Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference Call for HSBC Holdings plc Earnings Release for 3Q 2019. For your information, this conference is being recorded today. At this time, I will hand the call over to your host, Mr. Noel Quinn, Group Chief Executive.

Good morning to everyone in the London, and good afternoon in Hong Kong. Welcome to our third quarter results call. As you know, this is my first quarterly results update since taking over as Group CEO in August. I want to provide you with my views on business performance and the areas that are performing well. But also on those parts where we have performance issues and action is required. Ewen will take you then through the detail of our Q3 performance. Reported profit before tax for the 9 months was up 4% and the adjusted profits were broadly flat at $17.9 billion. Adjusted revenue for that same period was up 4.8%, which reflected strong performances in RBWM and CMB. Adjusted revenue in GB&M for the 9 months was down 7% and the 9 month group annualized RoTE was 9.5%. As a stand-alone quarter, Q3 was reassuring in some areas but disappointing in others. Reported profits were down 18% to $4.8 billion and adjusted profits were down 12% to $5.3 billion compared with last year's third quarter. Adjusted revenue was down 2% to $13.3 billion. Our Asian business were once again, the driving force, contributing 87% of group adjusted profit before tax in the quarter. Commercial Banking continued to grow revenue and balances, particularly in Hong Kong and the U.K. Retail Banking held up well in Hong Kong despite the current situation there. And customer redress charges obscured strong lending and deposit growth from our U.K. ring-fenced bank. Our transaction banking businesses showed good resilience and Global Private Banking continued to attract good levels of net new money. It was also good to see a continuation of the cost discipline from the early part of 2019. However, we are clearly facing a more challenging revenue environment than in the first half of 2019 and the outlook for revenue growth is softer than we anticipated at the half year. For this reason, we no longer believe it possible to achieve a return on tangible equity of greater than 11% in 2020. Looking at our portfolio of businesses and geographies, it is clear that while we have many parts of our portfolio that are performing well, we also have parts where the performance is not acceptable. Our Continental European business and the non-ring-fenced bank in the U.K. are not producing acceptable returns, particularly in Global Banking and Markets. Given current market conditions, they are unlikely to do so unless we take decisive action. While our U.S. commercial business grew revenue in the third quarter, our U.S. business as a whole has an annualized return on tangible equity for the year-to-date of 1.9%. This is clearly well short of our 2020 target of 6%, which we have previously said we no longer expect to reach. Having a strong presence in both Continental Europe and the U.S. is important, but we need to reshape our presence in both. It is now clear that our previous plans for both businesses are no longer sufficient given the softer revenue outlook that we now face. The returns need to be improved and the capital allocated to those geographies needs to be reduced. We need to rebalance our capital away from low-return business into higher growth, higher-return opportunities in other parts of our footprint and I am determined to do exactly that. As a consequence of these actions, it will be necessary to adjust the cost base of HSBC. We also need to remodel the organizational structure of HSBC to remove some of the complexity that has, I believe, been an obstacle to effective execution of our plans and also to reduce the cost associated with running the group. We will provide an update on these plans alongside our full year results in February. I'll provide new financial targets at the same time. I'd like to finish with a few words about Hong Kong and the U.K. We are committed to supporting both Hong Kong and the U.K. through the current challenges they face, and I would like to acknowledge the exceptional work and dedication of our people in helping our customers during this current period of uncertainty. At different times throughout our 154-year history, both Hong Kong and the U.K. have faced significant challenges, and HSBC has done whatever we can to help them through to the other side. HSBC has always taken a long-term view and will continue to do so. Ewen will now take you through our Q3 performance.

Thanks, Noel. Good morning or afternoon all. I'm now going to turn to the slide deck. So on slide three as you can see from today's results and Noel's commentary he's just given, it was a mixed quarter overall with a more subdued outlook but with a substantial set of management actions underway to respond to this. Reported profits after-tax in the third quarter was some $3.8 billion, that's down 16% versus the third quarter in 2018. Underlying this on the positive side, retail, commercial and private banking had solid quarters as did the transaction businesses and Global Banking and Markets. We're constraining costs well below last year's growth rate, we're managing RWAs actively and results out of Asia remain robust despite current challenges in Hong Kong. Against that, Global Banking and Markets, Global Markets had a weaker quarter particularly compared to a very strong third quarter of 2018. We had a number of one-offs, including high remediation costs in the U.K. ring-fenced bank and negative market-related impacts and credit charges were impacted by higher credit charges against unsecured lending in Retail Banking and higher specific charges in Commercial Banking. Turning to the next slide. Total adjusted revenues in the third quarter were $13.3 billion, that's down 2% on the third quarter in 2018. Looking across the four global businesses. In Retail Banking and Wealth Management, overall revenues were broadly stable, in Retail Banking, revenues were up 4%, driven by balanced growth in both lending and deposits. Wealth management revenues were down 6%, which was affected by $225 million of negative market impacts in our Insurance Manufacturing business. Commercial Banking revenues were up 4%, largely through balance sheet growth across all regions in credit and lending and the benefit of wider margins in Global Liquidity and Cash Management. In Global Banking and Markets, revenues were down 15% or 10% if you exclude negative credit and funding valuation adjustments, mainly from continuing weakness in Global Markets. Private Banking had another good quarter. Revenues were up 11% and total net new money inflows in the third quarter were $5 billion and $19 billion for the year-to-date. In Corporate Centre, our revenues were $194 million, up on the third quarter of 2018 driven by the reduced impact of hyperinflation accounting in Argentina, together with favorable valuation differences on long-term debt and associated swaps. On slide five, net interest income was $7.7 billion, that's up 3% on the third quarter in 2018. This reflects a mix of volume growth, up 7% over the last year partially offset by slightly lower margins. For the third quarter, NIM was 156 basis points. That's down six basis points on the second quarter. Customer redress of interest costs of $135 million in the U.K. ring-fenced bank accounted for three basis points of this. And the impact of hyperinflation in and Argentina accounted for a further two basis points. Overall, despite and expected outlook of interest rates softening, our two largest markets for net interest income, namely Hong Kong and the U.K., continued to see good volume growth. For Hong Kong, despite softness in U.S. dollar interest rates, HIBOR remained somewhat elevated with an average one month HIBOR of 203 basis points in the quarter. That's flat on the second quarter and up 72 basis points on the first quarter. I would note though that one month that HIBOR is currently about 30 basis points lower on average in the fourth quarter to-date. Turning to slide six. I'm pleased with a better disciplined we've been able to do and still on cost of this year compared to a growth rate of 5.6% in full year 2018. We've constrained adjusted cost growth to 2.6% in the first nine months. Third quarter cost growth was flatted by certain items, including Argentinean hyperinflation and the timing of investment spend. As I look at cost growth excluding these items, we're running at about 3% percent cost growth for the first nine months and expect to be running at a similar growth rate for the fourth quarter. Importantly, we're showing reduced cost growth while continuing to invest. Investment spend this year is currently at $3.3 billion. That's up 13% versus the first nine months of last year. Given the weaker third quarter performance relative to plan and compared to expectations at the second quarter, we have reduced year-to-date variable pay accrual by some $180 billion. We will reduce it, again, in the fourth quarter, resulting in a full year P&L benefit of around $300 million. As discussed at the second quarter, we're now on track to take out $650 million to $700 million from the full year 2020 run rate. We've taken a further $120 million in total severance costs in the third quarter. And as we've progressed, the strategic work that Noel has talked about, we expect to strip out further costs as we execute against this and this likely to result in additional severance costs in full year 2020. As a quick reminder, our fourth quarter costs have the full impact of the annual U.K. bank levy. We expect this to be in the order of $950 million, broadly inline with the 2018 charge. And the fourth quarter will also include a further increase in investment spending of around $200 million. Our reported costs also include customer redress costs of $488 million. This includes $388 million relating to PPI, reflecting exceptionally high information requests in August ahead of the PPI deadline. On the next slide, we saw a higher credit costs in the third quarter, some $883 million or 34 basis points. This compares to $545 million or 22 basis points in the previous quarter. Underlying this, higher credit charges relating to unsecured lending in Retail Banking in the U.K., the U.S. and Mexico, higher charges against specific clients in Commercial Banking in both the U.K. and Hong Kong, and movement from Stage 1 to Stage 2 lines, particularly in Hong Kong, given changes in models and the updating of forward economic guidance. Credit costs in the third quarter included an additional $90 million charge to reflect the economic outlook in Hong Kong. We continued to sector our guidance of 30 to 40 basis points of credit cost through the cycle and based on the current economic outlook, we expect to be at the low end of this range during this financial year. The outlook for credit remains more uncertain than usual and ECLs sensitive to forward economic guidance with Hong Kong and the U.K., in particular, subject to a broader array of credit outcomes. On slide eight. Core Tier 1 at the end of the third quarter was stable at 14.3% with profits and reductions in RWAs, offset by dividends and the $1 billion share buyback. We continue to actively manage RWAs across the group. They were down $21 billion in the third quarter. RWA growth of $8 billion from lending growth and credit migration was outweighed by a $14 billion reduction from methodology and policy changes and a $13 billion reduction due to FX. We expect RWAs at year-end to be broadly similar to the end of 2018. We've now completed our $1 billion buyback program for the year. The average price of the program was £6.02 per share, resulting in 136 million shares being bought back and canceled. So to conclude on slide nine, if you strip back our third quarter performance, I think we had a decent quarter in Hong Kong and Asia, as well as the Middle East and Mexico. These businesses continued to generate attractive returns. Our areas of weakness were Argentina, the U.K. ring-fenced bank, the non-ring-fenced bank in the U.S. Argentina and the U.K. ring-fenced bank were both negatively affected largely by one-offs. In Argentina due to the macro situation, and in the U.K. ring-fenced bank, due to $606 million of combined redress charges. For the non-ring-fenced bank in our U.S. business, combined, these are around $280 billion or 32% of total RWAs of which approximately 85% of these RWAs are in Global Banking and Markets in Commercial Banking with the bulk of Global Banking and Markets RWAs being in the non-ring-fenced bank, and both businesses also have loss-making Retail Banking operations. As part of the work we're now doing, we expect to materially reposition both the new non-ring-fenced bank in our U.S. business with a view to both improving currently unacceptable returns and to release capital through material RWA reductions. Looking ahead to the fourth quarter, the U.K. and Hong Kong continued to have large deltas around them. Hong Kong has somewhat flatted by the continued strength in the HIBOR, although the underlying Hong Kong macro data is weak. And the situation in the U.K. depends on Brexit outcomes. Also note that we could see significant charges in the fourth quarter and beyond, including the possible impairment of goodwill and additional restructuring charges. So to conclude, a tough quarter at the headline level, but masking some good underlying country and regional performance that continue to grow and produce attractive returns. Retail, commercial and private banking had solid quarters as did the Transaction businesses and Global Banking and Markets. We're constraining costs well below last year's growth rate. We're managing RWAs actively. But with a weaker outlook, we need to accelerate action to redeploy capital into higher returns and this will also support our current capital plans. We intend to sustain the dividend while maintaining our core Tier 1 above 14%. And with that, Sharon, if we could please open up for questions?

Thank you, Mr. Stevenson. [Operator Instructions] We will now take our first question today from Tom Rayner, Numis. Please go ahead. Your line is open.

Hi, Tom.

Thank you very much. Hi, Noel. Could I have two questions, please? Firstly, just to see if I can - to add any color to the restructuring plan. It sounds from what you and Ewen has just said that the focus is going to be around the U.S. and possibly, parts of GBM, as you said non-ring fenced bank, I'm assuming, predominantly that's GB&M. And I'm just wondering if you could help us scale the size of potential RWAs that may be reduced any sort of associated profit linked to those RWAs, just so we can start to get a bit more of a feel for what may be coming? And just linked to that first question, I mean, if we are going to see material restructuring charges, I guess, its sensible to assume that the sort of buyback commitment becomes a bit irrelevant in that scenario, so we should probably just stop thinking about it in a buyback it we’re now going to be trying to scale restructuring. And I had a second question on Hong Kong, but either of you want to deal with the first one first or?

Tom, let me take the first question - the first part of the question, then I’ll hand off to Ewen. I mean, we acknowledge that the returns in Continental Europe, including the non-ring fenced bank and the U.S. aren’t where they need to be. So first, we need to try and improve those returns. But also, we need to reduce the amount of capital that's associated with both of those geographies and try and redeploy some of that capital into higher growth, higher-return opportunities elsewhere in our portfolio. The exact quantification of that redeployment and those actions, we will be updating at the time of our Q4 results. So we're not able to give you detailed today on the exact quantification of that. But it's fair to say, taking capital out of the region will take revenue out and if we take revenue out, we're going to have to adjust s the cost base that supported that revenue. And that's where the potential for restructuring charges comes from. But the detail will be provided at the Q4 time. But I'll let Ewen add some color to that.

Yeah. So Tom, we have been deliberately vague at this point because yeah, we have kicked off a piece of work, but it's not sufficiently advanced to enable us to announce this at this point. I mean, the other thing I would note, we've got a new management team in the U.S. that only started in their new roles just over three weeks ago and they need time. I mean, I did use the word material deliberately to think about it in that context. Typically, I mean, in terms of time frame, I would expect that would take us a couple of years to execute the bulk of that restructuring. And the other thing I would note as part of the announcement, too, is Noel has also signaled over the desire to go after the sort of complexity of the group at the center, so there's quite a bit of cost complexity associated with that as well that we're trying to unpick. And then yeah, you can go into the back of the slide presentation. We've set out, yeah, what the nine month performance was of the U.S. and what the non-ring fenced - both for the non-ring fenced bank in the U.S, you can see there $280 billion of RWAs not making a lot of money. You can see – yeah, broadly how that sits across the businesses. I said 85% of it was Global Banking and Markets and Commercial Banking. So you can, I think, run some approximate maths on the back of that, and I am sure Richard and the team in IR can talk to you after the call as well. On buybacks, I don't think we've made any comment about rolling out buybacks. Yes, you should imply on what I said that we're going to see significant RWA reduction coming out. Some of that will get absorbed by restructuring charges, but I would still expect it to be a material amount of RWA release, some of which we'll use to redeploy into higher growth regions where we can, some of which we'll use to continue to support the dividend and I would expect to have some buyback capacity out of there as well. I mean, we recognize the fact that the amount of scrip dividends that gets paid out year - each year is relative diluted. So we will continue to actively manage that through buybacks with an overarching target of keeping our core Tier 1 ratio about 14%.

And then Tom, just one other point of clarification. You shouldn't assume that the corrective action that is appropriate for Continental Europe is necessarily the same corrective action for the U.S. The market dynamics, as you know, of Europe are very different to the market dynamics of the U.S. And therefore, remediation program could be different in the U.S. to that which we have in Europe.

Okay, clear. Thank you. Sorry, quite long spent a lot of your time. The second one was just on Hong Kong. Quite a lot of noise around the ECL charge. I want to see if you're be able to split down what you're seeing in terms of the underlying credit position of your books in Hong Kong versus the charge you've taken in Q3, which is, obviously, a big step up on Q2 driven by various assumption changing and sort of IFRS 9 related things. I wonder if you could help us get a sense of what's happening to the actual underlying credit performance in the region?

Yes, the first comment I'll make is Hong Kong had a very resilient performance in the first nine months of this year, and particularly in Q3. And I'm talking in totality. Its revenue position, size of the balance sheet, the deposit book, they've all been very resilient. But I'll hand off to Ewen to comment specifically about the ECL position.

Yes, what you can see in our number is quite a significant step up in Stage 1 to Stage 2. About half of that is just due to modeling changes. The forward economic guidance has changed and deteriorated, which led to the $90 million additional charge Yes, there's, obviously, two hitting Hong Kong at the moment. One is the U.S., China trade dispute, where you can see trade numbers down materially in Hong Kong, and the second is the ongoing protests, which is impacting things like tourism numbers, hotel occupancy rates, retail. So a bit of the both, but we're most focused on is small end of SMEs at the moment. That's where, yes, we do see emerging signs of distress. As you know, the Hong Kong mortgage book is very low LTV. We're feeling good about that. So any area that we're sort of slightly cautious on at the moment is, yes, the smaller end of SMEs. And yes, I think the outlook for credit depends very much on those two exogenous events that were not in control of is, which is when does the trade dispute and how does it get resolved, and similarly for the protests.

Okay. Thank you very much.

Thank you. We will now take our next question from the line of Benjamin Toms from RBC. Please go ahead. Your line is open.

Hi, both. Thanks for taking my questions.

Good morning.

Morning. The first one is just really about the announcement of a new CEO. Do you expect that announcement to be made before giving the new targets to the market at the end of the year? And secondly, on the ECL, sorry I come back to. I think you said there that you expect for the full year to be in the lower end of the range of 30 to 40 Bps. Is it fair to say then you expect the ECL charge to be higher in Q4 than Q3 or do you expect a flattish quarter-on-quarter, a better description? Thank you.

I'll take the first question and then hand back to Ewen for the second. As Mark said at the time of the announcement of the change earlier this year, he expects that the process could take between 6 and 12 months. The process is underway. It's a decision the Board will take when they feel it's appropriate. It's not something I'm able to give any more detail on today. I'm part of the process and I'm sure they'll make a statement as and when they're ready. In the interim, we're running the business and trying to make the decisions that are appropriate for the business and got the full support of Mark and the Board to do what we need to do to improve the business in the meantime and we're operating on that basis. Hence, the announcements we've made today and these figures we've given you today.

Yes, just that – I think from my perspective, clarifying that, yes, we definitely expect to be coming back to the market as part of full year results with a revised set of financial targets irrespective of where the Board sits and the CEO timetable at that point. On that – yeah, I did say that I expect to be at the low end of 30 to 40 basis points range. As I think we should try and be too precise on this. Yeah, in particular, note we've got a very sizable $400 million plus overlay sitting in the U.K. depending on what happens around Brexit and politics in the next few months. Yeah, that could either be too high or too low and equally, outcomes around Hong Kong can swing a bit as well depending on, yeah, various factors, which I mentioned earlier. But yeah, as we sit today and based on what we see today, we expect to be at the very low end of that range.

Thank you, guys.

Thank you. Our next question comes from the line of Magdalena Stoklosa, Morgan Stanley. Your line is open.

Hi, Magdalena

Hello. Good morning, good afternoon.

Morning.

Two questions from me here, I missed here. One, I'm going to do - I think I'm going to do a full round up on the provisioning side and also then your lending businesses performance. So we talked about the provisions in Hong Kong. But could you give us a sense of what do you see in the kind of U.K. and Continental Europe? In your commentary, you've mentioned the unsecured kind of credit deterioration in the U.K. but also a little bit in commercial as well. So any kind of detail there would be kind of very useful for us. But also on the back of that and you're kind of - and what you see on the ground and your risk appetite into 2020. How do you actually see the loan volumes developing, both in Hong Kong and U.K. into 2020? Where do you see the demand? And kind of where do you see still your kind of business priorities to grow? Thank you.

Okay. The – look, on the U.K., a few things. Yeah, part of the reason for the growth in credit impairments and unsecured book is purely the fact if you look at the growth characteristics, we're continuing to grow U.K, Mexican, U.S. card portfolios, which is the way that IFRS 9 modeling works means that we will set up provisions against that as we grow it. Commercial, I would say at this point, yeah, it does feel at the moment that - yeah, what we saw in the first couple of quarters in terms of being quite sector-specific and often quite unrelated to Brexit. For example, trends in high street retailing has become a bit broader-based at this point, but we'll see. Brexit was always going to be slow burning and it continues to be slow burning. Yes, the growth outlook for the U.K., as we look at it, is expected to be relatively weak in the first half of next year. But yeah, where do we see a good credit growth? We continue to like the mortgage sector. We've now fully built up broker network. I think were up to about 88% coverage. You can see in today's numbers, we grew flow share in second quarter - third quarter with 7.6%, which actually is our best quarter, I think, this year. And our stock share is up to about 6.7, 6.8 on the back of that and actually, the average LTV at the book declined in the quarter. So mortgages would be one that I think we're going to continue to take share and we still continue to have a degree of excess liquidity in the U.K. I think in Hong Kong, yeah, we grew the loan book by about 2% in the quarter. I think we will become increasingly selective while recognizing the fact that across our end business in Hang Seng, we are collectively 40% to 50% of the markets in most sectors. So to the extent, there's a slowdown in the Hong Kong economy, it's hard to see that we wouldn't just slow down proportionately with that. And to extent that there's a deterioration in credit, we will be exposed to that deterioration in credit.

The only other thing I would say is - on top of that is, if you look at Asia as a trading block, there's still growth within Asia. China is still growing, granted at a slower pace than we've seen in recent times, but it's still a growth market. And trade within Asia and inter-Asia trade is still a growth market. So we still believe there are opportunities for growth, but we need to be a little bit more cautious. And it's hard to predict what our future growth will be.

Yes, and we also had a question on Continental Europe, I think there was one single name exposure in France, which contributed to the credit charges in the quarter as well.

Perfect. Thank you very much.

Thank you. And your next question comes from the line of Andrew Coombs, Citi. Please go ahead. Your line is open.

Hi, Andy.

Good morning. A couple of follow-ups just with respect to strategy and plans going into 2020. The first is the severance charge versus savings for 2019 is the 1:1 relationship. Is there any reason to think that would be different going forward with any updated strategy? And second question would just be anything you could elaborate on with respect to the FSB announcement coming out mid-November on G-SIBs and any expectations you have for that because, obviously, your capital position that's potentially impact on how many - or how much restructuring charge you can book? And then finally, when you talk about GBM taking capital out of that business, if I could just ask you, where is the bulk of the capital in that business? Where does it sit? So of the $246 billion of RWAs, I’d always thought banking, SS, GLCM, GTRF are relatively low risk intensity. Equities, which has obviously got a lot of attention of press, quite low, too, high on leverage but low on RWAs and I just thought a lot of the RWAs sit in fixed income must not be late [ph] in credit. But if you could elaborate a bit more there, I'd appreciate it? Thank you.

Okay. What we'll do is we'll take the third question first and I'll just make a few opening comments and then hand over to Ewen and then he can handle question one, question two as well. On the first question, just remember actually within our Asia franchise, we had a very strong performance from GB&M in Asia. So we're focusing in on the deployment of our RWAs in Continental Europe and the U.S. as the areas that require focus. And one of the recipients of that refocusing of capital could well be GB&M in Asia and elsewhere in the world, particularly in the Middle East as well. So there are both positives and challenges within the GB&M results, and I just want to draw your attention to that. You know our Asian heritage; you know our heritage in the emerging markets as a wholesale bank and that's true in both GB&M and in Commercial Banking. I'll hand over now to Ewen and specifically on the composition of the RWAs in Continental Europe, but it's fair to say their RWAs tied up in both our markets business and our banking business and we need to look at the efficiency of both of those RWA deployments. It isn't one or the other.

Yes, Andy, the assumption that we don't have a lot of RWAs in our Global Banking business is not right. Because that's where all of the lending business and support of both the transaction businesses and parts of the Global Markets business sits. So the bulk of the RWAs actually sit within Global Banking and Global Markets. There's relatively limited RWAs against the transaction businesses and then there's a decent chunk of upwards there as well. If you follow up with IR afterwards, we'll be able to give you some additional color in terms of what. I'm not just sure what we disclosed to the market so far.

But the other thing I would just reiterate, we do intend to continue to have a presence in Continental Europe, in U.S. after this reshaping, after this re-modeling. We are in a global wholesale bank, serving both the very largest of multinational corporates, but also uniquely for HSBC. The middle market entrepreneur-owned businesses on a global basis and we, therefore, need to be able to be a lender and a transaction bank for those clients across our global footprint. It's a question of the amounts of capital we utilize in each area of that footprint and how much we deploy in Continental Europe relative to elsewhere. So I just want to reiterate, it will be a global footprint, but the distribution of assets will change over time.

So we before we move onto the two questions, it sounds like you're more - it's more about reshaping the business, reallocating RWAs from one region to another rather than an absolute extraction of RWAs. Is that fair?

No, it's not necessary - it's too early to assume that. I think there'll be an element of redeployment into other opportunities, but there may well be - our utilization or freeing up of the RWAs to benefit the group as a whole. So I think that's the detail we will bring forward for you when we do our Q4 update. So it could be - it will be redeployment and potentially, creating greater capacity.

Yes. I mean, when you look at a business overall, Andy, in Global Banking and Markets, it varies quite significantly, depending on which region you're looking at. I mean, Asia, for example, was 50% of the revenues and over 80% of the profits, and about $160 billion of the RWAs of the 280s. So it’s across the non-ring fenced bank in the U.S. On your other two questions, I think - look, assuming one for one severance costs versus annual benefit is as good an estimate we would have at this point. On the FSB, you're right, we - I think we all are expecting an update on the G-SIB, either on the second or third week of November. Yes, we are at the cusp, I think, of bouncing between the current bucket and going up a bucket. A couple of things on that. That doesn't necessarily mean that our 14% capital target would change. We would have to work through the detail on that. The other thing I would say is since year-end 2018 and some of the stuff that we've been talking about today but also some areas that we've been able to act on, we would expect our G-SIB indicators to becoming down sufficiently, so that we'll be able to get back into the current bucket that we sit. The last thing I would say is, is on top of that, the G-SIB indicators are all going to change. So we need to work through the detail of that in 2020. But I wouldn't assume if that announcement comes out and we've moved up a bucket in two to three weeks’ time, that you will see us adjusting our 14% target. I think we need to work through a lot of detail before we would get to that sort of conclusion and we would actively try and manage the business so that wasn't the outcome.

All right. Thank you, Both.

Thank you. And our next question comes from the line of Raul Sinha, JPMorgan. Your line is open.

Thanks very much for taking my questions. Maybe a couple, please. Firstly, on the RWA guidance. I was wondering if you might be able to unpick a little bit the 4Q guide that you know, RWAs are going to be broadly stable. How much of that is an expectation of may be slower loan growth versus potentially model benefits that you're still expecting to come through in the fourth quarter? And then, I don't know, Ewen, if you have any further discussion or commentary around Basel III and the sort of overall impact on HSBC just given all of the commentary you've had today in terms of RWAs. That seems to be quite an important - big part of the puzzle that we're still missing for you. Any further commentary around Basel IV, and Basel IV impact would be helpful? Thanks.

So on RWAs for the fourth quarter, I guess, there's pluses and minuses. We do think we're going to continue to see growth in RWAs as a result of business growth. Some of the big FX benefit that we got in Q3, we do expect some reversal of that. Offsetting that, we continue to see - we've always signaled that we had a set of RWA mitigation actions that we described that we thought we’re going to be biased to the second half. We still see a decent amount of those coming through in Q4, including model benefits and some recycling of RWAs out of some corporate relationships. So yes, we do think that gets you broadly to net stable for the quarter. On Basel III.I, actually, as the regulators are calling it, rather than IV, they're sort of two things. There's both Basel III.I and there's also potentially some impact on Brexit. Yes, we do, I think, recognize the fact that we've been short of guidance to the market. I would observe that since I've been in my job for the last few quarters, actually, the positions continue to get improved first. I think relative to where I would have expected when I first joined, yes, particularly, the near term impact from 1st of January '22, if that's well being asked or assume that Basel is going to get introduce on 1st of January '22, I think from many of us, we still think that looks ambitious and that timetable could slip. I don't think we'll get clarity from Europe and the U.K. until first half of next year on the actual timetable. One of the complications in the U.K. is obviously, the Bank of England doesn't know whether they're having to comply with European directives or whether they're independent of Europe at that point, and if they're independent of Europe, whether going to seek to achieve full equivalents or partial equivalents or not. So I do expect that their impact to be, at least initially, to be a lot lower than what some commentators have been observing today. And then you have to model out five years and say, at what point do the output floors then bite? And we do think further out, in some ways, the lower the impact upfront, there will still be a larger impact once the output flows hit in the future. But as I say, I think we're sort of - I've been talking to Richard O'Connor, I think we do plan to come back at sort of full year-end results and provide us much guidance as we can at that point because we appreciate that it is a missing piece of the puzzle.

Thanks. It sounds like we're going to be talking about this for years. I was wondering if I can have another one on Hong Kong deposits, particularly for north [ph] What was interesting for me was that Commercial Banking deposit saw a bigger downtick in Hong Kong compared to retail or particularly Private Banking and, I guess, that chimes in with some of your commentary around small business. What are you expecting in terms of future trends on the deposit side? You think that we are likely to see any material deposit outflows? Or do you think that the performance we've seen so far in Q3 sort of broadly affects the worse of the changes?

No, I wouldn't read movement in the Commercial Banking deposit book as a function of unrest in Hong Kong. That fluctuates up and down. On a normalized basis, it can fluctuate quite significant. As businesses - and remember, the Commercial Banking business covers everything from small SMEs through to very large multinational corporates. That can move quite a bit quarter-to-quarter based on individual transactions that may or may not be taking place in anyone of those clients in that book. So I wouldn't over read the Commercial Banking deposit movement as a linkage to the situation in Hong Kong. If I now turn to the retail book - deposit book, the quantum of deposits in our balance sheet at the end of Q3, I think was broadly flat to the end of the half year and so slightly up on the beginning of the year. It remained resilient and strong. Clearly underneath that, there is the potential movement in and out of that deposit book. But we've seen relatively small amounts of movement out of that deposit book into other parts of the world, very, very immaterial movements. And overall, the deposit book has grown. So it's proven to be very resilient. But if you - there have been a number of very high net worth, ultra-high net worth clients who have put contingency plans in place by opening bank accounts elsewhere in the world, but there's been very little, relatively little movement of funds into those bank accounts. But funds have remained in Hong Kong.

Thank you.

Thank you. We will now take our next question, and the question comes from the line of Christopher Manners, Barclays. Please go ahead. Your line is open.

Hi, Chris.

Hi. Ewen. Hi, Noel. Yes, so just a couple of questions, if I may. The first one is just on the U.K. net interest margin. I think you have to adjust for that, yes, customary redress and the NII line. It looks like it's already gone down a couple of basis points quarter-on-quarter. And could you maybe just help us a little bit with the dynamics, what we should be expecting next year, maybe just in terms of the structural hedge, and mortgage competition and a bit around that? And then the second question was just on the outlook for your associates. Obviously, you’ve seen some higher loan losses in Saudi, British and expenses with Alawwal. And I guess when we look at where they're concentrating on fee [ph] and people, obviously, a little bit concerned about the profitability there. Could you help us a bit about how we should model that associate income going forward? I know you talked about goodwill write-downs. Are you still happy with the valuation, both on the balance sheet as well? Thanks.

Yes, so on the investment in Saudi, Chris, there was some one-off associated with the merger that would have appeared in the Saudi Associate in second quarter that we picked up in our third quarter results. So there were one-offs, about $140 million in impairments. So you should, in a way, just assume that we go back to normalized associate income out of that state and that was just a one-off major related impact. BoCom, no change in position. You shouldn't read anything into today's announcement as to a change in relation to our stance on BoCom. Again, I had several of these calls where I observed that a market value was below the value in use. But the actual amount of capital that we've got against BoCom is about $10 billion or $11 billion rather than $18 billion of value in use. So those goodwill impairments - potential goodwill impairments that were highlighted today, I think if you go into the annual report and accounts, there's a note there on the goodwill that provides some color, but you'll see a material amount of goodwill still sitting against the European business and the global banking and markets business. On the U.K. NIM, you know I don't like forecasting NIM. But look, there will be a continued mix shift towards mortgage growth. I think yes, the outlook for U.K. rates, I think consensus is for a further rate cuts at some point in the coming months. So yes, all of that, I think, is going to impact NIM negatively over time. You're right if you back out the redress costs that we're sitting against interest income, I think that accounts for about 18 basis points of the 20 basis points of NIM reduction in the U.K. But I would think that NIM in the U.K. continues to gradually reduce over the coming quarters. But that can, obviously, change if suddenly we have a different rate stance coming out of - whatever comes out of Brexit.

Got you. Can I just ask one follow-up on your jaws guidance? I think when we were speaking in Q2, that you'd still said - said you're going to do positive jaws each year and you've actually got good jaws guidance - good jaws performance so far, the 2.2% year-to-date. And as I remember, Q4 last year was quite difficult quarter. So is there any reason you sort of removed that jaws comment?

No, don't read anything into that. Look, we've - yes, we continue to - I mean, jaws is an elegant and that it relies on revenue that we don't - some revenue line items that we don't control. Yes, if you look at what happened in fourth quarter of last year, we had a very weak set of markets in the final six weeks of the year. We lost about $1 billion of revenue through no fault of our own just because of what was happening in the markets which impacted both Global Banking and Markets and our insurance manufacturing business. So we went from what we thought was going to be positive 1% jaws to negative 1% jaws. So assuming nothing untoward happens in the market, we're sitting at 2.2%, I think, for the first nine months. We would expect to have positive jaws for the full year. But yes, we are managing both absolute costs and to jaws at this point. As I said, we are sort of pleased with the fact that we've taken absolute cost growth down this year quite materially relative to last year's run rate and I would expect that absolute cost growth continues to reduce from here.

And what I said in the opening statement was we will update our detailed plans with our Q4 results and we'll update, at that point, what targets we operate to on a go forward basis of when we do our update when we do our Q4 results.

Okay, understood. So we might see sort of a $1 billion cost target instead of jaws 1?

I'm not going to prejudge what we will say at Q4.

Thank you very much.

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

Good morning, Manus.

Hi, everyone. I wanted to ask, please, about the path of your capital development over the next 12 to 18 months. You've given us some indication of where you're going to go after RWAs and some are going to be freed up and some are recycled. But between here and now, there's, obviously, some significant potential charges to come and as you have pointed out, the outlook in your two core home markets is quite uncertain. So my specific question is, how much tolerance would you have to go below a 14% Core Tier 1 ratio because once you put restructuring charges in your - you're pretty close to it. And secondly, what's your tolerance on the dividend payout ratio going upwards north of 100% potentially during the quarter, the restructuring period? Thank you.

Yes, just a few things. I mean, obviously, the 14% is a number that's a reasonably robust capital target for us based on the fact that we need to come under the Bank of England stress testing rules, be able to survive a global synchronized downturn. So in some ways, how we're stressed is a more extreme stress test than a U.K. domestic bank because of the type of event that we're modeling is a more severe event, tail risk event. In return for that, you should, therefore expect that we are a more resilient bank through market cycles have better ratings, lower wholesale funding costs, all of which you see. Yes, in terms of the dividend, remember that there's a significant component each year, 20%, 25% that's paid out by way of script. So if you look at last year, there was an 80% payout ratio but the actual cash payout, pre-buy back, was about a 60% payout ratio. So there's a considerable flex in there, I think, for us to moderate the buyback or stop a buyback, which provide significant additional flex, I think. And therefore, why we're able to say that we intend to continue with the current sustainable dividend policy. You're right that there are a whole bunch of one-offs on the horizon. We're dealing with Brexit, credit migration, which can swing both ways, frankly. We've got, for example, over $400 million of overlays in the U.K. for Brexit that if we've got to a softer version of that, some of that could get written back. We've got Basel on the horizon but as I said earlier, I don't think - as we model that through the upfront impacts, I think they're going to be at the lower end of what we may have expected six months ago, and the timing of when that's going to impact us, I think, looks uncertain. But overall, I think yes, what's probably the thing to flex is probably buybacks, yes, the 14% target is a reasonably robust target. I think we would not want to fall below that for anything other than a very, very limited period and we do appreciate that the cash dividend is a very important underpinning to the current shape for us.

Okay. And just a follow up then. If the G-SIB asset does go up and you're looking at delta to MDA to your target of 200 basis points, I think, it will be. Is that - do you have the right level? Do you look at delta to MDA as your - as one of your guiding principles? Or is it more what you get in your ability to be out the stress test that will guide you?

Well, it's everything that sort of guides us and so - but as I said earlier, just because the G-SIB indicators go up. I mean, yes, increasingly the G-SIB indicators are relatively blunt, I would argue outdated tool and that's it's 11 indicators governing our capital structure. Far more important I think as what sits behind our stress testing analysis and all of the work that goes behind that as to how much capital we need. I also say that even if our G-SIB buffer was to go up, I think as we said today, we've already mitigated a lot of that increase that we saw during 2018. We've got a new set of G-SIB indicators coming in place. And therefore, yes, we would see it as a - view it as relatively temporary uplift than the underlying capital requirement of the bank. We do expect some RWAs increases coming out of Basel reform, which, again, is another offset to that. And I do think in terms of the signaled reduction in RWAs out of the non-ring fenced bank in the U.S. will also provide, yes, an important source of capital underpinning to us.

But just to be clear then, if you went below 14, it would only be for a very brief period is what you just said, so may be one quarter just below?

Yes.

Okay. Thank you.

Thank you. Our next question comes from the line of Jason Napier, UBS. One second sir. Jason, your line is now open.

Thank you very much. Three if I could. Good morning. The first, just looking at GB&M. I wonder if you could give us a sense of what the RoTEs are within the market as opposed to the rest of the business. Secondly, on Basel IV, and I think you're probably are going to be talking about this for an extend period. I wonder whether you could just give us a sense as to which areas, whether it's by division or kind of real-time the bank is most sensitive to. And then thirdly, I appreciate that you're not keen on sort of NIM guidance, but I wonder whether might give us a sense if yield curves stay where they are, what sort of headwind our net interest income in dollars might be over the next year because I don't think we're fans of parallel shifting yield curves, disclosures either. So if you could give us a sense of what the planning assumptions might be if we stayed here for 12 months? Thank you.

Yes, on the last one, I would - even do if you like it, Jason, refer you back to our interest rate sensitivity. I mean, yes, the fact is we have a relatively short-dated book because of a combination of the way that both the assets and liabilities are repriced in Hong Kong and also the trade book in commercial is relatively short-dated. So if you compare us to other banks, typically, you get a - you get most of the five year impact of a shift in the yield curve happening in the first two years. So to the extent dollar interest rates declined sharply and on the back of that, that HIBOR has some impact as well, you will see that flowing through the numbers over a couple of quarters, pretty quickly, I think. So depending on where we end up on dollar interest rates next year, we do expect some material impact. And hence - yes, that was probably the biggest core underpinning of why today we've announced that we're not sticking to our 11% RoTE target for next year. That, together with the fact that we think the outlook for Global Banking and Markets has deteriorated as we look at things today relative to what we would've thought a quarter ago. On the RoTE, it's a bit simplistic to look at Global Markets versus Global Banking because global banking tends to have a very low RoTE because it has the bulk of the lending book sitting there but that lending book supports both the transaction businesses and the Global Markets business to some extent. Within Global Markets though, the FX business is a fantastic business, top three globally, makes very good returns, yes, very linked in to the underlying customer franchise business far more than some of our peers and it would be the other parts of Global Markets that tend to have lower returns, the other fit businesses and equities. But it's about - even in our own analysis - internal analysis, it's a bit simplistic because we couldn't do parts of that business without the lending support.

Our core focus is on understanding customer profitability and the build-out of that total relationship rather than purely measuring profitability at a product level. So our orientation is around the customer profitability, more so than individual product profitability.

And then the question on Basel III.I Global Banking and Markets, yes, does have the disproportionate hit from Global Banking - from Basel III.I reform. I think yes, many in the other markets, there may be a longer dated impacts in our output floors, but I think you have to speculate about how the book develops. But in most markets, the output floor is not a dramatic impact, but I think partly that will depend on the development of the mortgage franchise in some markets.

Thank you.

Thanks, Jason. Operator, I think we have time for one more question.

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

Hi, there. Thanks for taking my questions. I just have one back on strategy and then two very quick ones, a point of clarification. On strategy, I appreciate you want to wait for the formal update before you give us any more color on the precise details, but when you're talking about unlikely to make another returns in certain areas in the current environment, is it the current environment that you have in minds when you're thinking about how you reshape the business? Or are you working towards a target structure that assumes things will improve slightly from here when you think about long run cost base capital allocation, et cetera? And then the two points of clarifications. One was on Hong Kong impairments. I think you said, Ewen in response to a previous question that about half of the move in stage 2 was one-off in nature for model changes. Is that, right? I just thought that in wholesale…

Yes…

Exposures jump from, I think, 3% to 8% of the group. So should we think about half of that as a reasonable guide to underlying stage migration or is there something else going on which might be overstating that move?

No, it's half of it is what I said from model changes.

Okay, perfect. And then just - sorry, just one other one, which is G-SIB, if I can. Appreciate if you go up next month, there are certain measures might come down next year, such as the complexity score, I presume, but you also referenced changes to the approach itself, which I would have thought would be a net headwind for HSBC or is that wrong to assume? Thanks.

Yes. Look, on the net headwind - on the changes to the G-SIB indicators, possibly, but it's not just potential restructuring. We've also been able to take action, for example on derivative gross ups since the 2018 submission where our G-SIB score today would be lower - materially lower than what it would have been at in the end of 2018. So we do think whatever comes out of G-SIB is a manageable outcome for us, particularly in the context of RWA inflation coming out of Basel III.1. You want to answer the one on strategy?

Yes, on strategy I mean, clearly - the re-modeling that we're talking about and the reshaping of the portfolio is not just that a today issue. I mean, we had returned issues for a while in Continental Europe and the U.S. But I think those - the actions need to be more urgent now biggest the economic environment we're facing is very different today than that which we assumed 18 months ago when we did the strategic plan update 18 month ago. So I think it's appropriate for us to take the action. The action isn't just predicated upon current trading conditions. We've had challenges in both of those portfolios for a while. But the ability to turn around those businesses in today's economic conditions has been hampered, hence, the desire to take action now. So I don't think we should assume that the economic environment in Continental Europe is going to significantly improve anytime soon and therefore, we want to take action. I did draw your attention to the fact there, the strategy and the way forward for the U.S. may be different to that of Continental Europe because the market circumstances in the U.S. are different to the market circumstances that exist in Europe, and that's why I think it's appropriate we give the management teams time to work out the detail between now and the end of the year so we can give you a full update with the Q4 results.

Okay. Thank you.

If I can now just close with a few comments, please. I would like you to remember the following: We have a global wholesale franchise, a global wholesale business with deep roots and heritage in Asia and the world's fastest-growing markets. That remains uniquely placed to connect both large multinationals and mid-market entrepreneur-owned businesses to the world. We also have powerful and profitable Retail Banking and Wealth Management businesses in our biggest markets. This combination has demonstrated, time and again, its ability to provide strong profits and good returns for shareholders and is integral to the HSBC history, identity and the investment case. However, we also have parts of our portfolio that are not delivering acceptable returns and given the changes to the external environment, we need to accelerate our plans to remodel these parts of our business portfolio, which is exactly what I intend to do. If you have any further questions following this call, then Richard O'Connor and the rest of the IR team will be pleased to help you. Thank you for joining us today.

Thank you, ladies and gentlemen. That concludes the call for the HSBC Holdings plc earnings release for 3Q 2019. You may now disconnect.