Kong was the biggest IPO market in the world last year and is still relatively slow at this point. I don't think we've seen the recovery into April that some of our peers have seen or seem to be talking about in recent results announcements.

Joseph Dickerson -- Jefferies -- Managing Director

Your local markets are up quite a bit, though. They perform well and volumes have been a little better in Q2.

Ewen Stevenson -- Group Chief Financial Officer

The other thing I would say about global banking and markets for us is it's a very different business mix. So, Q1 on Q1 revenues were up 3%. Equity's headline was down 8%, but there's a one-off in there. If you strip that out, it was a weaker performance. Then the transaction businesses are doing very, very well, which means for us, the performance of GB&M, the nuance around our business is very, very different to others.

On headcount, are we investing in headcount today? We've got more frontline staff. We're investing in the Hong Kong wealth and private banking businesses. We're putting people into China. I think the other dynamic you should expect to see with us and probably all the banks is a shift out of contractor resource in the UK into full-time staff.

So, yeah, we do publish, I think, contractors and you would expect the number to come down as the year progresses, which is really just, in some cases, from contractor headcount to FTE headcount. This is very much driven by, I think, IR 35, the new tax position of HMRC in relation to contractors.

Joseph Dickerson -- Jefferies -- Managing Director

I can't wait to analyze that one. Thanks, Ewen.

Operator

Your next question comes from Raul Sinha, JP Morgan. Your line is open.

Rual Sinha -- JP Morgan -- Analyst

Thanks for taking my questions. Maybe just a follow-up on the costs and then a broader question on the ROTE target -- firstly, on the cost growth, you talked about on a clean adjusted basis if you take out the levy comparator from last year, the cost growth is about 3.8% year on year. Then obviously, investment spend is likely to intensify through the year. So, I was wondering on a net basis should we be expecting cost saves to be ramping up from the Q1 level so that you could kind of hold a cost growth number on the same level or does that 3.8% number effectively represent something that is a start and you will invest from here?

Ewen Stevenson -- Group Chief Financial Officer

Well, I think for Q2, you could see that drift up because investment spend will go up. By the time we get to Q4, we'll have better discipline around cost base and therefore Q2 costs may well go up as a growth rate, but over the full year, I would hope by the time we get into Q4, what you'll begin to see is run the bank costs off helping offset that growth rate.

Rual Sinha -- JP Morgan -- Analyst

Okay. Then just linked to that, I was wondering what do you think about the challenge that is represented by the 11% ROTE target? Obviously, you've done 10.6% on your numbers, but that excludes the levy in Q1. Then maybe growth picks up from here, but current is still very benign and obviously, you're doing $5 billion of investment, but there are plenty of big banks around the world that are probably doing even more. I was just wondering how you think about the building blocks to the ROTE target given where we are today.

Ewen Stevenson -- Group Chief Financial Officer

Yeah. So, I guess we've been persistently more bullish in our ability to grow topline. I hear what you say on other big banks in the world. Other big banks in the world obviously don't have our advantage position in parts of the world that are growing. So, you can be a big bank and invest in a lot a market that is not growing and you're still not going to grow a lot. Your costs may go down, but your topline is not going to go up.

We think that there is more topline upside than we're currently getting credit for. All of the discussion on NIM, if NIM instead of coming down begins to stabilize and go up a bit because of improved Hong Kong interest rates, then all of that volume growth at that point drops through to revenues. I think on costs, I think we can control costs a bit better than what we're getting credit for in consensus at the moment. I don't think we have a big difference of view on credit costs.

I think on tax charges, we do think that our effective tax rate is probably going to trend toward a couple of percentage points below where we're currently getting credit for. I think when you put all of those drivers together, it does require a supportive underlying macro environment. We're still confident that we can get to the 11% in that context. We would note that leads to several different outcomes relative to where consensus is for 2020.

The other thing I would say going into '21, which I think a number of you have picked up is obviously bank levy moves to a very different place in '21.We think it trends to around $400 million in '21, which relative to today is about a half-billion dollar pre and post-tax benefit to our numbers.

Rual Sinha -- JP Morgan -- Analyst

Got it. Thank you very much.

Operator

Your next question comes from the line of Jon Peace from Credit Suisse. Your line is open.

Jon Peace -- Credit Suisse -- Analyst

Good morning. Could you talk about the very strong net new money in global private banking in the first quarter, how sustainable you think that is? Are you seeing any improvement in risk appetite from Asian private clients? The second question is one of your European peers today saw a capital surprise from RWA mitigation and global markets. I wondered if you saw any opportunities there as part of your overall RWA mitigation or if your different mix means that's less relevant?

Ewen Stevenson -- Group Chief Financial Officer

Yeah. So, on the second question, I don't know. I've been tied up since about 5:00 this morning on calls. I don't know what the RWA mitigation action was. Certainly embedded in our forecast of RWA guidance is quite significant RWA mitigation actions across the businesses. So, we do have significant RWA mitigation. It's not like we've developed a special sauce where we can grow topline at the rate that we're growing topline and still commit to underlying RWA growth at 2%. So, there is a significant amount of RWA mitigation actions built into our plant already, but I'm not sure what the specific thing is that you're talking about.

On private banking, it was a very strong quarter for net new money. In context, Q1 was more than the entire net new money of full year '18. So, is that going to be sustainable? Maybe. Maybe not. But we've got a new management team in place, private banking, Antonio Simoes. It's a business I think with huge potential if you look at the current returns that we're getting out of that business, there should be significant potential to improve returns and improve profitability in the coming years.

Obviously, in Asia, we think we've been significant under-punching our weight in the region. We've got a big focus. When we look at our product offering, we think we are uniquely competitively advantaged because no other bank, a lot of the banks we're competing with can't help bring that mix of ultra-high net worth private banking, commercial banking, and investment banking together as one complete package for customers. Many of them are either fighting on one leg or two legs. So, we do see significant potential in that business.

Jon Peace -- Credit Suisse -- Analyst

Great. Thank you.

Operator

Your last question comes from the line of Martin Leitgeb from Goldman Sachs.

Martin Leitgeb -- Goldman Sachs -- Analyst

Good morning. I have one follow-up question just on some of the earlier comments and questions made. If I take either the return guidance or the return consensus at this stage and square that up with your comments made and I think if I heard correctly, that was 2% from here. If we take into consideration script neutralization, that means either the core tier 1 ratio is going to hedge higher over the coming year or there's a meaningful amount of carpet available for further growth from here for the franchise.

I just wanted to ask you in terms of what areas of growth are you most excited about? I think you've lacked before both opportunities for growth within the lending business, where you are below 10% market share, you could gain share, but equally in the non-lending business and asset management, wealth, private banking, and so forth. I was just wondering if you could steer us a bit more where you would be most excited about growth and whether this would be predominately organic or whether this will be small inorganic steps. Thank you.

Ewen Stevenson -- Group Chief Financial Officer

Yeah. So, just on that very last point, none of our plans are currently premised on any inorganic activity. We think we can deliver our plan without any of that. Your point on capital, as returns improve, we have progressively better and better capital generation in excess of funding the current distribution policy.

Some of that capital, we're less than three years away now to Basel III implementation. So, we are going to have to build up some capital in anticipation of likely higher RWAs and Basel. Although, as I said earlier, we still haven't worked through whether there is an offset and if so, how much or whether that would drive you to a different core tier 1 target over time.

In terms of where we're excited about growth, Asia, Asia wealth, the greater Bay Area, which is Macau, Hong Kong, and Pearl River Delta, we think should offer exceptional growth opportunities. We see significant opportunities to build and take share in the ASEAN region. The UK as we talked about it, we think we can continue to grow better than market. We're in other markets like Mexico, where the growth upside is material.

Then in some of the other areas where we've got a lot of capital, it's mainly on our returns uplift focus, particularly US and the non-ring fence bank that we talked about earlier. But overall, given the markets that we're in, particularly in Asia and other places like the Middle East and Mexico, we have natural growth opportunities that are substantive.

So, if that's enough, Martin...

Martin Leitgeb -- Goldman Sachs -- Analyst

Very clear. Thank you.

Ewen Stevenson -- Group Chief Financial Officer

Thanks, everyone for joining the call today. Thanks for your questions. Thanks for the relatively few questions on NIM. Sharon, with that, if we could please end the call. Before I finish, obviously Richard O'Connor and his team are happy to take any follow-up questions you've got during the day. Thanks all for joining.

Operator

Thank you, ladies and gentlemen. That concludes the call for the HSBC Holdings plc earnings release for 1Q 2019. You may now disconnect.

Duration: 66 minutes

Call participants:

Ewen Stevenson -- Group Chief Financial Officer

Chris Manners -- Barclays -- Analyst

Tom Rayner -- Numis -- Analyst

Fahed Kunwar -- Redburn -- Analyst

Guy Stebbings -- BNP Paribas -- Analyst

Magdalena Stoklosa -- Morgan Stanley -- Managing Director

Jason Napier -- UBS -- Analyst

Alastair Ryan -- Bank of America Merrill Lynch -- Analyst

Manus Costello -- Autonomous Research -- Analyst

Joseph Dickerson -- Jefferies -- Managing Director

Rual Sinha -- JP Morgan -- Analyst

Jon Peace -- Credit Suisse -- Analyst

Martin Leitgeb -- Goldman Sachs -- Analyst

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