John Flint - Chief Executive Officer Iain Mackay - Chief Financial Officer

Ronit Ghose - Citi Chris Manners - Barclays Joseph Dickerson - Jefferies Raul Sinha - JPMorgan Manus Costello - Autonomous Guy Stebbings - Exane David Lock - Deutsche Bank Claire Kane - Crédit Suisse

Thank you. Good morning from London, good afternoon to everybody in Hong Kong, and welcome to our 2018 interim results call. I'm here today with Iain MacKay, and I will pass over to him shortly. Let me start, though, by recapping our strategy and covering the main points of our results. In June, we set out 8 strategic priorities that will enable us to grow our profits on a consistent basis and create value for shareholders. In particular, we aim to deliver a return on tangible equity of more than 11% by the end of 2020. To do this, we intend to deliver growth from areas of strength, to turn around low-performing businesses, to invest in revenue growth and the future of the business, and to simplify the organization and invest in future skills. Central to this is our ability to use the revenue capacity of the group to invest in growth and competitiveness within the constraints of full year positive jaws. For the first half of the year, reported profit before tax was up 5% compared with the same period last year. And adjusted PBT was down by 2% due to increased investments in the business. For the second quarter, reported profit before tax was up 13%, and adjusted profits were broadly in line with last year's second quarter. This performance was in line with our expectations. Our global business delivered an increase in adjusted revenue of 7% in the second quarter. This was offset by the Corporate Centre, which was down against a strong second quarter of 2017. In line with the guidance we issued in May, our second quarter adjusted cost rose by 7% and was stable compared with the first quarter. We grew lending by a further 3% compared with the first quarter and 5% from the start of the year. Our common equity Tier 1 ratio remained strong at 14.2%. This includes the impact of foreign currency movements and the full amount of the $2 billion share buyback that we announced in May. Iain will talk you through the numbers.

Thanks, John. Looking quickly at some key metrics for the first half. The return on average ordinary shareholders' equity was 8.7%. The return on average tangible equity is 9.7%, with a lower tangible net asset value per ordinary share of $7, driven by foreign exchange movements and with a negative jaws of 5.6% due to increased investments in the business. We remain committed to achieving positive jaws for the full year. Slide 4 provides detailed analysis that will take us from reported to adjusted. You'll note that there are no costs to achieve this year. The only main difference in the first half was the legal settlements and provisions. In July, we reached an agreement in principle with the U.S. Department of Justice to resolve its full year investigation to HSBC's historical origination and securitization of residential mortgage-backed securities. This amount was substantially covered by the provision we made in the first quarter, as covered in Page 102 of the interim report. You'll find more details on the Appendix. The remainder of the presentation focuses on adjusted numbers. Slide 5 break downs adjusted profit for the year for the first half by global business and geography. Profits in our 4 global businesses rose by $851 million. By contrast, Corporate Centre PBT fell by $1.1 billion due to lower revenue. In Asia, excellent performances from Retail Banking and Wealth Management and Commercial Banking contributed to a strong PBT performance. Europe bore much of the impact with the fall on the Corporate Centre and was also affected by a drop in revenue in global markets. The drop in Corporate Centre revenue comprised $241 million of valuation differences on long-term debt and associated swaps, which would broadly reverse if held to maturity; a $242 million fall in Balance Sheet Management revenue; a $169 million movement in losses on disposal of legacy assets; and a $114 million of additional interest expense, primarily due to MREL issuance. Slide 6 looks at profit before tax for the second quarter, which was broadly stable compared with the same period last year. PBT was up in all four global businesses and up significantly in Asia, North America and Latin America. The drivers of the increase in Asia were broadly the same as for the half year. In North America, revenue increases and expected trade loss releases related to the oil and gas sector contributed to a large increase in profits. In Latin America, the increase in PBT was driven by a good all-around performance in recordable businesses in Mexico. Corporate Centre was again the main driver for Europe due largely to a $632 million fall in revenue. The drivers of this movement were again based on revenue in the half year. Slide 7 just shows revenue trends by our global businesses. Second quarter revenue from our four global businesses was $865 million or 7% higher than the same period last year. I'll go through each business in more detail for the next few slides. Slide 8 looks at Retail Banking and Wealth Management revenue, which grew by $326 million or 6% compared with last year's second quarter. We also made market share gains, particularly in the UK mortgage market. Higher balances and higher interest rates drove a $472 million increase in deposit revenues, particularly in Hong Kong and the UK. Income from investment distribution increased by $57 million, reflecting higher sales of retail securities and mutual funds, mainly in Hong Kong. Lending revenue fell by $83 million due to asset margin compression from competition in the mortgage market. We continue to grow lending quarter-on-quarter and year-on-year. Customer lending rose by 8%, and customer accounts increased by 3% compared with the same period last year. As Slide 9 shows, Commercial Banking revenue grew by $466 million, up 14%. Growth in Commercial Banking was increasingly broad-based with good performances from Credit and Lending, and Global Trade and Receivables Finance, in addition to another excellent quarter from Global Liquidity and Cash Management. Global Liquidity and Cash Management revenue grew by 22% on the back of increased balances and the impact of wider spreads in Asia. Credit and Lending revenue grew by 6% due to balance sheet growth in the UK and Hong Kong. Global Trade and Receivables Finance revenue rose by 4% as we grew balances in Hong Kong and the United Kingdom. Commercial Banking grew lending by 3% in the second quarter and by 8% compared with last year's second quarter, mainly in Asia and the UK. Global Banking and Markets revenue grew by $65 million or 2% compared with last year's second quarter. After credit, funding and valuation adjustments, revenue was broadly stable. We saw continued positive momentum in key product areas, including double-digit percentage revenue growth in Global Liquidity and Cash Management, Securities Services and foreign exchange. Global Banking revenue was broadly stable as the impact of growth in lending balances and market share in debt capital markets was offset by lower corporate issuances and tighter margins. Global Markets revenue was down by 13% against the strong second quarter of 2017 due mainly to lower client activity in Rates and Credit. Adjusted RWAs fell by $11 billion in Global Banking and Markets in the second quarter. Global Private Banking revenue grew by 2% compared with last year's second quarter, supported by positive net new inflows. The Corporate Centre was a major factor in our second quarter performance. As noted earlier, a significant portion of reduction in revenue rose from valuation differences and long-term debt and associated swaps, on which we expect ongoing volatility from quarter-to-quarter. These differences would broadly reverse if held to maturity. We continued to manage primary legacy credit positions. In the first half, we realized the loss on one specific transaction that was capital accretive. With respect to Balance Sheet Management, full year revenue guidance remains broadly unchanged at $2.3 billion to $2.5 billion. Interest expenses are expected to stay broadly at the current level for the rest of the year. And we remain focused on improving capital efficiency in the Corporate Centre. Net interest income largely reflected higher deposit margins in the second quarter, rising 4% to $7.6 billion. As we walk through -- as we work through the quarterly net interest income and net interest margin trends, we identified a few possible minor adjustments to the Q1 net interest margin number, which certainly would confirm continued corporate progression. Net interest margin in Asia rose by 15 basis points from the full year to 2.03% due to higher deposit margins. By contrast, Europe net interest margin fell by 17 basis points to 1.18% due to asset margin compression and the higher cost of funding and liquidity in the non-ring-fenced bank. The higher funding liquidity balances and the impact of net interest margin reflected management's implementation of ring-fencing as of 1st of July this year. Group net interest margin for the first half was 1.66%, 3 basis points higher than for 2017. Competition for group core fee lending remained strong, balanced by higher yields and surplus liquidity. We anticipate further progress on net interest margin and net interest income as we continue to grow the business and as monetary policy normalizes. In the first half alone, we grew lending by 5%. There's more detailed information in net interest margin in the Appendix. Slide 14 looks at expected credit losses and loan impairment charges. The second quarter benefited from a release in the oil and gas sector in North America. And the credit environment remains stable, and expected credit losses remain unusually low. I remind that expected credit losses are very sensitive for any changes in forward economic forecast under IFRS 9. Slide 15 shows our operating expenses for the quarter. Fees were $554 million or 7% higher than the same period last year and broadly stable compared with this year's first quarter. Unlike in the last few years, there is no CTA program in the strategic plan, so we have to create the capacity to invest more through a combination of cost discipline and revenue growth. To that end, $300 million of cost savings helped absorb the additional cost of inflation, regulatory programs and compliance in the second quarter. We invested an additional $400 million in growth, digital and productivity in Q2. In Retail Banking and Wealth Management, we're investing in our Cards business in the U.S. and the U.K.; and in marketing, frontline sales and technology in the U.S., United Kingdom and Pearl River Delta. In Global Banking and Markets, we made further strategic hires in Global Banking and in Global Liquidity and Cash Management and continued to invest in our strategic joint venture in Mainland China. In Commercial Banking, we're hiring more relationship managers for our new business in Hong Kong and Mainland China and updating our core systems in Global Liquidity and Cash Management, Trade Finance and Business Banking in Hong Kong and the UK. We continue to invest in the business, subject to growth in revenue, and expect full year costs, excluding the bank levy, to be as previously guided. Turning to capital. The group's common equity Tier 1 ratio on 30th of June was 14.2%. Our common equity Tier 1 capital reduced by $6.8 billion in the quarter. Capital generation of $1.9 billion was more than offset by foreign currency movements related to a strong U.S. dollar and also the recent share buyback, the full impact of which is deducted from capital. Risk-weighted assets grew by 1% on an adjusted basis in the first half compared with loan growth of 5% Slide 17 looks at our group return metrics. Return on tangible shareholders' equity was 9.7%, or 11.5% excluding significant items in the bank levy. Our reported revenue as a percentage of RWAs rose by around 20 basis points to 6.3% compared with last year's first half. We continue to benefit from low expected credit losses in the second quarter. Our four main global businesses each achieved returns on tangible equity above the group's cost of equity. We are investing to grow the businesses and to improve the group's return on tangible equity to above 11% by 2020. I'll now hand back to John.

Iain, thank you. Our global businesses have now delivered eight successive quarters of year-on-year revenue growth and carry momentum into the second half of the year. On this basis, we remain confident of achieving positive jaws for the full year. Our main focus is on delivering a return on tangible equity greater than 11% by 2020 through a well-funded business with strong capital generation and a diversified balance sheet, and we are investing to grow revenue further and strengthen our competitive position. We remain cautiously optimistic about economic conditions for the remainder of 2018. We shall now take questions. The operator will explain the procedure and introduce the first question. Operator?

[Operator Instructions] The first question we have today comes from the line of Ronit Ghose from Citi. Please go ahead.

It's Ronit from Citi. Just a couple of questions. First of all, a quick question on margin. You've given us some comments around the Europe decline first half versus last year, 17 basis points down. I wondered if you could give us some more color on the quarter-on-quarter NIM trend, and specifically, any color around how much this is driven by the NRFB formation? That seems sort of big delta when I look at what happened to NII and NIM in the quarter, so that would be really helpful. My second question is about jaws, and this is for either of you. In the second quarter, obviously got underlying about 6 percentage point negative jaws. Costs, I think, underlying comes to about $16.4 billion for the first half. Are you looking at implicitly or explicitly flat costs half-on-half ex the levy? I'm just trying to work out how we get to positive jaws for the year because it's looking quite challenging.

Thanks, Ronit. Yes, quarter-on-quarter, from a net interest margin perspective, broadly, broadly stable. And the features that are driving that remain pretty much consistent with what we've talked about in the past. We continue to see good development across net interest margin in Asia, and our quantum analysis on that point will veer that out. Specifically, in the U.K. and formation of the non-ring-fenced bank -- or actually, the formation of the ring-fenced bank and, by definition, the non-ring-fenced bank. So if you reflect on HBU, we've maintained a strong funding and liquidity position within that legal entity consistently. As we created the ring-fenced bank, the strength of the customer deposit sitting within the retail bank and the commercial bank principally become part of the ring-fenced bank and are no longer available in terms of funding and liquidity sources to the non-ring-fenced bank. As we approach -- as the industry approach ring-fencing, the PRA set out some specific requirements with respect to LCR and net stable funding ratio. And to ensure that we achieve those positions by 1st of July with the margin of safety, we strengthened the funding and liquidity position within the non-ring-fenced bank over the first half of the year and, most notably, within the second quarter of this year leading up to the 1st of July. We have LCR and NSFR ratios somewhat in excess, in fact, well in excess of requirements from a regulatory perspective. And as we move through the remainder of this year, we'll optimize that balance sheet and hit the right position. But we wanted to make sure that we have a strongly funded position of the transition -- over the transition period into the non-ring-fenced bank. And for clarity, just for memory's sake, the non-ring-fenced bank essentially contains Global Banking and Markets and then other activities which are not permitted to be within the ring-fenced bank. And that -- raising that extra funding and ensuring a strong liquidity position has a adverse impact on net interest margin in the second quarter of the year. But overall, net interest margin continues to progress. Half-year-on-half-year, we saw $163 million for the second half of '17, $166 million for the first half of '18. And the key drivers of that are the continued normalization of monetary policy, notably in the U.S. dollar and related currencies, and that translating through the deposit surplus and again, most notably within Asia, but more broadly. And what we are beginning to see is some stability in asset pricing certainly in the Asian market. But what we commented today, it continues to be fairly competitive in mortgage pricing both within the Hong Kong and the U.K. markets. John, I don't know if, on jaws, you wanted to take that question.

Sure, Iain, thank you. So yes, on the jaws thing, I guess first thing to say is our results at this stage in the year are in line with our expectations. We are where we thought we would be. The money that we've spent is in line with our plan. And we guided that we expect cost ex the bank levy to be reasonably stable half-on-half. So that does mathematically get you to the stronger revenue growth number for the second half of the year. And the way that I think you should think about that is as follows. We've had good balance sheet growth in the first half of the year, and we've enjoyed continued progression with net interest margin, albeit modest progression. And as monetary policy continues to normalize, I think that will continue. So we should enjoy momentum on the net interest income line heading into the second half of the year. It's also the case that there were some aspects of the Corporate Centre performance in the first half that we might reasonably expect not to repeat themselves in the second half. So our business plans do see us get to positive jaws by the end of the year. And we remain reasonably confident about the revenue outlook that will get us there.

Iain, can I just jump back to your answer to the margin question. Can you quantify or help me understand exactly how much structural change or NRFB formation contributed to the headwind to the margin Q-on-Q? Or maybe another way to think about is, when you're looking ahead into the second half, is this like a steady state now for the UK, European business or do we get anything back? Any kind of color around that would be great.

Well, we will certainly see higher funding and liquidity costs in the non-ring-fenced bank going -- compared to history. What we would expect as we go through the second half of the year is that we will fine-tune our funding and liquidity requirements within the non-ring-fenced bank going forward. In terms of the impact to net interest income in the first half of the year, as we built that funding and liquidity position, it was somewhere in the region of $100 million was the impact in normal terms on that. But we did come into the creation on 1st of July with a strong funding liquidity position, somewhat in excess of the regulatory guidance. We'll normalize that out and get to a steady state. I think when we look at this at the end of the year, you'll hopefully -- well, I would certainly anticipate that you'll have a much clearer view of how that's likely to run from an overall funding liquidity perspective going forward.

Thank you very much. And the next question today comes from the line of Chris Manners from Barclays. Please go ahead.

Just a couple of questions, if I may. And the first one was on the impairment charge, looks very low in the quarter, obviously, and you flagged a write-back there. Could you maybe just help us a little bit with the outlook? Any parts of the loan book that you're worried about at all? And maybe you could sort of give us -- sort of think about to get to your 11%-plus ROTE, what sort of cost of risk numbers you're thinking about in there? And the second question was, maybe just come back onto the sort of European NII point. Obviously, we've had the UK rate hike now. How much of a benefit do you think that might be to your net interest income in the UK business? And how are you thinking about passing some of that rate hike back to savers?

So on that last point around the impact of 25 basis points on the bank rate at the end of last week, we -- over the remainder of the year, we would expect to see that, an uptick of some $40 million impact obviously to net interest income. In terms of talking about impairments, longer term, Chris, at the investor update on the 11th of June, we've talked about our 11% -- greater than 11% return on tangible equity target, reflecting what we believe to be normalized credit cost in the range of 30 to 40 basis points. So to be clear, that target on return on tangible equity is informed by higher expected credit loss, a little impairment charges that we are presently experiencing. In terms of any specific portfolios that are a cause for concern right now, that's not the case. We are seeing very stable credit cost at the low level, as we comment today, areas where I think we've previously commented that we're keeping a pretty close look not because there are emerging issues, but because the operating conditions would suggest there may be emerging issues. And for example, the U.K. high-season retail, more broadly, is one of the areas where our credit teams are keeping a very close watch on things. But whereas in the United Kingdom, further afield; in Europe, Asia, Middle East and the Americas, certainly, the credit outlook at the moment is fairly stable.

And could I just follow up on that $40 million of extra NII that you're expecting? What sort of pass-through rate would that mean on your savings accounts?

So the depositor beta, certainly in markets where there's fairly significant competition for deposits, is beginning to move up. In the U.K. ring-fenced bank, we have a very, very healthy funding surplus. And as a consequence of that, our depositor bases will be informed by the overall strength of the funding position in the United Kingdom. I think that's probably the extent of what we would say at this point, Chris.

I think, Chris, it's John, just one thing to add. Of course, now that we've actually ring-fenced, the management of the ring-fenced bank are the ones who are taking the decisions on pass-throughs and savings surprisingly. So it's a great time to get the question, we are in a slightly different world now.

But you would debate that with them, surely?

Of course, we would, indeed, of course.

The next question today comes from the line of Joseph Dickerson from Jefferies. Please go ahead.

I guess, just going back a bit to the first question. Could you discuss the, I suppose, your outlook for cost growth in the second half of the year? I mean, I know you've said that you would seek to generate positive jaws subject to revenue growth being there. But I guess, what type of cost growth would you expect in the second half of the year? Because it seems to me that you'd have to have -- I know cost picked up in the second half of last year, but it seems to me you'd have to have flat cost growth at some point in the second half if consensus revenue expectations are correct. And then just on the revenue point, should we -- given that the Corporate Centre in Q2 '17 was quite a large result, can we expect over the remainder of the year, perhaps, that the revenue growth starts to converge towards that 7% growth you've seen in global businesses?

Yes. So Joe, on cost review, you may recall within the second half of last year, we started to phase in some investments that we were particularly focused on trying to get ahead of in terms of exactly the areas we're investing in for growth of the business now, and that informs somewhat higher cost in the second half of last year. As John mentioned a little bit earlier, we would expect cost in the second half of this year to be broadly consistent -- ex the bank levy, I should say, broadly consistent with what we've seen in the first half. And again, that would be consistent with what we talked about back in May for the first quarter results. So we're very -- the cost discipline within the firm is enormously important in terms of informing, achieving positive jaws by the end of the year. We do have got good revenue momentum and balance sheet build coming through the first half and taking it into the second half of the year. In terms of the Corporate Centre, one of the key features of the Corporate Centre in the second quarter of last year was valuation differences coming through the holding company debt and hedging derivatives on our position. And that was actually a reflection of a movement of almost exactly the opposite direction in the first quarter of the previous year. So what we do see is some volatility within the overall funding position. But as we hold those bonds generally to maturity, we'd expect that to come back to zero. So it is very much around a valuation difference as opposed to a fundamental economic driver or cash driver within the business. From a balance sheet management perspective, the guidance remains very much consistent. So when you think about what's in the Corporate Centre, we've got our balance sheet management and corporate treasury positions sitting there. We've got our investments in associates principally [indiscernible] British Bank. That certainly what makes up the lion's share of risk weighted assets and capital sitting within the Corporate Centre. And then revenue generator, balance sheet management, we've got interest expense in holding company and a debt in MREL. And again, we guided to that being broadly consistent second half over first half. We continue to write down legacy in a capital-accretive fashion, notwithstanding some losses incurred and disposals in the first half of this year. And we're down to a very small number of RWAs, and we're down to about 6 billion of RWAs around legacy credit now in Corporate Centre. So yes, we would expect Corporate Centre to be more neutral in the second half of the year, allowing for some possible volatility in those valuation differences in holding company debt and derivatives.

[Operator Instructions] The next question today comes from the line of Raul Sinha from JPMorgan. Please go ahead.

I was wondering if I can have two, please. Maybe one, just follow up, Iain, on the liquidity point. If I look at the liquidity coverage ratio at the group level, I think you disclosed at Q1, it was 157.5; and Q2 has actually not moved much, it's 158. Is that right? And I guess that probably implies you built up liquidity towards the end of the first quarter. And is that the reason why you've seen some pressure on the margin. And should we expect that to go lower in the second half? Yes, that's the first one.

No. So from a liquidity coverage ratio perspective, I think overall growth consistency, we have seen a decline into more of our funding surplus into growing the balance sheet. I think it is most noted within the Asian market and within Hong Kong. We've seen very, very strong competition particularly U.S. dollar deposits within the Hong Kong marketplace, and that certainly is beginning to influence deposit pricing in that marketplace. But broadly, the dynamics around net interest margin generation remain very consistent in Asia with the deposit base continuing to show progress in terms of where it contributes to net interest income and net interest margin. And as I mentioned, there's some stability beginning to appear from a pricing perspective for assets in that regard. The key feature in terms of LLCR, and it's partially negligible at the group level, but from an LCR and NSFR level, the areas in which we purposely made movements in the first half and most notably the second quarter was to ensure that we had the non-ring-fenced bank, otherwise known as HBU, in the right position for the non-ring-fenced bank or rather, the ring-fenced bank creation in the 1st of July, rather, which is a derivative of the non-ring-fenced bank.

Is that why the rate sensitivity also seems to have come down a little bit in the U.S. dollar block especially?

Yes. So some of the features there, again, is we are seeing higher competition for U.S. dollar deposits, and that is certainly informing pricing in a number of markets. And what we also see, and I mentioned this earlier, is absolutely more of that surplus being deployed into assets with our customers. And the other feature that we're seeing is, with the increasing interest rate environment, we're beginning to see a switch, somewhat a switch away from demand deposits into time deposits. And again, that obviously influences overall net interest income and net interest margin. So as we would absolutely expect, as this rate cycle continues to develop, as customer behavior is beginning to change and inform the higher rates and informing where they place their money in terms of positioning within our balance sheet, and these factors coming together are informing progression in net interest margin. So we would expect to continue to see that progress, as John mentioned, but I hope that, that provides some clarity around the [Indiscernible] okay?

Could I have one on capital? Or should I come back?

Absolutely. Go ahead, Raul.

I mean, on the capital, I can see there's a 20 basis point negative impact from the FX translation move, I'm guessing that's basically sterling. And I was wondering if you were planning to do something to hedge yourself as we head towards a possible cliff edge around Brexit, or can you actually hedge your capital volatility for the core Tier 1 ratio?

Indeed, we can. From a structural FX perspective, one of very few structural currencies that we do hedge structurally is the U.K. sterling. So we do have a number of hedges in position there. We continue to revisit that on a regular basis based on how the balance sheet is positioned. It is partial. In terms of hedging our position fully, we just continue to reflect on that. But we've got a partial hedge in place at this point in time.

The next question today comes from the line of Manus Costello from Autonomous.

I had a couple of questions, please. The first one was on RWAs where, again, it's grown much by much less than the group assets over the first half. And in particular in GB&M, your RWAs are down 4%, but the assets were up 10%, I think, because of some model changes. So my question is, are there any model changes to come over the next few quarters? And are you concerned at all about how aggressive that risk density in GB&M is becoming? My second question is on BoCom. I just wanted to ask whether or not you thought the BoCom capital issuance in the second half of this year or expected in the second half of this year will have any impact on your value-in-use because that gap between carrying value and VIU is pretty tight again?

On RWA, within the second quarter, we had $8 billion of approvals by the PRA and models, which contributed to some reduction in RWAs within Global Banking and Markets. Coming out of 2017, we had a total of some $20 billion of opportunity for reductions in RWAs from model improvements, pending approval by the PRA. We received $8 billion of that in the first half, specifically the second quarter of this year. And therefore, by definition, there's some $12 billion still pending approval. In terms of the opportunity to improve RWA to models specifically, we've made a lot of progress in the sort of the course of the last three years. The opportunity from model improvements is also not negligible. It is a much less significant component of overall improvements to capital efficiency within the Global Banking and Markets business. And what you clearly have witnessed over the course of the last couple of years is the business has made significant progress improving capital efficiency, whether that's informed by the nature of managing the overall exposure to customers on a customer-by-customer basis, improving returns. And again, you see the overall return on tangible equity for the Global Banking and Markets business continues to progress. We see that at, I think, about 12.4% in the first half or the second quarter of 2018. So the business continues to be very sharply focused on capital efficiency. In terms of how much of that will come from model improvements going forward, it would be of lesser influence overall. I think if you think about the risks to RWA intensity within the Global Banking and Markets business, it almost certainly is informed, one, by credit development as the cycle continues to work its way through. But as you can see, we continue to avail of expected credit losses, and the outlook remains fairly stable for the time being. And the other area is regulatory change, the fundamental view of the trading book as a component of Basel IV. But again, that would seem to be still sometime into the future, notwithstanding the fact that we keep a pretty close eye on that. Manus, from a BoCom perspective, the impact of their fund raise, which is a convertible bond, so the extent to which that would have any effect on the overall capital position of the shareholding of HSBC would only be in conversion of that bond into equity. The extent to which that would dilute HSBC would be minimal. And to the extent we're diluted, then our equity accounting will simply account for a lower percentage of ownership in BoCom as we presently do. We sit at 19.03%. And then, if you like, the mathematics of our equity share flows through, obviously, market valuation, value-in-use, current value in the balance sheet. So the aspect of that per se and only upon conversion, I think, is unlikely to be a significant feature of the accounting for BoCom. The valuation in terms of valuation use over accounting value expanded very slightly in the second quarter. And as we've talked about in the past, this is something that is valued and revalued in a quarterly basis based on input from the markets, input from our colleagues at BoCom and is subject to a pretty good struggling form both our internal teams and our offers.

Can I just pick up just on one thing? I don't recognize the word aggression in the way that we do our capital planning and our capital management. I certainly think for GB&M, we've been very focused on just becoming more efficient. We've been embedding our return on tangible equity methodologies across the group. GB&M, two or three years ago, was quite challenged from a return perspective, as you all remember. And I think the business has been very disciplined about extracting capital from low-returning portfolios and low-returning segments. And I think efficiency is the right word. I don't recognize aggression. And I think from a regulatory perspective, the regulators are very diligent around everything we do here, so I think efficiency is the right way to think about this.

Thank you very much. The next question today comes from the line of Guy Stebbings from Exane. Please go ahead.

I just wanted to circle back on impairments, a couple of questions. The 30 to 40 basis points, including the ROTE guidance, interested to get your view on when you expect this to increase. I appreciate that's very difficult, but any color would be helpful. I seem to remember you stressed the other day, you're prepared to take a little more risk and grow a little more in unsecured in some markets, so how that might fit in? And then secondly, just on your comments on U.K. impairments, just to be clear, are you see anything here that you weren't expecting? And given your book is really quite prime, does that worry about the broader market at all?

The U.K. uncertainty, if you just want to know, we're not seeing anything at this point. We -- I think everybody would expect this, given the degree of uncertainty that faces U.K. economy at the moment, informed by the Brexit discussion, is it just merits appropriate diligence across the portfolios. But in terms of overall performance, it remains very stable. But I think everybody's well-aware of where those sectors which may be most exposed. But at this point in time, there's really nothing emerging of concern. In terms of when we'll see higher credit costs, I hate to say this, but your guess is as good as mine. But from a prudence perspective, in terms of forward planning and recognizing the goal of achieving and delivering a return on tangible equity of greater than 11%, the plan that we built, and it was the basis of the update to the market that John provided in the 11th of June, was informed by a higher expected credit loss coming through over the cycle, and that is informed by something in the range of 30 to 40 basis points. When that might emerge? I'm afraid I can't help you.

Okay. I think we're now heading towards our last question for the morning.

The final question today comes from the line of David Lock from Deutsche Bank. Please go ahead.

I've got two, please. First one is on trade wars. Just wondered if you've seen any change in behaviors from your Asia corporate client base heading into the second half of this year and if there has been any pull-forward of any activity or loan growth before the tariff implementation, which perhaps could lead to lower loan growth in the third quarter. And the second question is whether the BSM guidance of $2.3 billion to $2.5 billion, does that still stand? I saw that BSM was a bit stronger in the second quarter.

Thanks, David. So on trade wars, I think it's fair to say that we haven't yet seen any meaningful impact on our customer base, either in terms of activity or in terms of risk profile. Too early, I think, to know whether there will be an impact. As we think about the trade wars, I think from my perspective, I'm more concerned about the trade rhetoric damaging investor confidence, investor sentiment and sending markets lower. I think that could have more of an impact on things like our wealth business. But from a trade perspective to date, there's been no impact and no customer impact. With respect to balance sheet management, no change in the guidance yet. 2Q was a good quarter, but no change in the guidance that we previously offered for the full year.

And just coming back on the first question. I mean, there hasn't been any -- you haven't seen a spike in activity around people perhaps positioning themselves just out of conservatism, thanks to the second half of the year, there hasn't been any activity like that in the second quarter?

No, not that I'm aware of, no. Sorry, we do have one more question, if that's okay.

The next question comes from the line of Claire Kane from Crédit Suisse. Please go ahead.

Just a quick follow-up, please, on the cost. Just to clarify, you're still expecting cost ex levy to be stable half-on-half, so that would imply that 23.3 billion for the full year, including the levy, should down a bit from the guidance at Q1, 33.7 million with the cash buyback. And then just with that, given the number of the volatile revenue items included in your adjusted jaws definition, I mean, how comfortable are you that you may miss the target given the number of volatile items that are somewhat out of your control, particularly you've got enough in there if you continue at this run rate on those volatile items?

Yes, Claire, thank you. So let me respond to the second part of the question first. It is a good question. Based on the plans we've got now, we are confident that we will get to full year jaws. There are a couple of items in there that are non-economic. So for example, the valuation stuff, if we get to November and we have some big valuation swings, am I going to start to pull cost levers that would damage the franchise of the group over the remaining two months of the year? No, I wouldn't do that. I will always preserve the health of the organization over and above some accounting noise. But for the rest of the real costs, the real costs that are economic to shareholders, it is our intention to hit the full year positive jaws targets. So the valuation certainly is impossible to predict. I don't want, given that it's non-economic to shareholders, I don't want to be making management decisions based on something that actually is not that significant. Just the first part of your question reflected or related to the numbers, Iain, do you want to just comment on that?

Yes, absolutely. I mean, the currency movements take reported numbers down a little bit. But broadly speaking, it's clear that the mathematics that you set out are in the right ballpark, right? So the guidance around operating expenses for the remainder of the year remain consistent with what we said back in May and reiterate today. So you'd expect the second half of the year, ex the bank levy, to be broadly in line with where we were in the first half of the year.

Well, that concludes today's call, everybody. Thank you very much for being up so early to be with us today. For those of you who've yet to celebrate the summer, have a wonderful summer. Thank you.