Good morning, ladies and gentlemen, and welcome to the Investor and Analysts Conference Call for HSBC Holdings Plc's Earnings Release for the First Quarter 2022. For your information, this conference is being recorded. At this time, I will hand the call over to your host, Mr. Ewen Stevenson, Group Chief Financial Officer.

Thanks and good morning in London and good afternoon in Hong Kong. Thanks for joining today for our first quarter results. I'll run quickly through the presentation and then open up for questions. At our full-year results, Noel and I set out a path back to double-digit returns, strong revenue growth driven by volumes and rising rates and tight cost discipline. Our strategy to get there is on track. All of these building blocks were reflected in our first quarter results, strong underlying volume growth across most of our businesses, with $21 billion of lending growth and lending up in every global business and region. The benefit of rate rises is now being reflected in our net interest margin. Our net interest margin was up seven basis points in the quarter, our highest quarterly NIM since the second quarter of 2020 and implied consensus policy rates have further strengthened since full-year results with further positive implications for our net interest margin and net interest income in 2022 and 2023. We maintained good cost discipline with adjusting costs down 2% versus first quarter last year, in line with our target of keeping costs flat this year, and within a 0% to 2% growth range for 2023. Despite more challenged macro conditions this quarter, we remained firmly on track at this point to deliver double-digit returns in 2023. While reported profits before tax were down on last year's first quarter, this mainly reflected a weaker quarter for Wealth driven by a combination of weak markets and Hong Kong COVID restrictions together with a turnaround towards a more normalized level of expected credit losses from net right backs in first quarter last year. On capital with a 14.1% Core Tier 1 ratio, we're now back within 14% to 14.5% target range. We've completed a $2 billion buyback, we announced that our third quarter results and we expect to launch our next $1 billion buyback in early May following our Annual General Meeting later this week. With the now expected benefit of higher net interest income in 2023, this should strengthen our returns outlook and capacity to fund attractive growth and distributions. On the next slide, we're seeing good momentum across most parts of our franchise reflecting our focus back to areas of competitive strength. In Wealth and Personal Banking, our underlying insurance business performed well with new business levels equivalent to pre-pandemic sales. And that's despite the closure of the Hong Kong Mainland China border and the impact of COVID restrictions on Hong Kong branch openings. And our mortgage franchise continues to underpin good growth in personal banking. In Commercial Banking, we saw strong lending growth of $9 billion or 3% versus the fourth quarter with credit and lending up $6 billion and trade balances up $3 billion. Commercial Banking fees were also up 13%, the seventh straight quarter of increased fee income in Commercial Banking. We were profitable in all regions including strong performances in the U.K. Ring-fence bank in the Middle East. You will have already seen our sustainability announcements, which we're now working hard to implement. And we made further progress in reducing our real estate footprint, with a further seven buildings closed in the first quarter. Our footprint is now down 25% since the end of 2019. On the next slide, we provided an update on our business in Hong Kong and Mainland China in light of the material COVID restrictions that have been in place in both markets. In Hong Kong, branch closures in soft markets clearly impacted revenue. But we continue to see good sales activity in the quarter underpinned by the increasing shift to digital sales and the investment we've made over recent years to support this. Our remote sales capability particularly benefited insurance, which delivered pre-pandemic levels of sales volumes, despite the branch closures and the continued closure of the Mainland China border. As we've seen globally, with the short cycle of Omicron, Hong Kong is now starting to reopen. Our branches are operating normally again as of last week, and we expect client activity to begin to normalize as a result. In Mainland China, we had another solid performance despite the impact of COVID restrictions on our own team and more widely. Revenues were up 9% on last year's first quarter, lending grew by $6 billion, or 11% with a strong Commercial Banking performances, the standout. Turning to Slide 5, I've touched on most of this already, adjusted net interest income was up 10% at $7 billion in the quarter, reflecting both rate rises and balance sheet growth. But non-net interest income was down 16%, mainly due to insurance market impacts and the effects of COVID restrictions on Asia Wealth. Our tangible net asset value per share was $7.80 down $0.08, with profit generation more than offset by fair value movements and the impact of FX. Turning to revenue on the next slide, while Wealth and Personal Banking revenue was down 6%, the bulk of this was due to insurance market impacts. We had a good Personal Banking performance, revenues up 7% on first quarter last year benefiting from rate rises and balance sheet growth. This was offset however by a weaker quarter in Wealth with revenues down 19% driven by the impact of weaker markets and Hong Kong COVID restrictions. Commercial Banking revenue was up 9% spread across all our main products with continued good fee income growth. GLCM and trade were the standout performers, GLCM up 21%, reflecting both higher balances and higher interest rates and trade reflecting continued balanced growth. While Global Banking and Markets revenue was down 4%, this was mainly from lower revaluation gains and principal investments, Markets and Securities Services revenues were down 2% against the strong first quarter last year underpinned by good performance in FX, up 15%, Global Banking was up 4% reflecting our different business mix to many peers with GLCM revenues up 21% from higher rates and volumes. On Slide 7, net interest income was $7 billion, up $483 million versus last year's first quarter. This was mainly driven by higher rates and volumes, particularly in Wealth and Personal Banking and Commercial Banking. On rates, the net interest margin was 126 basis points, that's up seven basis points on the fourth quarter. Implied consensus policy rates have further strengthened since full-year results with further positive implications for net interest income in 2022 and 2023 giving us even greater confidence in retrieving double-digit returns in 2023. On the next slide on credit performance, we've reported a net charge of $642 million of ECLs in the quarter, some 25 basis points of average loans. The overall quality of our loan book remains good, Stage 3 loans as a percentage of total loans are stable at 1.8%, the ECL charge includes around $250 million relating to Russia exposures, and around $160 million relating to China commercial real estate. We've released most of our remaining COVID-19 provisions, some $600 million in the quarter. This was largely offset by additional reserves of $525 million, comprising $275 million of forward economic guidance driven additional expected credit losses and a $250 million central management provision reflecting a cautious approach given the increased economic uncertainty. We continue to expect ECLs to normalize towards 30 basis points of average loans for the year. Turning to Slide 9, first quarter adjusted operating costs were down 2% on the same period last year, driven by continued cost control, and the lower performance related pay accrual relative to last year's first quarter. As in previous quarters, we are continuing to invest in technology, while reducing other BAU [ph] costs. We've made a further $600 million of cost program savings during the first quarter with cost to achieve spend of around $400 million. We've remained on track to achieve the higher end of our $5 billion to $5.5 billion of cost savings over the three years to the end of this year, with at least a further $0.5 billion of cost savings from this program now expected in 2023. To reiterate, despite a low run rate cost to achieve in the quarter, we continue to expect to have total cost to achieve spend of around $3.4 billion this year, which will complete our combined cost to achieve spend of $7 billion when the three year program ends in the fourth quarter of this year. We remain on track to achieve stable costs this year compared with 2021 and we remain committed to keeping underlying cost growth in 2023 within a 0% to 2% growth range. Turning to capital on Slide 10, our core Tier 1 ratio was 14.1% down 170 basis points on the fourth quarter, and back to being within 14% to 14.5% target range. We flagged the impact of regulatory changes and the unwind of software capitalization benefits at our full-year results. Together, these reduced our core Tier 1 ratio by around 80 basis points in the quarter. And the dividend accrual and the announced additional $1 billion buyback accounted for another 30 basis points. In addition, the steepening of the yield curves on financial assets designated as hold to collect and sell were reflected in negative after tax reserve movements of $3.1 billion or around 40 basis points, which was reflected in other comprehensive income and our core Tier 1. Reported RWAs were up $24 billion on the fourth quarter, due largely to regulatory changes and lending growth partly offset by ongoing risk weighted assets saves and FX movements. Our cumulative RWA saves are now $112 billion. We're firmly on track to achieve our new ambition of at least $120 billion of cumulative RWA saves by this year-end. Just as a reminder later this year, we expect an impact of around 35 basis points of core Tier 1 from the sale of our French retail business, which we expect to contribute to us falling below our 14% to 14.5% target range during the coming quarters. But as I said at our full-year results, our intention is to manage within the 14% to 14.5% range over time. We've now completed $2 billion buyback announced in October and we expect to launch our next $1 billion buyback in early May following our AGM later this week. As we're now at the bottom of our target range due to the impact of fair value market losses, and that we're continuing to see good expected growth in the business, we're now unlikely to announce further buybacks during 2022. However buybacks remain an integral part of our capital management toolkit going forward. So to conclude, despite a tougher set of operating conditions this quarter, we've remained very focused on getting back to double-digit returns in 2023. To achieve this, we need to see good volume growth, rising rates, and cost discipline. All of these attributes were there in these results, underlying volumes grew in most parts of our business underpinned by lending growth of $21 billion. Our net interest margin rose seven basis points for our highest quarterly net interest margin since the second quarter of 2020 and costs declined by 2%. So despite the macro environment, impacting Wealth revenues and expected credit losses this quarter, the fundamentals of the benefit of rising rates have only strengthened since our full-year results. Increasing our confidence in delivering double-digit returns in 2023 and our capacity to find attractive growth and distributions. With that, Martin, if we could please open up for questions.

Thank you Mr. Stevenson. [Operator Instructions]. We will now take our first question today. This comes from the line of Joseph Dickerson of Jeffries. Please go ahead.

Hi, good morning.

Hi, Joe.

Hi, thank you for taking my question. Just a quick one. Just on the Q1 non-interest income, I mean how much of this is frankly backward looking given. You've got a lot of market impacts, et cetera. And it sounds like your commentary from your commentary things are starting to pick up in the Hong Kong. Can we start to see some, I guess, are you able to recoup some of the "lost revenue" from things like well, sales and markets will do what they will. But I guess it seems like if most of this is backward looking your separate quite a rebound and non-interest income over the coming quarters. I just would like your commentary on that, please? Thank you very much.

Yes, Joseph. Thanks. I think it's a mix. So there'll be insurance market impacts. Obviously, that will depend on the performance of markets on the second quarter, but we certainly wouldn't. And we're not anticipating the same extent of negative market adjustment that we saw in Q1. Yes, there are some line items like equity brokerage, the flow business that obviously equity brokerage volumes for us in Hong Kong were down almost 50% in the quarter. We do expect that to normalize back. Q1 is normally our strongest quarter, but we don't think we'll recoup the flow business that we lost in Q1. If you look at something like mutual funds sales, which is in Hong Kong were down around 30%, I think there'll be a mix. I do think part of that we should recoup in the coming quarters. So overall, I would -- yes, I think you'll see a decent recovery in Q2, Q3, Q4. Yes, it's some of what happened in Q1, I think is last. And just remember that Q1 is our strongest quarter normally. So you have to seasonalize my comments that I've just made.

Thanks very much.

Thank you. We will now take your next question. This comes from line of Aman Rakkar of Barclays. Please go ahead.

Good morning, Ewen.

Good morning.

Two questions if I may. One on revenue, you're flagging up further net interest income outlook. But note that you retained the kind of mid single-digit revenue growth aspiration for this year. So it just wanted to be exactly clear on to what extent there was an offset in non-interest income. Is this simply because of the activity impact in Hong Kong and China? And what kind of assumption you making about reopening when you're thinking about mid single-digit revenue growth in 2022? The second was around FX. I think this is something typically consensus struggles the model very well for HSBC. And I know that there is a pretty meaningful revenue headwind from FX of about $1.4 billion based on March offset by $9 million lower costs based on the average FX in March. If I was to look at spot FX rates, they're probably even a touch weaker here? And particularly for revenues if I was to rebase your 2021 revenue for the updated FX and factor in your mid single-digit revenue guide. It probably is pointing to 2022 revenues around 51 billion. Consensus is around 53 billion. So I mean, does that math sounds about right to you? Is there any additional color that you'd add to that? Thank you.

Yes. So, look, we do think that we'll see net interest income growth comfortably in excess of sort of mid single-digits. The offset by slower non net interest income growth, particularly given the impacts that we've seen in the first quarter on Asia well, yes, which will hold. Yes, which will impact non-interest income for the remainder of the year. But yes, there will be an FX impact. Yes, I do think your estimate around 1.4 billion, 1.5 billion is a reasonable estimate of that, net interest that FX impact roughly split, I guess, across non-interest income and net interest income. Yes, your forecast feels a bit like to me. Actually, despite everything I've said about the impact of FX. So yes, that's probably all we're going to say on your own forecast.

And that's great. Thank you very much.

Thank you. Your next question today comes from line of Raul Sinha of JPMorgan. Please go ahead.

Good morning. And thanks very much for taking my questions. Maybe the first one, just focusing a little bit on the NIM trajectory. And on the Slide 18, you again showing a very helpful breakdown. And what is interesting here is the U.K. bank NIM actually improved quite significantly quarter-on-quarter. Whereas clearly, everything else is sticking up very nicely as we go along. So I guess my question is, is there anything specific in terms of repricing you're seeing in the U.K. to explain that movement? And related to Hong Kong are you seeing, how should we think about the gap between HIBOR and LIBOR, it's about 50 basis points now? HIBOR is obviously lagging the move up in U.S. interest rates? How should we think about that impacting the NII trajectory? And then underneath it. Just another follow-up question, if I can on RWAs. You've obviously had positive credit migration, again from asset quality this quarter. I was just wondering, what do you think about the moving parts, a lot of the ways for the rest of the year? Thank you.

On the NIM trajectory in U.K., I think there's nothing really to call out in relation to asset on the asset side, continuing pressure, as you all know, and sort of U.K. mortgage market. But the main thing you're seeing is the benefit of the two rate rises that already come through in the quarter. And as we've talked about, yes deposit features being sort of below 50% for the first few rate rises. So yes, we continue to think that we will see very material net interest income growth in the U.K. as policy rates continue to rise over the remainder of the year as we expect. In Hong Kong, with HIBOR yes, consensus seems to be -- yes, the current consensus, in our own forecasts at HSBC, I think perhaps for 50 basis point rise in fed funds next month and another 50 in June. If we get that 100 basis point rate rises coming through, it's very difficult to see how HIBOR doesn't react. So if you'd asked me, yes, at full-year results, I would have said we could have embedded sort of six month lag between HIBOR and U.S. dollar rates. Given the shape of U.S. dollar rate rises that we're now likely to see being much more front end loaded. I think it's hard to see that gapping more than one quarter. So on risk weighted assets for the remainder of the year, yes, in terms of things to call out you've obviously got FX. Yes, I don't think there's any material reg movements from here to call out. You've obviously got the impact of M&A to factor through including the French retail bank exit and a few smaller acquisitions that we've made. But, the Q1 was definitely the quarter that we expected to see most of the activity that we've now seen, so it will be a much more normalized trajectory, I think, in the coming quarters.

Thank you, that's really helpful. If I do have a second follow-up, but on regulatory changes, in last quarter, you've called out about a 5% out of view inflation guide for the medium-term on regulatory changes. And how much of that is remaining? Just thinking more medium-term about RWA loss?

Yes, I mean, I think at the moment where through most of it -- yes, you then roll forward to the introduction of Basel, I guess, first of January 25 maybe. We're actually thinking that will be a small net benefit to us. Even further forward, by the time we're out to 2030 we may see the impact of output floors at that point, which would be, I think, unless we adjusted our business model would be a negative at that point. But certainly over the next few years, I think we're through the bulk of it. And as I say, in one January 25, we as we currently model, we think Pfizer will be a net positive for us.

And that's really helpful. Thank you.

Our next question today comes from the line of Jason Napier of UBS. Your line is now open.

Good morning, Ewen.

Hi, Jason.

Thank you for taking my questions. Two please, both on net interest income. The first is if we take 4% volume growth over the year, and just run it into 2023. And then give you about 150 basis points of kind of yield curve moves. I'm getting sort of $37 billion to $38 billion of net interest income. Consensus is sort of in the $33 billion. I think what you're saying about FX, but I guess we've all got our opinions on using a 50% deposit in the max. Is there anything kind of wrong with volumes plus 150 basis points that we should know about sort of structurally as far as the walk forward into next year is concerned? And then I got a second question.

No. Well, I don't like talking about NIM and forecast, Jason, but I think reflecting on what's happened over the last couple of months. Yes, I think, yes, the average consensus model was probably outdated following our full-year results in late February. Since then, we've seen very material rate rises coming through in March and April, which I don't think is reflected in consensus. So internal forecasts are materially ahead of consensus as they currently set for net interest income in 2023 without commenting on your numbers.

Sure. Thank you. And then the second one, perhaps a more useful one from your perspective. Just in terms of the mechanics of the way that I've never quite been able to square the 5 billion number, even if you are using a 50% deposit return today, I find myself even less capable of doing that. And I'll tell you why the unwind of FVOCI is a sort of a $5 billion tailwind period. But of course, that only relates to 350 billion in bonds. And you've got a trillion in loans and deposits that match one another. I just wonder why the rate gearing isn't substantially more than that. If the bond held went on its own. Given what's happened to rates its about $5 billion. Is it something fundamental that I'm getting wrong there that you can spot?

Yes, I'm not sure your bond tail is a bond tail. I think so, the way I think about it is we have a gross and net interest rate exposure. We hedge about 20% of our overall net interest income exposure through that bond portfolio that we're referring to, which we've just taken the fair market value losses on. Yes that doesn't provide us with that incremental $4 billion, $5 billion of unwind over the next five quarters. We see that benefit and the other 80% of the portfolio. Yes, and the interest rate sensitivity that we show you is the net interest rate sensitivity, not the gross interest rate sensitivity. So if we didn't have that portfolio and hedging in place, yes, that $5.4 billion is probably closer to $7 billion or something. So the benefit of higher rates that we've seen coming through that has created the fair market value losses. The benefit of that higher net interest income, we won't see in that portfolio. We'll see in the unhedged 80% of the portfolio that we've given you interest rate sensitivity for. I don't know whether that helps or hinders your understanding, Jason.

That's very helpful, thank you. So that's why your year one uplift is $5 billion in New Year, $3 billion, $4 billion, $5 billion gets to $8 billion to reversal of that. That helps, Ewen. Okay, got it. Thank you.

Your next question today comes from the line of Yafei Tian of Citigroup. Please go ahead.

Thank you, I have two questions.

Good morning.

Hi, good morning. The first one is around the capital market side of the business, very resilient quarter because of market volatility. Just wanted to get a bit of flavor with April volatility coming down a bit, how you are thinking about the FIC and the capital markets side of the revenue for second quarter? And then secondly is to look at Slide 25, where you give quite a lot of color, the impact through OCI, but just wanted to have a better understanding how should we be modeling the coming few quarters, at least the potential OCI impact that is going to come from the higher rates that we're seeing? Thank you.

Yes, so on Global Banking and Markets and the outlook, I mean, I guess a few things. There's nothing really to call out that surprised us so far in April. So very much tracking, according to underlying plans at the moment. We haven't seen any material slowdown going on in our markets franchise month-to-date. Global Banking, I don't know whether it's asked but our pipeline continues to look pretty robust and has been pretty resilient probably in part, we are less exposed to the U.S. M&A and IPO markets and some of the other markets that we are exposed to like the Middle East have been outperforming for us. The other thing I would note in our Global Banking Markets franchise is a lot of the revenue line items are interest rate sensitive, so Securities Services, GLCM, GTRF they should outperform on the back of this better rates environment, which will help cushion if there was any weakness that we saw in some of the sort of more traditional investment banking lines and market lines that you would compare with peers. And I do think we're continuing to operate in an environment with higher levels of FX volatility, which again should benefit our FX franchise. On OCI. I think the only thing to call out is if you take the -- if you take the month-to-date adjustment on the Treasury portfolio, there's about an additional $1 billion pretax of fair value losses, which would obviously run through OCI in April.

Sorry, would there be anything additional to that $1 billion or do we think about it?

It very much depends on the forward curve of interest rates from here over the remainder of the quarter. If they didn't move, it would be about a billion dollars, if they do move, it will adjust up and down. But just to give you some sense of sensitivity, and please take this as a very broad and basic sensitivity. But yes every approximately 25 basis points of higher rates across the curve adds about a billion dollars of additional fair value losses and the reverse of that also being true i.e. if they were 25 basis points lower, that fair value loss would come in by about a billion dollars. So I think that will give you enough to model over the quarter depending on where interest rates are relative to today.

Got it, is that how many quarters does that last, so let's say if rates curve stabilize and I guess from that point onwards, will there'll be any benefits that we should be thinking about once interest rates stabilize at certain level from higher treasury returns or should we just take that into account to fund the net interest income that you have provided?

No, there'll be no latent one-off gain or loss at that point. Yes and then effectively, you'll see the benefit of wherever those rates stabilized come through and net interest income and the net interest margin over time.

Got it. Thank you so much.

Our next question today comes from the line of Omar Keenan of Credit Suisse. Please go ahead.

Good morning everybody. Thank you very much for taking the questions. As was commented, earlier market expectations for policy rates have moved up since the full-year. So appreciate the sensitivity that's been given on for the year one and year five. Can I perhaps just ask about how you're thinking about things in terms of -- in terms of the net interest margins? If we think about 2019, I think the Fed funds rate peaked out at about 2.5% and NIMs were quite close to 1.6%. I think they were 1.59% for the year. Has anything changed in terms of the balance sheet structure that would mean that just in terms of tend to check in that wouldn't be achievable again or is that a good target to think about and just on a related question to rate, can I ask if you're thinking more over the medium term, how comfortable are you that through the cycle 30 basis point not guidances right for a world where policy rates are close to 3%. So I guess the crux of the question there is to try to understand where the negative from higher rates might come offset the positive then if that inflection rates are substantially higher above 3%? Thank you.

Yes, so I mean what's changed since 2019 I mean firstly the balance sheet is materially bigger. So average interest earning assets have gone up materially. So on a rate by volume basis, we should be earning higher net interest income if we return to previous NIM levels. The other thing is, I think the market implied rates particularly in some markets are actually higher than 2019. So we certainly expect to see a very strong recovery back in NIM. As you model it through, it maybe in some markets that gets you back to higher levels of NIM in different currencies than you had previously and the balance sheet is larger. On the negative impacts of higher rates, there's a few things I mean firstly on costs is, yes the higher rates reflects higher inflation. Yes, if you looked at our fixed pay increases this year, they were more than double the fixed pay increases that we put through in 2020 or the year before, so we do think we're managing to offset that inflation at the moment by additional cost saves. And we've committed and continue to commit to flat costs this year, and keeping cost growth within a 0% to 2% range next year, the higher end of that range reflects very much the impact that we're seeing of inflation. On ECLs, I think rates need to go up materially higher than what are currently being what we're currently seeing in forward rate curves remember, we're starting from decades or century lows in terms of the start of this rate cycle. So we do think they would have to go up materially further than what we currently see implied. So just as a reminder, we said 30 to 40 basis points during the cycle, not 30. We continue to be comfortable with that guidance.

Thank you very much.

Our next question today comes from the line of Tom Rayner of Numis. Your line is now open.

Good morning, Ewen. Could you maybe you sort of talk us through in a bit more detail this sort of the impact of these OCI movements on the capital ratio, and how you might expect that to impact to reverse over the next four to six quarters because I guess my concern is that consensus forecast may have already factored in the benefits of higher interest rates based on your sensitivity disclosures and the forward curve, but not factored in the negative impacts that you're now flagging on the capital ratio. So there is a danger, that consensus sort of equity Tier 1 ratio versus consensus NIM might be somehow out of line, if you could maybe talk us through that please.

Yes, so on OCI movements, yes as we talked about today, there would be about another billion dollar pretax movement in April, based on how rates are strengthened further in April. Yes, there is a sort of multiplicative effect on our threshold deductions as Core Tier 1 declines, then you also, I think you'll see in the numbers, there's also a sort of meaningful chunk of Core Tier 1 impairment that's come through as a result of the reduction in Core Tier 1 and the impact that has on threshold deductions together with the increases we've seen in BoComm, and now the acquisition of AXA Singapore. Yes, rolling forward, it's not the unwind of just a repeat to what I was saying with Jason, it's not the unwind of the fair value losses that benefits net interest income and capital, it's the impact of those higher rates on the 80% of the book roughly, that's not hedged. And therefore we expect it will take about five quarters for that higher net interest income to get us back to the same place. We don't think as I said earlier that yes the rate rises, implied rate rises that we've seen coming through in March, and April are reflected in consensus. If we look at our internal numbers, they are materially ahead of consensus for '23 based on the latest rate curves, so I think what you will see therefore as that translates into core Tier 1 is you should get back to the same point on core Tier 1 sometime next year. But in the near-term, we've had the 40 basis point impact from the fair value losses, we've had through first quarter, we've got about another 10 basis points, if you adjust for fair value losses in April or just under 10 basis points. Yes, we will recoup that through higher net interest income over the following five quarters. So there'll be a timing mismatch on capital. It's that timing mismatch on capital, which causes us to say today that we think it is now unlikely that we will do further buybacks in the second half of this year. But the reverse of that should be much higher net interest income, much higher returns, much higher distribution capacity in 2023 and beyond.

Yes, okay. Net-net though, if you are putting through net interest income based on future rate movements, we have to consider the capital implications of those rate movements as well. Is that fair?

Yes, so I think if I looked at consensus today, it hasn't reflected, it didn't, hadn't reflected the impact of the fair value losses on capital equally, it hadn't reflected the benefit of those interest rate rises on net interest income over time.

Yes, okay. Could I just ask second, just a very quick one, just on Q1 ECL numbers. So obviously there's lots of moving parts here and I guess the provisions you've taken of Russia and for China CRE reflect everything that you expect at this moment in time, so you won't expect, I guess to be taking similar provisions for those issues and with the economic uncertainty as well, there was a charge in there, I think maybe it's just a change in assumptions. But these are things which we can look at as sort of Q1 noise and really going forward, we should think more about the underlying sort of run rate charge that you expect this year?

Yes, well so for Russia, I would say, we've obviously spent a lot of time on Russia exposure, we've been able to do a pretty good estimate of where we think losses will come through. We think that $250 million charge we've taken for Russia is a good estimate of what we can see today. So something dramatic would have to change in relation to the Russia Ukraine war, or our position on our Russian subsidiary to get to different outcomes, or what we've announced today. On the $160 million out of China commercial real estate, yes, I would not make the same statement, yes, you've got a very fluid situation in the China commercial real estate sector, there's been two big factors going on. One has been policy tightening that we saw at the back end of last year that started to get unwind -- unwound at the beginning part of this year, that created a liquidity squeeze that has now eased substantially. But the underlying credit conditions of the China commercial real estate markets continue to be weak. Yes, we did see a number of small names go into default this quarter. Yes, the $160 million charge was a mix of Stage 1, 2 and 3 it's down materially from the $0.5 billion or so that we took in Q4. But I wouldn't say yes, it would be a big call time to say that was in relation to the remaining provisions required from the China commercial real estate market. But we're not anticipating it will be a material number. And it is contained within the guidance that we've given for full-year provisions. So yes, that statement is that we expect to trend towards 30 basis points of ECL provisions this year. Q1 was 25 basis points.

Yes, kind of good. Okay, that's it for me. Thanks a lot.

Our next question today comes from the line of Ed Firth of KBW. Your line is now open.

Yes, good morning, Ewen.

Hi, Ed.

Yes. Hi. I have two questions both on costs really? One was back to the cost to achieve charge? You're obviously running well below that. And all the annualized rate, I guess I know, the expectation I get what you're saying about the expectation is to pick up in the rest of the year. But in the past, if you've -- if you haven't spent the money, you then roll it forward into the next year. So should we be expecting that as the sort of the course scenario? Is that the way we should be thinking about it as we look over the rest of this year? And I guess that's the first question. And then the second point is, if I look at your cost guidance, flat this year and flat to 2% next year. I mean, that is quite markedly different from a number of other global banks who are talking about the need for additional investment, particularly digital payments, et cetera, et cetera. And I'm just wondering what -- why that is so? I mean, is it -- do you feel that you were over investing in the past? And therefore you now you can bring it back a bit? Or are they doing stuffs that you're not doing? Why is that sort of about difference in terms of the cost?

Okay, so on the first one, you shouldn't think of the program drifting into 2023. We have a board approved program that expires at the end of this year. We will spend the remaining $2.9 billion, I think it is between now and the end of the year, and if we don't we lose it. So our intention is to spend that money. We think it is sensible to spend the money because we can drive up incremental cost savings. And that thinking is factored into our confidence in keeping fast growth to zero to 2% next year. So yes, our current intention is that we will run very close to spending that $2.9 billion for the remainder of the year. So if you don't see it coming in next quarter, just assume I'm making exactly the same comment where we get to interim results about the flow through into the second half. Yes, on the cost program, maybe I should say, thanks. Yes, I've run the cost program. So look, I can't comment on other banks. But look, I think what's clear here is that no top down is very, very committed to delivering on the targets that we've announced to the market. Yes, we've got very detailed plans in relation to achieving the flat cost for this year. I would say for next year, we need to find about an incremental cost savings of about a billion dollars. We are working hard on that at the moment. We expect to have that solutions by the time that we get to interim results at the beginning of August. And that sort of cost gap is not unusual relative to previous guidance that we've given for future years at this time of the year. We're well developed across a number of work streams and identifying areas that we can strip out of incremental cost. So yes, I would say the cost management here has been transformed over recent years. And you can see that in terms of the overall cost trajectory that we've had from 2019 onwards, where we broadly kept costs flat now '18, '19, '20 -- so '19 through '22.

Yes. Okay. I just think if you were given the inflationary environment, that's obviously a much -- you're actually improving your cost savings, and rather than in holding a plan?

Yes, no, we understand that. And that's why we've got a degree of a range for next year consistent with that.

Great. Thanks so much.

Our next question today comes from line of Guy Stebbings of BNP Paribas. Your line is now open.

Hi, Guy.

Hi, morning. Morning, Ewen. Most of my questions been asked and answered. So just a couple on the capsules [indiscernible]. And could you expand on the hit from the threshold deductions in Q1? I recognize some of it was simply a reflection of the moving equity base itself. But how much is residual stuff? And was it a particularly odd course for welcome treatment? Should we be worry about a similar move in the future or actually might receive a partial reversal if welcome dividends sort of come through? And then on capital and longer-term and I suppose to be able to quantify the helpful commentary on Basel 3.1 expected to be a net positive now pre the output for some very broadly, are we talking low single-digit percentage drop in our days or something of that sort of magnitude? Any additional color are very helpful? Thanks.

Yes, so in terms of the increase in threshold deductions, about $1.3 billion off it comes from the growth and the value of investments in AXA, which is about $600 million and Bocom, which is about $700 million. And then there's about $800 million is due to the threshold being lower because we've got a lower core Tier 1 ratio, which is as a result of the fair value losses, the loss of core Tier 1 treatment for software intangibles, the dividend accrual and the billion dollar share buyback. I would take it from all the comments we've been saying today, we think we're back into a cycle of much higher returns, which should drive continued core Tier 1 improvement and therefore help mitigate some of the impacts that we've seen this quarter. Sorry the second question?

So the second question was just almost Basel 3.1 comments that you gave?

Yes, so -- yes, as we said, we think in 2025, we'll see a modest benefit from modest from the introduction of Basel reform, partly, but almost entirely driven by the fact that we've taken most of the impacts up front, including in this quarter. So I do think over the next couple of years, you'll see a much cleaner RWA trajectory for us with the only thing to pay attention to which we'll need to give you color on is the impact of M&A both buy side and sell side.

Okay, thank you.

Our next question today comes from the line of Manus Costello of Autonomous. Please go ahead. Your line is now open.

Good morning.

Hi, Manus.

I wanted to ask about the macro situation, please, because there are some negative macro signals coming out of China. We've got lockdowns the FX is volatile, the yield premium to the U.S. has disappeared now. But you seem to remain quite confident in the outlook and haven't really tempered that enthusiasm much. I just wondered if you could give us more color on why you aren't more worried about the way China is developing at the moment? Or whether I misread what your comments were?

I mean they were probably I mean, as you know, as we think about Greater China. The impact on Hong Kong is a far more dominant driver of what happens to us. Yes, and we are confident that a combination in Hong Kong, a combination of the market reopening as lockdown restrictions get lifted together. And importantly, the likelihood that we're seeing material movements in HIBOR in the coming quarters, will mean that we'll see a real strong recovery in Hong Kong earnings. In Mainland, China or itself I think it reflects a few things. Yes, firstly, just an observation that were that despite being the biggest bank in China, we are small. We have biggest foreign bank in China, we have less than a 0.2% market share. If you look last year, we grew the loan book by 11%, which was far in excess of underlying GDP growth. So our ability to grow the loan book is not as correlated to underlying economic growth. And if we were a big lender, as we are in Hong Kong. So yes, we are somewhat insulated to some extent. I think with Pinnacle, again, our life insurance venture, we're continuing actually to see very good traction in that business. And see nothing in relation to what's happening that would cause us to slow down the plans for that business. We also have a lot of revenue connected with trade and China. And somewhat perversely, if there's a disruption in supply lines, it means people are going to run bigger trade balances with us, as we've seen in our overall trade franchise with a disruption in supply lines. So again, you've got a number of things in our book, which we're not a perfect. Yes, it's different in the U.K., in Hong Kong. We very much track macro in a market like China, or it's much more micro.

Okay, that makes sense. Thank you. Can I just ask a very quick follow-up on NII as well, just because you commented that you expecting rate hikes to come through more quickly and HIBOR that's arise more quickly than previously? At what point did the mortgage caps in Hong Kong kick in? And how material might that be? If the rate hikes are coming sooner and larger? Does that mean that we hit the caps sooner and therefore NII benefits flat now quicker?

Yes, I'll get our Investor Relations team to follow-up, Manus, but I think it's around 160 basis points is where it starts to have an impact on NII growth. And I'll get our Investor Relations team to follow-up.

Okay. Thank you very much.

Thank you. We'll now take our last question today from the line of Martin Leitgeb of Goldman Sachs. Please go ahead. Your line is open.

Thank you and good morning, Ewen.

Hey, Martin.

Thank you for taking my question. I've just two questions please. One on U.K. NIM. And the follow-up on capital and the reporting on HSBC U.K. Bank plc shows that NIM increased by 15 basis points to 163. And I was just wondering if you could share your thinking on the phasing of rate benefits coming through in the U.K.? To what extent does hedging delay the impact because it seems like from the increase you had in the first quarter that hedging is comparatively a smaller part of the rate sensitivity if you like and that actually a good part of the rate sensitivity comes through quite quickly. Would you be able to share how big the structural hedges in the U.K. link fence so to get a better sense on facing of any further rate hikes on the P&L? And on capital I was just wondering the leverage ratio is up meaningfully in the quarter following obviously the changes. Does that impact how you see certain businesses, which have a low risk rating and a high comparatively high asset weight? Say trade finance REBO [ph] is the more opportunity to engage stronger in some of these business lines? Thank you.

Yes, look on the second one, Martin, I think that's a very complex question that you need to drive down into the individual legal entities, because we're sort of relatively unique and that we don't have a single balance sheet. If you look at the average peer probably 70% plus of their assets are within a single balance sheet where for us, I don't think a single balance sheet is more than about 30% of our total balance sheet. So we're leverage constraints, capital constraints, stress constraints impact as an entity-by-entity discussion. But I don't think fundamentally anything's changed our strategy in any of those legal entities over the last one to two quarters. On U.K. NIM, I think we are hedged lower to much lower than some other banks. We also have, I think higher levels of liquidity and short dated liquid assets. So I do think we probably have more interest rate sensitivity than peers, but without commenting on their interest rate sensitivity. So yes, as you saw in our disclosures full-year, Sterling is our most sensitive currency. And we do think what we're seeing in terms of rate rises therefore should corresponding to very material net interest income growth not only in the ring-fence bank, but also in the non-ringfence bank that has exposure to Sterling interest rate sensitivity.

Very clear. Thank you very much.

There are no more further questions at this time. Back to you Ewen.

Okay, well thank you everyone for joining. Appreciated the discussion and look forward to catching up with you in interim results. If you do have any immediate follow-up our Investor Relations team is here to help. So thank you all for joining.

Thank you, ladies and gentlemen. That concludes the call for the HSBC Holdings Plc's earnings release for the first quarter 2022. You may now disconnect.