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HSBC HOLDINGS PLC (NYSE:HSBC)
Q4 2019 Earnings Call
Feb 18, 2020, 3:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Mark E. Tucker -- Group Chairman

Good morning, ladies and gentlemen, and thank you for joining us this morning.

Before we get into the details of the presentation that Noel and Ewen will make, I wanted to just set aside a few minutes just to give you some context. During the course of the last year, the Board determined that it had two major priorities: one was to ensure that a new Group Chief Executive is selected; and the other was the need to enhance performance, accelerate pace, and improve our sustainable returns. Collectively we concluded that both urgent challenges and that we needed to tackle them immediately and separately. We have always seen that these have needed to be parallel processes with independent timescales and the Board, I can promise you, has been fully engaged in both.

Let me deal first with the Group CEO selection process. The Board has embarked on a very thorough and rigorous process to search for and identify a new CEO. That process is well under way. And it's the Board's intention to announce the outcome within the six- to 12-month time scale that we outlined in August.

Turning now to the business update. We saw a pressing need to reallocate capital away from underperforming businesses, to support the growth of higher return businesses, particularly where we have competitive advantage. The Board and executive are also acutely aware of the need to improve efficiency, reduce costs and inject pace. And we have been working hard on this and it is to Noel's credit that he has grasped the issues and tackled the task with energy and resolve. He and the rest of the executive team have worked very closely with the Board to formulate and determine the plans that they had announced today. And as you've seen, they amount to a very significant shift in the allocation of the Bank's capital and resources. They build on a natural and inherent strengths of the organization and are designed to significantly improve sustainable returns for our shareholders.

I think finally, and is, I think just worth mentioning, important to mention and to recognize the continuing exceptional work of our team of our staff across the world, particularly those in Mainland China and Hong Kong, who are dealing with the impacts of COVID-19 on both our customers and the Bank. The Board, and I want to make it clear that we owe them enormous gratitude, and thanks for their continuing dedication, their care and their immense professionalism.

Having said all of that, let me now pass over to Noel and Ewen to take you through the details.

Noel Quinn -- Group Chief Executive

Thank you, Mark, and good morning to everyone in London, and good afternoon to everyone listening or watching in Hong Kong. We have two objectives today. The first is to take you through our Q4 and full-year results for 2019, and the second is to tell you how we're going to address the underperforming parts of the business and simplify the Group to increase returns, reduce our cost base and create capacity to invest in growth and technology. We're going to do this in three parts. First, Ewen will take you through the numbers for 2019. I'll then talk about our plan and then back to Ewen to cover the financial implications of that plan. And then we'll take questions.

So I'll now pass straight over to Ewen for him to talk about our results.

Ewen Stevenson -- Group Chief Financial Officer

Thanks, Noel, and good morning, or afternoon, all. On the fourth quarter, it was a decent set of results, adjusted revenues were up 3%, reflecting both a weaker quarter in 2018 but also the continuing strength of our stronger performing franchises, while adjusted profits were up 29% due to the goodwill impairment of $7.3 billion. We made a reported loss before tax of $3.9 billion.

As I go onto shortly, Hong Kong continues to produce very resilient results in the fourth quarter with adjusted profits up 3% relative to a year before. But given the continuing impact of coronavirus that we're seeing this year, we do expect a weaker first half.

A few particular points to call out, the headline results for the fourth quarter were impacted at a headline basis because of the large goodwill impairment. This reflected the weakened interest rate outlook and our revenue outlook and those change long-term growth rate assumptions. As you know, the goodwill impairment has no impact on core Tier 1. The UK ring-fenced bank was impacted the redress costs $224 million in the fourth quarter, driven mainly by sharply higher expected litigation costs in relation to PPI. We're making progress on reducing our cost run rate down from -- down by half from 5.6% to just under 3% in 2019. And second half costs were lower than first half costs. Our core Tier 1 was up 40 basis points to 14.7%. We've reduced net risk-weighted assets in the quarter by $22 billion, including a $19 billion reduction in Global Banking and Markets.

On Slide four, Group continues to be underpinned by a strong set of franchises all showing continued attractive growth rates. In Retail Banking and Wealth Management, full-year adjusted revenues were up 9% with good growth in deposits, mortgage balances and customer numbers. The turnaround of Global Banking -- Global Private Banking continues with net new money of $23 billion in the year. Commercial Banking revenues were up 6%, underpinned by strong growth in both lending and deposits. And for our global transaction banking franchise, revenues were up 3% and that's despite the impact of a softer interest rate environment. In Asia, revenues up 7% overall with good growth across most of the region and the UK ring-fenced bank had revenue growth of 3% underpinned by deposit balance and mortgage growth.

Turning to the next slide and to go into more detail on Hong Kong, macro conditions progressively became more challenging in the second half and remain challenging given the sharp and unfolding impact of the coronavirus. Despite these macro conditions last year, 2019 performance remained resilient, adjusted revenue growth of 7%, credit quality remaining robust and profits before tax of $12.1 billion.

On Slide six, as we said over recent quarters, we've also got businesses or parts of businesses that need to improve. Non-ring-fenced bank is impacted by a combination of high costs and challenging conditions for the sector overall. Revenues were down 3% in the full year. And as part of those Global Banking and Markets had a weak year in Europe, was sharply lower revenues, driving an 80% reduction in pre-tax profits.

Our US turnaround has been impacted by the changed US outlook for interest rates. Full-year revenues were down 3% and profits before tax down 39%. Our Retail Banking and Wealth Management and Private Banking businesses in the US were loss-making in the year. And profits in Commercial Banking and Global Banking and Markets fell -- both fell by more than 20%.

Turning to the detail of the full-year results on Slide seven, across most segments in our global businesses, we saw a strong revenue growth in 2019. Total adjusted revenues up 6%. In Retail Banking and Wealth Management, revenues up 9%, including 7% in Retail Banking, due mainly to lending and deposit growth in Hong Kong, Latin America and the UK and up 13% in Wealth Management principally from higher life insurance revenue, including positive market impacts. In Commercial Banking revenues up 6% with Global Liquidity and Cash Management up 6% and Credit and Lending up 5%. Trade finance had slower revenue growth in 2018 impacted by the ongoing US-China trade dispute. Within Global Banking and Markets, while revenues were down 1% overall, transaction banking showed good revenue growth, up 2%, but Global Markets had a tough year, with revenues declining by 8%. And within Global Private Banking, revenues were up 5% underpinned by our best net new money performance since 2008.

On Slide eight, fourth quarter revenues were 9% -- were up 9% overall, or almost $1.2 billion and that's despite $300 million of lower corporate center revenues. This quarter included a much stronger franchise by the Wealth Management franchise given the turnaround from weak markets in the fourth quarter of the previous year. And our best fourth quarter revenue performance in Global Banking and Markets for four years. And Commercial Banking and Retail Banking, we can begin to see the impact of lower policy rates with further headwinds expected in 2020.

On the next slide, adjusted net interest income was broadly stable from the third quarter and the net interest margin was unchanged at 156 basis points, helped by lower provisions from UK redress programs and releases relating to Argentinian hyper-inflation. Our Asian franchise experienced some asset margin compression with the net interest margin down 5% -- 5 basis points and in the UK ring-fenced bank, while the headline net interest margin was up 2 basis points, excluding lower UK redress provisions, the underlying net interest margin was broadly stable at around 200 basis points.

Turning to costs, excluding the UK bank levy, adjusted operating costs were up 2.7% in the fourth quarter relative to the fourth quarter of 2018. Our cost run rate this year was down by half and slightly better in the second half than the first, and that's despite higher investment spend up 10% from the previous year. For your models, in 2020, you should assume that our aim is to have adjusted operating cost broadly stable in -- on 2019 and adjusted revenues down very modestly with RWA disposal costs take into significant items.

Turning to the next slide on credit. Credit costs were down 5 basis points to 28 basis points in the fourth quarter. This reflected a number of items in the UK, we reduced our allowances for economic uncertainty by $99 million to $311 million. Against this in Hong Kong, we increased our overlay by $56 million to $138 million and we took incremental provisions in Argentina of some $125 million. Second half credit costs were 31 basis points. So we're now at the low end of our expected 30 basis points to 40 basis points of through the cycle range.

Given the impact of the coronavirus, we expect the continuing downturn in Hong Kong in the first half of this year. And we anticipate that we'll need to take additional expected credit losses into our first quarter results. I would caution, however, the impact of the virus could vary materially in part dependent on the time taken to contain the virus, with additional expected credit losses only part of a broader potential set of financial impacts on the Group, including lower revenues and volumes and credit rating deterioration driving higher risk-weighted assets.

On capital adequacy, our core Tier 1 ratio improved 40 basis points in the quarter to 14.7%. This reflected a material reduction in RWAs in the fourth quarter, that I'll go into detail on the next slide. We set out the detail of the risk-weighted assets and return on tangible equity walks during 2019 for risk-weighted assets, we've reduced these by almost $22 billion during the year with the bulk of this coming in the fourth quarter. We took a very conscious decision to accelerate our risk-weighted asset plans in Global Banking and Markets, resulting in a $19 billion reduction in that business in the final quarter.

Looking forward, we are sensitive to a number of potential headwinds and risks, including a forecast first quarter 2020 RWA uplift of around $10 billion due to modeling and regulatory changes and a similar amount from revenue growth.

For our return on tangible equity, it declined by 20 basis points during the year to 8.4%. This reflected a stable overall performance but was impacted by a 50 basis point negative impact from intangible movements, primarily due to present value in force movements in our insurance business.

So to summarize on the 2019 financial performance before handing back to Noel, for the full-year, adjusted revenues up 6%, adjusted profits up 5%, in part reflecting much better cost discipline with positive jaws of over 3% and a return on tangible equity of 8.4%. Our core Tier 1 ratio was up 70 basis points in the year to 14.7%, in part due to a significant RWA reduction in Global Banking and Markets. However, despite this continuing progress last year, we've recognized the need to continue to drive our Group returns to significantly improve areas of the Group with low returns currently, this requires a new cost and RWA reduction plan, that Noel will now step through.

Noel Quinn -- Group Chief Executive

Thanks, Ewen. I'll talk about our plans to increase returns in the second, but first I want to say a few words about the coronavirus outbreak. This is clearly something we're observing closely, and I'd like to pay tribute to the resilience that our people have shown during this very difficult time, and so thank them for their amazing commitment. Our first priority is, obviously, the well-being of our people and our customers. And we will continue to do all that we can to provide support, and ensure their safety. There will inevitably be a short-term economic impact that will doubtless affect our clients, and we will do all that we can to support them. However, the long-term strategic importance and attractiveness of Mainland China, Hong Kong and the broader Asian region remains unchanged. And the region as a whole remains a key part of our strategy.

Turning to our plan, we intend to deliver on three action programs between now and 2022. We will implement an RWA upgrade program, stripping out low returning RWAs from the underperforming parts of our business and redeploying them into higher returning areas. We will execute a $4.5 billion cost reduction program to reduce total costs, even as we invest in the business. And we will simplify HSBC to increase revenue synergies and accelerate the pace of execution.

We will target the following in 2022: a gross RWA reduction of more than $100 billion; a reduced cost base of $31 billion or lower; and a CET1 ratio in the range of 14% to 15%. Taken together, these should help us achieve our main target, our return on tangible equity of 10% to 12% by 2022. With a full-year benefit of cost reductions and redeployed RWAs flowing into subsequent years.

To be clear, I do not consider 12% to be a ceiling for the Group. I think we can go higher and we will aspire to do so. This is a deep and fundamental restructuring of the Bank that will enable us to deliver on our strategy and our potential. Crucially, it's not dependent on market conditions. It's focused on things that we can control. Our first task is to upgrade the return profile of RWAs. We plan to remove more than $100 billion of low returning RWAs and reinvest them in high-growth, high returning activities in other parts of the business. As you know, we have a very strong heritage with the wholesale and personal client base centered around the faster-growing, higher returning markets of the world. A differentiated proposition serving the banking needs of middle market entrepreneurial businesses globally. A personal banking franchise grounded in three scale and attractive markets in Hong Kong, the UK and Mexico. On a strong international Wealth business with circa $1.4 trillion of client assets. That core franchise deliver strong inherent RoTE and sustainable growth potential. These are the parts of the business that we want to continue to grow. However, as I mentioned on our Q3 results, we have parts of the organization, our US business and the non-ring-fenced bank in the UK and Continental Europe that are not producing acceptable returns, particularly in Global Banking and Markets. These are the businesses we intend to reshape.

Let's start with Europe. We want to focus our footprint in Europe on our international wholesale and transaction banking franchises. And connect our clients better to our international network, particularly Asia and the Middle East. By 2022 we intend to reduce the net RWAs in the non-ring-fenced bank by around 35%. And within that, to reduce Global Banking and Markets RWAs by around 50%. We also intend to reduce our non-ring-fenced bank costs by around 25%. We plan to do this by focusing our client coverage on clients that value our international network and presence, particularly in Asia and the Middle East rather than serve in pure domestic clients. We will scale back the amount of capital we deploy to our rates business and exit capital and leverage intensive product lines, such as G10 long-term derivative market making in the UK.

We will focus our European investment banking activities on supporting UK mid-market corporates and capital flows in transactions between Europe and the faster-growing markets of the world. London will remain an investment banking hub to support our global clients.

We will reduce our equity sales and equity research activities in Europe to much our client footprint, and we will transition our structured product capabilities from the UK to Asia, where the opportunity for profitable growth is greater. And we'll continue to invest in our transaction banking and financing capabilities. We recognize the need to take action to address our retail banking operations in France and a strategic review is ongoing. We will provide an update on that review when it is appropriate to do so. But we have not assumed any change to our current business model in the forecast shared with you today.

Turning to the US. We are one of the leading wholesale and transaction banking franchises and the leading trade bank in the world. So we need a meaningful presence in the US but we need a new approach that generates acceptable returns. As in Europe we're going to focus on our strengths. We'll reposition HSBC USA as an international client focus corporate bank anchored in Commercial Banking and Global Banking with a focused retail offering for international and affluent clients. This will be a fundamentally different business to today's. We will consolidate select fixed income activity in London and reduce US Global Markets RWAs by around 45%.

We will reinvest the majority of the RWAs saved into Commercial Banking and Retail Banking. In Commercial Banking, we'll expand our coverage of mid-market corporates who trade in the US and internationally. And in Retail Banking, we will expand our products offering and increase our investment in digital. We'll refocus our Retail Banking presence to serve globally mobile clients, reducing our branch network in the US by around 30%.

We considered a number of options with respect to US Retail Banking, including exiting it completely. But a retail deposit base in the US provides an important source of stable liquidity for our wholesale banking and global transaction banking activities and we believe we can connect our personal banking operations in the US, to our personal banking operations in the rest of the world just as we have in wholesale banking.

Finally, and partly as a consequence of these changes, we'll embark upon a major cost and consolidation program in the US that should reduce our total costs by between 10% and 15%. The big difference between this and previous US turnaround plans is that, all of these changes are within our control. We are not reliant on favorable market conditions and we have a new management team that is totally focused on delivering these plans. The outcome should be a leaner, more focused business delivering higher sustainable returns.

Moving on to Global Banking and Markets. It is worth taking a step back and considering the type of business that we want Global Banking and Markets to be. We want to continue to serve large, long-term capital providers, public sector entities and global corporate and financial institutions, who can use our international network, particularly in the faster-growing markets. We want to do this as the top transaction bank and a leading global financing house. And to reinforce our position as the foremost international bank in Asia and the Middle East. To deliver this, we will invest in Asia and the Middle East to cement our position as a top three corporate and investment bank across both global banking and commercial banking clients. We will continue to invest in our global transaction banking franchise to defend our market leadership and deliver sustainable growth. We will strengthen our investment banking capabilities in Asia and in the Middle East, while maintaining a global investment banking hub in London. And we will build leading emerging markets and financing capabilities in global markets and enhance our institutional clients business.

We will also improve collaboration with other businesses. Currently, Global Banking and Markets and Commercial Banking both own their own products and operations capabilities. They cross-sell fairly successfully today but we want to offer our clients a much more integrated service. To drive revenue synergies, we will reorganize our product teams to serve both front-line businesses and to drive cost synergies, we'll combine the operational support infrastructure for Global Banking and Commercial Banking. We will also to continue to invest in the digital systems and solutions that will improve the service we offer our clients.

So here is where we intend to reinvest the RWAs that we save. Even in the current environment, we see significant opportunities for growth. Our transaction banking businesses are a major revenue driver for the Group and will continue to do so. We have an excellent opportunity to build our international wealth franchise, particularly in Asia and among the international Asian community. Asia as a whole is a core engine of growth for the business over the next few years. We will continue to invest in the expansion of our business in China generally, the Greater Bay Area in particular and across Southeast Asia.

Given our heritage in the Middle East and the many market reforms that are taken place, we believe we are in a strong position to take advantage of the significant opportunities that will arise. We also intend to continue capturing market share in the UK ring-fenced bank as we have in recent quarters and we see strong growth momentum in our business in Mexico. We will also be investing more in technology, improving our digital platforms to expand our reach and improve customer experience.

Turning to cost reduction and simplification. There are three paths to reduce cost base and a simpler business. First, we will take out costs associated with the activities we choose to exit. Second, we'll keep investing in technology to reengineer manual or legacy processes, removing costs and improving the customer experience. Third, we will organize ourselves in a less matrixed and fragmented fashion leading to lower cost, increased accountability and greater agility. The net effect of these changes will be a simpler, more streamlined business. We expect savings of $4.5 billion from this cost program, which will allow us to substantially reduce our cost run rate. Our intention is to target total adjusted costs of no more than $31 billion in 2022.

Many of the changes we're going to make will have a material impact on the cost and complexity involved in running the Group. First, we will combine Retail Banking and Wealth Management and Global Private Banking to create one new global business, which we will call Wealth and Personal Banking. Not only will this increase our ability to find revenue synergies within a much larger wealth business, it means we can remove many layers and support structures associated with running two global businesses. Second, and as already mentioned, we will merge the back and middle offices for our wholesale banking businesses. This will help us sell more products to more clients, but it will also reduce duplication and increase collaboration.

Third, we are simplifying the way we manage our geographies, where previously we had seven geographies, we will now have four covering Asia, the UK, the US and the rest of the world. Each of these will be represented on the Group Executive Committee, which will be smaller than before. This will increase accountability, reduce complexity and improve our ability to execute at pace. Fourth, we will be able to reorganize our global functions to match the size and simplified structure of our front-line teams.

And finally, we as an Executive Committee will be increasingly incentivized via scorecards to deliver the right outcome for the Bank as a whole, not just for our individual business units or functions. This represents one of the deep restructuring and simplification programs in our history. It will help us not only to reduce our cost base, but also to become a more collaborative empowered customer-centric business, while maintaining or enhancing our risk framework. Taken together, these actions will significantly change the shape of the Group.

The new Wealth and Personal Banking business and Commercial Banking will occupy a greater share of RWAs for the group. While the share of Global Banking and Markets will reduce from 31% to less than 25%. On a geographical basis, Asia and the UK ring-fenced bank will be the main beneficiaries from the reduction in RWAs, currently allocated to the non-ring-fenced bank and the US.

So, in summary, since Q3 we have developed a detailed restructuring plan to address the low return portfolios of Europe and the US and to reshape Global Banking and Markets. We have plans to reallocate freed up capital into higher growth, higher return businesses and markets. We have begun an ambitious simplification and cost reduction program while increasing IT investment. This is a robust plan built around things we can control, predicated on reasonable revenue growth assumptions, combined with significant cost reduction and capital efficiency programs. We have reorganized our management structure to deliver up pace. We have established a dedicated transformation team to focus on executing the restructuring with a separate team focused on building future growth strategies. And since my appointment in August, we have taken tough decisions to deliver quick results. In the fourth quarter, we reduced RWAs by $22 billion, we reversed the direction of travel on both cost and headcount and we refresh the executive management team to position us for execution.

Now, we need to evidence continued delivery and I am totally committed to doing that. Back to you, Ewen.

Ewen Stevenson -- Group Chief Financial Officer

Thanks, Noel. To take you through the broad financial implications of what Noel has just outlined, we expect to have risk-weighted assets in 2022 that are broadly in line with year-end 2019 with reductions in the non-ring-fenced bank, the US and parts of Global Banking and Markets, increasing our capacity to invest in both planned growth in priority markets and to deal with the expected impact of regulatory changes. Over the same three-year period, we're also planning a material reduction in the leverage exposure of Global Markets.

We're targeting an annual cost base of $31 billion or less in 2022, which translates into a return on tangible equity in that year of 10% to 12%, and we want to do those, while maintaining our core Tier 1 ratio in the range of 14% to 15%. For clarity, these targets exclude the impact of any business disposals.

On the next slide on risk-weighted assets, we're planning to materially reduce RWAs in the non-ring-fenced bank and to a lesser extent in the US and as part of this, and given that almost 60% of the RWAs across those two entities are Global Banking and Markets related, we're specifically targeting a material reduction in capital allocation to that business. Largely offsetting this is planned growth in other franchises, the core underlying RWA growth across the Group is currently at around 4% to 5% per annum. So over a three-year period will largely offset the RWA reduction we're planning.

On Basel III reform, at this point, we'd become less concerned about the day one net impact, we now see a relatively limited uplift post mitigating actions we are planning to take.

On the next slide, we set out where we expect the gross RWA reduction to be achieved. The bulk of the reduction and revenue impact we're targeting is expected to come from Global Banking and Markets and to a lesser extent, Commercial Banking. The rundown program is likely to take three years to execute with a dedicated team now set up to execute this. The disposal losses of the RWA rundown program and Global Banking and Markets is expected to cost in the order of $1.2 billion and this will be taken into significant items, spread mainly over 2020 and 2021 with the associated net revenue loss expected to be in the order of $2.5 billion. We're also targeting a gross reduction in leverage exposure of $250 billion in the non-ring-fenced bank in the US, partially offset by around $50 million of anticipated growth in the global markets franchise in Asia.

On the next slide, we expect RWAs at the end of 2022 to be broadly in line with where they were at the end of 2019. 2020 revenues will be impacted by the impact of lower interest rates and the assumed non-repeat of certain positive revenue items in 2019. These items include positive market impacts and insurance and disposal gains, which in total to around $0.5 billion. We intend to reduce RWAs by over $100 billion in areas generating low revenues to risk-weighted assets with very high cost income ratios. And we intend to redeploy these risk-weighted assets in areas of higher revenue and lower cost income ratios, particularly over the medium- to longer-term. The reduction on redeployment of RWAs and associated revenue impacts will be spread fairly evenly over the three years of our plan and we do expect further benefits from the redeployment of RWAs to flow into 2023 and beyond.

On the next slide, the targeted gross reduction in RWAs helped us fund the cost of the restructuring, the underlying growth in RWAs from our stronger performing franchises and the anticipated net impact of Basel III reform. However, current Group capital -- Group returns are insufficient to fund both the natural growth in our business and to fully immunize the Group dividend. So, in an order to bridge to 2022 we -- when we expect to have higher returns we're suspending the buyback for this year and next.

We're also shifting our guidance and our core Tier 1 ratio. We're still targeting to be above 14% but signaling today that over the next three years, we expect to be at the higher end of 14% to 15% range from 2021 onwards. Over the medium-term, as we target reducing gross peak-to-trough stress in the Group and seek to further optimize today's capital inefficiency that comes from our subsidiary structure, we plan to reduce our core Tier 1 ratio back to the lower end of the 14% to 15% range.

Turning to costs, we plan to substantially reduce our cost run rate to $31 billion or better by 2022. Given underlying inflation over this period and the expected reduction in the bank levy, this reflects a real reduction in the order of 10%. With the shift to higher yielding RWAs over the same period, we expect the material operating profit improvement over the next three years. The cost reductions broadly fall into three buckets, direct cost savings relating to business reductions, these amount to around 45% of the total. The organization simplification that Noel has just outlined, including a substantial restructuring of Group central costs, this amounts to around 35% of total savings and for the remainder technology investment that leads to increased levels of automation and productivity accounting to around 20% of the total. The cost program will require intense focus on delivery, there are almost 200 separate cost initiatives underpinning this. Progress will be monitored through a tight central oversight team with some of those cost initiatives starting today.

On Slide 33, we expect costs to achieve to have been substantially completed by 2022 with full run rate benefits achieved in subsequent years. Expected cost savings of $4.5 billion from this new cost program are phased across the three years, $1 billion to be delivered in 2020, a further $2 billion in 2021 and the remainder in 2022. We expect that additional restructuring costs in the order of $6 billion will be required with more than 90% of these costs incurred this year and next.

So to conclude from me before handing back to Noel, we believe we're setting out an ambitious but realistic plan to achieve a number of objectives. Firstly, to materially improve overall Group returns by 2022, that allows us, both to grow, how we want to grow and to fund our current distribution policy. Secondly, to take capital and cost away from underperforming franchises. So we can continue to invest where we have stronger returns and growth prospects. And lastly, to simplify our currently overly complex structure, reducing the overall Group and central costs and improving the capital efficiency of the group.

Noel?

Noel Quinn -- Group Chief Executive

Thanks, Ewen. So to quickly summarize, strong revenue growth in our target areas and good cost discipline in 2019. Our firm intention is to grow returns, create the capacity to invest and to build a platform for sustainable growth. A robust plan to restructure our US and European businesses, reposition Global Banking and Markets and reallocate capital to higher growth businesses, all while simplifying the Group, a path to a return on tangible equity of 10% to 12% in 2022, through a gross risk-weighted asset reduction program of more than $100 billion and a gross cost reduction of around $4.5 billion by the end of 2022. We also have a strong ambition to seek additional strategic opportunities for growth and higher returns, and a commitment to deliver.

With that, we're happy to take questions. And I think Richard will step up and...

Questions and Answers:

Richard O'Connor -- Head of Investor Relations

Thanks, Noel. We've got some questions from the web. But before we take some of those, we'll take it with the audience. Can I ask you to give your name, institution? Wait for the mic, please. And if you can at least to start with limited to two per person and we'll try and go around a few times. So we do a few from the floor to start and then go to the web from there. Raul?

Raul Sinha -- J.P. Morgan -- Analyst

Hi. Good morning. It's Raul Sinha from J.P. Morgan. Maybe two, please. One on the strategy, I guess, for the plan to work the capital redeployment will be the key element, and I really appreciate the detail you've given us on where you are taking capital away. But I was wondering if you could give us more detail about where you're going to capital put -- where you're going to put that capital into. And apart from the areas in terms of geographies and businesses, could you also talk about whether the plan is organic or whether also you might consider inorganic options?

Noel Quinn -- Group Chief Executive

So, I'll deal with the second one first. The plans that are before you and the forecast that are before you were all based on organic activity. There is no inorganic assumed in those plans. Second on capital redeployment, we still believe and has -- have seen in 2019 strong growth in Asia, in the Middle East, in our UK business and we want to continue to fuel that growth and we see that growth continuing going forward. We've also seen extremely strong growth in Mexico. Let me just recall, Mexico today or in 2019 achieved a return on tangible equity of 15% and that business has extremely strong growth momentum still in it. So we want to provide that.

In terms of Asia to be more specific, we see still growth potential in our international Commercial Banking franchise. That proposition is well positioned to continue to grow. I think we have a unique and differentiated position in international mid-market [Technical Issues].

Ewen Stevenson -- Group Chief Financial Officer

[Technical Issues] it goes both ways, too, or equally there is no disposals built into these numbers. So to the extent that there is disposals you should factor that on top of what we're announcing today.

And in terms of organic growth, I'll just point you to look some of the underlying growth rates that we've had in places like Asia over the last decade. And yes, there is a near-term impact fro the coronavirus, but we do think there is a secular growth opportunity in trade, in wealth in Asia over the next 10 years to 15 years and that we are relatively uniquely placed currently to take advantage of that.

Noel Quinn -- Group Chief Executive

Just to give you one example of that, in Asia, Commercial Banking, I remember when I took over that business at the end of 2010, we had a balance sheet at that point of around about $80 billion. Today that balance sheet is closer to, I think, $135 billion and still has potential to grow. So we want to continue to fuel that investment.

Richard O'Connor -- Head of Investor Relations

Martin?

Martin Leitgeb -- Goldman Sachs -- Analyst

Thank you. Yes, good morning. Martin Leitgeb from Goldman Sachs. Could I just follow up on the capital comments earlier and I was just wondering and what timeframe should we consider HSBC to return to this kind of more normalized capital level of closer to the lower end of the 14% to 15% range rather than the 15% range you're kind of signaling over the next three years for the restructuring period.

And the second question more strategically, and I was just wondering, HSBC UK sort of ring-fenced bank, how strategic do you consider it within the Group context, just bearing in mind, obviously, the limitation imposed by ring-fencing on the utilization of retail deposits. Thank you.

Noel Quinn -- Group Chief Executive

I'll do with the second one first. We see it as a very strategically important part of the portfolio, it generates inherently higher returns. If you look at the underlying returns of the UK business in the UK market, it's an attractive market. We've seen growth in market share and growth in our own business in both Retail Banking and Commercial Banking. And we believe it will become increasingly connected to the rest of the world in a post-Brexit world. So, it's strategically important. Ewen, do you want to go to the capital?

Ewen Stevenson -- Group Chief Financial Officer

I'm go into a bit more detail on the comments and guidance around capital. Look, in the very near term we are obviously sensitive to the fact that we're doing a significant restructuring and the precise timing of restructuring guide is in RWA run down over that period can vary, and hence why we want some capital flexibility.

Secondly, the final rules on Basel reform haven't been settled. So, yeah, what you see embedded in the numbers today is a net increase of less than 2%. So if we got back, I think, if I was presenting views about a year ago when I was reluctant to do so, it was because we could see that there was a path to significant mitigation.

In the medium-term, we've got two big structural issues that we're working through as a Bank. Firstly, we have enormous complexity in the Group because of the subsidiary restructure. Our largest single balance sheet has less than 30% of the Group assets. If you compare us to US peers, typically 70% of one balance sheet is the dominant balance sheet in the Group, as a result, we have an enormous amount of capital and efficiency across the Group. We're also subject to 64 markets where in some markets, for example, were held to standardized rules are not able to take advantage of advanced modeling. So there is a progressive work plan on that over the next few years.

And the second issue that we're dealing with is, we still got I think a significant level of peak-to-trough stress across the Group. Some of that is getting addressed as part of this restructuring. For example, we're planning to substantially reduce the principal investment business, that sits in the non-ring fenced bank. One of the core reasons for doing that is not the fact that it produces attractive returns under base, but under stress it has enormous stress characteristics. So I think if we can make progress and solve those and make progress on those two issues, I think we can comfortably reduce down to the lower end of that range. In terms of timing, that's why I use language of medium-term, because it's difficult to be precise.

Richard O'Connor -- Head of Investor Relations

Claire, just behind Martin.

Claire Kane -- Credit Suisse -- Analyst

Good morning. It's Claire Kane from Credit Suisse. Couple of follow-ups. Firstly on the capital, in the event that you're unable to redeploy all the RWAs and I do know your plan to redeploy them in quite low risk weighted asset businesses, now RBWM and transaction banking, and the capital ratio was to go well north of your 15% range over the next two years. Would you consider buying back shares, or would you rather that was will built up to 2022? And what is the basis for your ROTE target? So the TNAV, clearly if you build up a lot of surplus capital that would dilute returns. So should we expect that you are in the mid area of your 14% to 15% range by 2022 and all surplus cash will be distributed at that point?

Ewen Stevenson -- Group Chief Financial Officer

Well look, on the latter point first, I think we said that we expect to be at the higher end of the range in 2022. So embedded in that 10% to 12% rating target is the higher end of 14% to 15% core Tier-1 being held in that year. The other thing I would say on returns is, we don't think 2022 is a clean year either for revenues, because we've reinvested revenues into new customer relationships, where the revenue buildup takes time. And secondly, we haven't got full run rate costs in '22. So we do think that there is further upside on the return, as you go out.

On capital, I mean, firstly, I mean we have a high degree of confidence. I guess, in our ability to redeploy $100 billion of RWAs over the next three years, if we were to end up in a scenario where that wasn't the case, we're not going to just sit and allow our capital ratios to accrete, well in excess of what we need them to do. But its our current expectation that we're not doing buybacks for two years. If that was to change because the RWA profile on the capital position of the bank was very-very different, we would relook at it, at that point.

Noel Quinn -- Group Chief Executive

Just on the reasonableness of our growth assumptions. Even today, with all of the challenges that exist around coronavirus, we are seeing a strong pipeline of activity in our business globally. And so I think we're very confident that we can deliver that growth plan. We've had delivered that or more in the past. So we believe we have made reasonable assumptions on the growth, and that it can be delivered.

Richard O'Connor -- Head of Investor Relations

Before we go to the floor, there is just a couple of from the web, on the coronavirus. Firstly, do your book -- your Q4 ECL assumptions do they take into account the coronavirus or as at the December 31st, and secondly, one from Jason Napier of UBS; DBS made some revenue guidance recently on the impact the of coronavirus. Can you talk a little bit more about them expected impacts from that please?

Ewen Stevenson -- Group Chief Financial Officer

Yeah, so for accounting purposes, coronavirus is a post-balance sheet event. So it's not in our 2019 forward economic guidance at that point, it will be obviously reflected in the forward economic guidance as part of Q1 reporting. To give you some numbers embedded into our disclosures in the annual report and accounts today is, various adverse scenarios for Hong Kong, economic performance -- yeah, what's the downside, the most extreme downside scenario in there, I would say makes an assumption that the coronaviruses are still continuing in the second half of this year. If you look at that and that was to become the central scenario, there would be about $600 million of additional loan losses, provisions required. We don't think we're going to be any way to like that Q1. But it's not the only P&L impact and capital impact as I said earlier. There will be revenue impact, which will become progressively more acute, if the coronavirus was to continue beyond the next month to six weeks. There would also be the risk of credit rating migration among the wholesale book in Hong Kong, which would lead to RWA inflation,

We think that the Q1 an impact, as we sit here today, is probably range bound in the order of about $200 million to $500 million relative to our previous planning assumptions. I think if the virus is still prevailing beyond that, we'll come back as part of Q1, reporting to give you a much fuller update on what we think the impact is at that point. But it really is a -- yeah, when we look at the modeling, it's really a call on -- predominantly a call at this point on how long does it take to contain the virus. When you look across the various scenarios that we're trying to model at the moment.

Underlying that, I think when you look at the underlying credit performance of the book, as Noel said, Q4 was good and January was certainly robust. We are getting some positive offsets against this, because HIBOR in particular continues to remain elevated, relative to previous planning assumptions as well.

Richard O'Connor -- Head of Investor Relations

That's a few questions from the web, from the likes of Tom Rayner, Jason Napier, and Manus Costello, can you talk a little bit more about the revenue loss from the RWA reductions, the timing thereof, the timing of reinvestment, should you should you expect revenue losses earlier in the plan and a hockey-stick toward the end. Can we just have a little bit more detail on the $100 billion reductions on $100 billion reinvestment please?

Ewen Stevenson -- Group Chief Financial Officer

Yeah. So we thought we were providing a decent amount of guidance. But it appears that there is still a few gaps the -- you'll see in one of the charts that we've got in the presentation, some sort of bar charts, and please don't get your rulers out to try and measure across. But for Global Banking and Markets, we signaled about a $2.5 billion reduction as a result of the RWA run down, that excludes the costs associated with the run down, which we will treat as a significant item. We do think offsetting that will be some degree of revenue improvement over the next three years. Therefore we think, order of magnitude, Global Banking and Markets revenues will probably be down on the order of about $1 billion relative to last year's run rate, by the time we get to '22.

For the material impact, as you can see on the bar charts that are in the slides is in Global Banking and Markets. For 2020 overall, we've talked about a very modest reduction in revenue impact. We have got interest rate headwinds. We've set that out, about $1.1 billion of lower interest income, as a result of reduction in rates that have been going on in 2019, and some assume reduction in 2020. The bulk of that will hit 2020. We've got about $0.5 billion of one-offs that were in 2019 that we're not expecting a repeat of, in terms of our forecasting. Offsetting that is a decent amount of growth that we're continuing to see in our underlying business.

And I think the last part of that was the timing across the period. Broadly, we think the revenue reduction from the RWA run-off and the revenue growth from RWAs we're putting on, is evenly sort of spread in terms of the build up and run down over the three-year period.

Noel Quinn -- Group Chief Executive

But I'd add one other point and that is one of the reasons we're doing the organizational simplification and the cost reduction program, is to make sure we have some mitigation, so that we don't end up with stranded costs, should the revenue go down on the reduction program for RWAs, but there will be a time lag for the revenue coming up elsewhere. So I think you've got to take the two in the round. It's the revenue reduction built on the RWA redeployment program and the cost reduction program that gives us more assurance on managing the situation.

Richard O'Connor -- Head of Investor Relations

More from the floor?

Guy Stebbings -- Exane BNP Paribas -- Analyst

Morning. It's Guy Stebbings from Exane BNP Paribas. Can I come back firstly to capital being created from the plan? If we think about the $100 billion of gross takeout that you're guiding to, but in the plan no buybacks before 2022 so you've only got the ordinary dividend, which most people would have had in their numbers. I mean, should we be inferring that the plan itself doesn't release any capital if you do redeploy? But incremental to that it's really about any business disposals, which creates that additional capacity. Is that the right way to be thinking about it?

Ewen Stevenson -- Group Chief Financial Officer

I'm just going to think about that for a second. So the $100 billion of RWA reduction would release $14 billion to $15 billion of capital for us, offset by the after-tax cost of the restructuring cost and the RWA rundown cost. So that still creates capital in that program. But it's all embedded in the statements around the suspension of the buyback for two years. Yeah, the second part of the question is?

Guy Stebbings -- Exane BNP Paribas -- Analyst

Well, it's just -- if we're looking at a capital ratio in 2022 broadly aligned to where we are today, we're saying no buybacks before 2022. Implicitly that assumes that there's no net capital release versus our previous guidance. But you're obviously not including within that any disposals, which seems like it could be the big delta?

Ewen Stevenson -- Group Chief Financial Officer

Yeah. If those disposals create value, I mean obviously it depends on the realization proceeds of those disposals and the -- so possibly. But I don't -- I mean if you think about some of the stuff that's been speculated about in the press, just remember that we have a lot of network markets that are relatively small. If we were to dispose of any of them I don't think it's going to have a material impact on our capital base overall. So, yeah, the big driver is things like interest rates the speed of the RWA rundown, the speed of the redeployment, all of that is going to have a far greater impact on the capital position of the bank.

Guy Stebbings -- Exane BNP Paribas -- Analyst

Thanks. And can I just come back to the capital target quickly and the peak-to-trough stresses that you referenced? If we look at the Bank of England stress test and we look the other component parts of the capital stack, consider some trapped capital it still feels like quite a conservative target. So is this very much an internal stress that you're applying that just...

Ewen Stevenson -- Group Chief Financial Officer

It's not -- it's certainly not driven by what the regulators think. We will always drive our capital targets by the higher of regulatory constraints and what we think. We have a more conservative view than the PRA on where our capital position should be. I think, look an offset to that is we are the best rated of the U.K. banks. As you know with our credit ratings, we get wholesale funding costs, therefore, that are substantially cheaper than our competitors. We've always wanted to position ourselves as a very strongly rated strong balance sheet bank. We get the benefit of that through funding costs. But it's certainly not driven by any conversation we've been having with the PRA.

Guy Stebbings -- Exane BNP Paribas -- Analyst

So we can't lean on new Bank of England disclosure on stress test in this year as a guide it's more about...

Ewen Stevenson -- Group Chief Financial Officer

No, no, no. The stress testing issue is our own internal issue. It's something that we've recently strengthened our stress testing team under new leadership. And we do think that we can make material progress over the next few years on reducing the peak-to-trough delta that we're seeing in our stress test results.

Richard O'Connor -- Head of Investor Relations

Magdalena?

Magdalena Stoklosa -- Morgan Stanley -- Analyst

Thanks very much. Could you give us a little bit more sense of the -- of your cost trajectory, that's particularly slide 32 that I'm referring to? What assumptions are embedded in your severance costs over the next -- over the time of the restructuring? But also if you could give us a direction of where the investments go and also the sense of the flex in that cost base? So we've got the $31 billion at the end of 2022. Should the revenue surprise on the upside or the downside? How will that number flex to?

Noel Quinn -- Group Chief Executive

You can tell me how the revenues will flex, I'll tell you how the costs flex. I mean, clearly we position the cost base to be in the context of the revenue growth opportunity. At the moment based on the current assumptions we believe $31 billion or less is an appropriate position. Should the economy and the growth be better, we'll invest in the business. Should it be different, we'll take a different course of action.

Ewen Stevenson -- Group Chief Financial Officer

As you can see on slide 32 there is a light gray bar there that has a significant component of investment and growth, but broadly, we expect cost to be flat down in the next three years. And getting down to $31 billion by the time you take the underlying inflation rate in the bank at the moment, it's about 2.5% per annum we are expecting a $700 million that order of magnitude reduction in the bank levy from 2022 onwards. If you back those two out, I mean, what's embedded in the plan is about a 10% reduction in real terms. But importantly, there's a significant component in there for growth investment. If we don't see the growth coming, we'll just scale back their growth investment.

Magdalena Stoklosa -- Morgan Stanley -- Analyst

And the severance?

Ewen Stevenson -- Group Chief Financial Officer

Pardon?

Noel Quinn -- Group Chief Executive

Severance.

Ewen Stevenson -- Group Chief Financial Officer

Well, the detailed assumptions based on where people are leaving and what the cost of them leaving which vary substantially across the world. So severance costs in Continental Europe as you know are substantially higher than they are in other parts of the world. But all of that is reflected into the numbers. And we've provided breakdown on one of the slides of what the breakdown of the cost to achieve that with about 40% of that I think is severance-related.

Noel Quinn -- Group Chief Executive

And we go with the timing of that CTA as well. So you have that timing in the slide.

Ewen Stevenson -- Group Chief Financial Officer

But I think the other important thing to remember on some of the job cut numbers that have been stated today, we currently have attrition of 25,000 people a year. So in the context of the 35,000 job number over three years, we anticipate about 75,000 people leaving the bank naturally over the next three years. And if we can be smart on recruitment against that, we can materially reduce headcount over a three-year period without having to pay any severance costs against that.

Aman Rakkar -- Barclays -- Analyst

Good morning guys. It's Aman Rakkar from Barclays. I'm just going to come back to capital and run the risk of asking too detailed a question. It's just to interrogate the kind of cautiousness that the message that's coming across regarding capital. I mean, basically, when I do some pretty crude back-of-the-envelope math, it does look like you're going to accrete pretty significant capital over the plan period even if you do redeploy the $100 billion of RWAs. I mean, basically if profits are broadly maintained at that current level, you're going to pay away basically half of that in the dividend post the script, and if I times that by three, obviously, we've got to take out the restructuring charge. It does basically look like you're going to build about 150 basis points to 160 basis points of capital from where you are now, so well above 16%.

I mean, first of all, is there anything there that you disagree with? And secondly, does that mean that there's some kind of intangible asset build or some CET1 deduction that we should be mindful of over the plan period?

Ewen Stevenson -- Group Chief Financial Officer

Yes. It's hard to have the debate in the absence of numbers. But the -- it feels a little bit high. I mean, maybe if you can sort of step through your model with IR afterwards we can figure out why. But I would sort of go back to Claire's question earlier. If we see our capital ratios accreting comfortably above 15%, we're not going to allow that to happen. And we will manage our capital base appropriately for how much capital we need. The same way in 2019, we undertook a $1 billion buyback as we felt we had the capacity to do that so we did it. So if we are being cautious that's a good thing and if we do accrete more capital than we think because of our caution then we'll take action against that.

Richard O'Connor -- Head of Investor Relations

A couple on Hong Kong from the web. One from Ronit Ghose, on the Q4 Asian NIM down five basis points. Is that the effective run rate for Asian NIM going forward? Can you talk a little bit about that? And then from Vincent Guao [Phonetic] asking about the Stage 2 growth in Hong Kong balances in the second half and provide a bit more color on what drove that please?

Ewen Stevenson -- Group Chief Financial Officer

Yeah. On Asian NIM, we did see some asset margin compression. The other thing is a significant portion of the Hong Kong deposit base is U.S. dollar-based. So U.S. dollar interest rates are down, so you will see ongoing impact of that. I've given up since I've arrived at the bank trying to predict the trajectory of HIBOR, but we're obviously very sensitive to the trajectory of HIBOR. And in some ways as I said earlier it's sort of linked to the coronavirus where it's remaining high at the moment. So -- but we would expect HIBOR this year, and we've got that in our economic forecast to decline at some point during the year.

In terms of a Stage 2, I mean, look, Hong Kong pre the coronavirus has been facing some difficult economic circumstances. And all you're seeing is the natural migration I think of their credit book, but Richard will have the numbers. But the underlying if you looked without the quality of the Hong Kong credit book is, yeah, you have to imagine some extremely difficult scenarios. As I said earlier, shifting to assuming coronavirus continues for most of this year only gets you to incremental provisioning of $600 million in Hong Kong. So we don't expect anything like that, but we do expect some increase in provisioning this year.

Richard O'Connor -- Head of Investor Relations

Okay. Ian over in the corner.

Ian Gordon -- Investec -- Analyst

Hi. Ian Gordon from Investec. Can I just have one question on the U.S. please? Correct me if I'm wrong, but I don't think there's any suggestion that the U.S. will ever be anything other than the drag to group returns. So obviously, I welcome what you've announced retaking capital out of GBM and slashing costs within the retail business. But in terms of the reallocation within that geography, is it based on genuine enthusiasm for the opportunities you see? Or is it based on some other structural restriction e.g. scale requirements time it takes to extract capital under CCAR or something else?

Noel Quinn -- Group Chief Executive

We do see the plan delivering acceptable returns in the U.S. business over the medium term. So we see a significant increase in returns. That's a combination of the reduction in the balance sheet in the Global Markets business, a refocusing of the retail business. We do believe there is an opportunity to serve international clients in the U.S.. But we also believe it's important to have a stable balance sheet in the U.S. to support our global market-leading capabilities in transaction banking and trade and that the package together is the right package. We did look hard at what we do in the U.S. and did we look to dispose of the retail business? We looked hard at that. We don't think that's the right answer. To be honest if I wanted an easy headline and I wanted an easier day-to-day, I'd have just made the decision to sell the U.S. retail business. But I genuinely don't believe that's the right answer for us as a bank.

I don't think it's the right answer for our business in the U.S. or for our business globally. You've got to remember, we are the market-leading global transaction banking business. And circa 70% of that transaction banking business is denominated in U.S. dollars. We cannot put that business at risk by having a subscale, inappropriate or high-risk business in the U.S. that is not able to fund itself. So that is an important part of buying in HSBC is that global transaction banking business. Now many people said, we wouldn't be able to turn around the Mexico retail business five, six years ago and were advising us to sell that at that point in time. Well Nuno is here in the room today, him and his management team in Mexico have done an excellent job. That business today is growing significantly double digit year-on-year and high double digit and it's generating return on tangible equity today of 15% with strong momentum for future growth. We have to achieve that same outcome in the U.S. not just because of the U.S. business because of what it means to be in the U.S. for our broader HSBC strategy. So the easier decision for me would have been to make the sale decision. The harder decision and gets me less headlines today and possibly less support is to do what we believe is right for the bank. And that's the decision we've taken. And we'll give our team the support to do it.

Please remember as well, we've chosen a strategy for Retail Banking now that is different to the past. In the past on the East Coast, we were largely a mass-market full-service, subregional bank in Retail Banking. On the West Coast we were more of an affluent internationally orientated bank. I don't think it's appropriate to run both strategies together alongside each other. It's inconsistent. If we were to choose a strategy for Retail Banking in the U.S., it's to support the international and more affluent sector of the marketplace in the U.S.. And our belief is, that's a big market segment. It's in excess of 40 million people. Our brand plays into that market segment well. It's our job to make sure we can do it profitably and that's what we'll be focused on. But it's a big enough market segment to be meaningful. In fact it's bigger than most countries we're in frankly. And I know -- I don't believe you have to be a full-service national bank in the U.S. in order to make money. But we have to prove that to you over time.

Ewen Stevenson -- Group Chief Financial Officer

There's also just a couple of other things that you won't see on the capital side in the headline numbers that -- yes, while I talked about a sort of less than 2% uplift on day one because of Basel reform in the U.S. there's about a 15% uplift in the numbers. So while we're showing you a sort of stable RWA picture, actually that reflects a significant reduction in RWA offset by anticipated inflation. So the Basel reform across the globe is not uniform in how it impacts different legal entities.

The second thing is, today if you look at the U.S. filings you will see that U.S. RWAs are about 40% higher than PRA RWAs. So a significant part of this plan is optimizing that gap. And there is significant equity release that's embedded in this plan out of the U.S. business back to the group over the next three to four years. Part of that goes to some of the structural issues that I was talking about earlier in terms of the double leverage and subsidiary complexity that we're dealing with.

Richard O'Connor -- Head of Investor Relations

Joe?

Joseph Dickerson -- Jefferies -- Analyst

It's Joe Dickerson from Jefferies. I guess this is the first restructuring plan post crisis that really seeks to address the Midland back office. How many -- can you give us a sense of how much headcount is going to actually come out of what we used to call the Corporate Centre or corporate HQ? Secondly, I see that you made a small release of the U.K. uncertainty overlay and there's I think $311 million left in that provision which is a little bit higher than the low end of what you're calling out for coronavirus. What do you need to see to release the remainder of that? Is it certainty of a trade bill? What are the things we need to look for because there's pretty much an offset there?

Noel Quinn -- Group Chief Executive

I'll let Ewen answer the second one and I'll give you an answer on the first, if I can. We're not giving individual headcount targets or detail at this stage on either any subregion or business line or the center. What I will say is, I firmly believe that it's absolutely important to not only reduce the cost of the superstructure of HSBC in order to provide some mitigation to the RWA redeployment program so that I don't end up with stranded costs.

But I also think it's an important thing to do to empower the organization with greater agility and greater pace to delayer and de-matrix. And I think we've had a structure in place that served us well post the financial crisis and through the DPA. We had to build up a more substantial complex support structure for the businesses during that period. But I think in a phase that we're going into we need more agility and simplicity. And therefore that requires our central cost base to go down. And I want to recreate a much more clinical divide between what is the holding company or the group of HSBC and that we should be there. Separate from that we should be in the countries to allow the countries to make growth happen. And so I'm not going to give you any specific headcount targets on that. We can help you try to model that later. But nothing I think at this point in time. On the second point, Ewen?

Ewen Stevenson -- Group Chief Financial Officer

Yes. Just on -- we've broken out in one of the slides about 60% of the cost savings are coming from the back and the middle office. And sort of just personalize it to the bit I run, I mean if you look at the finance department today very manual with sort of poor customer control and cost outcomes as a result of that. We've got a three to four year plan to create a single data warehouse and heavily use the cloud which should lead to a dramatic improvement in the productivity of the department as a result of that. And we can see similar efficiency programs across much of the back office and middle office.

And we've just got a new COO, John Hinshaw who's got a deep background in technology and has led similar restructurings at other organizations he's led. So again, both on the technology side and the operations side, again we see significant opportunity for efficiency benefits all of which are reflected in today's cost announcement. On the U.K. overlay, I think part of what you're seeing is the fact that the U.K. -- stressing the U.K. portfolio under extreme stress results in higher levels of provisioning than you would see in Hong Kong, because it goes back to the fundamental credit quality of the Hong Kong business rather than any reflection on the U.K. Post the big triggering event in Q4 for the write-back of part of the overlay was the election which reduced some of the probabilities associated with some of the downside scenarios. I think in terms of releasing a significant amount of further overlay in the U.K., we're just going to have to see what -- how the forward economic guidance shifts during the year with yes there's still quite a broad spectrum of views around the U.K. economy, particularly as we continue to negotiate the exit from Europe this year.

Noel Quinn -- Group Chief Executive

I will say on the U.K. economy, it surprised me on the upside how resilient the U.K. corporate base has been through the three years leading up to the point we're at now.

Richard O'Connor -- Head of Investor Relations

One more from the web then we'll take two off from floor Raul and John. Still lots of questions on RWAs and capital and buybacks as you can expect. So one with a slightly different flavor from Manus Costello is your plan assumes 4% to 5% growth in organic RWAs. To fund that you need to get a return above -- right at the top of your 10% to 12% RoTE target. What happens if you don't reach that top end of the range? How will you fund growth in the future? Or is the dividend at risk? That's from Manus Costello.

Noel Quinn -- Group Chief Executive

Well firstly let me just -- and Ewen will cover it. But let me first of all make a comment. The RWAs we've taken out are probably yielding at the moment between 2% to 3%. The RWAs we're putting back in we're assuming will yield much closer to 5% to 6%. So just taking out one -- the RWAs and redeploying them, you get in a revenue and a margin uplift as a consequence of that. Because actually the market segment is going back into higher-yielding returns than the market segments it's coming out of. So you're going to get the margin enhancement as a consequence of that transformation program. Ewen?

Ewen Stevenson -- Group Chief Financial Officer

Yes. I don't think the math is right actually in terms of needing to get to the top end of the 10% to 12% RoTE range for the reinvestment. That's not what's embedded in the numbers. It's a significant amount of growth embedded in the plan that's not particularly RWA-intensive, particularly around some of the Wealth Management franchise. So look ultimately in order for the group to be sustainable with this distribution policy, we need to be targeting returns of about 11% to 12% return on tangible equity. We think this plan delivers that by 2022. We don't think 2022 is optimized for returns.

As I talked about earlier, we're right at the top end of that 14% to 15% range on capital. We think we can further optimize that and we think there's more revenue upside as we get the benefit of the reinvestment of the RWAs and we think we've got the full run rate benefit of cost that would to come through into 2023. But the previous plan that was set out in June just over 18 months ago was very much premised on getting to that 11% RoTE that we think we need to be.

The interest rate environment fundamentally changed on us. 2020 interest rates are probably about 150 basis points lower than what we thought they were going to be when the plan was set up, so hence why we've had to adjust the plan. We think this plan gets us back to that place by 2022. And we think it has inherent logic to it which allows us to sustain the distribution policy and grow the bank at about that 4% to 5% growth rate.

Richard O'Connor -- Head of Investor Relations

Raul and then John.

Raul Sinha -- JP Morgan -- Analyst

A couple of follow-ups for me. The capital ratio looks like it's going to go backwards in Q1. So just wondering if I can follow up on what you said in your opening remarks Ewen. There's $10 billion of model changes and there's $10 billion of inflation from -- is that from business growth?

Ewen Stevenson -- Group Chief Financial Officer

Yes. So we think over this year, there's probably about -- well firstly on the capital ratios, I think it wouldn't be surprising if it fell back about 20 basis points in the quarter. I'd heavily caveat there because it depends on coronavirus. But we think there's about $15 billion of headwinds this year on regulatory-related, modeling-related issues that were -- of which about $10 billion or just under $10 billion should come through this quarter. The other $10 billion that we see is relating to business growth. Part of that there's always a significant reduction in balance sheet in Q4, particularly around Balance Sheet Management and part of GBM when it comes back on early in the new year. But also, we're continuing to see decent growth in Retail Banking and Commercial Banking. So our current guidance is RWAs we'll be up about $20 billion or so in Q1.

Raul Sinha -- JP Morgan -- Analyst

Thank you. And the second one is on GBM, specifically. I think in the past, we've looked at divisional returns across HSBC. And I'm struggling to kind of go back to that. Maybe it's not relevant anymore. But can you talk about where the stand-alone GBM returns would look like under your plan relative to the 10% to 12% post the merging of the middle and the back office?

Ewen Stevenson -- Group Chief Financial Officer

Yes. A minor hesitation because we've also got the Corporate Centre reallocation process that we're intending to roll-out in the second half of this year, which has some impact on the returns. But this materially improves the return profile of GB&M through the period of the plan.

Raul Sinha -- JP Morgan -- Analyst

Is that in 10% to 12%? Or is it still below?

Ewen Stevenson -- Group Chief Financial Officer

Yes. Sorry, I'm just struggling to get the numbers straight in my head post the reallocation, but relative to the current returns the returns are materially higher.

Raul Sinha -- JP Morgan -- Analyst

Thank you.

Richard O'Connor -- Head of Investor Relations

Last question from John at the back.

John Cronin -- Goodbody -- Analyst

Thank you. It's John Cronin from Goodbody. Just a few specifically on the UK actually, in relation to flow share development in mortgages in the year-to-date anything you can say on that? Additionally, the recent modest improvement in deposit funding conditions in the market how do you anticipate that will pass through in terms of pricing? Or should there -- should we expect potentially some NIM accretion there? And finally anything you can say on the RoTEs you're currently printing on new mortgage flow? I think you gave us some numbers on that before? Thank you.

Ewen Stevenson -- Group Chief Financial Officer

So in terms of flow share in Q4 from mortgages it was just over 7%. So we're continuing quarter-on-quarter to put on flow share in excess of stock share in mortgages in the UK. We think we can continue to do that. As we've talked about previously we have about a 13% to 14% share of current accounts by value with about 10% share of consumer credit and we're sitting at just under 7% share of stock mortgages. So we do think that there's a long-term opportunity for us to continue to accrete share in mortgages.

On NIM, I would be a bit cautious because there continues to be -- we don't have it but the term funding scheme needs to be refinanced by the sector. It's not obvious to me how that get refinanced without some pressure on deposit funding at some point. The new -- the return on tangible equity for the new business on mortgages is comfortably ahead of cost of capital. It's very RoTE equivalent because of relatively low-risk weightings attached to that business.

The other thing I would say on the return overall in the UK -- the return on tangible equity in the UK it is impacted because we have a very large pension surplus. That pension surplus helps in terms of a stress test because we don't need to hold capital against the pension plan for the stress test because we've got the surplus. But if you were to adjust all that out I think returns for the UK business would be a couple of hundred basis points higher than we showed.

Noel Quinn -- Group Chief Executive

I'd just like to add a couple of comments as well about our plans to create a combined Wealth and Personal Banking business. There are two principal drivers behind that. One is and probably the most important one is revenue synergy. We believe that bringing the Wealth Management capability of our private bank. And to be able to extend that product capability and those services to a broader client base gives us significant growth opportunities in revenue across the whole personal customer base.

Equally we believe there are benefits in sharing the architecture and the skills that are being developed in -- and the capabilities that are being developed in our Retail Banking business particularly in the area of digitization. Now we can transfer those benefits into for the benefit of our private bank clients. So we believe there are opportunities for growth and revenue from bringing those two businesses together. There are also some cost synergies. But that is not the primary purpose for doing it. The primary purpose for doing it is to facilitate future growth. And some of the benefits will be the scale operations that are being built up in Retail Banking can be leveraged to continue to grow our Private Banking proposition for our Private Banking clients at a much faster pace without having to correspondingly grow the cost base alongside it.

So we believe that combination is a powerful one. Does -- and we also believe the opportunity for continued growth in our business in the area of Wealth Management is one that we should focus on. And we're looking at further activities and strategies that can take that business on to even grow higher growth rates. So I just wanted to add that sort of comment on the U.K. retail business.

Richard O'Connor -- Head of Investor Relations

That's -- no more formal questions. There's tea and coffee at the back. Obviously, do speak to the team as the whole of the executive committee is here. So do net them and ask them questions as well. And thanks very much for your time everyone.

Mark E. Tucker -- Group Chairman

Thank you.

Ewen Stevenson -- Group Chief Financial Officer

Thank you.

Duration: 90 minutes

Call participants:

Mark E. Tucker -- Group Chairman

Noel Quinn -- Group Chief Executive

Ewen Stevenson -- Group Chief Financial Officer

Richard O'Connor -- Head of Investor Relations

Raul Sinha -- J.P. Morgan -- Analyst

Martin Leitgeb -- Goldman Sachs -- Analyst

Claire Kane -- Credit Suisse -- Analyst

Guy Stebbings -- Exane BNP Paribas -- Analyst

Magdalena Stoklosa -- Morgan Stanley -- Analyst

Aman Rakkar -- Barclays -- Analyst

Ian Gordon -- Investec -- Analyst

Joseph Dickerson -- Jefferies -- Analyst

Raul Sinha -- JP Morgan -- Analyst

John Cronin -- Goodbody -- Analyst

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