Stuart Gulliver - Group Chief Executive Iain Mackay - Group Finance Director

David Lock - Deutsche Bank Ronit Ghose - Citigroup Alastair Ryan - Bank of America Merrill Lynch Rohith Chandra-Rajan - Barclays Chris Manners - Morgan Stanley Raul Sinha - JPMorgan Tom Rayner - Exane Manus Costello - Autonomous Stephen Andrews - Deutsche Bank Robert Noble - RBC Michael Helsby - Bank of America Martin Leitgeb - Goldman Sachs

Good morning, ladies and gentlemen, and welcome to the investor and analyst call for HSBC Holdings plc earnings release for first quarter 2017. For your information, this conference is being recorded. At this time, I will hand the call over to your host, Mr. Stuart Gulliver, Group Chief Executive. Please go ahead.

Thanks very much. Good morning from London, good afternoon to everyone in Hong Kong, and welcome to our first quarter results call. We've made good financial and strategic progress since the start of the year, and Iain is going to run you through the details shortly. Today's call will focus on the numbers, but there is the usual slides and our strategic actions in the appendix outlining some of our achievements within the quarter. And I'll give you a fuller update on strategic implementation at the half year numbers. I'll now hand over to Iain to take the rest of the call before we go into Q&A.

Good morning. HSBC performed well in the first quarter relative to a challenging Q1 of 2016. Adjusted profit and revenue both grew as our global businesses maintained the momentum from the end of last year. Reported profits were down, due largely to a change in the accounting treatment of the fair value changes and on credit spread on our debt. Last year's first quarter reported profit also included the operating results of the Brazil business that we sold in July 2016. Both of these items will feature in comparisons with 2016 reported results throughout 2017. You'll recall that the difference between reported and adjusted is that adjusted performance excludes the period-in-period effects of foreign currency translation differences and significant items. Significant items are those that management and investors would ordinarily identify and consider separately from assessing the underlying trends. Hence, we consider that the adjusted measure gives a better indication of the period-in-period performance of the business. Our 3 largest global businesses all grew adjusted profit before tax and achieved strong adjusted positive jaws in the first quarter. Global Banking and Markets had a very good quarter, with large adjusted revenue increases in major businesses. Retail Banking and Wealth Management also performed well, driven by rising interest rates, renewed customer investment appetite, the impact of market movements in our life insurance manufacturing business and strong wealth product and insurance sales across all categories. Rising interest rates and increased balances in Global Liquidity and Cash Management helped deliver improved adjusted revenue in Commercial Banking. Global Private Banking revenue is down on last year's first quarter after extensively positioning in 2016. This stabled out at the fourth quarter. We continued to grow lending in the quarter, particularly in Commercial Banking in Hong Kong and the U.K. Our adjusted costs were higher than last year's first quarter, but lower than the end of 2016, excluding the bank levy. We achieved a further $600 million of annualized cost savings in the first quarter, bringing the total annualized life-to-date savings to around $4.3 billion. We remain on track to hit the higher cost saving target that we announced at our annual results. Our common equity Tier 1 ratio strengthened to 14.3%, and we completed the $1 billion share buyback that we announced in February. We removed another $13 billion of risk-weighted assets in the first quarter and have now exceeded the risk-weighted asset reduction target that we set in 2015. All 3 of our North American businesses delivered material increases in profit before tax and we made excellent progress growing our business in Pearl River Delta and our insurance and asset management businesses in Asia. Looking quickly at some key metrics for the first quarter. The reported return on average ordinary shareholders' equity was 8%. The reported return on average tangible equity was 9.1%. On an adjusted basis, we had negative jaws of 0.6%. And we had tangible net asset value per ordinary share of $7.08. TNAV grew by $0.16 in the first quarter, driven largely by retained profits in foreign currency translation. There's more detail on this movement in the appendix. Slide 4 provides detail on the items that take us from reported to adjusted for the first quarter. Last year's reported results included fair value gains on the credit spread component of our own debt, which we referred to as FVOD. This year, these movements are reported in other comprehensive income, following the adoption of IFRS 9 rules relating to presentation of these instruments. That means that the income statements in the first quarter of 2017 includes no gains or losses relating to FVOD, whereas comparable period in 2016 included a positive fair value movement of $1.2 billion. This point of comparison will be a feature of all our reported results in 2017. This quarter's reported results also include $833 million of investment to achieve our target cost savings. You'll find more details of these adjustments in the appendix. The remainder of the presentation focuses on adjusted numbers. Slide 5 looks at first quarter profit before tax. Adjusted profit before tax of $5.9 billion was $641 million or 12% higher than the first quarter of 2016, driven by an increase in revenue and significantly lower loan impairment charges. The strong performance in Asia was driven by Retail Banking and Wealth Management. The year-on-year fall in profits in Europe was caused by a decline in profit before tax in the corporate center. The main drivers of this decline were a fall in valuation differences between the group's long-term debt and associated swaps and increase in interest expense, principally due to increased issuance of MREL and the non-recurrence of the U.K. bank levy credit booked in the first quarter of last year. Excluding corporate center, profit before tax in Europe grew year-on-year, with higher revenues and profit before tax in each of our 3 largest businesses, led by Global Banking and Markets. Slide 6 shows the positive revenue trends in our global businesses. First quarter revenue from our 3 largest global businesses was $1 billion or 9% higher than last year's first quarter. Global Private Banking also showed progress on a quarter-by-quarter basis after extensive repositioning in 2016. I'll go through each business in more detail over the next few slides. Slide 7 looks at Retail Banking and Wealth Management revenue, which grew by 15% in the first quarter compared to the same period last year. Wider spreads and balanced growth in Asia and Latin America helped increase Retail Banking revenue by $88 million, following the Fed rate rise in December. Income from investment distribution increased by $110 million, reflecting renewed investor confidence and a $52 million rise from sales of mutual funds, retail securities and wealth insurance distribution in Asia. Life insurance manufacturing revenue increased by $394 million, reflecting $138 million of favorable market impacts in Asia and Europe, compared with $168 million of adverse market movements in last year's first quarter. We grew both customer deposits and customer lending relative to both the prior quarter and the prior year, mainly in the U.K., Hong Kong, but also in Mexico. Slide 8 looks at Global Banking and Markets, which grew revenue by 10% compared with last year's first quarter. Rates and credit rebounded strongly, up by 53% and 114%, respectively. Global Liquidity and Cash Management also performed well with a 13% increase, helped by higher balances. Foreign exchange revenue fell by 10%, reflecting reduced market volatility. Global Banking and Markets continued to reduce its risk-weighted assets in the first quarter, but increased its lending, including term lending in Asia. And Slide 9 shows Commercial Banking revenue was broadly stable. Revenue growth of 7% in Global Liquidity and Cash Management more than compensated for a drop in revenue in both Global Trade and Receivables Finance and credit and lending. Growth in Global Liquidity and Cash Management came from balance sheet growth and wider spreads, mainly in Hong Kong. Global Trade and Receivables Finance revenue was down compared to last year's first quarter, but stable since the end of last year with good balance sheet growth. Loan impairment charges reduced markedly due to lower individual assessed charges and a net release of collective allowances, reflecting reduced exposures and lower loss rates relating to oil and gas sector in the U.S., Canada and the U.K. Global Private Banking revenue stabilized between the fourth and first quarters. Revenue was down $37 million or 8% compared to last year's first quarter, following the repositioning of the business, largely completed in 2016. We saw net new money inflows in the first quarter of $4.8 billion, in line with the strategy for the private bank that we set out in 2015. Corporate center revenue fell by $744 million or 69% compared to the first quarter of 2016. Balance sheet management had another good quarter, with revenue rising 18% to $845 million. Revenue fell, overall, due to minimal adverse fair value movement of $32 million related to the economic hedging of interest rate and exchange rate risks in our long-term debt compared with favorable movements of $249 million in last year's first quarter. There was also a $250 million reduction in revenue from our run-off U.S. CML portfolio and $176 million of higher interest expense in our own debt, driven largely by new issuance of MREL qualifying instruments. As we've indicated previously, we expect to complete the run-off of the U.S. CML portfolio this year and to make good progress in reducing legacy credit. Net interest margin of 1.64% fell by 9 basis points compared with the full year or 6 basis points excluding Brazil. This was driven by an increase in the cost of funds of 7 basis points, partly due to increased MREL required to meet regulatory requirements and the fall in gross yields of 1 basis point. Gross yields benefited from the impact of U.S. dollar rate rises on surplus liquidity in Asia. However, this was more than offset by the effects of base rate falls in the U.K. and from further disposals in the higher-yielding U.S. run-off portfolio. First quarter net interest margin rose by 4 basis points compared with the fourth quarter. Net interest income was broadly stable versus the fourth quarter of 2016, primarily reflecting the benefits from U.S. dollar interest rate rises in Asia and North America, contributing to higher net income on our deposit base and surplus liquidity. In addition, interest income rose as we increased lending balances, notably in Asia and Europe. These factors were partly offset by higher MREL costs and continuing disposals in the U.S. CML run-off portfolio. We also reduced our average interest earning assets during the period, primarily in low-yielding assets including cash, financial investments and reverse repos. Slide 13 looks at operating expenses. We achieved further annualized cost savings of around $600 million in the quarter, bringing the total annualized life-to-date savings to around $4.3 billion. We remain on track to hit our cost targets and planned exit rate. First quarter costs were $186 million or 3% higher than the same period last year, mainly because last year's first quarter contained a U.K. bank levy credit of just over $100 million. There were also increases due to inflation, performance-related compensation and continued investment in our regulatory and growth programs. Slide 14 looks at loan impairment charges, which were down by $564 million or 71%. In the first quarter, gross charges were $1.1 billion, a reduction of $443 million from last year's first quarter. This included a reduction in individually assessed charges in both the Commercial Banking and Global Banking and Markets businesses. Releases and recoveries increased marginally from last year's first quarter to $788 million, resulting in a net impairment charge of $236 million in the first quarter. This included a net impairment release of around $100 million related to oil and gas sector. In Mexico, there were higher charges in Retail Banking and Wealth Management, in line with our expectations as we continued to grow our market share of Retail and Consumer Banking products. The credit outlook within our portfolio remains benign. This is in no small part due to the strength of our risk management and portfolio repositioning since 2011. Turning to Slide 15. The total reduction of risk-weighted assets since the start of 2015 now stands at $280 billion. This takes us above our original group target on a currency-adjusted basis. We removed a further $13 billion of risk-weighted assets in the first quarter. $7 billion of first quarter savings came from our U.S. CML run-off portfolios, $4 billion came from Global Banking and Markets [indiscernible] credit and $2 billion came from Commercial Banking. We'll keep removing low-returning risk-weighted assets from business, and we'll maintain strong discipline in capital allocation through 2017 and beyond. Turning to capital. The group's common equity Tier 1 ratio was 14.3% on 31st March, compared with 13.6% at the end of 2016. Our common equity Tier 1 capital increased by $5.8 billion, of which $2.5 billion came from profits net of dividends and scrip, $1.5 billion came from regulatory netting and $1.6 billion came from favorable foreign currency translation differences. The common equity Tier 1 ratio includes the full impact of the $1 billion share buyback that we completed in April. During the first quarter, HSBC received updated guidance on MREL requirements from the Bank of England to be issued by 2019 and 2022. This is set out on Slide 17. The final requirements may change due to a number of factors; although, based on our understanding of the indicative guidance, HSBC currently meets its 2019 MREL requirement. Slide 18 shows our group return metrics. The return on average ordinary shareholders' equity was 8% and the return on tangible shareholders' equity was 9.1%. Both of these are slightly down compared to the prior year, primarily reflecting the adverse movement in significant items. Excluding significant items in the bank levy, return on equity would stand at 10% and return on tangible equity at 11.3%. To conclude, we have had an encouraging start to the year. Our global businesses are performing well and our medium-term prospects remain good. Our growing Asia business is generating higher profits and revenue, assisted by the strength of our network. We continue to do what we said we'd do: we've exceeded our RWA reduction target and continued to impose strict capital discipline. We're also well on track to deliver our higher cost savings target. We're committed to our regulatory and compliance programs and to completing global standards to meet our requirements under the terms of our deferred prosecution agreement. We also continue to invest to grow the business. We're focused on delivering adjusted jaws in 2017. HSBC remains a well-funded business with strong capital generation and a diversified balance sheet. We'll now take questions. The operator will explain the procedure and introduce the first question. Operator?

[Operator Instructions] We will now take our first question today from the line of Mr. David Lock of Deutsche Bank. Your line is open.

Two questions, please. First one, on capital. I just wondered if you had or could share any updates on how you expect buybacks to roll out this year given, obviously your core Tier 1 ratio is well above where you were targeting. Have there been any updates on the U.S. process there and if you had a core Tier 1 for the U.S. business for this quarter? And then secondly, just on rate rises from the U.S., I just wondered if you could disclose or share how much of the kind of U.S. rate rise from the back end of last year is already kind of in first quarter numbers. So should we expect a further improvement in future quarters from the more recent rate rise?

If I take your second question first. The impact of the fed rate increase in December is most certainly reflected within the numbers, and I think I commented specifically on how that was reflected in Asia and North America. And I think we would certainly, based on that improvement, we would expect to see the rate increase at the end of March come through in our numbers as the year progresses as well. Clearly, deposit betas are different market by market, but we have seen benefit coming through in the first quarter from the December rate increase. On capital and, more specifically, your buyback point, David, no change to the guidance from the midyear and the end of last year. We completed $2.5 billion in the second half of last year. On the 12th of April, we completed $1 billion. Our priority for capital is to invest in the growth of the business. Clearly, the focus is to generate profits that support the dividend and we've given clear guidance on what we expect the dividend to be in 2017, and we'll consider buybacks from time to time. We're going to take a pause now. We've completed $1 billion at the first quarter. And as we get through the first half of the year, we'll reflect on that, obviously reflecting on capital and where we are from a regulatory perspective with the PRA.

And did you have a core Tier 1 ratio for the U.S. entity?

I'm sorry, say again?

Do you have a core Tier 1 ratio for the U.S. entity?

Yes. Those details will be published at 10:00 a.m. today, okay? We do, but I don't have this top of my head. But what I can tell you is in the first quarter - sorry, at the beginning of April, we received the first dividend from our U.S. businesses in 10 years.

Okay. And the quantum of that will be disclosed at 10:00 a.m.?

Yes.

Our next question comes from the line of Ronit Ghose of Citigroup. Your line is open.

I just wanted to drill a little bit into these results. And overall, obviously they're very - I'm sure they're very pleasing for you, and they're good numbers. If I look at the loan growth in Asia, and Hong Kong in particular, sort of the 3% to 4% loan growth you saw Q-on-Q sequentially, could you just give us some more color around that? How many sort of one-offs do you think that are in there? How sustainable is this? Is this sort of any kind of Chinese credit, mainland credit tightening spilling over into Hong Kong, pushing Hong Kong growth? Any kind of forward-looking color would be great. And specifically, on margins, I've seen all the disclosure on NII sequentially quarter-on-quarter. Perhaps you can break out for us, the margin quarter-on-quarter went up. If I look at the underlying trends, how much of the quarter-on-quarter - I mean, how much positive was there from U.S. rate rises offset by other factors like asset spread reduction and higher funding costs? And finally, the third question is TLAC MREL. Previously, you've guided, I think, $500 million impact on NII. In today's release, you're saying it probably won't be as big. I just wondered if there's anything further you can comment on that.

Yes, so I'll take those in reverse order. So on MREL, what the guidance, and we've got this on the charts for you. I think what the guidance we think tells us, but we have obvious, glaringly obviously caveats there because this is the PRA providing guidance. This is not guidance from our other regulators around the world, but this is clearly very helpful. It's actually the Bank of England, I should say, that's providing the guidance. We believe, based on this guidance, that this would tend us towards the lower end of the $60 billion to $80 billion range that we talked about in terms of MREL, and that achieving the lower end of that range is probably over a longer period of time, like to the end of 2021. So I think, in that regard, it would certainly indicate a lower interest expense associated with lower issuance of MREL over that period of time. With respect to net interest margin, what we've clearly seen coming through our businesses is a continued pressure on spreads from an asset perspective, but some expansion coming through the liability spreads, and that's largely formed where we see dollar and dollar-linked currencies. So we've seen that in the U.S., we've seen that in Hong Kong to a certain degree as well. In terms of the 4% improvement from the fourth quarter of last year, it's largely - 4 basis points, sorry, not 4%, gosh, that would be lovely. 4 basis points improvement from the end of last year. Sorry, I've been up since three o'clock, I apologize - is very much driven by spread expansion within the businesses, so encouraging. On loan growth, Asia, I mean Hong Kong Commercial Banking has seen balanced growth in global trade receivables financing. And the last couple of years have been a tough place to be in terms of declining activity within global trade and receivable financing. Noel and the teams in Asia saw stabilization within that numbers, good balanced growth, a little bit of spread compression on those balances. But overall, an encouraging picture in that regard. We also saw balanced growth in United Kingdom coming through Commercial Banking, Global Banking and Markets, Retail Bank Wealth Management. And again, reverting back to Asia, we've seen Global Banking and Markets grow balances as well. So I think, to put this a little bit in context, I certainly wouldn't want to talk this down, but you will recall the first quarter of last year was a tough one, but we've taken some of the balance growth that we saw coming through in the fourth quarter, which was good momentum, and carried that into the first quarter. So it's certainly encouraging, not only in terms of what we see coming through the income statement, but what the balances that we see coming through in some of our key markets in the first quarter as well. We continue focus on repositioning and rebuilding our Mexican business, good progress on that regard in the first quarter. And again, I think our Canadian business continues to progress well. So overall, an encouraging picture from balanced growth.

Great. It's really helpful. Can I just pick up on the loan growth point? So pretty strong CMB, I get that. On RBWM, particularly if I take out FX adjustments, it looks like it was - compared to what you're seeing elsewhere in your franchise, the RBWM underlying numbers didn't look that strong. Am I being too nitpicky? Or is there anything else going on there? Have you taken your foot off the mortgage pedal maybe a little bit?

FX adjusted balance growth is about 1%. So it's growth, but it's at 1%. So we've grown market share in the U.K. We've got risk appetite for that, but we are very focused on high-quality product in that area, but 1% is the growth that we saw coming through in Retail Bank Wealth Management in the first quarter.

And remember, this always takes more time to actually drive RBWM asset book to grow because the individual loans are obviously much smaller than either Commercial Banking and Global Banking market.

Yes.

Our next question today comes from the line of Alastair Ryan. Your line is open.

Margin and capital again, please. Is it too much to ask for whether you've turned the corner? Clearly, that's been - it's been a long time coming down. A lot of things you're doing should make it start going up again. Is that something you'd guide us to yet or it's too early to tell? And secondly, 70 basis points, that's $6 billion of free cash flow in the quarter, which is a great number. Is there any reason that you would be changing your target range for capital or your expected range for capital, which you're now well above, to the point on we shouldn't become buyback junkies. But it certainly looks like there's probably more capital generation than you can reasonably expect to put to work even though you're growing the book again.

Yes. Thanks, Alastair. On net interest margin, I think I'd go back to my earlier comment. In terms of liability spreads, what we've seen coming through Fed rate adjustment has been encouraging, both in the U.S. and other dollar-linked currencies, most notably in Hong Kong. On the asset side, there's still a lot of liquidity chasing deals out there. We still see pricing pressure on asset spreads. I would be inclined to kind of keep a pretty consistent view, broadly in line with guidance that we provided at the end of the year in this regard. Encouraging signs, but I think we're going to stick with the guidance that we've provided at the end of the year, but hopeful. And, clearly, Alastair, if the Fed were to become even more helpful than they've already been and get another rate increase or 2 out there this year, I think that clearly would be further signs of encouragement from our perspective. On the capital front, no intention to change the target range of 12 to 13. But as we said previously, a clear preference to operate at the top end of that range in the medium term. We also said earlier that, in the medium term, we're going to operate above the top end of that range. I don't want to go down the regulatory sort of rabbit hole on this one, but there are, obviously, a number of factors that are out there that we still need to work through. Basel IV revisions will come upon us at some point. Hopefully, they'll have no impact, but it's an unknown at this point in time. IFRS 9, in which we'll provide more guidance at the half year, we would expect to have some impact, although probably not major. And again, I think we're sort of living in an interesting period, let's call it that. So having completed $3.5 billion of buybacks in the last 6 months, a good profit generation in the first quarter building the capital ratio, the guidance around how we deploy that capital remains consistent. It's about growing our business. You make a good point around our capacity to deploy all of that. It's very much about generating profits that supports the dividends. And we'll think about buybacks periodically, but we won't be revisiting this, at the very earliest, until the first half.

Our next question today comes from the line of Rohith Chandra-Rajan of Barclays. Your line is open. Rohith Chandra-Rajan: A couple for me, please, if I could. One, sorry, returning to net interest income, but perhaps on the average interest earning assets, just to comment on the slide that there was some reduction as you took out some low-yielding assets. Just wondering if you could clarify whether that's fully worked through in the Q1 number or whether that will be an ongoing headwind into Q2. And then, secondly, on noninterest income, which is clearly a very strong performance, I guess, supported by wealth and insurance in RBWM and a trading performance in GB&M. I guess a couple of things caught my eye there. Number one, obviously, was that the market impact on insurance, we probably assume wouldn't repeat at $138 million; and then BSM also had a good quarter. So I was just wondering if you could talk about the sustainability or underlying trends in noninterest income.

Yes. We'll talk about your average interest earning assets point. I think that's probably a discrete effect within the first quarter. We're always going to see movement across different classes of assets and liabilities within the balance sheet as our customers reposition. So I wouldn't necessarily say that's something that we're going to see recur every quarter, but it probably take this a bit fairly discrete. From a noninterest income perspective, sorry, repeat your question a second? Rohith Chandra-Rajan: It was really about the sustainability of noninterest income. So it was obviously a strong performance from GBM, and I guess, the wealth and insurance bits of RBWM and sort of - and I guess a couple of things stood out. One was the markets impact on the insurance business and also strong BSM. So just wondering if you could talk about underlying trends and sustainability in noninterest income.

Yes. Thanks for repeating that. Got it. Look, so BSM, very strong quarter, within that $845 million, we had about $100 million of AFS gains, and there is absolutely variability in that quarter-on-quarter, so I would not annualize that first quarter number in BSM. Our guidance around BSM remains absolutely consistent in terms of that $2.5 billion to $3 billion per annum. In terms of the variability within the present value in-force accounting within the insurance manufacturing business, you track back as many quarters as I can count, and you see variability from market movement. And the first quarter of last year was a pretty miserable sort of environment to operate. We saw negative adjustments coming through. In the first quarter, we've seen positive adjustments, and that's obviously contributed a swing of more than $300 million in the quarter. If you take that effect out of the Retail Bank Wealth Management revenue growth, the adjusted revenues grew 8%. So about -- of the 15% growth, about 7% came from those market movements within insurance manufacturing, about 8% coming from current accounts, deposit accounts, retail brokerage, wealth management product sales. So that's a good performance coming through the Retail Bank Wealth Management. Much of that orientated in Hong Kong, but also coming through the U.K. business.

And on GBM, so you know the nature of the Global Banking and Markets business, but what I would point you to is we broke out somewhere in one of the appendices, the quarterly revenues at Global Banking and Markets, and you will see that they are not that volatile. So actually, GBM had a great first quarter. It was our strongest since the first quarter of 2014. And in terms of concern, is it repeatable? Clearly, it's not an annuity business in its entirety, but it contains a number of annuity revenue streams in terms of trade finance, in terms of security services, GLCM, et cetera. So if you look at the revenue numbers of GBM overall, you'll find quarter-on-quarter, it's quite consistent and that it hasn't got the variability of many of our competitors. So it was a great first quarter. No, you can't multiply it by 4, but I'm not sitting here concerned that will all evaporate again at all.

Our next question today comes from the line of Chris Manners from Morgan Stanley. Your line is open.

Yes. So two questions, if I may. The first one was, as I remember the last quarter, you put up a slide highlighting some of the headwinds that you were expecting to revenue growth, the 2 billion from FX if we use January exchange rates, for example, also the U.K. curve. Could you maybe update us a little bit there? I suppose that we actually have some of your, obviously, cables moved with the stronger pound, some of the emerging market currencies moved. Could you maybe update us on those headwinds? Because it seems they would have abated a little bit, and I noticed you didn't put the slide -- those comments again. And the second one was on the impairments. Obviously, 11 basis points is fantastic to see. And obviously you had write-backs in US and Europe. But when we look at your slide, you say you have gross impairments of 49 basis points. That sounds relatively high. Where should we be expecting that to trend over time? And what would you see as a sort a normalized write-back rate as it were? Thanks.

So what we have done this quarter and we'll decide later whether we'll repeat this, is that we've broken out the gross and net for you in terms of loan impairment charges, recoveries and releases to provide a little bit more detail around that. But if you were to take the consistent reporting, it's 11 basis points that you look at. I would not only not encourage it, discourage anybody from multiplying that out by 4 and assuming that's the rate for the year, as I'm sure none of you would dream of doing. I think you always have to look at the longer-term performance. And if you track back, whether it's 8 or 12 quarters to give you a better sense of how to predict the future, because it's impossible to really tell. But good loan impairment charge experienced in the first quarter. Clearly, we saw recoveries coming through from higher provisions that we made in the fourth quarter of '15, first quarter of '16 in the oil and gas and metals and mining sector. And we saw a sort of a net recovery of about $100 million coming through oil and gas sector, principally UK, Canada and the United States, which clearly aids the numbers in this respect. But overall, loan impairment charges coming through the Commercial Banking, Global Banking and Markets were lower in the first quarter. There are really no clear indicators out there of credit quality deterioration across our portfolios. In Retail Bank Wealth Management, we saw slightly higher provisions. Part of that is informed by Mexico where we continued to rebuild the business and grow our share of Retail Banking and consumer finance products as well as in the UK where we had a small methodology adjustment for credit cards coming through. Not an indicator -- not indicated by higher delinquency, but just a methodology adjustment within the UK business, but it was a very small number. That's really the story on loan impairment charges. In terms of revenue guidance, Chris, I would keep with what we talked to you about the -- at the end of the year. I mean, clearly, there's been a little bit of a change in cable rate, but I think the thing to think about is the $2 billion correction that we put around thinking about overall position on FX adjusted basis for revenues. The bank rate in the U.K. is still feeding through. We'll see that for another few months. I think the other thing to factor, which we are guiding on today, is an expectation based on the guidance from the Bank of England that we'll have lower MREL issuance over the coming years, and that would translate through to an expected lower interest expense in that regard.

Our next question today comes from the line of Raul Sinha from JPMorgan. Your line is open.

If I can have a couple please as well. Just to go back on the loan growth, if I may. Some of the rates of growth are very, very strong in Asia. And one of the things that stands out as a highlight, clearly, is Pearl River Delta, which you did promise us it's going to grow very well, but the mortgage book there looks like it's up 54%, and commercial bank is up -- obviously up 20%. So could you maybe talk us through as to what is driving these very strong rates of growth? Is this just kind of you stepping up distribution and taking market share? Or is there really kind of underlying growth? And just if you could touch upon the credit quality element of that as well, that will be really helpful.

So as you can imagine, clearly early days from a credit quality perspective. We're building a book from very low balances within the Pearl River Delta. You're absolutely right, we've got good growth coming through, that's about having feet on the ground and distribution capability, late '15 and '16 was very much about investment in that capability, and that's what Helen Wong and the team in the Greater China area are now driving. So very encouraged by what we see, but too early to really talk about how that performs with credit quality, but I can say that the underwriting standards that are being applied in Pearl River Delta are entirely consistent with what we see in Hong Kong and the Greater China area. So I think we're pretty confident about the quality of what we see going on there. Global Banking and Markets grew nicely in terms of Asian balances, and Commercial Banking as well. So look, the focus -- we've talked about this two years ago, about taking capital through RWA reductions and being able to redeploy that back into our markets that demonstrate a great propensity for profitable growth. And our Hong Kong, Mainland Chinese and Asian markets are those where we're going to try and deploy more capital. It absolutely does not exclude our focus on rebuilding the Mexican business and growing UK, European and Americas businesses, but the strength that you've seen in Asia is built on momentum that we established in the fourth quarter of last year and which has been encouraging in the first quarter.

Just if I can get an update on BoCom and the value. I think last time you discussed, the headroom was quite limited, and I was wondering if you might have written up after BoCom's results, the VIU?

The headroom is about $200 million right now, so it's a little bit less than it was at the end of the year. The guidance in BoCom is absolutely consistent, Raul. I mean, the accounting in this one, as you know, is interesting. If you want a refresher on that, go back to the annual reports and accounts where we've got a better part of a page and a half of disclosure around the assumptions in the model, the sensitivity in the model, two changes in those assumptions. We've been talking about the risk of VIU and carrying value conversion and crossing over for the last two or three years. But guidance is consistent on that, and happy to refresh on the detail of it once you got a chance to reflect back on the annual report and account guidance.

Okay. I just wanted to check if the VIU went up. It sounds like it has gone up if the headroom's -- because you have obviously recognized.

Obviously, carrying value goes up each quarter because we recognize our share of profits under the equity method accounting and VIU. So the gap is -- the VIU, in total, is $16.5 billion, and the carrying value is $16.3 billion.

The next question today comes from the line of Tom Rayner from Exane. Your line is open.

Iain, just on the margin guidance, I'm just trying to get a sense why you're being so cautious now. I mean you've got 1.64% sort up in the bank, so to speak, in Q1. So you'd have to see the margin down at sort of 1.52%, I think, for the rest of the year to not beat your guidance. I'm just wondering, is there anything else such as maybe a sort of passing through of the rate rise to your savers more than we've seen so far? Is there anything specific that's making you repeat the sort of existing guidance or are you just being cautious? And I have a second question, please.

I think, at the moment, there is a little bit of a disconnect, as you've probably observed, between Hibor and LIBOR rates, and that's a little bit in terms of RMB balances still flowing into Hong Kong dollar balances, which is keeping Hibor at a lower level. And the deposit betas, as you know, in the US, we compete very actively for deposits so that the beta there is a little bit higher than we presently see in Hong Kong. I think, taking the facetiousness out of it, Tom, it's just early days. We're certainly encouraged by what we see, and we'll provide more guidance about this when we come to you at the half year, hopefully.

Okay. I got you. And just, I know you said you're going to update us on IFRS 9 at the half year. Is there anything you can say broadly about sort of the issues about not only the day one impact on capital, but how you view the flow cyclicality of the accounting standard? How that might affect your reporting? How regulators might think about the impact of IFRS 9 in terms of adjusting the capital ratios, the RWA calculation, whether the stress tests might have a sort of perverse impact? Is there anything more broadly you can say at this stage about the standard?

What I would like to say broadly about the standard, it is a monumental pain in the [indiscernible]. And yes, I think it absolutely presents challenges, not so much the adoption. Adoption I think is the complexity that we add to the standard, building models, multiple economic forward-looking scenarios, transitions from stage one to stage two. I mean you know all of this stuff well. It's not so much the transition, which I think presents challenges. It is working through the credit cycle and the volatility and the pro-cyclicality that may present as you see significant credit deterioration, how that affects portfolios and how you move from 12-month loss experience to a lifetime loss experience. So I think one of the really important things about IFRS 9 implementation is about getting the disclosures right. When we see movement from stage one to stage two, what's driving it, getting to a clear understanding of what that really means about the credit quality within the portfolios? If you look at what the teams have done over the last six years in terms of repositioning credit portfolios, strong credit risk management across the businesses, you see that reflected in our loan impairment charges, the overall credit quality of the book. Now how do you take that, an implementation of IFRS 9, and then envisage, for example, a repetition of the deterioration that we saw in the oil and gas sector in 2015, and then how do you write that up in terms of what that means for the fundamental credit quality in the portfolio? So we're absolutely adding complexity through this standard. And you chaps know this much better than I do, but adding complexity doesn't engender a greater understanding of financial statements and performance in a business. So I think the most important thing about the standard from an implementation perspective is the quality of the disclosures and the insights that we provide to the users of our financial statements as we implement it. The implementation is very much on track. As you know, there's a ton of work to be done by the industry in this regard, but life is going to be a little bit more complicated for users of financial statements.

And just to echo that point, just on a specific thing, the stress test, and again Iain’s point is right on the mark, which is the disclosure will have to be much greater because the impact will be to tend to make the effective stress test deeper and sooner. So they bring it forward in time and make them deeper. And therefore, the year-on-year comparisons will need to be completely unpacked to stop, if you like, false conclusions being drawn. So it's really going to be about how much disclosure can be put out there to make sure that the reaction of the market is well informed.

Yes. And I think, building on Stuart's comment there, I think one of the things that is helpful in terms of what the PRA is doing around their IFRS 9 stress testing module coming a little bit later than the annual cyclical stress and the biannual exploratory stress is that it hopefully helps separate out and isolate some of the IFRS 9 components and then provides information to regulators about what the potential impact on capital is. There is an interesting challenge here more widely, with respect to regulatory -- the Prudential regulatory regime for capital and IFRS 9. The opportunity to maintain consistency within the regulatory capital regime is absolutely clear. Today, you take the difference between expected loss and your allowance for loan losses, and if expected loss is greater than ALLL, you deduct that from your capital ratios. If you wanted to neutralize the impact of IFRS 9, and in actual fact, demonstrate confidence in the regulatory capital regime, if ALLL were to exceed EL, then you would add it back. And that, at least through some transition period, until the market regulators and preparers of financial statements become adept at understanding how to appropriately reflect, report and inform movements in credit quality through IFRS 9, that's certainly something that we would advocate. But I do think the approach that the PRA is taking to the IFRS 9 module for stress testing will be helpful in terms of informing, from a capital perspective, what it may do in significant periods of credit stress.

Thank you. Our next question today comes from the line of Manus Costello from Autonomous. Your line is open.

I had a couple of questions as well, please. I wanted to ask, first of all, about the impact of rates away from the Fed, in particular in Hong Kong. I wonder if you could talk about how important it is to you that Hibor starts to go up and how meaningful it would be if Hibor is drifted down during the course of the quarter? How significant is that in terms of your NII assumptions? And do you need the best rate in Hong Kong to move up to really start to capture some of the full benefits of higher rates? And my second question is just a simple one on revenue guidance. You quoted, Iain, on the newswires this morning as talking about looking for 3% to 4% revenue growth during this year. Can you just clarify off what base that comes from, and what the key drivers are that are going into that assumption? Thank you.

Yes. Thanks, Manus. So the guidance this morning was based off of how we based you at the end of the year, okay? So if you think about some of the guidance we gave around the end of the year, and Chris brought this up earlier, particularly around the FX impact there of approximately $2 billion, and then rebasing the 3% to 4% off that point was what I was referring to. So apologies for lack of clarity in that front earlier this morning. I think in terms of rates, I mean, clearly, there is a little bit of dislocation between Hibor and dollar LIBOR in Hong Kong right now, getting better linkage between those two would clearly be beneficial. I'm just reflecting on this earlier in the week with our team, part of what seems to be driving that is that we do see flow from renminbi deposits and Hong Kong dollar deposits and that's keeping Hibor at a lower rate. So getting better linkage around that would certainly be -- would bring more benefits. We have seen benefits coming through that deposits spreads in Hong Kong on dollar deposits in the first quarter. A better linkage Hibor/LIBOR would absolutely help that further.

But if Hibor is lower in Q2 than it was in Q1, might you actually see some NIM pressure in Hong Kong?

I don't see much as NIM pressure. It's just less pickup, I think, is what we would anticipate.

Our next question today comes from the line of Stephen Andrews from Deutsche Bank. Your line is open.

Just a question on capital again. Just curious as to why you're not feeling more comfortable in terms of extending the buyback programs now. Is there something specifically you're looking for, given how much headroom you've got on capital? And then, secondly, related to that. Just on the North American business, that's obviously where a lot of your RWA reduction in the quarter has come from. I mean it's about $10 billion, and that shows up in the US bank accounts as well. I mean, if I just filter that through, I know we don't have the North American holdco numbers yet, but it looks like that could have ended Q1 with a sort of 19%, 20% core equity Tier 1, just aggregating out the numbers, which means you probably got about $7 billion to $8 billion of excess capital now, which is most of the group's excess capital. How should we think about that moving upstream? I know you said you're taking your dividend out, which you sort of flagged you'd hope you'd do last year. But has there been a shift, at all, I would say, over the last 3 or 4 months in terms of how quickly or slowly you might be able to get that capital out of the US? Or is it still pretty much as you thought?

Really, no change, Stephen. We had never an expectation that we would get a dividend before the first half of 2017. We filed the 2000 CCAR around about this time last year. We've got no objections to capital plan from the Federal Reserve, which was extremely helpful. And we upstreamed dividends from the US subsidiaries into the parent company group in early April of this year. So that was the first dividend from the US subsidiaries to the parent company group since 2000 -- sorry, since 2006. So we're encouraged by that. Your calculation, broadly speaking, is accurate in terms of the amount of surplus capital that sits in the US, and that is, by a long stretch, the single largest pocket of surplus capital within subsidiaries within the group. And in terms of upstreaming, we would still expect to take this. Because of the quantum, because of the CCAR cycle, it is an annual cycle, and the capital plans that have to be reviewed as a part of that, we would still expect this to take three years plus.

Can I just have one follow-up question? Does the DPA, at all, impact on the ability to get capital out of the US? Or is it kind of unrelated?

Look, the DPA -- the decisions around the DPA are made by the Department of Justice. I think we would probably be a little bit naive that when our regulators in the US reflect on capital strengths that they don't reflect on everything that impacts our business in terms of both financial performance and regulatory compliance. So we can't read the minds of the Federal Reserve, but I think it will be unusual that the DPA's existence does not bear some weight in their thinking as they reflect on the capital position of the group in the United States.

Our next question today comes from the line of Robert Noble from RBC. Your line is open.

I was just wondering if you could expand a little bit further on the deposit betas that you're seeing split by retail and corporate and geography, and how you expect those to change over time if rates follow the forward curve as we expect. Thank you.

Yes. Deposit beta, I mean, geographically, if we pick out the US, we compete actively for deposits in the United States, and the beta is, broadly speaking, higher in the United States than it is in other markets. It's relatively low in Hong Kong at this stage, and you would imagine that's the case. You look at the A/D ratio in Hong Kong markets, it's about 50% -- a little bit under 50%. That will evolve over time in terms of pay away to customers. As interest rates build, we would expect to pay proportionately a little bit more of that away to our customers. When you then think of the contrast between retail and commercial, the betas in commercial are higher. We tend to pay away more to the commercial customer. And again, that's competition in different markets and also a recognition that some of the commercial deposits tend to be behavioralized to a shorter duration than is the case within the retail portfolio. So that's broad guidance, but it's pretty dynamic in terms of how we set deposit pricing by our various businesses in the various markets. It's very much driven by market, market-by-market local dynamics.

Our next question comes from the line of Michael Helsby from Bank of America. Your line is open.

I've just got a clarification and then a couple of -- sorry, a few questions on the UK. Just on the clarification, Iain. On the revenue base that you're referring to, sorry, I get the FX point, so does the base include the TLAC and the CML and the rate adjustments that you were referring to at Q4? Or am I just simply deducting the $2 billion FX?

It's the FX.

It's just the FX? Okay. Thank you. And on the UK, could you tell me what your gross market share was in the mortgage market in the first quarter? And what the mortgage...

Just over 7%.

Just over 7%? And what actual net mortgage growth you got? And what the percentage of your FCR now is in the UK?

What percentage of what is in the UK?

The FCR piece. I think you've got quite a low percentage if you book on FCR, but if you could -- if you've got that number, that would be great.

So $1.5 billion, 27% I think.

Right, okay. And clearly, there's been a lot in the press about the unsecured markets in the UK. And obviously, the Bank of England, they're looking at it. Can you just update us on what your -- how you're approaching unsecured at the moment, whether you've backed off in that area?

No, we'd like to go in unsecured. A conversation with John Flint earlier this week, cautiously with a focus on the segments that we're entering into. So clearly, in terms of diversification within the Retail Bank Wealth Management business globally, we've got very strong well-underwritten mortgage portfolios. We tend to be underweight in unsecured, and that would be the case in really all of our key markets with possible exception of Hong Kong. So John and the team do have a focus in growing our share of unsecured. But given some of the comments that you made there, Michael, there is caution around how we do that in terms of quality of underwriting and understanding the customers we're onboarding.

And then just finally on the UK, I think, just from where I'm sat, the Brexit negotiations probably couldn't have got off to a worse start if they tried. And it does look like the chances of a very hard Brexit look like they're increasing. So with that regard, I was wondering if you could update us on how you're planning for this. What the potential disruption could be? And what you can actually do to mitigate it? I'm just conscious that you're having to submit plans into the Bank of England. So anything that you can help us to understand that, that will be great.

No change on that front. You know what you've heard Stuart say and Douglas say in terms of possibly having to transfer up to 1,000 employees to our French universal banking platform based in Paris, and that's based on a very detailed product-by-product, client-by-client, revenue line by revenue line analysis performed earlier this year. So that guidance will not change. And it is up to 1,000, and that will be informed really by how the shape of a Brexit negotiation takes place and what that means for financial services and supporting customers. So the focus, clearly, from our standpoint is to be in a position to support customers across our different global businesses seamlessly as we work through Brexit. And that may mean that we have to transfer up to 1,000 of our staff to upscale the capabilities within our French platform at this point. But that is based -- that analysis was based on a hard Brexit outcome. And therefore, I don't think we're going to be updating guidance on that certainly based on what we know at this point in time.

We'll take our last question today from the line of Martin Leitgeb from Goldman Sachs.

One question really just from my end. And over a couple of the last quarters, you keep surprising positively on capital progression. And so I just wonder how should we think about capital progression going forward. And I think there is a couple of elements to the question. Obviously, the first one is, in this quarter, you had a good progress on increased netting. Is there more scope to do so? And equally, you mentioned in the presentation that you have achieved your RWA reduction target now, pretty much, and that there was a further scope for further cap going forward. How should we think of that? Should we think of that progressively becoming smaller in terms of number? Or would you expect the current base to be roughly maintained going forward? Thank you.

Yes. Thanks, Martin. I think as we commented previously, from a netting perspective, then we probably achieved a pretty optimal perspective. We always look at opportunities to improve platform management. But I think we've largely emptied that bucket at this point. From an RWA reduction perspective, notwithstanding the fact that we've achieved the target, we still have work and opportunity to do it. This was never about reducing the balance sheet of HSBC, but it was very much more about capital discipline and deploying that capital into lines of business and with customers that deliver returns for shareholders. And that recycling of capital, whether it'd be in Global Banking and Markets, Commercial Bank and Retail Bank, will continue. And it is about maintaining that capital discipline well beyond 2017 and beyond achieving the target that we have already achieved. So look, on the netting front, good progress, but that game's probably largely completed, but on a wider opportunity for continuing to improve capital efficiency, the allocation of that capital into a profitable business is where the focus will continue.

Okay. Thanks very much. And that concludes this morning's call. So thank you for your time.

Thank you. Ladies and gentlemen, that concludes the call for the HSBC Holdings PLC earnings release for first quarter 2017. You may now disconnect.