RESTRICTED HSBC Hong Kong
Presentation by Mark McCombe, CEO Hong Kong March 2011
www.hsbc.com Forward-looking statements
•This presentation and subsequent discussion may contain certain forward-looking statements with respect to the financial condition, results of operations 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 Annual Report and Accounts 2010. Past performance cannot be relied on as a guide to future performance. •This presentation contains non-GAAP financial information. Reconciliation of non-GAAP financial information to the most directly comparable measures under GAAP are provided in the ‘Reconciliation of reported and underlying profit before tax’ supplement available at www.hsbc.com.
2 2010 highlights
Improved financial performance
All regions and customer groups profitable
Strong capital generation enabled an increased dividend
HSBC well placed for evolving regulatory environment
3 2010 financial highlights
Better / 2009 2010 (worse) Reported PBT 7.1 19.0 +169% (US$bn) Continued recovery in underlying profits Underlying PBT1 13.5 18.4 +36% (US$bn) Significantly improved EPS (US$) 0.34 0.73 +115% credit quality
ROE (%) 5.1 9.5 +440bps Strengthened capital position Core tier 1 ratio2 9.4 10.5 +110bps (%)
Increased dividend Dividends3 (US$) 0.34 0.36 6%
Notes: (1) Underlying results eliminate the effects of foreign currency translation differences, acquisitions and disposal of businesses and changes in fair value (FV) due to movements in credit spread on long-term debt issued and designated at FV 4 (2) As at 31 December (3) Declared on ordinary shares in respect of 2009 and 2010 Business performance in 2010 Performance review Challenges and opportunities1
2010 KPIs2
Return on total Shareholders’ 9.5% 12% - 15% equity
Cost efficiency ratio 55.2% 48% - 52%
Advances-to-deposits ratio 78.1% <90%
Notes: (1) Figures on a reported basis (2) Key Performance Indicators 6 Hong Kong Strong business growth offset by impact of low interest rates
Profit before tax, underlying US$bn +11% PBT increased 11% to US$5.6bn 5.6 5.0 Income growth from higher investment sales in PFS and trade related business in CMB offset by deposit spread 2009 2010 compression
LICs declined substantially across all Better / customer groups to low levels 2009 2010 US$bn (worse) Revenue 9.5 10.1 +7% Costs increased due to recruitment and LICs 0.5 0.1 +77% general wage increases
Cost efficiency ratio (%) 41.7 44.0 (230)bps
Loans and advances to customers 99.3 140.7 +42% Strong customer loan growth from recovery in trade flows and residential Customer accounts 275.0 297.5 +8% mortgages
7 Economic Outlook
Rebalancing the world economy1
Year 2010 Year 2050
Emerging Emerging
27%
46% 54%
73%
Developed Developed
Source: HSBC Global Research “The World in 2050” Source: HSBC Global Research “The World in 2050”
Note: 8 (1) World concentration of GDP HSBC well placed for evolving regulatory environment
2007 2008 2009 2010 2011
Government Further liquidity Initial Basel rules on Translation of injections of injections regulatory capital, liquidity Basel rules to liquidity reforms to and funding CRD4 Creation of trading books Initial interest Bail-out Dodd-Frank Observation rate cuts schemes Focus on Act in US period for liquidity (TARP, APS) remuneration framework Independent Interest rates Interest rates Banking FSB proposals cut further cut to near Commission on SIFIs zero in UK Impetus from Implementation G20 Economic Recovery & of Dodd-Frank stimulus Resolution Development ICB conclusions packages Plans of local Development of regulatory EU Crisis responses Management Frameworks
9 RESTRICTED HSBC Hong Kong
RMB Internationalisation
www.hsbc.com RMB to be the third largest international currency Rise of Greater China Significant Economic Benefits for Hong Kong
People Trade
China has over 9m mass affluent, growing at 13% China is the largest exporting country 4 CAGR. 825k individuals of wealth over RMB10m – USD1.5trn total exports in 20103 4 Spending power spilled over to HK – Will surge to around USD2.4trn in 2020 – 10.5m Mainland tourists to HK in 1H 20106 Robust HK/China trade – accounted for 30% of luxury retail sales1 – 53% exports/44% imports of HK to/from China5
China GDP USD5.7trn GDP in 2010, 2nd largest in the world Capital Currency
China engages in active foreign asset acquisition Targeting full convertibility and continued domestic infrastructure spending Reserve currency? Strong capital flow between China and HK RMB internationalisation – 45% of overseas projects in China is HK related2 – 547 Mainland companies listed in HK7
1. Business Week. Dated April 2010. 6. Tourism Commission, Hong Kong SAR 2. World Trade Organization 7. China Daily. As of 31 July 2010. 3. Ministry of Commerce, PRC 12 4. HSBC estimates 5. Census and Statistics Department, Hong Kong SAR China is now the 2nd largest economy and largest exporting country
GDP 2010 (est) Total Exports 2010 (est) USD trn USD trn 16.0 1.6 1.5 14.6
14.0 1.4 1.3 1.3
12.0 1.2
10.0 1.0
8.0 0.8 0.7
5.7 6.0 5.4 0.6
4.0 3.3 0.4 2.6
2.0 0.2
0.0 0.0 US China Japan Germany France China Germany US Japan
Source: International Monetary Fund CIA – The World Factbook 13 The potential and the need for a third IFC in Asia – after New York and London
Share of Global GDP Share of World Trade
Other (10%) Other (15%) Asia (25%) Asia (27%)
Americas (20%)
Americas (30%)
Europe (30%)
Europe (43%)
Source: IMF, OECD. 2009 14 RMB could become the 3rd highest turnover currency globally if RMB is fully convertible
Daily Avg Turnover Daily Avg Turnover USD bn USD bn 3,500 3,379.9 3,500
3,023.1 3,000 3,000
2,500 2,500
2,000 2,000
1,556.6 1,500 1,500 1,289.0
1,000 1,000 891.8 756.4 578.0 513.5 500 500 424.4
35.8 0 0 USD EUR RMB GBP YEN USD EUR RMB GBP YEN 2010 BIS Data 2010 BIS Data (if RMB fully convertible)
Note: Estimate of RMB daily average FX turnover is based on a turnover-to-trade ratio of 0.3, which is lower than 0.32 for EUR, 0.4 for YEN and 0.46 for GBP. The rise in use of RMB will offset the use of USD, EUR, YEN, and GBP at a share of 40%, 30%, 20% and 10% Source: HSBC estimate 15 Stages of development of Hong Kong’s RMB business gradual opening of the capital account
RMB full current account convertibility Dec 1996 Existing restrictions on capital account
Feb 2004 RMB Personal Business
July 2009 RMB Trade Settlement
July 2010 RMB Investment and Insurance
2011 RMB Overseas Direct Investment
?? RMB IPO
?? RMB Foreign Direct Investment, RMB Mini-QFII, ….
RMB fully convertible < 2020 RMB as Reserve Currency for overseas countries
16 Hong Kong – The RMB Offshore centre
RMB Deposits RMB315bn 1
RMB Trade Settlements RMB371bn 2
RMB Accounts 1.9m 1
CNH 5 Daily Turnover USD400~500m 3
Offshore RMB bonds RMB107.5bn 4
RMB Deposits in HK RMB Trade Settlements in HK RMB bn RMB bn 350 RMB 120 RMB 315bn 300 100.9bn 100 250 80 200 60 RMB 150 103.7bn RMB RMB 40 RMB 100 55.9bn 64bn 10bn 20 RMB 50 RMB 0.04bn 1.2bn 0 0 Jul Jul Jul Jul Oct Oct Oct Oct Apr Apr Jan Jun Jun Jan Nov Dec Feb Mar Nov Dec Nov Dec Feb Mar Nov Dec Aug Sep Aug Sep Aug Sep Aug Sep May May 2009 2010 2009 2010 1. Source: HKMA 2. Up to Dec 2010 / Source: HKMA / Local news 3. Source: HSBC Global Research 4. Up to Feb 2011 / Source: HSBC / Bloomberg 17 5. CNH – RMB circulated in the offshore market Strategic Considerations What is the Market Potential? USD2trn trade settled in RMB by 2015
37% of Hong Kong SMEs have settled cross-border trade in RMB1 Expected to increase to 50% in next 12 months1
More than USD2trn or half of China’s total trade flows with emerging markets will be settled in RMB by 2013 to 20152
RMB to become a fully liberalised currency by 20202 RMB2.2trn trade settled in RMB, roughly the same size as total trade in 2010
2010 l 2011 l 2015 l 2020 l
1. HSBC Trade Confidence Index 2. HSBC in-house estimates 19 Is there enough Offshore RMB Liquidity? RMB deposit can reach RMB1.2bn by 2011
Forecast of RMB Deposits in Hong Kong Base case: RMB deposit will grow to RMB bn % of HK RMB780bn by 2011, and RMB1.2trn Total deposits Strong Case by 2012 2,121
35% Potentially 13%~22% of HK’s total 2,000 deposit 1 30%
Growth comes from sustained RMB 1,500 Base Case 25% 1,188 trade settlement and RMB outward 1,272 direct investment 22.2% 20%
1,000 779 15% 13.4%
Weak Case 10% 500 315 438 375
5% 64
0 0% Jan '10 Dec '10 Dec '11 Dec '12
20 Source: HSBC Global Research • Based on Dec 2010 HK total deposit balance Is RMB just a substitution business? HK as the RMB Offshore Centre generates incremental growth
Substitution vs Incremental
Sustain and gain market share Growth of mainland China – Most products today are just a replica of – More customer growth (personal, the existing HKD/USD products. The corporate, institutional) will be RMB rationale is then to sustain and gain related. More future business will be market share RMB denominated
HK as Offshore RMB Centre – Attract RMB trade flows and fund flows from other countries globally, e.g. correspondent bank relationships with overseas
Access to the Mainland financial market – Opportunities in interacting with the onshore RMB financial market, e.g. bond investment, interbank business
21 HSBC’s Strategic Positioning HSBC will lead RMB Internationalisation
First international bank to complete in HK & Macau Cross-border First international bank to complete in ASEAN countries Trade Settlements First international bank to complete in all 6 continents
First-in-market: HSBC Trade Finance Standard Rate (3.88%) Pioneer Product RMB insurance (among the first in market) Launch 160,000 commercial accounts with RMB capabilities Business Internet Banking RMB-enabled (among the first in market)
A leading book-runner of offshore RMB bond issuance in HK Bonds & First to launch RMB structured deposits Investments First offshore RMB Certificate of Deposits: sole book-runner & lead manager First among foreign banks allowed to invest in mainland bond market
Largest global RMB capability platform in 39 markets Global Platform Personal Banking launched in 7 Asia Pacific sites (HK, Macau, Singapore, Japan, Malaysia, Brunei, New Zealand). A few more by 1Q 2011
23 A leading RMB global network RMB capabilities established in 39 markets on all 6 continents
Russia
Canada UK Poland Germany Kazakhstan Czech France Armenia USA Spain Italy Japan Turkey Israel UAE South Korea Mexico Bangladesh Saudi Arabia India Hong Kong Macau Thailand Philippines Vietnam Malaysia Brunei Singapore Indonesia Brazil Mauritius
Paraguay South Africa Australia
Chile Uruguay
Argentina New Zealand
Red: RMB Trade Transaction Completed
24 A leader in Offshore RMB Bond Issuance
HSBC led the first 2 Dim Sum Pricing Issuer Rating Maturity Amount Coupon bond transactions in 2011, Date Issuer Moody's S&P Format Date (RMB m) (%) 4-Jan-11 World Bank Aaa AAA Sr. Unsec. 2yr 500 0.950 namely World Bank’s 2-year 3-Jan-11 Bank of Communications - - Cert. of Depo. 2yr 500 1.400 RMB500m senior bond 17-Dec-10 ANZ - - Sr. Unsec. 2yr 200 1.450 issue and Bank of 15-Dec-10 Shui On Land (Synthetic issue) - - Sr. Unsec. 3yr 3,000 6.875 15-Dec-10 China Pow er International Developmen - - Sr. Unsec. 5yr 800 3.200 Communication’s 2-year 10-Dec-10 VTB Capital Baa1 BBB Sr. Unsec. 3yr 1,000 2.950 RMB500m CD 9-Dec-10 Galaxy Entertainment Group B3 B Sr. Unsec. 3yr 1,380 4.625 30-Nov-10 Ministry of Finance of China Aa3 A+ Sr. Unsec. 3yr 2,000 1.000 30-Nov-10 Ministry of Finance of China Aa3 A+ Sr. Unsec. 5yr 2,000 1.800 30-Nov-10 Ministry of Finance of China Aa3 A+ Sr. Unsec. 10yr 1,000 2.480 26-Nov-10 The Export - Import Bank of China Aa3 A+ Sr. Unsec. 2yr 1,000 1.950 26-Nov-10 The Export - Import Bank of China Aa3 A+ Sr. Unsec. 3yr 4,000 2.650 23-Nov-10 Caterpillar A2 A Sr. Unsec. 2yr 1,000 2.000 17-Nov-10 China Merchant International Baa2 BBB Sr. Unsec. 3yr 700 2.900 9-Nov-10 China Resources Pow er Baa3 BBB Sr. Unsec. 3yr 1,000 2.900 9-Nov-10 China Resources Pow er Baa3 BBB Sr. Unsec. 5yr 1,000 3.750 28-Oct-10 HSBC Aa2 AA- Cert. of Depo. 1yr 90 1.800 22-Oct-10 Sinotruk Hong Kong Ltd - - Sr. Unsec. 2yr 2,700 2.950 18-Oct-10 Asian Development Bank Aaa AAA Sr. Unsec. 10yr 1,200 2.850 15-Oct-10 China Development Bank - - Sr. Unsec. 2yr 3,000 2.700 11-Oct-10 China Development Bank - - Sr. Unsec. 3yr 2,000 3m SHIBOR + 10bps 8-Oct-10 ICBC (Asia) A1 A- Cert. of Depo. 2yr 117 2.300 8-Oct-10 ICBC (Asia) A1 A- Cert. of Depo. 3yr 47 2.650 17-Sep-10 Deutsche Bank Aa3 A+ Cert. of Depo. 2yr 200 2.000 16-Sep-10 Bank of Tokyo-Mitsubishi Aa2 A+ Cert. of Depo. 1yr 20 1.980 16-Sep-10 ICBC (Asia) A1 A- Cert. of Depo. 2yr 1,000 2.250 16-Sep-10 ICBC (Asia) A1 A- Cert. of Depo. 2yr 1,000 2.250 7-Sep-10 Bank of China - A- Sr. Unsec. 2yr 2,200 2.650 7-Sep-10 Bank of China - A- Sr. Unsec. 3yr 2,800 2.900 2-Sep-10 China Development Bank - - Cert. of Depo. 2yr 500 2.100 2-Sep-10 China Development Bank - - Cert. of Depo. 2yr 1,000 2.100 1-Sep-10 China Development Bank - - Cert. of Depo. 1yr 100 1.950 19-Aug-10 McDonald's Corporation A3 A Sr. Unsec. 3yr 200 3.000 10-Aug-10 HSBC Aa2 AA- Cert. of Depo. 1yr 114.45 2.000 7-Jul-10 Hopew ell Highw ay Infrastructure - - Sr. Unsec. 2yr 1,380 2.980 6-Jul-10 Citic Bank International - - Cert. of Depo. 1yr 500 2.680 25 Key Takeaways
RMB will become the 3rd largest currency in the world
RMB internationalisation reshapes the competitive landscape of the banking industry
HSBC with its advantages in HK, mainland China and global network is well positioned
26 RMB Internationalisation Disclaimer
This document is issued by The Hongkong and Shanghai Banking Corporation Limited (HSBC). The information contained herein is derived from sources we believe to be reliable, but which we have not independently verified. HSBC makes no representation or warranty (express or implied) of any nature nor is any responsibility of any kind accepted with respect to the completeness or accuracy of any information, projection, representation or warranty (expressed or implied) in, or omission from, this document. No liability is accepted whatsoever for any direct, indirect or consequential loss arising from the use of or reliance on this document or any information contained herein by the recipient or any third party.
Any examples given are for the purposes of illustration only. The opinions in this document constitute our present judgement, which is subject to change without notice. This document does not constitute an offer or solicitation for, or advice that you should enter into, the purchase or sale of any security, commodity or other investment product or investment agreement, or any other contract, agreement or structure whatsoever and is intended for institutional, professional or sophisticated customers and is not intended for the use of private individual or retail customers. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. Recipients should not rely on this document in making any investment decision and should make their own independent appraisal of and investigations into the information and any investment, product or transaction described in this document. Unless governing law permits otherwise, you must contact a HSBC Group member in your home jurisdiction if you wish to use HSBC Group services in effecting a transaction in any investment mentioned in this document. This document, which is confidential and not for public circulation, must not be copied, transferred or the content disclosed, in whole or in part, to any third party. The document should be read in its entirety.
Copyright. The Hongkong and Shanghai Banking Corporation Limited 2010. ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Hongkong and Shanghai Banking Corporation Limited.
References to HSBC Research are to opinions held by HSBC Global Research in previously published research reports and do not represent an endorsement by HSBC Global Research or any product or strategy referred to herein. HSBC Global Research is not under any duty to update any such opinions.
All the information set out in this presentation is provided on the best of the Bank's current knowledge and understanding of the relevant law, rules, regulations, directions and guidelines governing or otherwise applicable to RMB trade services but the Bank makes no guarantee, representation or warranty and accepts no liability as to its accuracy or completeness. Please refer to any updates that shall be published or issued by our Bank from time to time including notices that we place at our HSBC branches.
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