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HSBC HOLDINGS PLC (NYSE:HSBC)
Q3 2020 Earnings Call
Oct 27, 2020, 3:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference Call for HSBC Holdings plc's Earnings Release for 3Q 2020. [Operator Instructions].

At this time, I will hand the call over to your host, Mr. Noel Quinn, Group Chief Executive.

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

Thank you, and good morning in London, good afternoon in Hong Kong, and thank you all for joining us. Let me start by saying that I'm pleased with our third quarter performance and the way that our business and our people have continued to respond to a challenging environment. We're doing all we can to support our customers, communities and colleagues through the ebb and flow of COVID restrictions and are committed to helping them manage the uncertainty that remains.

As far as our business is concerned, we are more optimistic than when we last spoke in July. Economic forecasts are looking brighter, particularly in Asia. As you can see from our Q3 results, expected credit losses have now stabilized and we've got a clear plan to accelerate growth and adapt the business to the ultra-low interest rate environment.

Looking further ahead, we are also committed to helping our clients make the transition to a low-carbon economy. You'll have seen our announcement two weeks ago that we're aiming to align our financed emissions to the Paris Agreement goal to achieve net zero by 2050 or sooner. The COVID-19 pandemic has been a huge wake-up call for us all and the climate crisis has the potential to do much more -- has the potential to be much more drastic in its consequences and longevity. We're therefore stepping up support for our clients in a material way as we work together to build a thriving low carbon economy and focusing every part of our business on helping achieve that goal.

Turning to our third quarter performance, these were promising results set against the continuing economic impact of COVID-19, with significantly smaller expected credit losses, good strategic progress, a growing capital ratio, good customer retention and an improved economic outlook. Our Asia businesses continue to show good resilience, contributing $3.2 billion of reported pre-tax profit and Global Markets grew adjusted revenue by 16% versus last year's third quarter. Our capital markets revenue is up 21% year-to-date on the back of strong collaboration across Commercial Banking and Global Banking and Markets. And our Global Markets revenues are up 31% year-to-date, largely in the areas we have targeted for continued investment.

Our profitability was challenged by the impact of interest rate reductions earlier in the year on our deposit franchises across all our global businesses. As a result, reported pre-tax profits of $3.1 billion were down 36% and adjusted profits were down 21% on last year's third quarter. ECLs of $785 million were down significantly on the previous two quarters and broadly stable versus the same period last year. We maintained a firm grip on costs, down 3% on last year's third quarter, with an ambition to go further than previously promised. Deposits of $1.6 trillion were 12% higher than last year's third quarter. We strengthened our capital ratio further to 15.6%. And despite headwinds, we made good progress in reducing risk-weighted assets in low returning areas and reducing our cost base in a sustainable way.

Turning to slide three, the revenue impact of lower-for-longer interest rates is going to continue over coming quarters as the impact of interest rate cuts unwinds through the P&L. In response, we are accelerating all areas of our strategy with a particular focus on boosting sustainable non-interest income and going further on costs. The three main levers for this are going to be: an acceleration and an increase in our investment in and across Asia; faster digitization through higher levels of technology investments; and the extensive restructuring of the businesses we talked about in February.

Starting with Asia, as you can see from slide four, Asia is rebounding strongly, much more than the rest of the world. Given our ability to connect the world to Asia and support growth in the region, our Asian opportunity is growing and we are stepping up investment to capture it. Previously, just under half of our growth investment was aimed at Asia. Now, a large majority of our future growth investment will go to growing our Asia wealth, wholesale and sustainability franchises, as well as reinforcing our position in Hong Kong and extending our position across the Greater Bay Area and South Asia. In the last 12 months, Asia's share of Group risk weighted assets increased by 3 percentage points to 44% and that number will keep growing as we reallocate additional capital to the region as a whole.

Our recent investments have helped launch new initiatives aimed at supporting both our clients and business growth. These include VisionGo, a platform connecting SME service providers and customers in Hong Kong, which has on-boarded more than 8,000 members since its launch in April. Pinnacle, supported by its new Fintech subsidiary, which is a first for a foreign financial institution in China. And in Southeast Asia, a new capability to onboard SMEs to multiple markets simultaneously as well as a new multi-currency digital wallet for international SMEs piloted by our GLCM business in Singapore. Our Asian franchise saw more good growth in the quarter, with higher deposits and stable lending, supported by strong credit quality. While we can go much further and we're backing up our ambition with investment to match.

Turning to slide five, our technology investment is critical, not just to provide new capabilities to our customers, but also to boost efficiency and reduce long-term costs. For that reason, we'll maintain technology investment throughout the cycle, even as we reduce spending elsewhere. HSBC is already a substantially digital bank. A large proportion of our global payments already flow through digital channels. And downloads of HSBCnet are up 155% for the first nine months of the year. But we have further opportunities to meet growing market need for sophisticated, robust, rapid payment solutions and to lead our industry in applying digital solutions to analog services like trade.

Despite the current economic environment, we've forecast to spend more in 2020 on technology than ever before, including investments to further digitize our key retail and wealth platforms, enhance transaction banking for high net worth clients in Asia, build a new trade services operating model fit for a digital future, build and expand HSBC Kinetic, a UK mobile SME bank that uses cloud to deliver a faster, same-day service for customers, and launch and enhance HSBC Evolve, a new FX execution platform enabling greater collaboration and better digital solutions for large and small corporate clients. This investment is helping to redesign our cost base, while building the future of HSBC, and we won't sacrifice it for short-term gain.

Moving to slide six, we're making good progress in restructuring our US and European businesses, achieving $41 billion of RWA saves, largely through actions in Global Banking and Markets, and around $600 million of cost program savings so far this year. In the US, Michael Roberts and the team have already reduced RWAs by 8% year-on-year, adjusted costs by 7%, FTEs by 11% and branches by more than 30%. I'm pleased with this progress so far, but given the current economic climate, we are looking at options to accelerate. We will provide an update on this at our full-year results in February.

In our non-ring-fenced bank in the UK and Europe, Nuno Matos and the team have delivered more than $18 billion of gross RWA saves, reduced FTEs and contractors by 7%, and initiated plans to reduce Global Banking and Market FTEs in our European hub in France by 38%. The strategic review of our French retail operations is ongoing, but nearing completion. We will announce the outcome via our full-year results in February. In the meantime, we have announced the acquisition of the minority interest in HSBC Germany, enabling us to fully integrate the largest and most export orientated European market into our strategy and business model. The combination of our current progress and increased ambition means that we now expect to exceed our $100 billion RWA gross reduction target in 2022 with around $50 billion of that total expected by the end of 2020.

In summary then, our 2020 to 2022 transformation plan is fully on track and we will go further and faster wherever we can. We are pushing harder on costs and now expect to beat our target to reduce group costs to $31 billion or lower in 2022. We expect to achieve around $50 billion of low-performing RWA gross reductions by the end of 2020 and to exceed our $100 billion target by the end of 2022. We will provide an update on our plans for our France and US businesses by our full-year results and we'll provide an update on our dividend policy in February.

We are working hard to get back to being able to pay dividends and we seek to pay a conservative dividend if circumstances allow with respect to the 2020 financial year. The Board's decision on whether to pay a dividend will depend on economic conditions in early 2021 and be subject to regulatory consultation.

With that, I'll pass over to Ewen to go through the numbers.

Ewen James Stevenson -- Group Chief Financial Officer, Executive Director and Member of the Group Management Board

Thanks, Noel. And good morning or afternoon all. Against the continuing economic impact of COVID-19, these were a decent set of results which coupled with further good progress against our strategic objectives, additional strengthening in our core Tier 1 ratio and tail risks in aggregate haven't diminished over recent months, have Noel and I in a more optimistic mood than last time we spoke at our second quarter results. Post-tax profits of $2 billion were down 46% versus the third quarter last year, were up materially on a weak second quarter. Adjusted revenues were down 10%, mainly reflecting the impact of interest rate reductions, which impacted all of our global businesses and particularly our deposit franchises.

Near zero interest rates will be a persistent revenue shock to our business over the next few years. We're actively adjusting our business model to address this, building sources of non-interest income, implementing asset side repricing where we can, adjusting the revenue model for some product and customer segments, and materially reducing our cost structure through digitization and automation.

ECLs were significantly lower than the second quarter at $785 million or 30 basis points of gross loans, with Stage 1 and Stage 2 allowances broadly unchanged. With ECLs at $7.6 billion for the first nine months, we're now guiding to the lower end of our previously announced $8 billion to $13 billion range for the full year.

We're continuing to take action on costs. Our adjusted operating costs fell by 3% against the third quarter of last year and down 4% year-to-date. Our balance sheet metrics continue to improve. Our core Tier 1 ratio was up a further 60 basis points to 15.6% in the quarter, and customer deposits and lending were broadly stable from the second quarter with deposits up 12% or $164 billion year-on-year. Our tangible net asset value per share of $7.55 was up $0.21 on the second quarter due to both retained profits and currency movements.

Turning to slide 10 and looking across the three global businesses. In Wealth and Personal Banking, revenues were down 13% with Retail Banking revenues falling by just under $1 billion due largely to the impact of falling interest rates on deposit margins. At a headline level, Wealth Management revenues grew by $177 million, but excluding positive market impacts in insurance manufacturing were down 8% due mainly to lower insurance new business volumes. Commercial Banking revenues were 17% lower, due mainly to the impact of lower margins on global liquidity and cash management.

In Global Banking and Markets, revenues were up 3% despite the impact of lower interest rates. Global Markets grew by 16%, represent -- reflecting continued good performance in credit and FX. Equity revenues also increased by 39%. Looking forward, assuming economies continue to rebound from COVID-19 lows, we would expect some increase in corporate investment and loan growth from the low levels seen in second and third quarters this year. We also expect Global Markets revenues to now normalize as volatility reduces and corporates complete their bond and equity fund raisings. Also don't forget, the fourth quarter is normally a seasonally weaker quarter for revenues for us in both Global Markets and Wealth.

On slide 11, net interest income was $6.5 billion, that's down 6% against the second quarter. The net interest margin was 120 basis points, down 13% on the second quarter -- 13 basis points, sorry, reflecting the continuing impact of near zero interest rates, with our Asian franchise in particular seeing material deposit spread compression. The UK ring-fenced bank NIM was stable quarter-on-quarter excluding significant items. As we look forward and assuming interest rates remain unchanged, we expect further modest net interest income headwinds in the fourth quarter with some quarter-on-quarter stabilization from there. We still expect approximately $3 billion lower net interest income in 2020 versus 2019.

On the next slide, given the forward outlook for net interest income, we're focused on building our non-interest income revenues. We have already substantial fee income businesses to invest in, particularly in Wealth and Private Banking, we're also one of the global leaders in FX and are increasingly building out our strength into Asia for Global Markets and Global Banking. We're also looking at new revenue models in other areas, such as Global Liquidity and Cash Management and Retail Banking that have previously relied on deposit spreads to drive economic returns. Fee income showed some recovery in the third quarter from the COVID-related lows seen earlier in the year, up 4% versus the second quarter.

Turning to slide 13, adjusted operating costs were 3% lower than the third quarter in 2019 and down 4% for the first nine months. This continues to reflect the impact of our cost reduction actions and lower spending on discretionary cost line items as a result of COVID-19. Relative to the plan we announced in February, we now plan to exceed our cost target set for 2022 with gross cost savings exceeding our previously announced $4.5 billion in that year, while still sustaining investment in technology spending in areas of focus.

In part, this reflects changed customer and employee behavior as a result of COVID-19, namely substantially increased digital engagement from our customers and using the benefits of technology to adopt a hybrid working model for most of our employees with materially lower internal travel requirements going forward.

These customer and employee trends are also consistent with our sustainability goals, opening up further opportunities to materially reduce our own carbon footprint, in line with our commitment to be net zero operationally by 2030. To help achieve these additional cost savings, we now plan to spend more than the $6 billion in cost to achieve by 2022, with around $1.6 billion of the total expected to be spent in 2020. We'll provide a more detailed and quantified plan in February when we announce our full-year results.

On the next slide, ECLs were much lower than first-half trends, some $785 million or 30 basis points of gross loans. This reflects a more stable economic outlook and a significant reserve build in the first half, while overall ECL allowances remain broadly unchanged. The Stage 1 and Stage 2 P&L charge for the year to date is around $4.2 billion, of which, just $300 million was incurred in the third quarter. The Stage 3 charge for the quarter was around $500 million, relating primarily to a small number of wholesale exposures across various sectors and a stable level of retail defaults. This was partially offset by $300 million of releases relating to pre-COVID-19 cases. The $785 million ECL charge, we believe, is unusually low at this point in the economic cycle benefiting from releases.

So, I would discourage you from using this as a new baseline. While ECLs have started to stabilize, we do still expect them to remain higher than normalized levels over the coming quarters. With ECLs at $7.6 billion for the first nine months, for 2020 as a whole, we now expect to be toward the lower end of the $8 billion to $13 billion range, although uncertainties remain around COVID-19 and Brexit, in particular.

On slide 15, our core Tier 1 ratio at the end of the third quarter was 15.6%, up 60 basis points in the quarter. This was driven by RWA reductions on a constant currency basis, profit generation and FX translation differences. Excluding FX movements, RWAs fell by $11.8 billion, primarily as a result of our risk-weighted asset reduction program.

As previously signaled at the second quarter and relative to guidance we gave in February, we've made good progress this year in reducing portfolios of higher stress and enhancing capital levels at the holding company. As such, we now expect to be at a target of 14% to 14.5% core Tier 1 ratio when we can begin to normalize our core Tier 1 position again.

On slide 16, we're making good progress against our $100 billion gross reduction target of low returning risk weighted assets by the end of 2022. For the first nine months, we've achieved $41.5 billion and expect to have achieved approximately half of the $100 billion target by year-end. As a result, we now expect to exceed this target and to do so without exceeding our $1.2 billion spend target that we announced in February.

So in summary, against the backdrop of COVID-19, this was a decent quarter for us, another resilient Asian performance and a decent quarter for fixed income, a more optimistic credit outlook and further progress on cost reduction and core Tier 1 build. As we look out, without discounting the continuing high levels of uncertainty, we think the combination of tail risks has diminished relative to the last quarter and therefore we are now more confident on the outlook.

We recognize that we've still got a tough period ahead of us, given the very material impact of near zero interest rates over the next few years, coupled with a gradual recovery in customer activity in some segments from COVID-19 lows. But we think the building blocks are now being put in place for a substantially enhanced returns in the coming years, a change of revenue model that will be less reliant on deposit spreads, a normalization of credit costs from 2020 highs, lower operating costs using the benefits of digitalization and automation, and increased confidence in being able to operate the bank at reduced capital levels once the economic environment stabilizes.

Noel and I are very focused on the path back to paying dividends with a core Tier 1 ratio of 15.6% relative to a target of 14% to 14.5%, we are now accruing meaningful capital buffers. However, I would caution about getting ahead of yourselves on distributions. When we start we'll start conservatively and look to build sustainably from there.

With that, Sharon, if we could please open up for questions.

Questions and Answers:

Operator

Thank you, Mr. Stevenson. [Operator Instructions]. Your first question comes from the line of Raul Sinha from JP Morgan. Please go ahead, your line is open.

Raul Sinha -- JP Morgan -- Analyst

Good morning, Noel. Good morning, Ewen.

Ewen James Stevenson -- Group Chief Financial Officer, Executive Director and Member of the Group Management Board

Good morning.

Raul Sinha -- JP Morgan -- Analyst

Or afternoon. A couple of questions from my side. I guess starting off, just on the NIM and NII trajectory, couple of points related to that. One, if you could talk a little bit about the the HBAP NIM

Outlook. Obviously, you had quite a big fall in the quarter. And then related to that, if you could elaborate a little bit in terms of what do you expect within your sort of kind of the assumptions for HIBOR, are you expecting HIBOR to sort of stabilize around these levels? Or are you still thinking that we're going to converge toward US dollar LIBOR, which is obviously some way below where HIBOR is?

And the second one, I guess a little bit more broader in terms of the areas where you are tweaking your transformation program, and you've obviously talked about that a little bit. I was particularly interested in Wealth Management and Insurance, in terms of what are the growth initiatives you can focus to make a meaningful contribution, given where your plan was when you announced it and where we are today. And you've obviously got a big cash [Phonetic] in terms of rate-sensitive revenue. So, any sort of commentary on Wealth Management and Insurance, sort of material growth opportunities would be really helpful. Thank you.

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

Okay. I'll take the second question, but I'll ask Ewen to answer the first part of the question, if that's OK.

Raul Sinha -- JP Morgan -- Analyst

Yeah. Sure.

Ewen James Stevenson -- Group Chief Financial Officer, Executive Director and Member of the Group Management Board

On NIM, Raul, a few things. I mean, as you know, the HBAP book is relatively short-dated. So, we did see a material contraction in HIBOR. I think it was down over 60 basis points quarter-on-quarter. The -- and as a result, that translates very quickly within quarter into the net interest margin. The -- as we look out -- yeah, been here for seven or eight quarters now, trying to predict the path of HIBOR has always been difficult, but I think -- yeah, we do think that -- yeah, we've seen for the time being a bottoming and that has been a bit higher so far in October. The -- again, that will translate to stabilization, I think, in Hong Kong and possibly a recovery. But if we translate all of that into an outlook for 2021, at an aggregate level, I think, yeah, we're broadly, as we sit today, comfortable with where consensus is or a range around consensus.

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

Okay. And with respect to wealth management in Asia, we started our journey on -- of more rapid expansion, actually before we announced the results in February or the update in February. We've been growing our market share in insurance in Hong Kong throughout 2019 and have continued that journey in 2020 and intend to continue to invest in our business. And we've seen very good results from that activity. We've claimed -- reclaimed a lot of market share on our insurance business in Hong Kong and we'll continue to invest in that business.

We're looking to expand our insurance proposition beyond Hong Kong into other markets, Singapore, India and in China. With respect to the broader wealth agenda, we again started a program of expansion of our private bank in Asia, increasing the number of relationship managers we have on the ground, the product capability in Hong Kong. We want to take that further across into South Asia and into China.

And then more recently, we've talked about the investment we made in Pinnacle, which is a wealth management platform in China, which is a combination of around about an extra 2,000 to 3,000 salespeople based in China serving the wealth management needs of the China population. We expect to put those people on the ground over the next two to three years. But we're also building our technology platform to provide those salespeople with the product capability to serve the market as well.

So, we see that as an area of growth and further investment. It will be protect Hong Kong and continue to take market share in Hong Kong, penetrate into China, and expand across South Asia.

Raul Sinha -- JP Morgan -- Analyst

Given the amount of capital you've built, would you consider inorganic opportunities as well in this area?

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

I think we always look at both organic and inorganic. You should always base the strategy on an organic plan first, which is what we're doing. But we're open-minded as to where the right opportunities for growth will come.

Raul Sinha -- JP Morgan -- Analyst

Thank you.

Operator

Thank you. We will now take our next question, and the question comes from Martin Leitgeb from Goldman Sachs. Please go ahead, your line is open.

Martin Leitgeb -- Goldman Sachs -- Analyst

Yes, thanks. Good morning.

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

Yeah. Good morning, Martin.

Martin Leitgeb -- Goldman Sachs -- Analyst

Yeah, good morning Ewen, good morning Noel. My first question is in terms of how should we think about capital progression from here. So obviously, the very strong Brent in terms of 15.6 or 15.4 excluding transitional impacts. And your comments on dividend, dividend being conservative from here. Should that mean that over the near to medium term we should expect HSBC to run over and above the 14% to 14.5% threshold or do you see opportunities either way, either to deploy more for growth or deploy more for returns as and when the economic outlook normalizes?

And the second question, I was just wondering if you could give us a feel how broad the review -- the strategic reviews you're currently undertaking? The strategy laid out back in February, obviously, was before the pandemic unfolded. How broad a strategic review are you currently undertaking, both in terms of potentially investing lower return areas, but also with regards to future areas of growth for the Group? Thank you.

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

Okay. I'll take the second question. I'll ask Ewen to cover the first.

Ewen James Stevenson -- Group Chief Financial Officer, Executive Director and Member of the Group Management Board

Yeah. So on capital and how we think about it, Martin, I guess a few things. Firstly, in terms of today's ratio, just to put a couple of qualifiers around it. I mean, firstly in Q4, as you know, we would typically expect core Tier 1 ratio to fall in the fourth quarter for a couple of reasons. Firstly, the earnings are obviously impacted in the fourth quarter by the UK bank levy by seasonally lower Global Markets and Wealth revenues. And we signaled, I think, as part of my comments earlier that we expect to have a higher CTA charge, cost to achieve, restructuring cost charge in the fourth quarter relative to what we saw the run rate in the first three quarters. And we also do still expect some RWA pressure coming from ratings migration, albeit we've been continuously surprised this year about the degree of ratings migration, which has been less than we might have anticipated.

We also get in our ratios some benefit from COVID-19 regulatory relief currently, that's around 20 basis points. But I think the regulators are always going to back out their numbers when they look at our capital ratios and think about excess that we've got. And I think going into 2021, we're always going to want to have a buffer for contingency, given 2021 will continue to be relatively uncertain as we sit today. I do think that if you went back to the start of the year and you think about what we're managing to in our capital raise, it's really two things: one is, the degree of stress that we're running as a bank and we do think the restructuring plan that we've announced and the areas that it's targeting is going after some of the highest risk portfolio as we have in the bank. So over the next few years, we think the aggregate level of stress you'll see from us getting reported in the annual stress testing cycle will reduce.

And secondly, as I think you're aware, we've been holding excess capital in some of our subsidiaries, for example, in the US. And as we continue to restructure I think we'll be able to get more of that capital back to the group. So as a result, we think that we can manage the bank in the medium term to 14% and 14.5%. I think we should aspire to do better than that, but that aspiration I think has to be very much premised over the medium term with us making serious inroads into reducing the gross level of stress that exists in the bank. I'm confident we can get there, but I wouldn't bake it into your numbers today.

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

And on the second part of your question, we recognize that it's -- the lower interest rate environment is a very material drag on revenue and that it will be a hardened road to recover that lost revenue. I also fully recognize, there's no one silver bullet to addressing that gap. It has to be a combination of growth from new areas of investment, particularly fee income generation activities, such as I talked about earlier, wealth in Asia across a broad range, mass affluent private banking asset management insurance, growth from our transaction banking business and the fee income generation from that in foreign exchange, trade and payments and cash management, and growth of our balance sheet, particularly in Asia, where I do believe there is still growth potential over the medium term for the asset side of the book, but we're also going to be looking at pricing, pricing of our asset book and pricing of our fee income. I think it's going to be a combination of those activities coupled with a continued focus on prudent cost management with an expectation, as Ewen said, to exceed our 2022 target of $31 billion. So it will be a combination of those things.

And if I think back to the GFC, there was no one single solution to rebooting revenue post the GFC, it was a combination of things. And we're going to be very much focused on those same activities this time around.

Next question, please.

Martin Leitgeb -- Goldman Sachs -- Analyst

Thank you very much.

Operator

Thank you. Your next question comes from the line of Manus Costello from Autonomous. Please go ahead, your line is open.

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

Good morning, Manus.

Ewen James Stevenson -- Group Chief Financial Officer, Executive Director and Member of the Group Management Board

Hi, Manus.

Manus Costello -- Autonomous -- Analyst

Hi, everybody. I just wanted to ask about the balance sheet and cash. Your cash position has grown again this quarter. You're up $130 billion since the end of last year. I just wonder, what can you do to help manage that cash position to help boost the NIM or offset the pressure on the NIM, or should we assume you're just going to run this structurally very high levels of cash in your liquidity management in the future?

Ewen James Stevenson -- Group Chief Financial Officer, Executive Director and Member of the Group Management Board

Well, I'll give a quick instinctive reaction to that, Manus. I mean I'm a strong believer in a strong balance sheet and a very liquid balance sheet. So, I understand that at the moment that liquidity is not only in NIM, but in the middle of a quite a severe economic crisis, it's good to have a very strong liquidity position. And that's been a cornerstone of HSBC for many years. And it then allows us to have the strength to continue to invest in growth of the asset side of the balance sheet as that growth reemerges in the economy and be cognizant of the fact that Asia seems to be coming out of the COVID crisis faster than the rest of the world. Therefore, I expect growth opportunities to reemerge in Asia, so that although that liquidity is not earning money in its own right it has the potential to earn money for us on the asset side of the balance sheet and it gives us the comfort to continue to make investment decisions in that we have a strong balance sheet, both liquidity and capital. Ewen, do you want to comment... I mean I think, Manus, customer behavior has been exactly what you would have expected it to be so far during the crisis, which both on the retail side and the corporate side, a desire to retain liquidity at the moment, given all of the uncertainty that exists. So over the last year, we've built deposits by, I think, it's 12% over $160 billion. That's not a natural year-on-year growth in our deposit base and reflects very much I think customer behavior. So, as people get more comfortable with the trajectory out of COVID-19, I think you'll begin to see that reverse. On the corporate side, we've already seen relative to the first quarter when a lot of corporates drew-down substantially on secured lines they had with us start to repay those lines. So I think as both consumers and corporates get more confidence back, you'll see those cash balances reducing.

Manus Costello -- Autonomous -- Analyst

So, it's more about your customers' behavior rather than any treasury approach that you might take?

Ewen James Stevenson -- Group Chief Financial Officer, Executive Director and Member of the Group Management Board

Yes.

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

Correct.

Manus Costello -- Autonomous -- Analyst

Got it. Thank you.

Operator

Thank you. Your next question comes from the line of Aman Rakkar from Barclays. Please go ahead, your line is open.

Aman Rakkar -- Barclays -- Analyst

Good morning, gents. Just a couple please. Just coming back on NII. So thanks very much for that comment around consensus next year. I guess just the kind of implied Q4 exit level probably suggests an annualized number below $25 billion next year. So, it's going to get to where the Street is. It looks like you're going to be looking to do kind of 3%, 4% loan growth. It's probably my best estimate for now. Given that you're probably just going to be deleveraging in the US and Europe, interested in what kind of growth you're targeting in terms of loan growth in Asia to kind of deliver those numbers. I know that balances were reasonably robust in Q3.

And I guess the second is on ECL. Can I just check, is around up circa $1 billion charge the best guess of the kind of underlying ECL for you guys in Q3? And if that's the case, does that potentially imply a number next year that's perhaps closer to $4 billion than the $6 billion that consensus has in next year? I mean does that number look full to you or is it -- is there just too much uncertainty for now? And I -- yeah, I'll leave it there. Thank you

Ewen James Stevenson -- Group Chief Financial Officer, Executive Director and Member of the Group Management Board

Okay. Well, firstly on your NII math, yeah, we don't disagree with the math at an aggregate level. I -- yeah, we do anticipate that there'll be sort of low to mid-single digit loan growth next year to sort of underpin the comments I made about consensus and NII for next year. The -- I would -- the part of your commentary that Europe and the US is deleveraging I think is only partly correct. I think a lot of the deleveraging that we saw happened in the second quarter. There is the ongoing restructuring that we're doing in the run-down of the RWA books, not all of that is in lending assets and we're continuing. We do expect UK, Europe, US economies to recover in '21. And we are seeing consensus forecast for Asia. Ex-Japan GDP forecasts are thinking -- are sitting above 5% for both '21 and '22. So, we do think Asia growth again will outperform Western growth.

On ECLs, your -- consensus, I think is sitting at about $6.1 billion for '22. When we previous -- sorry, for '21. When we previously guided on loan loss provisioning pre-COVID through the cycle, we talked about 30 basis points to 40 basis points. At 40 basis points, at the top end of that, you get to just over $4 billion. That feels to me intuitively as we look out a bit low at the moment, equally $6 billion feels a bit high, so sort of somewhere between those two numbers. But there is still a significant uncertainty out there around 2021. And I would also caveat my comments on ECLs generally around Brexit. I think our comments about -- toward the lower end of the $8 billion to $13 billion range are very much premised on a trade agreement happening. And if a trade agreement didn't happen, then I think we would have to adjust up our ECL estimates. You could easily see $0.5 billion to $1 billion of additional ECLs in the fourth quarter if in the next few weeks we didn't have a trade agreement.

Aman Rakkar -- Barclays -- Analyst

Prefect. Thank you.

Operator

Thank you. Your next question comes from the line of Jason Napier, UBS. Please go ahead, your line is open.

Jason Napier -- UBS -- Analyst

Good morning.

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

Hi Jason.

Jason Napier -- UBS -- Analyst

Thank you for taking my questions. Hi there. So the first one on loan losses, I'm afraid again. The performance of your loan book has been quite frankly stellar if you look at the stage data, with only 6% of retail loans in Stage II, even a little over 1% in Stage III. I wonder, did you have any steps that you might be able to share on the extent of any distortion in -- that your customers are seeing as a consequence of the support that's around furlough schemes and moratoria and so on? Or is that really just conversational in nature and really that book is this strong at this stage of the downturn?

And then the second question -- and I appreciate, this is an extraordinarily sensitive area. The Hong Kong Autonomy Act, I wondered whether you could share what it is in your view that HSBC needs to do to avoid sanction under that act? It appears that there is some leeway around significant transactions as regard the sanctioned individuals. What do you see as your responsibilities on that act, please? Thank you.

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

Okay. Jason, thank you. Let me -- I'll add a couple of comments on the quality of the loan book and then hand to Ewen if he wants to add some comments, and then I'll pick up on the Hong Kong Autonomy Act. Firstly -- the first thing about the nature of the book is, inherently we particularly in our consumer banking business, we have a high quality secured book at the heart of what we do. So, we're primarily a secured book rather than an unsecured. Clearly, we do some unsecured lending. But proportionately, we have a much higher percentage of secured lending, for example, here in the UK than the rest of the market. And that's why I think you see a particularly strong performance in our retail book relative to other banks. That would also be true in Hong Kong. What we've also seen as some of the government schemes have unwind and payment holidays have unwind, we are seeing a better performance on that unwind of government schemes than we had previously modeled or expected. And people are reverting to normal payment patterns at a higher percentage than we had originally modeled. So, that's -- they are just some general comments.

Ewen James Stevenson -- Group Chief Financial Officer, Executive Director and Member of the Group Management Board

[Multiple Speech] just add a couple of more things on that. The -- in terms of some -- we've obviously got a global portfolio of government support schemes, and I think as we've seen some of them roll off, particularly on the retail side, our experience so far, Jason, has been -- I would describe it as marginally better than what we had modeled. So, it has been sort of encouraging signs that the credit assumptions that we've got are holding up.

And secondly, I think that government support that we've seen I think for the corporate sector has bought time for the corporate sector to restructure, it's bought time for the corporate sector to go out and raise debt and equity. So, sitting here six months ago we were far more concerned about downside tail risk than we would be today, in part because the government support has just allowed people to time to restructure their businesses and be better prepared.

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

And on your second point, Jason, we're confident in our ability to navigate the increasingly complex regulatory environment and that we are committed to complying with the laws and regulations in every market we operate in. We fully acknowledge that there is a level of complexity there today given the geopolitics, but we're confident of our ability to navigate that situation. And I think that's what I'd say to you in regards to the second part of the question.

Jason Napier -- UBS -- Analyst

Thank you.

Operator

Thank you. Your next question comes from the line of Edward Firth, KBW. Please go ahead, your line is open.

Edward Firth -- KBW -- Analyst

Good morning, everybody.

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

Just two questions. Again, apologies, it's back to net interest income. But I was sort of more interested really in the sort of longer-term outlook for net interest income rather than like this year, next year. And I guess the two questions I had. One, if I look back to sensitivities you've provided us in the past, the sort of broadly -- if you look out five years, it's about double the one-year impact. Is that still the way we should think about it? Or are there things that you can do or have done that can effectively mitigate that so that the bulk of any interest rate impact we should see is sort of broad -- plus or minus 10 basis points is broadly in there? So that would be my first question.

And then the second question is related to that. One of your -- one of the big advantages of HSBC probably for the last 100 years has been loans-to-deposit ratio of around 70%. And I guess it's a bit lower now, but it has been a bit higher, but that's broadly where you stuck it. And I guess in this environment, that means, what, 30% of your deposits are either making no money or actually loss-making. Is there anything that you think over a two, three, four year plan that you can do to address that? Is that something that -- I mean could we see that moving up to 80%, 90%, that sort of level? Or should we -- or is your preference to remain liquid, likely to keep that roughly where it is? Sorry, that was a long question. Let me take the second part. The AD ratio, yes, at the moment is showing a significant surplus. At different points in the economic cycle that moves around, and if you were to go back a couple of years you started to see quite significant loan growth with slightly slower deposit growth. So you've started to see that AD ratio narrow to a degree. As Ewen said earlier, we've had an influx of deposits as customers have borrowed less, spent less and accumulated cash. And so, you could expect over time that AD ratio to change. But I think we've always as a bank had a history of having a strong liquidity position. So, I don't see us really operating at a 90% AD ratio in the future, even in great times, because we operate in markets around the world that are inherently more volatile and therefore we believe strongly in -- having a strong liquidity position to manage through that volatility in difficult times. So, you get some movement in the AD ratio going forward, but I don't think you're going to get us operating at a level of 90% on a consistent basis or at any point, given the inherent nature of our book of business.

Ewen James Stevenson -- Group Chief Financial Officer, Executive Director and Member of the Group Management Board

So, I think -- your first question I think was around the NII sensitivity tables five years out. The -- yes, I do assume a static balance sheet, I do assume no management action. So I think you should assume that over a five year period we would have some capacity to mitigate some of the risks that you see in that interest rate sensitivity table.

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

And just going back to that point on AD, if you were going to say -- it depends how you look at that surplus and is it earning money or not. You remember that high liquidity or low AD ratio is giving you access to an inherently higher return market in Asia and the Middle East. So, you don't necessarily deploy all the liquidity to get every last ounce of earnings out of it, but having that liquidity there allows you to access an inherently higher return market, Asia and Middle East, the emerging markets. That gives you a higher level of compensation for the amount of lending that you're doing. So you earn it in a different way than full deployment into low volatility, low return markets, you're getting the earnings in a different way from HSBC.

Edward Firth -- KBW -- Analyst

Okay. So it's not like it's a strategic priority for you to find assets to try and bulk up that balance sheet.

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

I'd rather find growth, good sustainable revenue growth, rather than just buying books of assets for the sake of buying books of assets to use up liquidity. Sustainable revenue growth is what we're motivated to do.

Ewen James Stevenson -- Group Chief Financial Officer, Executive Director and Member of the Group Management Board

You would know that 20 years ago we tried something like that and it didn't work out so well, so...

Edward Firth -- KBW -- Analyst

I just wanted to see if you want to do this time again.

Ewen James Stevenson -- Group Chief Financial Officer, Executive Director and Member of the Group Management Board

No.

Edward Firth -- KBW -- Analyst

Thanks you so much.

Operator

Thank you. We will now take the next question from Tom Rayner from Numis. Please go ahead, your line is open.

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

Hi, Tom.

Tom Rayner -- Numis -- Analyst

Hi there, Good morning. I just wanted to ask sort of broad, strategic questions really, and you might sort of kick me on and say wait until the full year. But in terms of what you've said today on the restructuring plan, you're flagging additional cost savings, you're flagging additional RWA reduction. I'm just trying to think in terms of the potential impact that, that might have on future revenue growth and how important it is for you to be seen -- for HSBC to be seen as still having sort of growth potential, almost still being a bank that's in higher-growth markets. You want the market to view you as a potential growth stock. How does that sit with a focus on continuing to look for more cost savings and more RWA reductions? And obviously, that comment alluding to Household International is quite interesting because, obviously, you get too desperate for both when you buy a bad asset as is asked. So that was my first question.

And then the second sort of strategic issue, again, from what you're saying is all of the investment is being pivoted now, by the sound of it, toward Asia. If this continues, I mean, is there a risk at some point -- the whole question of domicile and where it makes most sense for HSBC to be domiciled, is that going to reemerge? Or is that something that's been talked about, discussed and decided on, and we're not going to be back there anytime soon? Thanks.

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

Yeah, let me -- a couple of comments on that. Let me first of all say, I don't think pursuing a more efficient organization necessarily means you cannot produce growth or pursue growth. I think the cost reduction we're going for are good sensible cost reduction ambitions, reducing bureaucracy, simplifying processes, increasing automation, improving customer experience, all of those things are supportive of our growth agenda as well. So -- and what we've clearly said in this statement that we are going to continue to invest in technology to further digitize the bank and out of that digitization will come a lower cost base, a better customer experience and growth opportunities as you tap more market opportunity. So, I don't think they're incompatible and certainly we don't want to be a growth-only transformation story. We must also be a growth story and particularly with the footprint that we have as an Asian bank and an international Asian bank, that would be part of our agenda.

And on domicile, we've said on many occasions, we're not revisiting the domicile decision. We believe there is a power in being a global international bank with a strong focus on Asia, a strong focus on the Middle East, a strong business in the UK. We're an international bank bridging East and West and we're not revisiting the domicile decision.

Ewen James Stevenson -- Group Chief Financial Officer, Executive Director and Member of the Group Management Board

And on sort of going further on RWA reduction, Tom, I mean you can see in the dispersion of returns in our data pack that we've got a lot of capital that's not earning appropriate returns, earning well below cost of capital returns. And I think you and everyone else on the call should welcome the fact that we're trying to accelerate that and take more of those assets of our balance sheet, get more capital back as a result of that. And if we can invest that in growth, particularly in Asia, we're happy to invest it. And if we can't, we'll find a way of returning it to shareholders.

Tom Rayner -- Numis -- Analyst

Okay, lovely. Thanks a lot.

Operator

Thank you. We will now take our next question from the line of Guy Stebbings, Exane BNP Paribas. Please go ahead, your line is open.

Guy Stebbings -- Exane BNP Paribas -- Analyst

Good morning and good afternoon, everyone. Thanks for taking the questions.

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

Good morning, Guy.

Guy Stebbings -- Exane BNP Paribas -- Analyst

Good morning. I just wanted to come back firstly to capital and specifically to try and size some of the headwinds coming in the fourth quarter. You called out the typical seasonal impact from the levy and Global Markets being a bit lower plus the higher CTA to come. So perhaps earnings themselves might be a small headwind to capital, plus it looks like you're guiding to around about 30 basis points headwind from RWA movements. So just taking that into consideration, CET1 position could drop, maybe toward 15% but I think you previously guided to software intangible benefit of around about 20 basis points. So is there reasons I think we should still be some way above 15% before any possible dividend announcement among our full-year results?

And then the second question was just on CP14/20 an introduction of the mortgage draw in the UK which is perhaps quite personal for HSBC given your lower starting risk weight density. I appreciate you were already expecting those rates to move up, given some of the other regulatory changes and I think you'd guided to 7% or 8% previously. But given this further move, does it change your view at all on UK mortgage book growth in the future or I guess the reversely, it could actually incentivize you to tilt the book to high margin, high risk business over time? Thanks.

Ewen James Stevenson -- Group Chief Financial Officer, Executive Director and Member of the Group Management Board

Yeah, so -- but we've previously guided I think an RWA growth for the full year of sort of but mid-single digits. If you look today, that would imply relatively material RWA growth in the final quarter. That looks to me, as I sit today, at the top end of the range of what we would expect, then you would have to see a degree of RWA migration that is substantially higher than we've seen recently. So, we could well see a core Tier 1 ratio at the end of the year above 15 I think.

The -- on your comment on UK mortgages, even with those higher risk-weights, we still think that we make sensible economic returns on the mortgage lending we do in the UK. So yes, it is a -- the other thing I would say is that the UK is one of those businesses that in the outer years of the plan would have been impacted by output flows. So in some ways, this is just an acceleration of that impact of future capital buffers we would have had to build anyway into the UK business.

Guy Stebbings -- Exane BNP Paribas -- Analyst

Okay, thanks.

Operator

Thank you. We will take our last question from Joseph Dickerson from Jefferies. Please go ahead, your line is open.

Joseph Dickerson -- Jefferies -- Analyst

Hi, good morning. Just a couple of quick ones please. Just on the trajectory of getting down your targeted CET1 range, I guess how do you think about buybacks in that context, particularly in the near term, given the various capital treatment of buybacks, and you've done buybacks before? So, any thoughts there would be helpful.

And then as you seek to move toward more sustainable sources of non-interest income and de-emphasized deposit spread businesses, I know you've mentioned that you're reviewing the US business. That obviously -- the last review, as already noted on this call, happened when rates were higher. I guess is everything on the table as regards the US business, notably the retail business which has, I believe, off the top of my head 50% or lower loan to deposit ratio. Thanks.

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

Ewen will take the first part of the question on CET1 and I'll pick up on the US.

Ewen James Stevenson -- Group Chief Financial Officer, Executive Director and Member of the Group Management Board

Question again on CET1 was -- on buyback, the -- yeah, as you've said, we're certainly not adverse to doing buybacks. I think you should assume what we want to do first is reestablish the dividend and set a sensible and sustainable dividend policy for 2021 and beyond. And then to the extent that there is excess capital on top of that, think about buybacks as part of that. I would caution though that for 2021 in particular, there continues to be meaningful levels of uncertainty around the economic outlook for 2021. So, don't expect us to try to seek to rapidly normalize our capital structure during 2021 until we see genuine, sustained and concrete recovery in the global economy and we're through COVID-19 in a very meaningful way.

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

And with respect to the US. I just want to reiterate, Michael and the team in the US together with Greg and Georges running Global Banking and Markets, have really made very strong progress in the first 9 months of this year. I reiterate, RWA is well done, adjusted costs down, FTEs down 11%, branches reduced by 30%. So, they've made great progress. But they're also very cognizant of the fact that the circumstances are more challenging today than it were in February and therefore they're looking at ways to accelerate the road to improve returns. But I won't go into any more detail on that at the moment. We'll do that with our Q4 results. But I'm pleased with what they've achieved so far.

Joseph Dickerson -- Jefferies -- Analyst

Thanks.

Operator

Thank you. That was our final question. I will now hand back for closing remarks.

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

Thank you, Sharon. And I just wanted to say thank you to all of you for dialing in today, for your interest in HSBC and your questions. I'd summarize by saying that we are making good progress on our transformation agenda. We are investing in new growth opportunities, particularly across Asia. I'm pleased that we were able to produce $3.1 billion of reported profits in Q3 and we were able to finish the quarter with a CET1 ratio of 15.6%. I look forward to speaking to you again at the full-year results in February. Thank you.

Operator

[Operator Closing Remarks]

Duration: 67 minutes

Call participants:

Noel P. Quinn -- Group Chief Executive Officer, Member of Group Management Board and Executive Director

Ewen James Stevenson -- Group Chief Financial Officer, Executive Director and Member of the Group Management Board

Raul Sinha -- JP Morgan -- Analyst

Martin Leitgeb -- Goldman Sachs -- Analyst

Manus Costello -- Autonomous -- Analyst

Aman Rakkar -- Barclays -- Analyst

Jason Napier -- UBS -- Analyst

Edward Firth -- KBW -- Analyst

Tom Rayner -- Numis -- Analyst

Guy Stebbings -- Exane BNP Paribas -- Analyst

Joseph Dickerson -- Jefferies -- Analyst

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