John Flint - Group Chief Executive Iain Mackay - Group Finance Director & Executive Director

Jason Napier - UBS Investment Bank Raul Sinha - JPMorgan Chase & Co. Christopher Manners - Barclays Bank Edward Firth - KBW Joseph Dickerson - Jefferies Fahed Kunwar - Redburn Guy Stebbings - Exane BNP Paribas Ronit Ghose - Citigroup Manus Costello - Autonomous Research David Lock - Deutsche Bank This presentation and subsequent discussion may contain certain forward-looking statements with respect to the financial condition, results of operations, capital position and business of the group. These forward-looking statements represent the group's expectations or beliefs concerning future events and involve known and unknown risks and uncertainty that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Additional detailed information concerning important factors that could cause actual results to differ materially is available in our earnings release. Past performance cannot be relied on as a guide to future performance. This presentation contains non-GAAP financial information. Reconciliation of the difference between the non-GAAP financial measurements with the most directly comparable measures under GAAP is provided in the earnings release available at www.hsbc.com. The Analyst and Investor Conference Call for HSBC Holdings plc Earnings Release for 3Q 2018 will begin in two minutes. [Operator Instructions]. Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference Call for HSBC Holdings plc Earnings Release for 3Q 2018. For your information, this conference is being recorded. At this time, I will hand the call over to your host today, Mr. John Flint, Group Chief Executive. Please go ahead.

Good morning from London, good afternoon to everyone in Hong Kong and welcome to our third quarter results call. Iain MacKay will take you through the number shortly, and then we will field questions together. Let me start though by recapping our strategy and reflecting on our performance. In June, we outlined our plan to get HSBC growing again and to create value for shareholders. To do that, we are delivering growth from areas of strength, turning around low-performing businesses, investing in revenue growth and the future of the business and simplifying the organization and investing in future skills. Central to this is our ability to use the revenue capacity of the group to invest in the business while maintaining good discipline around costs. Our third quarter results demonstrate our ability to do that, and to deliver on the promise to get HSBC back to growth. Our three main global businesses had very strong quarters. All three are increasing returns, winning new business and investing in future capabilities. We see the potential for further growth, and we're continuing to invest to capture those opportunities. I'll now hand over to Iain to talk through our numbers.

Thanks, John. Reported profit before tax of $5.9 billion was up 28% on last year's third quarter. And adjusted profit before tax was $6.2 billion, an increase of 16%. For the year-to-date, reported adjusted profit before tax were up by 12% and 4%, respectively, in the first nine months of last year. Group adjusted revenue was $1.1 billion or 9% higher than last year's third quarter due to strong performance of our 3 many global businesses. Third quarter adjusted costs rose by 2%, reflecting our continued investment in growth and technology. We grew lending by a further 2% compared with the second quarter and 6% from the start of the year. Our common equity Tier 1 ratio remained strong at 14.3%. The numbers also take into account the classification of Argentina as a hyper-inflationary economy, and I'll cover that in more detail later. A quick look at some key metrics for the year-to-date. The return on average ordinary shareholders' equity was 9%., the return on average tangible equity was 10.1%. We had a lower tangible net asset value per ordinary share of $7.01, driven by foreign exchange movements. This was up $0.01 from the second quarter. Earnings per share was $0.56. On the nine months, we had a negative jaws of 1.6%, and we remain on track to achieve positive adjusted jaws for the full year. Slide 4 shows the items that take us from reported to adjusted. The principal difference with last year's third quarter is the absence of cost to achieve from our reported numbers. Last year's third quarter also included $104 million of releases in relation to legal settlements and provisions. More detail can be found in the Appendix. And the remainder of the presentation focuses on adjusted numbers. Slide 5 breaks down adjusted profit before tax for the year-to-date by global business and geography. Profit before tax increased in our four global businesses by total of $1.9 billion in the back of strong revenue performance. The Corporate Centre profit before tax fell mainly due to lower Central Treasury revenue and the impact of hyperinflation in Argentina. Slide 6 looks at profit before tax in the third quarter, which was up significantly in the same period last year. Profit before tax grew in all four global businesses and 3 out of 5 regions, particularly Asia and Europe. The increase in Asia came largely from growth in transaction banking, revenue in Global Banking and Markets and Commercial Banking, and from increased revenue from current accounts, savings and deposits in Retail Banking and Wealth Management. The rise in profit before tax in Europe was due primarily to good performances in the U.K. from Retail Banking and Wealth Management and Commercial Banking. In North America, higher revenue in both the U.S. and Canada contributed to an increase in profit before tax. Hyperinflation in Argentina was the main cause of lower profit before tax in Latin America. This was tempered by the strong performance of our Mexico business, which continued to deliver double-digit balance sheet and profit growth. Our business remains well balanced as the breakdown by global business demonstrates. Slide 7 shows the revenue trends in our global businesses. Revenue from our four global businesses was $1.6 billion or 12% higher in the third quarter versus the same period last year. And I'll go through each business in more detail over the next few slides. Slide 8 covers Retail Banking and Wealth Management revenue, which grew by $711 million or 14% compared to last year's third quarter. Our balances and interest rates generated a $758 million increase in deposits, savings and current account revenue, notably in Hong Kong. On Wealth Management side, $116 million increase in insurance manufacturing revenue came mainly from higher new business premiums and actuarial assumption changes. Lending revenue fell by $181 million due to continued asset margin compression from competition in local mortgage markets, particularly in Hong Kong. Customer lending rose by 8% compared with the third quarter of last year, mainly on the back of continued strong mortgage growth in the U.K. and Hong Kong. Customer deposits increased by 3%. As Slide 9 shows, commercial revenue banking grew by $479 million or 15%, with growth across all our product lines. Global Liquidity and Cash Management revenue grew by 24% on the back of higher balances and wider margins notably in Asia. Credit and lending revenue increased by 5%, thanks to balance sheet growth in all regions. Global Trade and Receivables Finance revenue rose by 3% as we grew balances in market share in Asia and Europe. And lending grew by 8% compared with the same period last year and 2% compared with the second quarter. In Global Banking and Markets, revenue grew by $374 million or 10% compared with last year's third quarter, thanks largely to our strength in transaction banking. Revenue in fixed income currencies and commodities grew 10% on the back of a 39% increase in foreign exchange revenue. This more than cover the 29% fall in revenues from rates. Security Services generated double-digit percentage revenue growth, while revenue in Global Trade and Receivables Finance also increased. Global Liquidity and Cash Management revenue is 23% higher due to increased balances and higher interest rates. Adjusted risk-weighted assets fell by a further $5 billion in the third quarter. This included $6 billion from recycling one profitable client exposure, offset by business growth of $4 billion. Additionally, there was a $2 billion reduction in market risk due to low volatility and changes in mix of exposures. Return on average tangible equity was 12.5% for the year-to-date. Our differentiated Global Banking and Markets business model continues to deliver for our clients and create value for our shareholders. Global Private Banking was broadly stable versus last year's third quarter. Corporate Centre revenue fell by $439 million compared with last year's third quarter. The other $304 million of this was due to hyperinflation in Argentina. This cost was booked in the third quarter, but it reflects the year-to-date impact. You can find more detail in the Appendix. Valuation differences on long-term debt and associated swaps resulted in the fall of $139 million versus the prior year. We expect ongoing volatility from quarter-to-quarter, and these differences would broadly reverse the instruments that are held to maturity. Legacy credit revenue increased by $45 million and included a gain on the sale of legacy assets in the third quarter. Our Balance Sheet Management full year revenue guidance remains unchanged at $2.3 billion to $2.5 billion. Net interest income largely reflected higher deposit margins in the third quarter, rising 3% to $7.7 billion versus the second quarter. Group net interest margin for the year-to-date was 1.67%, 4 basis points higher than 2017. In the third quarter, we benefited from interest rate rises in Hong Kong, the U.K. and the U.S. Hyperinflation in Argentina reduced the year-to-date group net interest margin by 1 basis point. You can find more detail on net interest margin in the Appendix. Slide 14 looks at expected credit losses and loan impairment charges. Expected credit losses of $507 million related to Retail Banking and Wealth Management in Mexico and the U.K. and Commercial Banking in Asia, Turkey and the Middle East and North Africa. Higher expected credit losses in Asia reflected increased charges across a small number of customers, and also included an overlay relating to the possible impact of higher tariffs and trade restrictions. You'll recall that in the adoption of IFRS 9 in 1st January this year, we included a $245 million overlay in the first quarter relating to U.K. economic uncertainty. And it is worth bearing in mind that expected credit losses remain sensitive to any changes in foreign economic forecast under IFRS 9. The credit environment remained stable and expected credit losses remained low. Slide 15 shows our operating expenses in the third quarter. These were $155 million or 2% higher than the same period last year, and $161 million lower than this year's second quarter. We continue to create the room to invest through a combination of cost discipline and revenue growth. We delivered $317 million of cost savings in the third quarter, which more than cover the additional cost of inflation. The impact of Argentina hyperinflation dropped costs down by $139 million. As you can see from the detail on the slide, we invested another $338 million in growth digital and productivity, and regulatory programs in the third quarter. We're on track to deliver full year positive jaws based on current operating trends, and this is a discipline to which we remain committed. Turning to capital. The group's common equity Tier 1 ratio at 30th of September was 14.3%. Profit for the period of $3.9 billion more than covered $2.1 billion of dividends net of scrip, resulting in capital generation of $1.8 billion in the quarter. In addition, there were adverse foreign currency movements of $1 billion. Risk-weighted assets grew by $2.6 billion on an adjusted basis in the third quarter, loan growth was 2%. Slide 17 looks at our group return metrics. The return on tangible shareholders' equity was 10.1%. Our three main global businesses each achieved returns on tangible equity above the group's target of 11%, offset by the factors mentioned earlier in Corporate Centre. Our reported revenue as a percentage of risk-weighted assets rose by around 30 basis points to 6.3% compared with the first nine months of last year. I'll now hand back to John.

Thank you, Iain. As you can see, we are starting to unlock the revenue potential of HSBC, and we're doing what we said we would, increasing revenue from areas of strength, improving returns and investing in the business while keeping a tight hold on costs. We remain cautiously optimistic on global growth. Geopolitical concerns have softened the customer confidence slightly since the half year, and they're clearly creating some volatility in the capital market. However, we're not yet seeing that impact to core revenue streams in a meaningful way. Our balance sheet is growing and provides us with a strong secure revenue base. On top of that, our most significant external driver in recent quarters has been the normalization of interest rates, and this is reflected in a very good set of numbers. We'll move to Q&A shortly, but first, I'd like to say a quick word about Iain. As most of you know, Iain leaves HSBC in December after 11 years, having done 32 sets of results as our Group Finance Director. In that time, Iain has been a terrific colleague and an integral part of the work we've done there. He goes with the gratitude of the group and our very best wishes for the future. We will now take questions. The operator will explain the procedure and introduce the first question. Operator?

[Operator Instructions]. We will now take our first question. Your first question comes from the line of Jason Napier of UBS.

Two, if I may. The first was just looking at the composition of loan growth. Sort of $9 billion of the $15 billion in loan growth was in the U.K., whereas the Asian book is effectively flat, and it's obviously the area where I imagine the equity market expects kind of longer-term growth. I wonder whether you wouldn't mind sort of beyond the comments you've made around returns in Hong Kong being pressed more tough, talk about sort of the prospects for better loan growth bank going forward, whether that's current results or a function of risk reward or pricing or what have you. And then secondly, just focusing on the U.K. as a driver of loan growth in the period. I believe the intermediary channel was about 40% of gross lending in the quarter, and that's probably about double if I note right away you were kind of at the end of last year. So I just wonder, in terms of getting to an industry normal level of about 2/3 or more, kind of what's missing. What's the outlook? Is it just time and training? Or is it perhaps price? If you could talk a little bit about the composition of that business, that'd be great.

David, thanks very much. It's Iain here. So looking at growth in lending balances in the year-to-date basis, that's about 6.3%. And Asia balances in the year-to-date basis are up about 7.5%. Now truthfully, most of that consumable part of that was developed in the first half of the year, the first two quarters. So very strong growth coming through our Asian businesses, notably within Hong Kong. The third quarter certainly has been a little bit slower, about 1% growth. That broadly is in line with seasonality that we would expect to see and that we've often experienced in the past. So nothing particularly concerning in that regard. And as we said, strong loan growth, very much in line with the guidance and what we were expecting in terms of coming through the Asian business over the course of 2018 on a year-to-date basis. I think overall, from a U.K. mortgage perspective, we continue to grow into that business very much in line with an expectation that we would grow into what we expect the natural market share. But as you observed, the gross balances are developing at quite a nice rate, we're still sitting at around about 6.3%, 6.4% market share of stock in that particular area, maintain a very conservative risk appetite in terms of how we develop that market. And probably one of the key contributors to continued growth in that space is the expansion of our intermediate channel, which is in the area that we were barely, barely present in more - just a little bit more than a year ago. And that has grown very nicely over the course of this year, where we now have about 85% coverage for that channel.

Just to follow-up on that last point. So 85% coverage, I think you've indicated that that's almost the size you're sort of intending to go just cost benefit wise. Just what is it that keeps you from being at around 2/3 of intermediary lending in the channel? Do you think you have to cut prices further?

No, I think we're still working on the development of the platform in actual fact. The platform was really introduced in November of last year, and we still got quite a lot of work to do in terms of process improvement within that channel in terms of reducing cycle times and making the platform really work for the intermediaries. So it's just a question of continuing to develop that channel and work through it. I don't think there's any particular impediment to growth in that particular area.

But Jason, it's John, just to add. I don't think it's our target to get to kind of the market norms of penetration. So you're right, 70% of the U.K. mortgage market is broker intermediated. 40% of our flow going through that channel, we're around about the kind of levels of penetration at the channels that we want to be at. But I don't think we're setting ourselves to get to 70% of market norms. I'd be - in the short to medium term, I don't think we'll get it much above 50%. So it's not a target that we want to get to market norms, but it's good to see that we made - good to see that we made the progress that we have with that channel.

Our next question comes from the line of Raul Sinha of JPMorgan.

So if I can have two, please. Just the first one is on the impact of trade tariffs on your business as you've seen this quarter, and how we should expect it to evolve going forward from here. If I look at the revenue line and impairment line, I was wondering if you might be able to comment where specifically have you seen any negative impact in the revenue line, if anything. And clearly, in the impairment line, I think you've talked about an Asia overlay. Could you give us some sense of what assumption changes you made there that have driven the sort of high impairment, and what sensitivity should we think about going forward?

And your question?

The second is on GBM and its performance in the quarter, I thought was really good. And I think you noted that FX revenues were very strong, offsetting the weakness in rates, up 39%. I think what it was up 30% plus as well. I was just wondering if we should be - what we should be thinking about in terms of the sustainability of that, particularly the FX performance. And is there anything you'd call out there in terms of strength?

Thanks, Raul. On the - I'll talk to the expected credit losses, and I'm sure John will give you more insight on what's happening on revenues as it relates to trade and tariffs. In terms of actual credit experience, we're really not seeing any impact coming through at this point in time at all whether across retail or wholesale exposures, whether in Asia and perhaps, more understandably, in the United States. A very stable credit environment, the extent of which we saw our credit costs coming through in wholesale, specifically the Commercial Banking in Asia, was very much business as usual. There was nothing untoward in that regard, nothing singled out by an individual sector or marketplace. So absolutely nothing unusual when compared to previous quarters in that regard. What we have done as part of the implementation of - the ongoing implementation of IFRS 9 is, as you're aware, part of the modeling with respect to expected credit losses is the forward economic guidance, which we revise on a regular basis. But our view coming through the third quarter was that forward economic guidance did not capture all of the possible impact and expected credit losses of trade and tariff restrictions. And as a consequence, we provided an overlay of $71 million as sort of like a management adjustment to adjust for the fact that we did not believe that the economic outlook fully captured all the forward-looking elements of that. So that's really what you've seen coming through credit costs in the third quarter, specifically as it related to Asia. John, any reflections on the revenue picture?

Yes. There's nothing really in the numbers yet as evidence of stress arising from the trade spat - yes, so nothing really on the sales side, but nothing on the revenue side that we can point to. Clearly, customers are a little bit more aware, strong anxious of the issues, so it's top of the conversations. But today, we haven't seen anything less than the numbers. We're going to be publishing on Thursday a client survey - customer survey we've done that speaks to the outlook for trade and the outlook for business optimism. 75% of the 8,000 corporates that we've surveyed still has a positive outlook with respect to their own businesses and trade. And within Asia, the numbers are even higher than that. So I think an obvious area of concern, but too early for it to be on our numbers.

On GB&M, Raul, I mean, the picture remains very - well, the performance in the third quarter, as indeed the case through the nine months of 2018, has been a good performance from Global Banking and Markets, continued focused on driving capital efficiency. That, combined with the revenue and profit performance, has got return on tangible equity for the year-to-date of 12.5%. We saw very good performances in foreign exchange. Credit performed well in the third quarter. And the one area which would - possibly in comparison with our - particularly our U.S. peer group, was the equities business. And I think that's largely informed by the shape of our equities business, where it's much more focused within the Asian business notably and constant with the exposure to emerging market equities, where we certainly saw some pressure on compression on margins in the equities business. But also just, I think as we've all observed, a slightly harder quarter in terms of emerging market equities in the third quarter. But across the three, it's pretty strong in Global Banking as well, as well as Global Liquidity and Cash Management and Global Trade. If you reflect back on the majority of previous years, we've always seen a little bit of seasonality coming through the fourth quarter. As it relates to Global Banking and Markets, our revenue forecast pick up on what we believe would be some seasonality. And clearly, the extent of which we've seen some volatility in the equity markets over the first few weeks of October would probably inform that, that will reflect, to some degree, in terms of that fourth quarter seasonality.

Okay. So you wouldn't call anything out in the FX line particularly?

No.

Our next question comes from the line of Chris Manners.

So yes, two questions, if I may. The first one was on the sort of net interest margin and, yes, how things are going sort of mortgages versus deposits? When I look at Page 21 of your slide deck, the mortgage revenue looks like it's down about 15% quarter-on-quarter and down about 30% versus where we were in Q1 '17 at about $450 million. So I thought maybe you could sort of talk about the mortgage trends and why that revenue line's quite so soft. And then on the flip side, your deposits are very good. And RBS for clients in our third stage is a 40% pass-through in the U.K. from the rate hike that we just had. Maybe you could let us know how much you at HSBC had passed through to savers on the U.K. book. And then the second question was just on capital. Obviously, nice to see the Pillar 2A requirement come down there. Do you think that was a permanent step down lower? And maybe you could help us think through about is that more volatility on that line? Or is that something that you've done to reassure the PRA about your capital, and we should just take 40 basis points off of the steady-state ratio?

Do you want to take mortgages, John, or...

Do the capital one first.

Okay. So Pillar 2A exactly so in terms of the impact coming through CET1 Pillar 2A, and that's the product of work by the team. And as you know, the PRA are happy first to communicate the change in Pillar 2A, but not the composition of the change in Pillar 2A. I think what is certainly very accurate to say is that the teams have worked very diligently over the course of the last few years to continue to provide a greater understanding as to how the group manages risks that are not necessarily captured in Pillar 1. I think we've been successful over the course of the last few years of through improving data quality, improving dialogue and understanding with the PRA and helping them understand the discipline around managing some of those risks, and that has resulted in the reduction that you see. As you know, we're subject to an annual SREP review, which focuses on an individual capital requirement as well as stress testing. And as to whether or not that reduction proves to be permanent, I think we'll continue to be dependent on the group's ability to demonstrate the discipline with which we manage these risks, continuing to improve the quality of our data, continuing to improve transparency through our regulatory reporting with stress testing and SREP processes. So great progress made. I'm afraid that it's not really up to myself or John or the business to comment as to whether it's a permanent reduction. But it certainly will be our intention to continue to manage capital very, very diligently in a disciplined manner to, hopefully, realize that outcome.

Yes. And then on the NIM questions around deposits and mortgages, there's not a great deal to say. Obviously, at this stage in the rate cycle, this is what you normally expect to see happen to margins. Our two big mortgage books are here and in Hong Kong, and both markets are very competitive. Clearly, we have a structural advantage in both markets in that our cost of funds is different to the market. But both markets are competitive and margins have been under pressure for some time, and that's what we're seeing in the numbers. With respect to the question around the pass-through rates in the U.K., it's difficult to kind of give a broad answer or a complete answer. On the retail side, we passed through - the last rate hike, we passed through a little more than half, I think, to retail customers. On the wholesale side, I don't have the number. So it's very difficult to - well, I don't have the information to give you an equivalent number to the RBS one. Yes.

Our next question today comes from the line of Ed Firth.

Can I just come back again on this question of the savings numbers in that Slide 21, because it's obviously been a very strong performance there. I'm just going trying to get a sense at how much of this is, what I would call, a sustainable uplift. And how much of it is a sense of the rate have just gone up, and therefore, this quarter you've probably done particularly well because there may have been a delay of a month or weeks, and that we should see a sort of smoother picture going forward? Or is that trajectory something that we should now be factoring in over the next, I don't know, 6 to 12 months?

Yes, it's John. Look, I think this story around savings is the story that really underpins the revenue - has underpinned the revenue progression of the group for the last few quarters, and it's likely to underpin the revenue progression for the next few. Because we have these structural surpluses, they've been deployed reasonably short term into the financial markets, and as monetary policy normalizes, the value of those surpluses refloats. It's really nothing more or less complicated than that. So if we believe that the Fed will continue to hike, and in particular, if we believe that HIBOR LIBOR will normalize, i.e., HIBOR will continue to track back towards LIBOR. So I think over time it will. And then there is further upside in that line. It's nothing more or less complicated than we have surpluses which are now worth more now that policy rates go up. And those of you without a much longer-term history of HSBC will recognize how much margin - how quickly our margins compressed when rates came off that crisis. So this is just the reverse of that. So that there is - if rates continue to go up and the Fed and if LIBOR normalizes, there is possibly more to come.

Okay. It's just if I read the newspapers, there seems to be signs of prime rate - some pressure on prime in Hong Kong and perhaps savings rates are you're going to have be ticking up a little bit there if there's a bit more competition around. Is that fair? Or actually, are you finding it pretty easy to hold your pricing where it is?

No, that is fair. That is absolutely fair. I think the likelihood that we will pass more future rate hikes onto customers than we did at the earliest stage in the cycle, I think that's absolutely fair. So yes, that's real.

Our next question comes from the line of Joseph Dickerson of Jefferies.

Just a quick one. If I look at the - your cost, which was $7.7 billion in Q3 operating, yes, there was some slight $100-plus million impact from Argentina. Could you just discuss your investment strategy over the coming quarters? Because I think consensus expectation is for Q4 have a fairly big $600 million, $700 million ramp-up in Q4, which strikes me as somewhat odd given where you are now and kind of the walk that you provided in the presentation. So any commentary on that would be helpful. Also, in terms of your expected credit loss, you called out the U.K. unsecured, but I note the delinquencies are getting better there. So is this similar to the overlay that you did the trade, in other words, some caution around the U.K. that's a management discretion? Any help on two items would be helpful.

So Joe, thanks very much for the question. You'll recall, I'm sure, the first quarter, we provided guidance that we would expect to see the cost profile for the remainder of the year impacted for constant currency to be broadly stable, with the exception of the point that you, quite rightly, identified in terms of the downward push from hyperinflation accounting in Argentina, which was $139 million. That is precisely what we're delivering. Now the commitment around delivering positive jaws is really that discipline around trying to keep the cost and investment profile in line with our propensity to generate revenue growth, which, again, we fully expect to accomplish for 2018 and beyond. But if you reflect on Page 15, the cost profile that you're seeing, I think we would guide you to something reasonably stable into 2000 - sorry, in the fourth quarter, obviously recognizing what the bank levy, to the tune of some billion dollars, coming through in the fourth quarter as we ever do. As it relates...

Iain, was that basically flat on Q3 ex bank levy, assuming no major changes in currency?

Exactly, yes.

Okay, got it.

On credit costs, now broadly, as you can see from our numbers, pretty stable. The increase that we're seeing coming through some unsecured is very much in line with what we're seeing of the growth in the unsecured business growing from a small base. Whether it's in the U.K, Mexico, Hong Kong or the United States, we're seeing slightly higher delinquencies in dollar terms, not necessarily in rate terms, on the back of growing an unsecured lending book. In terms of reflection on the U.K, we - when we implemented IFRS 9 on the 1st of January this year, included within that implementation was our reflection of forward economic guidance at the time did not capture the full effect of the possible impact of the U.K., on the U.K. economy, of leaving Europe. And we incorporated an overly at that time of $245 million. That has remained consistent throughout the course of the year. There's been no adjustment upwards or downwards. And as we refresh forward economic guidance going into the fourth quarter of the year, we may see some movements, either upwards or downwards, in that degree. But really, there are no other factors coming through credit costs other than those we've identified. It's a very, very stable picture. I think one of the things that we saw was continued recoveries coming through the Global Banking and Markets business, notwithstanding the fact that they're slightly lower than in previous quarters. But I think we're beginning to see some normalization of these credit costs at levels we would expect.

Our next question comes from the line of Fahed Kunwar of Redburn.

Just two. The first one is on the interest-earning balance sheet you guys have provided in the quarter was very helpful. It's quite a big jump in the lending yield. I think jumped kind of 10, 11 basis points in the quarter, just looking at the nine months versus the first half. Is that because the kind of effective excess liquidity and HIBOR moving up is inside that line? Or is there something else going on? Because I guess it doesn't chime with a lot of the commentary around pressure and asset margins, particularly on the mortgage side of the business. That's question one. And then the second question was on your risk-weighted assets? Obviously, you've had quite decent-sized currency benefit in the quarter. If I exclude that, then your risk weights basically grew in line with your lending and your leverage. Now overall, I think your target was for revenue growth in excess of risk-weighted asset growth. Should we think about kind of risk weights now broadly growing in line with the balance sheet? Because over the last few years, you've had very good capital efficiency. Or is that - is the effect of GBM optimization still to come through on that point? And I guess, a wider point here is on your core Tier 1 ratio, to you Pillar 2A reduction, you're talking about higher 14%, I think 15% being the kind of core Tier 1 requirement you want to go into going into Basel IV, is that still the case? Should we be still thinking about capital build? Or is the Pillar 2A offset mean you're comfortable around the kind of level of core Tier 1 you are at right now?

Thanks Fahed. No change to guidance on actually any of the points that you raised, whether it's with respect to common equity Tier 1, whether it's with respect to the rate of growth in the balance sheet versus the rate of the growth in risk-weighted assets. So if you recall, in June, John talked about sort of mid-single - low to mid-single-digit growth on the balance sheet and 1% to 2% growth in risk-weighted assets, so continued focus on driving capital efficiency within the business, and you'll have seen in these third quarter numbers continue to progress in that regard, notably within the Global Banking and Markets business. So I think the easiest response to a number of your questions there, Fahed, would be no change to guidance that was provided with the update strategy in June. In terms of overall yields, yes, we've certainly seen improvement in yields both on the asset side and the liability side as we've seen interest rates move up both in U.S. dollars, Hong Kong dollar related there, too, and also, to some extent, within sterling. That's very much as we would expect. In terms of both assets and liabilities, as we see the opportunity to invest surplus capital - surplus liquidity, rather, at slightly higher rates, we're continuing to get good yield coming through that surplus liquidity position. But I think your observation is as we see higher interest rates, we are seeing what we'd expect as both higher yields coming through in assets and in liabilities. I think John's comment earlier around depositor betas is, obviously, as we work through this rate increase cycle, a slightly higher proportion of those rate increases are being shared with our customer base, whether the U.K. or Hong Kong or other jurisdictions impacted by interest rates. But certainly, from a yield perspective, we're seeing improved yields in markets affected by higher interest rates.

And just to follow-up on one good question. So we should expect the core Tier 1 ratio to build going forward.

We said we will maintain common equity one above 14%, recognizing some of the matters that we still have to work through in terms of building understanding and clarity around what Basel III revisions and reform may mean. But we indicated a number above 14%, and that's what we're sticking it.

Our next question comes from the line of Guy Stebbings of Exane BNP Paribas.

I just wanted to circle back on capital and then a question on U.K. mortgages. On capital on Pillar 2A, I appreciate no change to guidance. But the gap now, if you like, between your buffer and your capital stack is quite sizable. So I appreciate the dynamics are particularly complex, right, just to see - given the structure with local RWA differences, double leverage considerations, not to mention Basel finalization. But how should we think about our move in Pillar 2A? I mean, does the make-up your requirement limit the actual impact to any change in Pillar 2A that you have in the business?

The movements in Pillar 2A, particularly the variety that we've experienced in 2018, are helpful. And as I think the regulation is quite clear, Pillar 2A requirements or Pillar 2 is there to capture risks that our supervisor, believe it or not, captured in Pillar I. As we work through reforms to Basel III, one of the things that I think of the Bank of England has been quite clear and helpful on is that as they see those changes filter through Pillar I, so changes whether to the standardized approach or to the internal ratings-based approach, for example, then there is an expectation that there'll be some offset coming through Pillar 2. Now it's obviously too early today to see how exactly that filters through, but what we've accomplished this year is simply to realize through building improved understanding of how we manage risk in this area, some economies from a Pillar 2A perspective. It would be nice to continue to build on that. It clearly is an advantage in terms of building confidence around our capital management capabilities, both internally and clearly with the PRA as well, and we'll build on that. So I don't think, at this point, it does not have a particularly telling impact on our capital guidance as I just highlighted.

Okay. And then just on U.K. mortgages, obviously, it's been an area of considerable growth in recent quarters and again in Q3. Given the market is very competitive, how far away are we from a point where you would sort of reconsider the amount of capital and liquidity you're deploying into the U.K. mortgage market? Or do some of the kind of favorable dynamics on the deposits side kind of offset that and you're happy to continue to grow at the current level?

Yes, Guy, it's John. Yes, we're still happy to grow into the U.K. mortgage market. And we've been an absent from the big part of it for such a long time, we're really just stepping back into it. Our market share in mortgages is still less than half of our natural market share on the liability side of the balance sheet. So there's still very much, if you like, underway. And there is still plenty of good risks for us to take in the U.K. Post of the structural reform, we do have capital and funding to deploy back into the domestic economy, it's one of the byproducts of that structural reform. So we're happy to continue to do this. We're not changing our risk appetite, and we'll stay disciplined, but there are still very good business for us to write. Whether we grow as quickly as we did in Q3, I don't know. But we should continue to take back some of the market share that we give up and plan if there is.

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

It's Ronit from Citi. I have three sets of questions, please, if I may. The first one is, can I circle back to your strong GBM performance? I've obviously heard what you've said so fat on the call, but is there any more color you can give us on your FICC performance in particular? Is there any color on either, say, client activity, whether it's FI versus corporates, positioning went well? Only reason I'm following up is that it's pretty broad-based. It's FX - I mean, quarter-on-quarter FX rates and credit. And if I look at the trading line in your P&L, this looks like it's the best quarter since - from like early 2016. You seemed to have capitalized on some of the EM volatility. Any color on that would be great. Shall I move onto my other - next two questions?

Go ahead.

The second question is on RBWM, and I'm looking at Page 21 of your deck in the Appendix. And by the way, this is - in the last couple of years, your disclosures have become really helpful. But Page 21, you split it out. And I can see the strong performance in savings you've talked about, partly offset by the loans pressure. But can you comment a little bit more on the life insurance line, the manufacturing? I was kind of taken by surprise, a $100 million quarter-on-quarter improvement in life insurance manufacturing. I just felt given the soggy markets, particularly in Hong Kong where much of this must be booked, I would've thought I would have gone down rather than up quarter-on-quarter. And then the other line in RBWM is up also quite substantially. So that's my second question. And the third question is, how do I think about Argentina and the hyperinflation accounting? I know what you said about year-to-date, the negative impact that you booked. But looking at FX movements, it looks like a lot of the FX movement in the piece have happened during the third quarter. Is it fair to say that much of that impact is third quarter? Or was it actually - should I be thinking about it spread across the year in a kind of - in a quarterized, that negative year booked?

How about we do those in reverse order?

Okay. Just go ahead on as you think.

So it is a - the requirements of IAS 29 and 21, the 2 go together. There's not a great - there's no judgment involved. There's just a set of criteria that we have to apply. And we have applied those on a year-to-date inceptions-day basis. So we're required to disclose current purchasing power by reference to the index. And we disclosed in the earnings release, the index that we've applied. And that 100 - so the net impact of $140 million of PBT is the inception-to-date impact. There may be - we're required to do this every quarter. In actual fact, the standard is quite rigorous in that regard. So there may be an adjustment in the fourth quarter, but we'd expect that to be in the low 10s or even less in terms of any impact on PBT in the fourth quarter. Now when you've applied the purchasing index to the Argentinian data, you're then required to translate that into U.S. dollars for group reporting purposes at the end of the reporting date. So 30th of September date was applied. And that clearly amplifies, based on current movements, the impact that, that then has on PBT. So to be clear, we're not restating prior periods, there's a total catch-up of $140 million on PBT from hyperinflation accounting. There may be a small adjustment of that in the fourth quarter, obviously, we'll keep you posted in that regard. And that's about it, really.

Shall I have a crack at the life insurance one?

Fire away.

So yes, life insurance. So the way that we account that - if you're familiar with the previous accounting. So any changes to market or economic assumptions, changes in the value of equity markets or bond prices, et cetera, they transmit through the P&L on a monthly basis, or any market stress you'll see in the P&L on a monthly basis. However, there is an annual exercise which we conduct in September, where we update what we call a noneconomic assumptions. So any changes to models, any changes to things like longevity, perhaps some other parameters that I can't remember, we do that on an a basis in September. I think last year, it was a negative. This year, we've indicated that it was a positive. It was a positive adjustment of $88 million in the third quarter, so it's that. It's just annual noneconomic assumption adjustments that we do every year.

Yes, and in that other line also, Ronit, there's a negative adjustment in the prior period which impacted the other line within Retail Bank and Wealth Management. And it's a little bit of a conglomeration of odds and sods as it relates to Retail Bank and Wealth Management business. So there's nothing particularly telling in the other line as it relates to Retail Bank and Wealth Management. Going back to Global Banking and Markets for a little bit more color. We've always tried to make this point that this is a well-diversified business which does not - it's not particularly dependent on the strength of any particular business in any particular quarter. And hopefully, you can see, again, from the disclosures on Page 10 within the investor deck as well as those within the earnings release, that it's a well-diversified business. So within fixed income - within the fixed income currencies and commodities space, you've seen a very strong performance in the third quarter from foreign exchange. Credit came along quite nicely. Rates, again, we saw has been quite weak, and that's been a continuing phenomenon over the course of the last few quarters. I think the one point that will perhaps stand out compared to the American peer group is that equity seemed a little bit weak. And that almost certainly goes to the competition of our equities business, with stronger concentration within the emerging markets in Asia in particular, where equities performance both in terms of margins on the prime business and overall flow in the third quarter was probably more difficult in emerging markets than was the case in the United States, for example. Again, we saw a pretty stable picture within Global Banking. Global Liquidity and Cash Management is moving ahead strongly at 23%. Trade receivables financing, again another strong quarter. So this is a broad-based business, which is very much focused - a preponderance of focus on corporates as opposed to financial institutions. And again, that's an observation that we've made in the past, that the business is very much focused on a corporate customer base with a much higher proportion of corporates as opposed to financial institutions when compared to some of our peer group.

And Iain, just a follow-up on that comment. So has there been a notable pickup in corporate activity in FICC like hedging or other in the third quarter that has helped you? And just put you in contrast with some of the big global banks have reported, I mean, some reported good FICC results, but this looked particularly good to my amateur eye?

Yes, I think that's true. But I think other areas within FX, there was fairly sensible positioning done ahead of time within the emerging markets, recognizing some pressures that were coming through in that particular area. So our business and our results for business tend to be a reflection of how corporate is positioned as they see trading conditions develop in front of them. So that would be true both in the case of foreign exchange as well as within the Global Banking business.

Iain, good luck in the new role.

Thanks very much, Ronit.

Our next question comes from the line of Manus Costello of Autonomous.

Just of two quick ones for me. You'd previously called out that you've got the U.S. dollar deposits outside the U.S. were seeing upwards pricing pressure. I just wondered how that developed during the quarter and whether you're a bit more relaxed about the outlook now as rates continue to go up even further in the U.S.? And my second question is on your pension. You call out the fact that the recent judgment against Lloyds means that you're going to have to likely take charge as well. Can you give us any indication of how material that might be, please?

Thanks, Manus. In terms of euro-dollar liquidity, I think it will be fair to say that there has been building over the last quarter to some pressure just in terms of euro-dollar liquidity, and almost certainly informed by the fact that a number of central banks are beginning to ease off, call it, reverse quantitative easing. And as a consequence of that, you can certainly see slightly higher funding costs coming through in the euro-dollar space. But again, nothing particularly of note in the third quarter, but just an observation that liquidity in that space is high. But again, when you look at the strength of our corporate surpluses in our main operating centers around the group, this is something that we - overall, the improving interest rate environment for us is a very positive tailwind. But just as an observation around Europe - euro-dollar liquidity, that is tightening and you see some of them in the prices.

And so do you think that beta for you would be about the same as it was at the half year? Or has it increased versus last year?

Very, very marginal increase. Very marginal increase, okay? And in terms of the judgment handed down by high courts in respect to Lloyds Banking Group on Friday, as you know, that will affect a great many defined-benefit plans across the United Kingdom. Our largest defined-benefit plan in the world is the U.K. defined-benefit plan. It is very well funded. We carry a surplus on that plan of some £6.2 billion. The effect of that judgment will be that we will sit down with our actuarial team and go through and work through the impact of that judgment on the plan, but it will result in us recording a charge to the P&L in recognition of prior period service. So this is a cost of service from employees in prior period. We'll evaluate that. It will not be - well, I shouldn't say won't be because we're working through the valuation of it. In the realm of significant versus material, we would expect it to be significant but not material, if that makes any sense to you at all, Manus.

I think I'll follow-up with IR afterwards.

You can follow all you like. They've been told they can't tell you anything until their teams finished the work.

Okay. Manus, thank you. I think, operator, it looks like we've got one more question, and then I will sum up if that's okay.

Our last question today comes from the line of David Lock.

First one is just on model changes. I think - and you've previously called out $12 billion of opportunities in the second half. I just wondered if you could give us an update of where we are and the likely timing of those. The second one is on Global Trade and Receivables Finance. If I could compare the funded assets, which were in the slides with the revenue trends, it looks to me like the margin has actually jumped from that 80 to 90 basis points in the third quarter. I just wondered if that's a real kind of increase you're seeing in the margin now or is that just averaging effect in the balances that I can see on the slide. And then the final one is another question on Slide 21. I think you've restated the way you split holdings interest expense and other. I just wondered if you'd give us a steer on how we think those lines should evolve over time. I think you've previously talked about $0.2 billion of MREL increase coming through this year versus last year. Could you give us any idea of how we should expect the fourth quarter and 2019 to evolve, that would be great.

In terms of any further issuance in the fourth quarter, I think it's going to depend on the market. We've largely, both at an AT1 and an MREL level, completed what we set out to do for 2018. We had pretty favorable funding markets for HSBC product over the course of this year and as recently in the third quarter. If the market is equally welcoming of HSBC paper, we may well be go ahead and try and prefund some of what we believe we would need to do or we know we would need to do in 2019, provided the conditions are favorable to us. If we were to do any more in the third quarter, it would probably in the range of $2 billion to $3 billion in the MREL space and across a range of currencies other than the U.S. dollar. So I think you'd probably get a sense as to how that would flow through into the fourth quarter and beyond. Really what we did within that classification was really just to split out the - to give you more of a headquarter cost view in terms of what is retained at the parent company in terms of our holding company capital buffer in terms of funding and refinancing requirements for that debt, because the principal issuer of instruments is the holding company, so just ensuring that we've got a strong refinancing buffer there to support any refinancing disruption. So really, nothing really else on that front. When you talk about the Global Trade and Receivables Financing, we've certainly grown the revenue in that regard. When you talk about margins, we've seen a little bit of expansion in margins. And when I say a little, I mean, a little in the European context and a little bit tightening in margins in the Asian context. So broadly, what you're seeing across the Global Trade and Receivables Financing is a host - a bit of an averaging effect with a little bit of expansion in Europe, offset by a little bit of compression within the Asian environment. You talked to model changes, we do. We still - we started the year with about $20 billion of opportunity for model approvals from the regulator. In the first half of the year, we got eight of that through, we've got about 12 still to come. whether that is going to come through in the fourth quarter, I would say hasten to say probably unlikely. Our model approvals require approvals from the European - the EBA or the ECB as well. And in that regard, we've, along with probably other banks in the U.K., fell slightly victim to the Brexit process, such that notwithstanding the best efforts of the PRA, there are a few models which have not yet been approved and probably will slip into next year. But we continue to manage down risk-weighted assets in credit, and what we've got is a very small one-off in the U.S. portfolio, which is principally operating risk-weighted assets, which we'd expect to see roll off progressively over the course of the next year or so. But the discipline around overall RWA management, no change in that regard. There's a strong focus in continuing to improve the overall efficiency of the capital deployed within the businesses, the Corporate Centre, the group overall.

Okay, very good. Thank you all very much for joining us this morning. Just as a quick recap, a really solid set of numbers for Q3. Management's primary focus is on improving the return on tangible equity of the group and getting us back with above 11% by 2020. In order to do this, we plan to grow revenues quicker than costs, and this is why our positive jaws discipline is something to which we remain committed. I was expecting lots of questions on jaws this morning, and we didn't get many, so I suggest that you're comforted by the progress we've made in Q3. As I say, we remain in line with our plan to get back to positive jaws. As I indicated that the half year, I won't make any silly decisions that damage the long-term health of the franchise just to get there. Positive jaws is the means to the end. The end is a much improved return on our equity. But again, Q3, I think, should give you comfort that we're making good progress against the strategy that we outlined over the summer. Thank you for being with us. Operator, this ends today's call. Thank you.

Thank you, ladies and gentlemen. That concludes the call for the HSBC Holdings plc Earnings Release for 3Q 2018. You may now disconnect.