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HSBC Holdings plc (HSBC) Q3 2021 Earnings Call Transcript

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HSBC earnings call for the period ending September 30, 2021.

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HSBC Holdings plc (HSBC -0.66%)
Q3 2021 Earnings Call
Oct 25, 2021, 2:30 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 Analysts Conference Call for HSBC Holdings Plc's Earnings Release for 3Q 2021. For your information, this conference is being recorded.

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

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Noel Quinn -- Group Chief Executive

Thank you. Good morning or afternoon wherever you are. Ewen is going to take the bulk of the call today and he'll do that in future Q1 and Q3 announcements. For today though, let me start by saying that I'm really pleased with our third quarter performance. We have had a strong quarter of profit generation across all regions, supported by another quarter of net ECL releases. What most pleasing is the underlying revenue growth we are now seeing across the business. We feel that we are turning the corner on revenue after absorbing interest rate impacts over the last few quarters. We have got strong fee growth in all businesses. [Technical Issues] In Global Banking and Markets, revenue is starting to stabilize and that's against the backdrop of a large managed reduction in risk-weighted assets and lending balances, as we indicated back in February 2020.

In terms of customer behavior, we're seeing a strong deposit performance without any material drawdown on the liquidity that we've built up over the last two years. The lending market was softer than we anticipated in the quarter, particularly in corporate loans, but the pipelines that we built up, position us well for when companies start investing in both the recovery and the low carbon transition. Our capital, as our revenue starts to normalize -- sorry on capital as our revenue starts to normalize, we've also looked to normalize our capital position. Capital returns to shareholders will be a big component of this and I'm pleased to announce a share buyback of $2 billion, which we expect to start shortly.

On our strategy, we're executing with exactly the kind of base I promised in February. We've made some important announcements in the quarter, including the acquisition of AXA Singapore. This complements our existing Singapore business very well and accelerates the buildout of our product and distribution capabilities, in one of the world's most important markets. Pre-COP26 we've been working incredibly hard with clients governments and our industry peers on accelerating the low carbon transition. We're working with a range of partners to find new ways to open the sustainable finance market for projects and investors.

Four months ago, we announced the pioneering partnership with Temasek, to create a debt financing platform for sustainable infrastructure in Southeast Asia, which I believe provides an important model for others to follow. This is just one of a number of sustainability partnerships that we hope to announce in the coming weeks, and I look forward to updating you on those shortly.

In terms of the financial industries contribution, the task force of international banks that I am encouraged to [Phonetic] share over the recent months, just released a guide for banks on setting and delivering net zero targets. This is an unprecedented collaboration, that makes an important contribution to help all banks operationalize the targets they've set. And importantly to bring consistency and coherence for our customers, regulators and investors.

I'm really excited about the months ahead. There is real dynamism and optimism within the business and we're focused on delivering growth in the areas we've targeted. With the added benefit of interest rate rises on the horizon, we're in a strong position moving into 2022.

With that, I'll hand over to Ewen, to take you through the detail.

Ewen Stevenson -- Group Chief Financial Officer

Thanks Noel and good morning or afternoon all. We had another good quarter reported pre-tax profits of $5.4 billion, up 76% on last year's third quarter, with an annualized return on tangible equity of 9.1% for the year-to-date. Adjusted revenues were down 1% on last year's third quarter, but up 1% excluding certain volatile items, with a welcome return to more consistent top line growth across most of our business lines. Expected credit losses were $659 million net released -- our third quarter in a row of net releases, with net releases for the year to-date of some $1.4 billion. We still retain 31% of Stage 1 and 2 ECL reserve build out we made in 2020.

Operating expenses were broadly stable, increases in investment in technology spend were offset by the impact of our cost saving initiatives. But due to some inflationary pressures, ongoing investment into growth, and additional costs due to the impact and timing of recently announced M&A activity, we now expect our adjusted costs for 2021 and 2022 to remain broadly stable at around $32 billion, excluding the U.K. bank levy.

Lending balances were down by $6 billion or 1%. This was due to the repayment of $14 billion of short-term IPO lending in Hong Kong, stripping out the impact of the IPO loans, lending grew by $8 billion or 3% annualized during the quarter, with further good growth in mortgage lending and trade finance. Our core Tier 1 ratio was up 30 basis points at 15.9%, primarily due to a reduction in risk-weighted assets. We now intend to reach our target for core Tier 1 of 14% to 14.5% by the end of 2022. This will reflect a combination of some regulatory driven RWA impacts, balance sheet growth and capital return.

Today's $2 billion buyback announcement is part of this commitment to accelerate the normalization of our core Tier 1 position. Our tangible net asset value per share of $7.81 was unchanged in the second quarter.

Turning to slide 4, we're seeing good signs of growth returning across our global businesses. In Wealth and Personal Banking, we've continued to grow Asian net new money and Private Banking and Asset Management. We've increased the value of new business and insurance by 59% year-on-year. We've hired 450 new wealth planners and Pinnacle, our new Chinese insurance venture. We've kept our U.K flow market share comfortably above our stock share, and we've made good progress on new customer acquisition.

In Commercial Banking, we're seeing encouraging trends in global trade, with good market share growth in key markets such as Hong Kong and Singapore, and we've maintained a strong business pipeline, with $64 billion of new approved limits. In Global Banking and Markets, we saw a more stable revenue compared to a strong performance in the third quarter last year, with good revenue growth in both security services and equities, and GB&M performance was achieved, despite a 7% reduction in risk-weighted assets year-on-year.

Looking geographically; in Asia, we're seeing strong underlying revenue trends, excluding insurance market impacts, revenues were up 7% quarter-on-quarter and 5% year-on-year. And in the U.K., ringfence bank revenues were up 2% quarter-on-quarter and 6% year-on-year, with fee income up 25% over the third quarter last year. Finally and importantly, we are delivering on our goal to be a leader in the transition to net zero. We helped issue $170 million of Green bonds year-to-date including leading on a number of pioneering green bond offerings, such as the first U.K. green gilt, and we're making good progress against the commitments we made in our AGM special resolution in May.

Turning to slide 5 and looking at third quarter adjusted revenues as a whole. In Wealth and Personal Banking, headline revenues were down 3% on a year-ago, but excluding market -- insurance market impacts, Wealth Management revenues grew by $145 million or 7%. This was mainly due to higher fee income and asset management and private banking, together with insurance sales growth. Personal Banking revenues fell by $31 million, due to the continuing impact of low interest rates on deposit margins. Commercial Banking revenues were 4% higher, driven by higher fee income across all products and growth and trade lending and deposit balances.

In Global Banking and Markets, revenues were down 3%. This was due to slower customer activity in fixed income markets versus a strong third quarter last year. However, equity has benefited from both higher client activity and volatility in Asia, and security services grew to a higher fee income and assets under custody.

Slide 6 shows the revenue trend quarter-on-quarter, with growth in all three global businesses, excluding insurance market impacts. This has been driven by a combination of more stable net interest income together with good fee income growth across all our businesses, up 10% year-on-year. We're increasingly confident that we're turning the corner on revenue growth. Commercial Banking is growing. Wealth and Personal Banking is growing and Wealth Management is stabilizing in Retail Banking and Global Banking and Markets has closed to that inflection point now that the bulk of its planned RWA reductions in the business are now complete. With the expectation of policy rates from 2022 onwards, we are now confident in seeing sustained revenue growth this coming year and beyond, which together with strong cost control will help to drive a sustained improvement in core returns and operating draws.

On slide seven, net interest income was $6.6 billion, up 2% against the third quarter of 2020 on a reported basis and broadly stable compared with the second quarter of 2021. On the right, the net interest margin was 119 basis points, down 1 basis point on the second quarter, primarily reflecting changes in balance sheet mix and continued weakness in HIBOR. Lending volumes were down in the quarter, but excluding the repayment of IPO loans, lending grew by $8 billion with continued good loan growth and mortgages in Hong Kong, in the UK, together with the ongoing growth in our global trade franchise. For 2022, with our net interest margin stabilizing, policy rate rises on the horizon and loan growth building, we're increasingly confident on the outlook for net interest income.

On the next slide, we reported a net release of $659 million of ECLs in the quarter compared with an $823 million charge in the third quarter of 2020. The net release was across all our global businesses, reflecting a more stable economic outlook together with Stage 3 charges that remained very low. Despite the net releases, we continue to retain a conservative outlook on risk. We still hold $1.2 billion or 31% of our 2020 COVID-19 uplift to Stage 1 and 2 ECL reserves. For the full year, we now expect net releases to be broadly in line with the net release in the first nine months, with perhaps a very modest net release in the fourth quarter after Stage 3 charges. For 2022, we continue to expect the ECL charge for the full year to be lower than our medium term through the cycle planning range of 30 basis points to 40 basis points with more modest ECL releases expected to continue into the first half of 2022 albeit with an expected net charge after Stage 3 impairments.

Turning to slide nine. Third quarter adjusted operating costs were broadly stable in the same period of last year. A $263 million increase in technology spending and a $340 million increase in investment and other costs were offset by further $600 million of cost program savings compared with the prior year with an associated cost to achieve $400 million. To-date, our cost programs have achieved savings of $2.6 billion relative to our end 2022 target of at least $5 billion in cost savings and cumulative costs to achieve spend to-date has been $3.1 billion with an intention to still spend $7 billion through the end of 2022.

In terms of outlook, with some inflationary and performance related pay pressures, ongoing investment spend and additional costs due to the impact on timing of recently announced acquisitions and disposals, we now expect 2021 and 2022 adjusted costs excluding the UK bank levy to be around $32 billion. This is relative to our previous FX adjusted guidance of $31.3 billion for 2022 which included the bank levy.

Turning to capital on slide 10. Our core Tier 1 ratio was 15.9%, up 30 basis points in the quarter. This reflected a decrease in risk-weighted assets from lower short-term lending, favorable asset quality movements and FX, partially offset by a decrease in CET1 including around $1.7 billion for foreseeable dividends. Excluding FX movements, risk weighted assets fell by $14.4 billion in the third quarter, driven by lower short-term IPO loan exposures in Hong Kong and positive movements in asset quality. In the third quarter, we made a regulatory deduction of 20 basis points for foreseeable dividends in the quarter. This was based on 47.5% of our third quarter EPS of $0.18, which is the midpoint of our 40% to 55% target payout ratio. The dividend accrual for 2021 so far is $3.8 billion after payment of the $0.07 per share interim dividend. Please remember that this is not guidance of our full year 2021 dividend intentions. The dividend accrual is purely a formulaic calculation that will show-up at the full year based upon the results and outlook at the time.

When thinking about the payout ratio for 2021, we will attach a much lower weight to unusually low ECLs as part of our EPS this year together with a desire to see higher dividends per share in 2022 relative to 2021. We intend to normalize our core Tier 1 ratio over the coming quarters to be back within our 14% to 14.5% target range by the end of 2022, driven by a combination of balance sheet growth, capital returns and regulatory impacts. Various things to note for your capital modeling through the end of 2022. We expect today's buyback announcement, the loss on sale of our French retail banking operations and the reversal of the current software capitalization benefit to each impact our core Tier 1 ratio by around 25 basis points and we also expect $20 billion to $35 billion of regulatory-driven RWA uplifts in 2022.

So in summary, this was another good quarter, good earnings diversity across the group, our broad base returned to top line growth in most of our businesses and continued strong control on costs. While the results were flattered by net ECL releases, we're happy to be turning the quarter on revenue with robust lending platforms, growth in trade and mortgage balances and the likelihood of earlier pipeline rate rises than previously anticipated. We're increasingly confident on the revenue growth outlook for 2022. We've included a few IFRS-17 slides in the appendix. We intend to go through this in more detail on our follow-up call on Wednesday for sell-side analysts.

Overall, we expect an initial downside adjustment to our insurance profits of around two-thirds and a smaller percentage adjustment to insurance's tangible equity. Importantly, there'll be no significant impact on the Group's regulatory capital and there'll be no impact on the dividend flows from our insurance businesses to the group. With slight inflationary cost pressures and the impact of IFRS 17 implementation, we remain confident in achieving returns at or above our cost of capital over the next three years, together with delivering attractive growth and attractive capital returns. Finally, we're looking to normalize our core Tier 1 ratio over the coming quarters, of which today's buyback announcement is an important first step.

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

Questions and Answers:

Operator

Thank you, Mr. Stevenson. [Operator Instructions] Your first question today comes from the line of Andrew Coombs from Citi. Please go ahead. Your line is open.

Noel Quinn -- Group Chief Executive

Hi Andy.

Andrew Coombs -- Citi -- Analyst

Good morning. Thanks for taking my questions. I will start with one on the buybacks and then one on costs. So when you come out and quantified the $2 billion plus buyback, can you just give us the metrics that you're using to size that. How you're thinking about this buyback [Indecipherable] buybacks going forward and basically the KPIs in your decision making process on the magnitude of those. So that would be the first question.

The second question on the cost outlook, where you slightly changed your guidance, say the definition you're using. I think that, in your old guidance, the debt 1.5 and then adjusting to the levy, it looks like you have taken up the cost kind of by about $800 million. So can you just give a breakdown of what the moving parts are in the increase? How much of it is due to the timing around the M&A and divestments, how much is inflationary pressured and how much is higher compensation related to performance related pay? Thank you.

Ewen Stevenson -- Group Chief Financial Officer

Yeah, so look on buybacks Andy, as you would expect, that it's part heart [Phonetic] and part science. We -- our capital position is obviously in a much better place than we had anticipated at the start of the year, when we had said no buybacks for this year. We've had a combination of much higher profitability, than we expected because of lower, much lower ECLs, net releases and a slower cost to achieve being expensed through the P&L. And risk-weighted assets have also been lower than we anticipated, partly because of lower growth, but also because of lower credit rating migration. I think within today's announcement is a commitment to get back to 14% to 14.5% by the end of 2022. We are committed to using excess capital, if we can't find attractive organic and inorganic growth opportunities. We've previously talked on inorganic, about wanting to spend up to $2 billion. In M&A, we've announced deal in Singapore -- actually Singapore, for just over $500 million. So that will give you some color of the extent of M&A activity that you might see over the next year or so. I do think that, yeah, we are likely to see, if we achieve what we think we will achieve next year, some further buyback activity in '22.

On costs yeah, I think your numbers are broadly right. If you add about $300 million for M&A yeah, in terms of the sort of roughly $500 million dollars and upwards pure cost. Yeah, the bulk of that is compensation-related, and you're right, part of it is variable pay. But I would sort of put it all in the bucket of compensation costs being higher. Broadly, our total wage bill is about $19 billion out of the $32 billion of total costs. So if you've got $0.5 billion of incremental inflation on that, it is about $0.5 billion -- 2.5%, about $0.5 billion of extra compensation costs. Yeah whether you put it into fixed pay or variable pay, I think we are seeing sustained wage price pressure globally at the moment. But in terms of the incremental amount that we put into the variable pay pool this year, it's significantly more than offset by the increase in profitability that we've seen.

Noel Quinn -- Group Chief Executive

I think if I could just add a color on that, to the extent that we've talked of variable pay, it's partly because we've had a good trading performance this year. And clearly we've given some indications of our view of trading performance next year being positive, and it would be right to have an appropriate level of variable pay at that point in time, in the event that trading performance next year does not materialize, then we have some flexibility on the variable pay. So it's right to also signal, that there is some fixed pay inflation pressures in the market generally, within Financial Services this point in time. So the extra top-up on costs, is a combination of fixed pay and variable pay, as a consequence of the external environment and the trading performance of the bank.

Ewen Stevenson -- Group Chief Financial Officer

And I think the last thing Noel also, that's important is, we've made a very conscious decision not to cut back on investment despite that inflationary pressure, in order to meet a self-imposed cost target.

Andrew Coombs -- Citi -- Analyst

That's great. Thank you both and thank you for the facts put out the slides and IFRS 17 as well. Thank you.

Operator

Thank you. Your next question comes from the line of Tom Rayner from Numis. Please go ahead, your line is open.

Noel Quinn -- Group Chief Executive

Hi Tom.

Tom Rayner -- Numis -- Analyst

Yes, good. Thank you. Hi there, Noel. Hi Ewen. Two please, just a quick follow-up on costs and then one on revenue. You mentioned you have -- about $300 million of the increased guidance is M&A related. Can you give us some sort of estimate of how much that M&A activity might add to the revenue over the sort of next two to three years, just to get a sense. And then just on revenue, clearly more positive on the revenue outlook, you flagged a number of areas. You didn't really comment, I don't think on the outlook for the net interest margin. I look at your consensus, and it only has an increase from Q3 right out to the end of 2020, so you have about 7 basis points. And if I just take you own rate sensitivity and sort of multiply it by what's being discounted by the market, there'd obviously be a multiple of 7 basis points. I wonder if you could comment on the outlook for NIM specifically, please. Thank you.

Noel Quinn -- Group Chief Executive

Thanks. So on costs, look in the near term, I think AXA Singapore will add about $300 million to revenues and $300 million to costs. Obviously, we would expect that pressure to move over time. But if you plug in $300 million into '22 on the revenue side. On NIM, but change inevitable [Speech Overlap], but if you looked at current consensus if you -- yeah, it does look low, relative to the consensus policy rate rises that we now see in the markets. Just as a reminder, our biggest single sensitivity is the U.K. where a 25 basis point rise would add about $0.5 billion of income in the first year, and secondly, Hong Kong. And it does look like in the U.K., we will see two, three rate rises between now and the end of '22 coming potentially as early as the next month or so.

Hong Kong, maybe a bit slower, but yes, one of the offsets to -- clear offsets to the guidance we're giving on costs today, is the fact that we do think we're going to see earlier and stronger rate rises than we had previously anticipated. Yeah, we lost about $7 billion over the last year, two years or so, as a result of a shift down on interest rates. So it has had a very, very material impact on us, and we do think with the policy rate outlook at the moment than consensus, that we should start to claw back a meaningful amount of that in the next two to three years.

Tom Rayner -- Numis -- Analyst

Super. Okay, thank you very much.

Operator

Thank you. Your next question comes from the line of Raul Sinha from J.P. Morgan. Please go ahead, your line is open.

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

Thank you. Good morning. Good morning, Noel and Ewen. Couple of questions from my side. Maybe firstly, just staying on the revenue line. I just wanted to understand the pandemic impacts, that's still washing through your various businesses and sort of holding back the revenue line. So I was wondering if you could comment on the wealth business in Hong Kong, with -- in light of all the travel restrictions, how you think the performance in this quarter has been held back and how that might shift over the next year or so? And also in trade obviously you flagged, a very strong improvement in trade balances, but there's a lot of uncertainty around clearly, what's happening to global trade. So any thoughts on the outlook? That would be helpful.

And then just a broader second question on China real estate. Thank you for the disclosure, I think we all get sort of your first order impacts and exposures are relatively limited. But I was wondering, what you think about the second order impacts on your business in the Mainland, just given defaults have spread beyond sort of single name into quite a few developers now. So how do you see that impacting the rest of your book and the rest of your business.

Ewen Stevenson -- Group Chief Financial Officer

Yeah. So maybe I'll set off and then Noel, you can add some comments then on trade and Commercial Real Estate after I finish. On Hong Kong and the border being shut, the I mean -- yeah you can see some direct impacts on things like insurance franchise. We're not as exposed, obviously to others like Pru and AIA to the Mainland Chinese insurance market, but it is a meaningful kicker to the performance of our insurance franchise in Hong Kong. Having said that, I think the value of new business in Q3 was in line with Q3 pre-pandemic. You can see certain sectors in Hong Kong continuing to suffer. The biggest border is the Hong Kong-Mainland China border rather than the International Water for Hong Kong given the pre-pandemic, about 50 million of Mainland Chinese were visiting Hong Kong in any given year. So we would expect that the border progressively reopens and it's been much slower than we would have anticipated six to nine months ago that we will just see an incremental benefit coming through to the Hong Kong business.

On trade, despite supply chain disruptions, I think we're pretty pleased with the recovery that we're seeing in that business. People are holding higher working capital balances at the moment, consistent with the uncertainty that exists in the supply chains, but yeah, we do view that as a temporary feature of the global economy at the moment and that we will get back to more normality and more sustained growth in 2022.

On the China real estate market, I mean, we've just been through, as you would expect a pretty intensive review of our Chinese real estate exposure, including the provisioning we've got against that where just to repeat what we said today, we've got no direct exposure to regular [Phonetic] borrowers. We're pretty comfortable with the exposure overall. In aggregate, commercial real estate in China was less than $20 billion in the context of $1 trillion loan portfolio. And I think the other thing you should read-in raw is the fact that we are doing the buyback today and the size that we're doing here it is that we're reasonably confident about where we're sitting in terms of our outlook.

Noel, do you want to add anything on it?

Noel Quinn -- Group Chief Executive

Just ironically on trade, there is a feature that, the more uncertain global economics are is normally the time when trade finance is in demand because of uncertainty over the supply chain, uncertainty over credit environment. So we've seen strong growth in trade balances. Part of that is a function of economic rebound. Part of that I think is a function of working capital cycles are longer today than they were pre-COVID and pre-pandemic because of the tensions in the supply chain and the bottlenecks. And part of those people tend to use documentary credit more in uncertain times than open account and therefore they turn more to the financial services sector to finance trade in a structured manner rather than financing trade in an unstructured open account methodology. So I think there's a number of reasons.

And then the fourth ingredient is frankly we are taking market share in trade in Asia, in particular, particularly Hong Kong, Singapore. So those four dynamics I think are leading to very strong double-digit growth in trade. I think if you look at our trade balances from the end of last year to the end of September, we are up around about 18%, 20%. If you do a year-on-year comparison in September to September, I think we may be mid-20% growth in trade, particularly in Asia. So it's those four factors I think have played into the trade performance.

On China, the only other comment I'd make is, look, there is second order risk in whatever there is a market adjustment of that size taking place in a particular industry sector and particularly one as important as commercial real estate. I think we're pretty comfortable with our position and we're staying very close to any potential second order risks. So I'll reinforce on you and say, we feel comfortable with our position of our bank in China is performing well inside a good nine months and we are well positioned on commercial real estate from a primary responder view. And we think we are well positioned on any second order risks, but before we shift I said there was no second order risks that potentially exists for all of us.

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

Thank you, Noel. Can I just follow up on the trade margin. I don't know if you've seen sort of shift in the trade margin within the business and if you expect that to shift going forward given what we're seeing in terms of the global trade picture. Thanks.

Noel Quinn -- Group Chief Executive

I'm not aware of any material shift in the margin. It's more of a volume game at the moment. But Ewen, is that your understanding?

Ewen Stevenson -- Group Chief Financial Officer

Yeah. Look, if anything, I think it's just picked up by a few basis points, but nothing material.

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

Thanks so much.

Operator

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

Noel Quinn -- Group Chief Executive

Hi, Manus.

Manus Costello -- Autonomous LLP -- Analyst

Hi, I just wanted to follow-up actually on those questions about that hopefully, post-pandemic reopening. You gave us some data in the second quarter about credit card balance is growing, but I haven't seen it so far this quarter. I wonder if you could talk to us about what you're seeing in unsecured and you mentioned within the NIM that there was a negative mix shift, which had the NIM. At what point will that mix shift change so as unsecured consumer starts to grow presumably you'd start to see a positive benefit. Any color you can provide around that would be appreciated. Thank you.

Ewen Stevenson -- Group Chief Financial Officer

Yeah. I mean, firstly on NIM, two things were going on I think to sort of push it down 5 basis point in the quarter. Firstly, it was high-ball drifted down by a couple of basis points over the quarter. We do hope we're now at the trough of that and there is a mix shift with both a higher propensity of mortgage looking on lower spread mortgage lending and the fact that we're continuing to increase our liquidity reserves at the moment. The unsecured was probably up about $1 billion underlying in the quarter for both across Hong Kong and UK and about half and half across the two markets. What we are seeing is credit card spending come back up closer to pre-pandemic levels, but what we're not seeing yet are the balances go up in line with that. I think that will help.

Manus Costello -- Autonomous LLP -- Analyst

Yeah.

Ewen Stevenson -- Group Chief Financial Officer

It should happen over-time. But at the moment, whether it's commercial customers or personal customers and we're seeing the same thing in UK mortgages, for example, people are paying down debt when they can. And I think that's just a sign of confidence at the moment that we would expect to continue to improve as we continue to move away from the depths of COVID.

Manus Costello -- Autonomous LLP -- Analyst

Okay. Thanks very much.

Operator

Thank you. Your next question comes from the line of Yafei Tian from Citigroup. Please go ahead. Your line is open.

Yafei Tian -- Citigroup -- Analyst

Thank you. I have a question around revenue. You gave a bit color that quite a lot of the optimism is coming from the higher expected interest rate in some of your markets. Besides that interest rate shift, are there any organic growth that HSBC is gaining market share that you think that where via sell side is missing that could it drive more consensus revenue upgrades from non-interest income. Thank you.

Ewen Stevenson -- Group Chief Financial Officer

Yeah. I mean, to be clear that we're not reliant on interest rate rises to underpin the business plan that we've got the -- we are seeing with NIM stabilizing, we're probably going to see about 3% loan growth this year. We would expect mid-single digit loan growth next year. So you would expect a healthy increase in net interest income next year with or without rate rises. We're seeing very good growth in fee income as we come out of COVID. I think it's up 10% year-on-year. So the core business at the moment is seeing very good attractive growth. Interest rate rises will just come on top of that.

And in terms of where we are growing, I know we said earlier, we're taking share and trade, we are up a couple of percentage points of share over the last year, both in Hong Kong and Singapore. We're continuing to grow UK mortgage share above stock share. I think we were sort of about 1% ahead of stock share in the quarter. We're growing the private bank I think ahead of peers, particularly Credit Suisse in Asia at the moment. So most of our businesses I think are flat to gaining share.

Yafei Tian -- Citigroup -- Analyst

Thank you.

Operator

Thank you. Your next question comes from the line of Guy Stebbings from Exane BNP. Please go ahead, your line is open.

Guy Stebbings -- Exane BNP -- Analyst

Hi, yes, good morning. Thanks for taking the questions. The first one was back on cost and then one on RWA. So on costs and you briefly [Indecipherable] did it to quote a previous question, the link with the interest rate outlook, I mean how much is the new guidance intertwined with market inflation and interest rate expectations, or to put it another way policy rates don't move higher in line with market expectations, should we expect you to come in lower than that guidance? And then the second question on RWA, consensus is nearly $70 billion [Phonetic] higher by the end of next year than where we sit today. I appreciate there are some regulatory headwinds on the horizon you flagged, and you've now delivered the majority of the gross RWAs, as you've guided to, by the end of next year. But the market RWA expectations, I guess $9 billion or $7 billion next year look a little too conservative, given the starting point and what you're seeing currently in terms of lack of credit migration? Thank you.

Ewen Stevenson -- Group Chief Financial Officer

Yeah. Look on cost yeah, they are connected, but not a direct line between the inflationary pressures that we're seeing coming through the cost structure, and the fact that we expect to see earlier policy rate rises yeah. To give everyone assurance. We are actively managing our cost base, in line with what we previously thought. We're still committed to taking out $5 billion of costs over the period to the end of 2022, and we've done just over half of that so far. But on a $19 billion wage bill, if you see each percentage point is another $190 million of cost, relative to where we were at the start of the year. We're definitely seeing more inflation. The offset for that should be policy rate rises coming earlier and stronger, and if they do, that will comfortably offset the inflationary pressure we're seeing on costs. But we are not -- we are not going soft on costs, just because we think that there is a potential of rate rises, that's not how we're operating the business.

On RWAs yeah, I mean, I think we've given you pretty much all of the inputs. The model -- I guess we're more confident on the RWA growth outlook for -- lending growth outlook for next year, than I think is currently in consensus. We've got it to mid-single digit loan growth. Yeah, the other thing that -- yeah we've given you the impacts on regulatory capital, you can plug in your own numbers in terms of -- we've given you our distribution policy on dividends. So the only things that you don't have is yeah, well, the profitability is going to be next year or buybacks we're going to do, and even on inorganic, we've tried to give you a steer as to what the total quantum of financial and organic that we may do as well.

Guy Stebbings -- Exane BNP -- Analyst

Okay, thank you.

Operator

Thank you. Your next question comes from the line of Omar Keenan from Credit Suisse. Please go ahead, your line is open.

Omar Keenan -- Credit Suisse -- Analyst

Good morning. Thank you very much for taking the questions. I've got a few questions on rate sensitivity, please. I was hoping you could give some color around deposit betas in your rate sensitivity disclosure, especially for the U.K. and Hong Kong, given one of your peers we assessed, the U.K. rate sensitivity, based on a sort of more realistic assumption of what deposit betas are likely to be? And any color that you can give on the proportion of deposits contractually linked to market rates in both those markets, would be very helpful? And the second part of my question on rate sensitivity is the other currencies figure of $1.5 billion. Could you perhaps just elaborate a little bit more about what the key sensitivities in terms of different currencies are there, because it's about as big as the Hong Kong sensitivity? Thank you.

Ewen Stevenson -- Group Chief Financial Officer

Yeah. So look on rate sensitivity, I think you should assume for the first one or two interest rate rises, there will be a relatively low deposit feature on that and that we will try to capture a higher than average -- capture out of those rate rises, and I think over the longer term, typically we work on the basis of about a 40% to 50% deposit beta. But in the very, very short-term, with the first rate rise, I think it will be much lower than that.

Yeah, in terms of other currencies, Indian rupee, renminbi, various emerging market currencies, of which Mexico is important. I'm sure if you follow up with the IR team, they can give you a full breakdown of that.

Omar Keenan -- Credit Suisse -- Analyst

That's wonderful. Thanks. And could I just check the published sensitivity, is that based on 50%?

Ewen Stevenson -- Group Chief Financial Officer

Yeah, so it differs by product, by market too, but roughly, yes.

Omar Keenan -- Credit Suisse -- Analyst

Okay. Thank you very much.

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. Just to add -- most of my questions have been asked actually, but a couple of points of clarification. So thanks very much for the IFRS 17 disclosure on the insurance business. In terms of the two-thirds PBT impact that you kind of expect in 2023. I mean -- I guess that insurance profit that we would be making that adjustment to, are we talking -- is it around kind of $1.5 billion hit that we should be looking for kind of reported PBT in '23? Any clarification there would be really helpful? And then just a second on the cost to achieve, I know you are sticking with the guidance at $7 billion, but it does imply that you are going to do a lot next year. I mean could you help us understand exactly why you've not been able to spend it so far, and kind of what you are going to be doing next year with that?

Ewen Stevenson -- Group Chief Financial Officer

Okay. So on PBT impacts. Well yeah, $1.5 billion -- it obviously depends what your forecast is, but if that's two-third of the insurance profits in that year, then yes, it's probably not wildly out of line with what we think. But just -- again just to repeat, IFRS 17 yeah, there is no impact on dividend flow from the insurance companies to the Group. There is no impact on Group core Tier 1, the timing of earnings recognition has changed, so fundamental economics, we don't think has changed. The other thing that on tangible equity, just because I know a few people have been flying around with numbers today, we think there'll be about $3 billion plus or minus impact to tangible equity, as there was a shift and the [Technical Issues] then will be negative, but minimal, and it's still tied in with our commitment to get back to cross capital returns.

On CTA, I think -- we think we'll probably spend about another $1 billion or so in Q4, which leaves us about $3 billion or so to spend in '22. We did have a slower delivery this year, a big part of that was -- a lot of our change programs are being run in India, and they obviously had a pretty severe impact, as a result of the pandemic, which meant that our hiring plans, particularly technology resources that we intended to bring on board, had been slower. So there has been about a three plus month delay to some major programs of work, and it's one of the reasons why, as a result of that, we expect costs to tick up in Q4, because we've got those ramp up and investment coming into Q4.

Aman Rakkar -- Barclays -- Analyst

That's great. Thank you.

Operator

Thank you. Your next question comes from the line of Rob Noble from Deutsche Bank. Please go ahead, your line is open.

Robert Noble -- Deutsche Bank -- Analyst

Good morning all. Could you talk us through how interest rates are actually hedged in those various markets, maybe it's the U.K., Hong Kong and US. And then, so we'll actually see what sort of reasons -- do you actually need medium, short rates to go up in all of those countries, or will you benefit from higher rates in the market and some not others? And then secondly just on the U.K., where do you see your front book mortgage margins are at the moment and in comparison to where they were -- where they are on the back book, what do you think recent swaps -- the increase in swaps and they are pushing rates up in the market in the U.K. now? Thank you.

Ewen Stevenson -- Group Chief Financial Officer

So on the hedging program, Hong Kong is very short-dated, everything reprises typically in one to three months. The U.K., there is a five year rolling hedge that we have in place, consistent with most U.K peers, I think which average duration then of about 2.5 years. The U.S. is slightly longer than the five years albeit, I think that will change, once we divest ourselves out of the retail banking business, and is not as material obviously as Hong Kong and the U.K. Yeah, if you look at the structure of our assets and liabilities, they do tend to be much more short-dated than the average peer, which is a combination the impact of the short-dated nature of Hong Kong, but also in the commercial space, trade business is relatively short-dated as well.

So the second question was Robert? The second question...

Robert Noble -- Deutsche Bank -- Analyst

Sorry I was on from mortgage margins versus back book and where do you think swap spreads were [Speech Overlap].

Ewen Stevenson -- Group Chief Financial Officer

Front book margins are probably slightly below back book margins currently for the first time in quite a while. Yeah, we have seen some margin pressure coming through the U.K. mortgage franchise. We do still think at current rates that we're writing business comfortably above the cost of capital. But there has been some margin contraction.

Robert Noble -- Deutsche Bank -- Analyst

Great, thanks very much.

Operator

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

Edward Firth -- KBW -- Analyst

Yeah, morning everybody. I'm sorry to go on about this interest rate sensitivity, but I guess it is quite, quite crucial in terms of the outlook. But the thing I don't really understand is, when I look at the currencies, if I look at your year one sensitivity, your sterling sensitivity is materially higher than your Hong Kong sensitivity, and yet your sterling is a bit that's hedged, the Hong Kong isn't and yet the total balances on Hong Kong are up well, orders of bank [Indecipherable] similar, but I guess you are benefiting slightly higher in Hong Kong then they are in Sterling. I think -- is it possible to help us a little bit, on why you have this huge sensitivity in sterling and perhaps not so much in places like Hong Kong, which are short-dated?

Ewen Stevenson -- Group Chief Financial Officer

Yeah. So look, I mean firstly in Hong Kong, remember that probably around 50% of our deposit balances are in Hong Kong dollars. So yeah, there is an impact of particularly U.S. dollar book in Hong Kong I think and that interest rate sensitivity, which with the U.S. dollar is about 40% -- yeah 80% of the 50%, there is no Hong Kong dollars. So yeah, look, I need to get your detailed answer out of IR team, if you give them a call. But I assume our interest rate sensitivity analysis is correct.

Edward Firth -- KBW -- Analyst

You know, I suspect it's about the assumptions. It's just -- the thing we're struggling with in all areas, just trying to make sure that as people can put in any assumptions they like, whether it's actually going to happen, I guess is the key question?

Ewen Stevenson -- Group Chief Financial Officer

Yeah, that's fair. But I mean we do take time to show that interest rate sensitivity and it is supposed to be helpful guidance.

Edward Firth -- KBW -- Analyst

Okay. No, that's great. Thanks so much. I'll speak to [Indecipherable].

Operator

Thank you. Your next question comes from the line of Martin Leitgeib from Goldman Sachs. Please go ahead, your line is open.

Martin Leitgeb -- Goldman Sachs -- Analyst

Yes, good morning. Just a very quick follow-up on structural hedging. One of your peers has announced its intention to deploy structural hedging a little bit more, just changing I guess some of the assumption, on the stickiness of certain deposits. Is there scope just based on your comments that Hong Kong is very short-dated, 40% of Hong Kong deposits are in U.S. dollar. Would there be scope to reassess some of those deposits, and think -- have you made it similar to the U.K., that deposits have a kind of behavior maturity of ICF [Phonetic], and post that -- could this be a source for additional income going forward?

And secondly on capital. I mean, first of all, thank you for the 14% to 14.5% guidance now for FY '22, just in terms of thinking about the core Tier 1 trajectory, and the end of scope for capital return for HSBC going forward over the medium term, should we use this 14%, 14.5% as a kind of a range going forward, with the scope for capital to achieving lower -- I'm just trying to get, if there is still capital inefficiencies within the Group, impacting this 14% to 14.5% range. Thank you.

Ewen Stevenson -- Group Chief Financial Officer

Yeah. So in terms of Hong Kong and the -- yeah, I mean part of the problem, Martin, as you know, it's a very short-dated book both on the asset and liability side. So the choice that we have always made, is not to run currency risk to extend duration, that there is probably a low hundreds of millions opportunity in the next few years, through improved management of our liquidity book. We've recently hired a few months ago, the Group Treasurer out of UBS to come to run our treasury business. And so I think yeah, over the next two to three years, we probably got a few hundred million dollars of upside, in terms of how we're managing our global liquidity pool.

Martin, on capital I would use the full 14.5% and over the next few years, I think our aspiration is to run it toward lower end of that range if we can. As you think further out, there is obviously the impact of output flows and what that does, and depending on where they are applied and the impact on capital positions of subsidiaries, etc, we're going to have to pay attention to. To get below 14% yeah, I think we've got a big program of where to step up our capabilities and stress testing, I think our peak to trough fall in stress is still too high. But yes, that will be a multi-year program of work to -- in pre-stress testing and then go after the sort of higher risk stress areas of the bank, where we're not getting remunerated appropriately. But for the purposes of the foreseeable future, I assume that 14% to 14.5% is where we're managing too and if we can, we'll manage to the low end of that range.

Martin Leitgeb -- Goldman Sachs -- Analyst

Perfect, thank you. Thank you very much.

Operator

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

Joseph Dickerson -- Jefferies -- Analyst

Hi, good morning. Thanks for taking my question. Just on the cost versus benefit from rising rates, I guess you've made the point that you haven't lightened up on investment spend, can we just -- should we therefore assume that the 90% or so of the rate sensitivity of whatever we might assume falls through to the bottom line. I guess, what sort of quantum should we think about, fall through to the bottom line.

Ewen Stevenson -- Group Chief Financial Officer

Well, I think the bulk of it frankly -- I mean it depends what inflationary pressure you put on a $19 billion wage bill on a $52 billion total cost base. But yeah, it's relative to the previous guidance of flat costs, if you've got 1% to 2% inflation on that, that's $300 million to $600 million of incremental cost, which I think more than gets offset by the interest rate rises. I mean what we saw over the last year, is the bulk of that we lost. We weren't able to offset with incremental cost savings. So I think we will keep, we will keep cost control tight, even if we see the benefit of rate rises coming through.

Joseph Dickerson -- Jefferies -- Analyst

Thanks very much. Very helpful.

Noel Quinn -- Group Chief Executive

On revenues -- Ewen, just to talk to, the amount of revenue that dropped off the P&L last year as a consequence of rate reductions was...

Ewen Stevenson -- Group Chief Financial Officer

$7 billion.

Noel Quinn -- Group Chief Executive

How much?

Ewen Stevenson -- Group Chief Financial Officer

$7 billion.

Noel Quinn -- Group Chief Executive

So from that gives you a sensitivity of the -- the upside sensitivity of rates for the downside, that we experience, relative to a 1 or 2 percentage points movement in costs. It's a highly, highly, highly leveraged ratio on revenue to cost.

Joseph Dickerson -- Jefferies -- Analyst

Brilliant. Thank you.

Operator

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

Ewen Stevenson -- Group Chief Financial Officer

If I could just -- Noel?

Noel Quinn -- Group Chief Executive

Yeah listen, thank you so much for your time today. A couple of closing comments from me. First of all, I'm pleased, as I said at the beginning with the performance of the business, and I'm pleased to see good signs of growth, organic growth in fee income balanced growth, Wealth Management, so that's good. I think, more to come on that front. We remain absolutely committed to driving our cost efficiencies, as we indicated earlier this year. We acknowledge that there are some inflationary pressures through VP from good business performance and from underlying inflation. But we believe that there is offsetting revenue growth to compensate for that. And we remain committed to our return on capital target. So good progress, more still to do, we'll continue to transform the business and we will continue to grow the business.

Thank you for your time.

Ewen Stevenson -- Group Chief Financial Officer

Thanks everyone.

Operator

[Operator Closing Remarks]

Duration: 67 minutes

Call participants:

Noel Quinn -- Group Chief Executive

Ewen Stevenson -- Group Chief Financial Officer

Andrew Coombs -- Citi -- Analyst

Tom Rayner -- Numis -- Analyst

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

Manus Costello -- Autonomous LLP -- Analyst

Yafei Tian -- Citigroup -- Analyst

Guy Stebbings -- Exane BNP -- Analyst

Omar Keenan -- Credit Suisse -- Analyst

Aman Rakkar -- Barclays -- Analyst

Robert Noble -- Deutsche Bank -- Analyst

Edward Firth -- KBW -- Analyst

Martin Leitgeb -- Goldman Sachs -- Analyst

Joseph Dickerson -- Jefferies -- Analyst

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