HSBC Holdings plc (HSBC) Q4 2021 Earnings Call Transcript

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HSBC Holdings plc (NYSE:HSBC)
Q4 2021 Earnings Call
Feb 22, 2022, 3:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Noel Quinn

Good morning in London. It’s great to see everybody in the room with us today. Thank you for coming. And good afternoon to everyone watching and listening in Hong Kong and elsewhere.

Ewen will take you through our Q4 numbers very shortly, but I’d like to begin with a summary of how we delivered against our strategic plan in 2021. As you know, we refreshed our core purpose as an organization a year ago. Opening up a world of opportunity draws heavily on HSBC’s past. But it also encapsulates what we need to focus on to succeed now and in the future.

By keeping our purpose and the values that underpin it firmly in mind, we’ve delivered good progress against our four strategic pillars. Focus on our strengths, digitize at scale, energize for growth and transition to net zero. And this has contributed to a strong financial performance, which was supported by the global economic recovery. Starting now with a few highlights.

I’m pleased with the progress we’ve made on both our transformation and growth agendas. And I want to pay tribute to the whole HSBC team for the job they’ve done in 2021. Underlying growth in key revenue streams came through strongly. In Q4 to offset the drag effects of decline in rates, resulted in reported revenue growth of 2% in the quarter.

Coupled with tailwinds from higher interest rates, this provides strong revenue momentum for the future. We’re also well on our way through a number of announced exits and acquisitions that materially alter our capital allocation to areas where we have distinctive competitive advantage. Reported profits before tax for the full year were up 115% to $18.9 billion. All regions were profitable.

Asia led the way with $12.2 billion of reported profits, including $1.1 billion from India, up $19 million on the year. There was also strong contributions of $2.2 billion of adjusted profits from our non-ring fenced bank operations in the UK and Europe, and $900 million of adjusted profits from the U.S business. I was also pleased there were strong fee income growth across all businesses, which overall was above pre-COVID levels plus, international accounts opening in commercial banking was up 13%. And trade balances were up 23% overall, and today stand higher than pre-COVID levels.

We increased spending on technology and performance related pay, but I’m pleased we kept costs stable, able to do so due to the savings from our transformation programs, which are ahead of plan. If rates fall of the past currently implied by the market, we now expect to reach at least 10% royalty in 2023. Thus, a year earlier than we had previously signaled. We took a charge on expected credit losses in Q4, primarily due to changing market conditions in the Mainland China commercial real estate sector.

Ewen will go into this in more detail. But I’m pleased to say we have seen some positive movements in market sentiments since the year-end. Finally, we’ve announced full year dividend of $0.25 per share up 67%, as well as our intention to initiate an incremental share buyback of up to $1 billion. On top of the existing buyback of up to $2 billion announced earlier in the year.

This slide sets out how this translates into progress against our ambitions. It shows good progress in key areas, revenue growth for the year as a whole was impacted by the low interest rate environment, particularly in Asia, where we experienced lower high ball rates in 2021. But we turn the corner in Q4 as net interest income grew year-on-year for the first time since the pandemic began. And all our global businesses grew fee income in 2021 by high-single digits.

Costs were down slightly year-on-year, and we expect 2022 adjusted costs to be stable on that position. ROTE was 8.3%, our capital ratio remains strong at 15.8%. And we expect to move into our seats one target range of 14% to 14.5 in 2022. And we’ve made $104 billion of RWA sales across the group over the last two years, against our original three year target of $110 billion.

Given this progress, we now expect to achieve $120 billion of cumulative RWA sales by the end of this year. The next slides go through key metrics on our four strategic pillars; The first pillar is focus on our strengths, which is about capitalizing on the unique advantages we have as an institution. Wealth and personal banking is one of those areas, particularly in Asia. Our investment in people, technology, and capabilities yielded strong returns.

We had a strong year in net new invested assets, especially in Asia, greatly helped by a strong flow of referrals from our wholesale banking clients. This is an inherent strategic advantage that we are investing in. Overall, wealth balances grew to $1,7 trillion, [Inaudible] funds under management increased by 5%, supported by more than 30 new asset management products in Asia. Asia wealth revenue also grew by 10%, mainly due to the improvement in equity markets and customer sentiment.

While, we also saw strong mortgage growth in Hong Kong and the UK. Finally, on this slide, I was pleased that the value of new insurance business in Asia in Q4 was higher than the same period in both 2019 and 2018. This is the cumulative effect of a significant investment program and turnaround in that business over the last three to four years. It is also particularly encouraging, given the border between Hong Kong and mainland China remains closed.

Slide 5 focuses on wholesale banking. We saw strong fee income growth across our wholesale franchises, even as we exited clients, and shrunk our capital base in global banking and markets. This offset lower trade in income when compared to the exceptionally strong performance we saw in 2020. International connectivity remains key to our strategy.

As I said earlier, trade balances were up 23% overall, and above pre-COVID levels. JLC and balances were up $54 billion, or 8% year-on-year to over $750 billion. And collaboration revenues were also up 8%, with referrals between commercial banking and global banking and markets up 12%. I’ve been pleased with the way the global banking markets has performed for the past two years, even while we’ve been repositioning that business.

Adjusted RWA were down 10% as we continue to transfer resources mainly from Europe into Asia, and the Middle East. Slide 6 shows how we’ve exited non-strategic businesses in the West while accelerating customer acquisition in the East. I’m pleased by the progress we’ve made in transforming the U.S and continental Europe business. But also by that good profit performance in 2021.

The transactions for the sale of the U.S retail business have closed on schedule in the last two weeks. Meanwhile, we expect to close the sale of our French retail business in the second half of 2023. We also accelerated the development of our Asia wealth capabilities through the acquisition of AXA Singapore, which was completed earlier this month on schedule. The acquisition of LNT Investment Management in India, which we hope to complete toward the end of this year.

And regulatory approval to take full ownership of our HSBC Life joint venture in China, all on top of the organic build out of our pinnacle business in Mainland China, which continues ahead of schedule; Slide 7 looks at our second pillar, digitize at scale, which is about making it easier for our customers to bank with us and making our processes more efficient. We’ve continue to invest heavily in technology while managing costs. Spending around $6 billion in 2021, which is equivalent to around 19% of our adjusted operating expenses, which was up 1% point on the prior year. Our ambition is to keep the increase in technology spending to more than 215 of our operating expenses by 2025.

This investment provides us with significant operating leverage as we grow the business in the future. It is also enabling us to deploy solutions at scale globally, and to further leverage agile working and cloud technology. While our usage of both agile and cloud increased in 2021, we have ambitions to drive further growth in the years to come. Digital penetration levels have also increased.

With today, 84% of trade transactions globally initiated through digital channels. A 58% increase in the share of digital payments made through HSBC net mobile app by wholesale customers, and 43% of retail customers are now mobile active. Although this figure was up 5% points on the prior year, I still see a significant opportunity to grow it much further; Our third a strategic pillar, is about creating a dynamic, inclusive culture where people want to work and they feel empowered. In our most recent staff survey, our employee engagement score was 72%, unchanged on 2020, more encouragingly, 5% points up on 2019, and 4% points above the financial services benchmark.

We’re aiming to build a more diverse business. We were pleased to exceed our target of 30% of women in leadership roles globally in 2020. And we set ourselves a new target of 35% by 2025. We’ve also made progress on ethnicity representation, especially for black colleagues.

But we still have a way to go to get to where we want to be and need to be on both of these measures. And we’re helping our colleagues to develop future ready skills, over 150,000 colleagues used the new degreed learning platform last year. With the average time spent on training for full time employee up 16% despite the pressures of COVID. An increasing share of this time was spent on areas like digital data and sustainability, all of which are essential for our future.

I also want to add that another important part of our culture is that we remain cost conscious. I am absolutely determined we won’t go back to the days when rising interest rates loosened our grip on costs; Slide 9 looks at the transition plan to net zero, our fourth pillar. Our ambition is to provide and facilitate between $750 billion and $1 trillion of sustainable financing and investment by 2030. I truly believe this will enable us to play a leading role in the transition.

And we’ve made a very strong start. Since the beginning of 2020, we’ve provided and facilitated $127 million of sustainable financing and investment to our clients. We are committed to working with our clients to develop valid, science based transition plans to understand sector by sector, client by client, how we move to net zero by 2050. These transition plans and the targets within them must be predicated on the science relevant to the individual sectors.

We will use them as a basis for further engagement and decision making, including how we drive change within our portfolio construct. As part of this process, we have today disclosed interim targets for on balance sheet financed emissions in the oil and gas and power and utility sectors. In the year ahead, we plan sets entrance entering targets for financed emissions across a range of other sectors. And we will work on our climate transition plan, which will be published in 2023.

I will bring together in one place how we embed on net zero targets into our strategy, our processes, our policies, and our governance informed by bottom of transition plans. I’m pleased by the progress we’ve made reducing greenhouse gas emissions from our own operations. A combination of less travel and sustainable energy deals enable us to halve our scope [Inaudible] got to emissions compared to 2019. As the world normalizes, we have to be clear that we do not expect a route to net zero to be linear, but we do believe that many of these changes are embedded for future years.

Overall, there’s more to do, but I’m pleased with the progress we’ve made so far. I’ll now hand over to Ewen for the Q4 numbers.

Ewen StevensonGroup Chief Financial Officer

Thanks, Noel, good morning or afternoon all [Inaudible] great to see so many of you in the room today with us. We had another good quarter reported. Reported pre-tax profits of $2.7 billion, up 92% on last year’s fourth quarter, adjusted revenues were modestly up on last year’s fourth quarter. This reinforces what I said at the third quarter.

We think we’re now past the trough in revenues. ECLs were $450 million net charge in the quarter. Operating expenses were down $800 million on last year’s fourth quarter due to a lower bank levy and continuing good cost discipline. Our return on tangible equity for 2021 was 8.3%.

Our core Tier 1 ratio share remained strong at 15.8%, tangible net asset value per share of $7.88 was up $0.07 on the third quarter. We’ve announced full year 2021 dividend of $0.25 per share, that’s up 67% on the prior year. We also intend to initiate an incremental buyback of up to $1 billion, this will begin after the buyback of up to $2 billion is completed in April. Turning to Slide 11.

As a headline, we’re pleased with the lending and fee income growth that we’re now seeing. Lending balances were up 1% overall on the third quarter. Underlying this was 5% growth for our personal and commercial banking businesses combined, equivalent to $38 billion in total, which was partially offset by planned reductions in global banking and markets. There was strong lending growth in wealth and personal banking up $27 billion, or 6% on the fourth quarter of last year, reflecting another strong mortgage performance in the UK and Hong Kong.

Lending was up $11 billion in commercial banking, mainly in trade and term lending in Asia. Fee income increased by 5% versus the fourth quarter of 2020, within this, commercial banking increased fee income by 15%, reflecting both good volume growth and repositioning in some areas toward fee income. On the next slide. Despite the impact of lower rates, we’ve been seeing a recovery in revenues for commercial banking for a few quarters now, and that’s continued in the fourth quarter.

Global banking and markets had another good quarter, driven primarily by good performance and effects and capital markets, and advisory. And we saw our first quarter of year-on-year revenue growth and personal banking since the onset of COVID-19, and in wealth, strong new business growth was offset by adverse insurance market impacts. Tonight, for the current quarter, we expect some weakness in our Asian wells revenues. As highlighted previously, our revenues will be impacted by the adoption of IFRS 17 in 2023.

We continue to expect an initial downward adjustment to our insurance profits of around 2/3, as we said at the third quarter, we are planning for an around $3 billion adjustment to our insurances tangible equity, and we intend to provide further detail on IFRS 17 in the third quarter of this year. On Slide 13. Net interest income was $6.8 billion, up 3% against the third quarter on a reported basis. This was mainly driven by higher yields on customer loans, as well as underlying asset growth.

On rates, the net interest margin was 119 basis points unchanged on the third quarter, with higher asset yields offset by changes in the asset mix. Based on the current interest rate expectations for 2022, we expect net interest income to now grow materially with further material growth in 2023. We think we’ve given you the building blocks to model this, including modeling the sensitivity is right to shift. Turning to slide 14 and recognizing the higher gearing we have to a better rate environment, I wanted to say a few words and I disclosed interest rate sensitivity analysis.

As a reminder, a high interest rate sensitivity is driven by our balance sheet structure, namely a deposit surplus of around $700 billion and the short tenure of our lending portfolios and trade franchise. For illustration purposes, our tables now assume a simplified past three rate for all interest bearing deposits. In reality, for the first few rate rises, we assume we’ll see a lower pass through rate rising toward or above 5% of rates continue to rise. On the next slide, we reported a net charge of $450 million of VCLs in the quarter.

This included stage two charges primarily relating to commercial real estate in mainland China, a substantial part of which is booked in Hong Kong. As Noel says, there has been some positive sentiment since the year-end. We expect this to begin to help ease the current tight, tight liquidity for the sector. Stage 3 charges remained low, and the quarter also included COVID-19 related releases, we’re continuing to hold around $600 million of COVID-19 uplift to stage 1 and 2 ECL reserves, equivalent to about 15% of the initial reserve.

The overall quality of our loan book remains good, stage 3 loans as a percentage of total loans are stable at around 1.8%. We expect ECLs to normalize toward 30 basis points of average loans in 2022, with upside from potential COVID-19 releases in the first half of 2022, and potential risk from continued uncertainty in Mainland China commercial real estate. Turning to Slide 16. Fourth quarter adjusted operating costs, excluding the bank levy, were modestly down on the same period last year.

2021 costs were broadly stable on 2020 as per our third quarter guidance. The fourth quarter performance was driven by continued good cost control, together with a lower performance related pay accrual in the quarter relative to the fourth quarter last year. The bank levy came in at $116 million, this was lower than expected due to an offsetting credit for bank levy fees paid in prior years. We expect the bank levy to normalize at around $300 million per year from this year onwards.

We made a further $600 million of cost program savings during the fourth quarter, with an associated cost to achieve of around $600 million. Turning to the next slide, in the first two years of our three year cost program, we’ve achieved savings of $3.3 billion, with cumulative costs to achieve spend to date of $3.6 billion. We now expect to see exceed our overall target of $5 billion to $5.5 billion of cost savings, with at least a further $2 billion dollars of cost savings in 2022, and at least a further $500 million of savings in 2023. We expect to fully utilize our $7 billion cost to achieve budget by the end of 2022.

So, please model a final cost to achieve spend of $3.4 billion this year. Despite inflationary pressures, Noel and I are committed to continuing to deliver tight cost control. For 2022, we aim to keep adjusted costs again, broadly stable, and in 2023, we intend to manage adjusted cost growth to be within a 0% to 2% range. A few things to note for 2023 costs and beyond.

Firstly, on recent M&A activity, we expect the net impact to be broadly neutral on costs in 2023, and modestly positive in 2024, following the completion of the sale of our French retail bank in the second half of 2023. Secondly, there will be a reduction in operating costs as a result of the shift to IFRS 17, but also an associated reduction in revenues. And thirdly, from 2023 onwards, we intend to move away from reported adjusted numbers with any further restructuring costs absorbed above the line and any large distorting items disclosed under notable items. Turning to capital on Slide 18.

Our core Tier 1 ratio was 15.8%, down 10 basis points on the third quarter. Reported risk weighted assets were down $1 billion on the third quarter, risk weighted asset sales and improving asset quality, offsetting risk weighted asset growth from lending and regulatory change. Accumulative risk weighted asset sales are now a $104 billion against the three year target of $110 billion by the end of 2022. Given this progress, we now have an ambition to achieve a $120 billion of cumulative risk weighted assets raised by this year-end.

On the next slide, we’re expecting to be within our core Tier 1 of 14% to 14.5% during this year, as shown on this table, we expect around 125 basis points of total impact during 2022 from notable items, including regulatory change and M&A. a large part of which will be in the first quarter. It will also include the planned sale of our French retail bank in the third quarter. Once within a 14% to 14.5% range, we intend to actively managed to be within this range.

But, please recognize that due to normal capital volatility, you could see us above or below this range in some quarters. In addition, and in line with PRA regulatory guidance, the dividend will accrue at 55% of reported profits for each quarter of 2022. This is not a signal of future dividend intentions. And finally, for clarity on our two buyback programs, the $2 billion buyback program that is currently underway has to complete by 20th of April under its six month regulatory authorization.

Post the AGM in late April, we intend to then launch the billion dollar buyback program that we announced today. So to conclude, in the context of a continued challenge macro environment, these were a good set of fourth quarter and full year 2021 results. Heading into this year, with strong core momentum underpinned by increasingly robust growth and continued tight cost discipline. If the current rates outlook is maintained, we’re on track to deliver a return on tangible equity of at least 10% in 2023, that’s a year earlier than our expectations at the third quarter.

And finally, and importantly, healthy capital distributions have now been restored. With that, Martin, can we please open up for questions in the room and on the line. And Richard’s coming up to host Q&A. Thank you.

Questions & Answers:


Thank you, Mr. Stevenson. [Operator instructions] The first questions will be taken in the room, so I will now hand over to Mr. Richard O’Connor.

Richard O’ConnorGlobal Head of Investor Relations

Good morning, everybody. I’ll take the first three from the room. As [Inaudible] has said, if you just give your name and institution, please over [Inaudible] in the front row to start with that. Would you wait for the mics, please? 

Raul SinhaJ.P. Morgan — Analyst

Hi, good morning. It’s Raul Sinha from JP Morgan. Thanks for doing this in person. Couple of questions for me to start.

Firstly, on NIM, wondering if you could unpack the moving parts across the big parts of the franchise. So if you look at edge NIM, it’s broadly stable. If you look at the UK NIM, it’s down quarter-on-quarter. What is driving the weakness in the UK NIM and how do you think mortgage pricing will impact that going forward? I think we can do our numbers on edge about NIM going forwards.

And then the second question is, just coming back to the cost discussion, perhaps more Noel. I think I was quite interested in your comments about the historical slippage in costs when rates have gone up with HSBC. And I guess one of the things that is different this time is inflation is obviously moving up. So I was wondering if you could talk a little bit about how you’re managing inflation, what are you seeing in terms of inflation across the bank and how you’re managing that over the medium term within your cost price? Thank you.

Richard O’ConnorGlobal Head of Investor Relations

Do you want to go first?

Ewen StevensonGroup Chief Financial Officer

Yeah. So the look on NIM, and I’m sure there’ll be a few questions on NIM. In terms of what we’re saying, look at in the UK. I think what you’re predominantly saying is that makeshift shift toward mortgages at the moment impacting NIM together with continued very healthy liquidity levels.

We do think, over time what we’ll see is a recovery in some of the other lane books, particularly unsecured, say you should begin to see both an improving shift in the asset mix together with significant benefits coming three from rate rises, as you can see in our interest rate sensitivity tables. Sterling is our most sensitive currency. In Hong Kong, I don’t think there’s anything particular to call out in terms of asset mix, again, I think the main source of debate, I think in Hong Kong looking out is obviously, Hong Kong dollar is paid to U.S dollars. Just how quickly if we are seeing, and when we do see a rising U.S rate environment, how quickly that will translate into a rising high ball.

I think if you go back over time, typically there’s been about a three month lack period. I think given omicron at the moment that that may elongate it out a bit. But we would certainly think, in the coming months, we’ll start to see a very material recovery and high ball coming as well. On costs, Noel —

Noel Quinn

Yeah. On costs, we’ve managed to contain the costs up slightly down in 2021 relative to 2020. Why? Because frankly, we took out $3.3 billion of transformation costs in the first two years of the transformation program that has allowed us to fund increased investment in tech. It’s allowed us to fund an increase in the variable pay pool ’21 relative to ’20 of 31%.

And if you look at the VP pool, it’s up 31% on ’20 is up 5% on 2019.  So our VP pool in 2021 still inflated over ’19, but we managed to keep the cost flat. Now, you [Inaudible], we’re also putting a further $2 billion of cost take-out this year as part of that transformation program, and another $0.5 billion the year after. And that, we believe, gives us the cushion necessary to recycle that cost transformation into investment in tech and into investment in people, while keeping the overall cost base flat for 2022, and within a range of naught to 2% thereafter, in 2023. And we’ve got a good line of size on the cost taker, so I think it’s manageable and achievable.

What we really want is the revenue momentum we have at an underlying level. Complemented by the interest rate curve that’s coming our way to actually flow through into returns, not to flow through into cost. And we’re determined to try and enhance the returns of the business, which is why we’re putting forward the return target by a year a 10%, but we want to go beyond that, and I don’t want the cost to take away from that achievement.

Ewen StevensonGroup Chief Financial Officer

The other thing that we’ve had during COVID is obviously the benefit and certain activity that’s just fundamentally changed as a result of COVID. So yeah, if you go back two years, we were spending $400 million on travel and entertainment that was less than $60 million last year. We expect it to recover, but we’ve said we’re not going to allow our travel costs to return to see it’s capped at 50% of what it was pre-COVID. We’ve announced that we’re going to get out of 40% of our non-brand base commercial real estate.

We’ve done about half of that so far. But again, I think COVID and the fact that we are going to adopt hybrid working on a permanent basis opens up a significant opportunity. I’m now hot desking, and I know that [Inaudible] has gone and stolen a whole bunch of printers out of the building to make it harder for us to print. But for those of you who hot desk, you certainly don’t want any paper at the end of the day because then you have to store it.

And then you’ve got this big shift in digital engagement from our customer base that’s gone on pre-COVID, particularly in some cohorts of the customer base, like the elderly who previously were not that digitally engaged. And again, I think that will open up further cost opportunities for us and at some of those cost opportunities, I think that have helped offset the inflationary pressure that we wouldn’t have seen previously.

Noel Quinn

Let me give you an example on that. If you can just Richard, if you allow me — Trade transformation, we embarked upon a digitization program of our trade platform with the biggest trade bank in the world. As you know, we fundamentally re platform that business over the past four years on until modern technology. Consequence of that trade revenue for the full year last year was up 9%, trade balance is up over 23%.

If you look at Q4 on Q4, trade revenue was up around about 20%, so there’s momentum in the trade, in the revenue. Well, what it’s also done is it’s increased our NPS [Inaudible]. We we’ve got a positive NPS in trade of 69. We didn’t have that four years ago.

If you also look at what is done for cost, we’ve got a 26% reduction in our baseline headcount that existed in 2017 when we started that program. So if you look at it from whatever angle, facility and revenue growth, because we’re more competitive, we’ve got new product capability, better customer service, as evidenced in the NPS on a lower cost to serve as evidenced in the headcount in trade. That’s why we’re putting more money into the digitization agenda and that’s the impact it can have on the business. And I think that’s why we can recycle some of those cost savings into inflation needs of the remaining employee base.


Richard O’ConnorGlobal Head of Investor Relations

Joe, next. And then [Inaudible] Joe in the middle. 

Joe DickersonJefferies — Analyst

Hi. Thanks. It’s Joe Dickerson from Jefferies. Just a quick question on the buyback.

So, is this something you want to make a recurring feature of your capital return because of rates? What you think they’ll do to get to your 10% return on tangible equity, you’ll generate a lot of capital. So is this something that you want to do on a quarterly basis, maybe in a quarter or what is there What’s the thought process around creating some regular cadence to buybacks?

Ewen StevensonGroup Chief Financial Officer

Yeah. Sort of broadened of question think, Joe. Our primary tool of distributions is dividends, and we’ve been clear that we’re going to pay within a 40% to 55% payout ratio this year. We were right at the very bottom end of that range and a 40% payout ratio.

I think that reflected our view on the sustainability of particularly the ECO line where we had significant right backs this year. So I think going forward, you should expect certainly for ’22, our expectation is that will be higher up and that payout range than last year. In terms of buybacks, we pointed out today that if you went to effectively, if you want normalize our core Tier 1 today for items that we know that are coming, such as regulatory change and M&A, the 15.8% is probably closer to 14.5% today for that 125 basis points of adjustments, we pointed out. And then you’ve got for this year, I think, the natural growth in the business where we said we’re targeting mid-single digit line growth, we’ve pointed out that we still think we have $14 billion or more to do with RWA saves.

We’ve got the dividend, we’ve got the incremental billion dollar buyback that we announced today. We do still expect there to be some inorganic activity. They will be similar to what we’ve done, small bolt on deals. I think consensus for this year, sitting about $2 billion of buybacks.

I think we’re reasonably comfortable with that consensus at the moment. But we do intend overall to actively manage our capital base, as we said. But for this year, I think we’re sort of comfortable with where consensus is currently sit. But you shouldn’t view this buyback program as some in perpetuity buyback program, we will use it to manage surplus capital. 

Joe DickersonJefferies — Analyst

Thank you. 

Richard O’ConnorGlobal Head of Investor Relations

Omar and then, Tom afterwards, OK.

Omar KeenanCredit Suisse — Analyst

Good morning, Omar Keenan at Credit Suisse. Thank you for the presentation today. I’ve got two questions, please. So one on rates sensitivity and then just the second one, on the outlook for acquisitions and divestments.

As the first [Inaudible] on rate sensitivity. Thank you for the disclosure on the deposit beta. I was wondering if you could help us with how much discretion HSBC has over its deposit pricing in places like Hong Kong? I guess with the idea being that surplus deposit position is quite good and the benefit from rate hikes might be much more than the guidance implies earlier on than that later on. And then secondly, on the outlook for acquisitions and divestments.

So, you’ve completed the three bolt-on acquisitions that you said you would do. And you’ve also completed or at least signed the exit from the French and U.S. retail business. Could you comment on how the footprint now looks like? And I guess just bearing in mind that there’s a bit of movement in Mexico with what Citigroup is doing, and whether there’s more potential for bolt-on whether we could see more inorganic activity at HSBC.

Thank you.

Richard O’Connor

Ewen, do you want to take right first?

Ewen StevensonGroup Chief Financial Officer

Yeah. Look on the rate sensitivity, I think. as we said, we would certainly assume that for the first few rate rises, the deposit beta is going to be less than 50%. And it’s a matter of public record, what intentions are in the UK.

We’ve announced a series of deposit increases as of the face of March. They would imply a deposit beta well below 50% for the rate rises that we’ve seen. Hong Kong, we are the market leader in the market. So, we would expect there to be some increase in deposit rates.

But again, I think for the first 50 or so rate rises, the deposit betas, we would expect to be well below 50%. Just to explain that we did change the table this quarter. Previously, we had a sort of average 50% deposit beta, but it varied by market. So what you see, for example, is that Hong Kong sensitivity has come down in that table relative to Q3.

The reason for that is because we’ve effectively increased the deposit beta up to 50%. We just thought that was easier for you because it gave a consistent basis for you to then make your own assumptions.

Noel Quinn

Just one of the points, and I’m sure you’ve got it in your analysis, and that is [Inaudible] somebody earlier about my liking of cash and there it’s is positive, particularly when you bring it in via operation accounts. And a lot of the cash deposits we bring in is not paid for deposits through savings accounts, it’s operates in accounts through JLC and through personal banking, through wealth management. And therefore, what we’re able to see is a higher ability to hold on to interest rate rises because we are so focused on bringing in operating accounts has the fuel paid for deposits. And that’s particularly true in our Asia franchise, where we’ve drawn in a lot of balances via JLC and business

Ewen StevensonGroup Chief Financial Officer

Like cash in a digital since —

Noel Quinn

Yeah — There’s one attribute I’ve carried with me for 34 years and from Willie Purvis, which is you get the cash in first and then lend it. So, old-fashioned. 

Ewen StevensonGroup Chief Financial Officer

The question on M&A, do you want to–

Noel Quinn

M&A. Yeah. I’ll take that. Listen, we’re pleased with the progress we’ve made on that.

We’re pleased with the disposal decisions on the U.S and on France. I think, Michael’s done an excellent job and his team in the U.S on executing on time, on schedule, and driving up the costs as a consequence of that. Really congratulate him on that. We’re on track for completion, a more complex disposal program on the French reseller business.

Hence, it will complete in 2023. But we know that to be the case, the plans are progressing well on that, on the bolt-ons going well, we’re still looking, we’re observing other opportunities in the market, particularly in Asia, particularly associated with wealth and for wealth read insurance, asset management, and broader wealth management capability. As and when any of those become a reality, if they do become a reality, we’ll let you know at that point in time, but we still actively looking at opportunities on the acquisition side, the stress, it’s spot on. And to maybe turn to your specific question on Mexico.

No, we’re not looking to acquire in Mexico. We have a good business in Mexico. It produce returns on tangible equity last year of around about 13%, I think. Within that, the wealth business, and retail business in Mexico has higher inherent returns.

We’ve got an organic growth model there with previously guided the market [Inaudible] There are M&A activity would be primarily focused on Asia and on wealth. So I think we’ve got a very clear focus on where we want the bolt-ons to be focused on.

Richard O’ConnorGlobal Head of Investor Relations

Tom, and then I’ll take one from the the line.

Tom RaynerNumis Securities — Analyst

Yes, sir. Thank you very much. It’s Tom Rayner from Numis. Could I just have two, please.

Just sticking with the rate sensitivity, initially. The thing I’m most interested in is how quickly will the sensitivity sort of fade away once you go beyond 100 basis points move? Because I guess you’re going to see pass through rates increasing as rates rise or so, I imagine there’ll be some assets spread issues such as in the Hong Kong mortgage market with caps vs. prime, etc. So I just wonder if you could give us a bit more color on on how things look when you go beyond the 100.

And I’ll have a second question on costs and if you want it now. The guidance 0% to 2% from 2023, I’m just wondering what’s going to determine whereabouts you land in that range, whether you’re running a jaws target, if you like. So if revenues stronger, you’ll be at the upper end and if revenue disappoints, you’ll be looking to hold it down that the bottom, is that you’re thinking there? Thank you.

Ewen StevensonGroup Chief Financial Officer

Yeah. So on rate sensitivity above 100 basis points, that’s not a question we often get asked, but please, we’re getting asked. If you look, I guess going back to where we were in 2019, the NIM at that time was 158 basis points, it fell to 120 basis points last year. We lost, I thought, about $7 million of net interest income to book the average interest earning assets bigger than where it was back in ’19.

So you’re right, in some markets like Hong Kong, there is a relationship with the prime rate, which does start to factor heavily in once rates rise by more than 100 basis points. So if I were you, I would look at the trajectory of what happened from ’19 through ’21. And then it’s not quite analogous because sterling rates are going to be much higher this time. But try and draw some comparisons from that as you do your modeling.

On costs, we’re certainly not targeting a jaws number, but it’s hard to target jaws when you’ve got rising interest rates and you don’t want the benefit of those rising interest rates to get reflected into rising costs. So I think it just highlights a decent degree of uncertainty is where we are on inflation. When you go out into 2023, we’ve got the impact of M&A that we’ve highlighted that also be that one of my first 17, which will take costs down, that’s not in that guidance. But you do have to model that.

We know that we’ve got at least $0.5 billion of cost savings coming through from the cost programs that we’re running. We’re getting rid of the cost to achieve program in 2022. So it’s definitely finishing at the end of this year. So any restructuring costs will be absorbed above the line.

In addition to that cost guidance, because we’re comparing what we call adjusted to adjusted, typically at the moment, we’re having about $0.5 billion of other costs that would be in [Inaudible] items being large litigation costs. And when we sell businesses and stuff, the losses on sale of that. So in addition to that adjusted cost guidance, typically there’s about $0.5 billion or so of other items, which will be on top of that.

Noel Quinn

Tommy, it’s a good question, but just to put it into context, so it’s hard to predict how inflation will move forward over the next year or two, but there’s likely to be inflation there, somewhere between no cost increases on a life for life basis and $600 million is the 2% relative to if you roll the clock back and you enrolled in the interest rates effect that we lost $7 billion, so the law to two is relatively insensitive, whether it’s law one or two relative to what could be, $6 billion or $7 billion of incremental revenue by that time. And I think what we’re trying to signal very clearly is we’re not looking to have an explosion in costs just because interest rates are going to come through, and to contain it in the north to 2% range is a reasonable reasonably flat cost base relative to what could be happening on revenue.

Ewen StevensonGroup Chief Financial Officer

If you look at consensus that has existed a couple of weeks ago, there was about a $6 billion increase in 12%  increase in revenues from ’21 through ’23. And we’re saying we’re going to keep cost growth to 2% over that period. And I think ’23 consensus as it was a couple of weeks ago is understated because it hasn’t fully reflected the impact of rate rises. 

Noel Quinn

So the rate rises in that consensus a few weeks ago is inconsistent with today’s curve.

Ewen StevensonGroup Chief Financial Officer

If you just take those numbers, you’ve got very, very material jaws coming through.

Richard O’ConnorGlobal Head of Investor Relations

OK. We’ll open the lines to [Inaudible] Jason Napier of UBS.

Jason NapierUBS — Analyst

Good morning, thank you for taking my questions. The first one is, around that revenue growth number that you just shared. If I just focus on net interest income, you’re annualized in the fourth quarter at $27 billion, 5% loan growth gets you to $28.5 billion, and half the rate gearing that you’ve given today on a [Inaudible] that’s too high, which [Inaudible] over $30 billion in 2022, and the same mass would get you at minimum, $35 billion or $36 billion in 2023. A year in the past, you’ve helped us with blunt expectations around, and I’m sure you don’t want the market to get too carried away.

But it appears to me that on the simple loan growth and rate gearing numbers you provided, that consensus should be substantially higher $2 billion or $3 billion for this year and maybe $3 billion for next year, that’s the first one. The second question is, around the shape of the group from a capital perspective, most of the RWA savings work has been done. And yet the share of Asia is roughly stable at about 42% of the group, and I just wondered whether the restructuring of balance sheets and the moving of capital around the group shouldn’t lead to faster RWA growth in the years ahead? Or was it really more about taking capital out to the low return destinations? So should we be expecting faster growth out of Asia now that capital has been freed up from its past users? Thank you.

Noel Quinn

 I’ll take the second question. Do you want to go wanted to —

Ewen StevensonGroup Chief Financial Officer

I hate forecasting than interesting counting. So anyway, I’ll do my best to talk about it. I did think, Jason, we think and I don’t know why in your mass, but you are a bit choppy on ’22. We think consensus for 2022, which we had a $28.7 billion was understated, but not by the magnitude that you’re talking about and consensus was published.

Average consensus were $31.9 billion for ’23. We think that is more meaningfully understated and I don’t know whether, Jason, how you factored things like the continued RWA run down program. Because if you look at what’s basically implied with our risk-weighted asset growth this year, if we’re talking about mid-single digits, we’re saying 3% of that is coming from regulatory change. So there’s a net, call it 2% points of net increase, which is underlying loan growth, yet less the RWAs we’re running off, but so modestly understated for ’22 more materially understated for ’23.

Noel Quinn

On your second point, the shape of the group. I’d probably draw your attention to two slides in the deck, the Slide 28 and Slide 30. Slide 28 is a new piece of information I don’t think we’ve previously disclosed, but what it shows for wholesale banking is the interconnectivity of the group. So if you look at the percentage of client revenue in wholesale banking that has an international connectivity, those clients bank refers in multiple geographies.

That percentage is 77%. Now, what you see in the report and accounts is where we book it in the legal entity. So you see legal entity book in Asia and you’ll see legal entity booking in Europe and in the U.S. But so much of what we book in Europe, in the U.S is connected to our business in Asia and the Middle East.

And what we try to give you in that is in wholesale banking terms, essentially, 77% of all revenue from clients in wholesale banking has some form of cross-border connectivity. But, you will see the revenue booked in multiple legal entities. So I think your analysis on how much capital is Asia related relative to non Asia is a bit distorted when you look at a legal entity basis. And if you then go to slide 30, what you will see from GB&M is 40% of the revenue, booked in the East, on a legal entity balance sheets in the East, emerges from Western clients.

So, 40% of Greg and Georgia’s revenue essentially gets booked in the East, but originates from clients we bank in Europe, the UK, the U.S, in the West. And that, again, if you look at it purely on a legal entity basis, you’ll see European and U.S. balance sheets and say, why are they so capital heavy? It’s because they’re a feeder of business into our operations in Asia and the Middle East.

Ewen StevensonGroup Chief Financial Officer

Yeah. Jason, I think in addition to what Noel has been through, if you go back to what we announced a couple of years ago about this $100 billion of RWA reduction in the West and redeployment in the East, what we’ve seen over the last couple of years, I think, is a very successful execution of the first part of that, we’re now in excess of what we started out with. But the redeployment in the East has been slowed down as a result of COVID. So we do think that that redeployment rate will now pick up as the Asian economies progressively come out of COVID.

Richard O’ConnorGlobal Head of Investor Relations

And we’ll take another question from the line of hopefully Ben Thomas from RBC of [Inaudible]

Unknown speaker

Good morning, and thank you both for taking my questions. Two, please. Firstly, your flow mortgage market share in the UK picks up significant Q4. Do you intend to keep the questions in terms of pricing and growth in the UK? And then secondly, to top -up its provisions for Chinese commercial real estate in the quarter, can you just give us some flavor on what you’re seeing on the ground in respect of Chinese CRE? And is it still the indirect exposure that keeps you awake at night? Thank you.

Noel Quinn

Ewen, you want to take the mortgage market?

Ewen StevensonGroup Chief Financial Officer

OK. Yeah. Our follow market share in the quarter, I think it was 9.3 stock shares, 7.5. I think, as you all know, we still feel structurally underweight and UK mortgages.

Our share of current accounts by value, has ticked up to just under 15% now. So, we still feel structurally underweight mortgages. I don’t think we describe our pricing as aggressive. We don’t necessarily aspire to be in the top three of the best buy tables, but we do think we can continue to take market share above our stock share.

I think a notable feature of what we saw in the market, which you’ll all be familiar with is, this was the first quarter for quite a while. I think where our front book margins were below bankbook margins and have continued to drop a bit in Q1 as well. We’ve also seen a significant increase in risk-weighted assets for UK mortgages from the beginning of this year. We still think we’re earning returns comfortably above the cost of capital at this point.

But, conditions are competitive at the moment in the UK mortgage market.

Noel Quinn

Yeah. And on China real state, listen, there was no doubt that in Q4. The level of market uncertainty increased, and the level of contagion risk on that whole sector of commercial real estate in China increased relative to Q2 or Q3. And therefore, we thought it wise and prudent to model in additional stage 1 and stage 2 provisions to reflect the uncertainty that refinancing risk and that liquidity risk.

We’ve seen the market conditions ease a bit at the start of 2022. We think that is likely to have a benefit on the risk position on commercial real estate in China. Time will tell. It’s still too early to tell how it will all play out.

It’s affected pretty much every private CR recline in China. As you and said, we have a mixture of POEs and SOEs in that sector. Around about, 30% SOEs, 70% most of POEs. Time will tell as to whether that sector has more losses come in or not.

But we thought it wise to model in some additional provisions based on that level of uncertainty. We think — sorry, the one thing I’ll also say we still stand by the fact, we have good quality clients, but we know for a long time operating in Tier 1 and Tier 2 cities with good properties. But the sector as a whole has a level of uncertainty over it that’s affecting all of them. Ewen, sorry.

Ewen StevensonGroup Chief Financial Officer

Yeah. All of that thinking that Noel just been through, is behind our guidance. When we’ve talked about approaching 30 basis points of ECL provisions for this year, I would note, is probably more conservative guidance than us and current consensus.

Noel Quinn

So, the uncertainty over series within that 30 basis points.

Richard O’ConnorGlobal Head of Investor Relations

Over to that side — 

Aman RakkarBarclays — Analyst

Yeah. Good morning, it’s Aman Rakkar from Barclays. I would have to please one back on rate sensitivity. One thing that’s always I found remarkable for a number of quarters now is how low your USD rate sensitivity is.

I think even on the updated deposit pass through assumption, relative to the $460 billion USD of deposits, I think that you can imply from Slide 27, why is that rate sensitivity so, so low out of the U.S? Does it imply a lot of hedging? Is there something you can help us understand that? And second would be on aspirations for wealth management. Note the cautious guidance in relation to Q1. I guess, I’m specifically thinking about the border between Hong Kong and China reopening. Is there any way you could help us quantify what the potential benefit could be if we were to rediscover a pre-COVID level of activity for that business? I know it looks like the onshore Hong Kong insurance franchises has done really well last year, so maybe there’s a bit of easing there.

But anything you can help us put some numbers to that would be really helpful. Thank you.

Ewen StevensonGroup Chief Financial Officer

Yes. In the U.S dollar, there’s effectively an accounting mismatch, which is driving that lack of sensitivity in that part of the funding base in the U.S is used to fund the trading book. So, in a rising rate environment, the benefit from an accounting, the accounting benefit on the revenue side goes to trading income, so you don’t get that normal rate sensitivity that you would expect. On the board of reopening if you go back to 2019, I think about 40% of our new business sales on insurance were to mainland Chinese.

So, keep the current profile of the domestic business in Hong Kong and as soon, going back to 2019 levels or higher as that border reopens.

Aman RakkarBarclays — Analyst

So just on that first rate sensitive point then, is that is that additional rate sensitivity that goes through non-interest income? Or are you saying that actually —

Ewen StevensonGroup Chief Financial Officer

Yes, that would be a conclusion of that. I guess, it would like hundreds of millions, I think.

Aman RakkarBarclays — Analyst

OK. Thank you. 

Noel Quinn

Well, we’ve covered it a bit in the slide, but I just do want to reemphasize because it was such an important plank of our strategy Asia wealth, just draw out some stats. Net new invested assets in our wealth business was up 21% year-on-year last year. That’s despite a bit of a slowdown in Q4. But for the full year, it was up 21%.

Trade wealth balances was up 5%, the invested assets of wealth was up 7%, so the net new money was up 21%. But, the overall balance sheet in invested assets was up 7%. Asset management was up 5% year-on-year as  full year, and wealth revenues were up 10%. So, that’s with a relatively subdued cross-border activity flow that’s just driving the domestic markets while we’re also investing in is China.

So, what we’re trying to do is, we’ve got a strong business that we’ve invested in in Hong Kong. We’re now investing in China through the joint venture, taking full ownership of the joint venture of our insurance and wealth business there and organically investing in Pinnacle 3,000 people over the next few years. So we want to drive stronger domestic growth in China, stronger domestic growth in Hong Kong, and then connect them through the likes of Wealth Connect and Stock Connect. And that’s where I think we got the icing on the cake, you can say, when the border opens up.

So I think there’s still strong underlying growth for the medium term. And although we’re signaling a softening in Q1, there’s a strong track record of the Hong Kong economy bouncing back. And I think that’s what will happen at some point later this year. 

Aman RakkarBarclays — Analyst

OK. Thank you. 

Richard O’ConnorGlobal Head of Investor Relations

Go ahead. And then — my behind. OK. Guy.

Guy StebbingsExane BNP Paribas — Analyst

Morning. Thanks, it’s Guy Stebbings from BNP Paribas. First question was back on income building on the last question. Thanks for the comments already on net interest income and reflecting on where consensus, I guess, for other operating income sounds like it can be a tough start to 2022, and you’ve refrained from giving guidance for this year on revenues versus the medium term double-digit guidance.

Just wondering if your sense is that it’s actually a bit of a gift back to the upside this year from some of those trends [Inaudible] it’s very difficult to judge in this environment, but any color there? And would you see that very much as a short-term issue and indeed there could be potential catch up on that line as the environment normalizes? So any distortion has really isolated to 2022. Indeed, your medium-term guidance right to be 35% of group suggests a rapid pace of growth to come through at some point in the future. And then the second question is just on cost, and thanks for calling out the restructuring going to be above the line from 2022. I think that’s a very helpful development.

It also goes against what we’re seeing a number of banks in terms of talking about perennially higher restructuring type costs and maybe with expected in the in the past. And in that context, naught to 2% cost growth over two years looks like a very good target set to hit. If you do indeed manage to reach that, just one thing, what gives you confidence you can do that if there are still some investment type actions. We are an inflation environment.

Is it just a sense of the the amount of run rate cost saves coming through the business give you that significant comfort? You can deliver that. Thank you.

Ewen StevensonGroup Chief Financial Officer

Yeah. On non-interest income, I guess I haven’t made the same comments versus consensus that should be [Audio gap] but look, in Q1, just we’ve had a couple of things going on. Firstly, we’ve had weak markets in Asia, which is impacting both the insurance MGU, but the market impact and also impacting equity brokerage. We’ve now got about half of the branch network temporarily closed in Hong Kong at the direction of HK may as a result of COVID-19 restrictions.

Q1 is typically best quarter of selling, while product and a lot of that is sold through the branch network. So, if we look at what’s happened in every other market with omicron, it’s been a three-month thing. And then the economies are reopened again. So yeah, we do think it is short dated in nature, and we’re not trying to reguide or on ’23 at this point.

So yeah, I do think there could be some disappointment in wealth in Q1. But by the time you get back into Q2 with Hong Kong reopening, we should see a really rapid recovery. On what’s the second question — cost.

Guy StebbingsExane BNP Paribas — Analyst

Cost, and why are we confident on naught to 2%?

Ewen StevensonGroup Chief Financial Officer

If you go back to 2018, the back end of the year that I joined, we grew costs at about 5.5% that year and we did exactly what went wrong not to do now, which is we were trying to inflate the cost base in line with rising rates. Since then, we’ve done an enormous amount of work to embed good cost discipline across the organization in a way that didn’t exist three years ago. We’ve got a very well drilled cost program at the moment. I would say, if you just the investment that we’re making into various parts of the bank and digitization and automation can drive out huge potential cost savings in some areas.

If I look at what I’m trying to do in finance at the moment, we’ve got a big move to take all of our reporting into a single dataset on the cloud, and run all of our reporting engines off the cloud. We think that can reduce operating costs and finance by 25% to 30% over the next three to four years. And it’s the same analogy that Noel used in the front office with the trade transformation that we’ve done in the last few years. So I think, we’ve got confidence as we look at the combination of those investment programs going on.

In addition, we are continuing to effectively, if you were to cut our cost structure on a geographic basis, what you see as the mature markets are declining. So, Europe, UK, U.S, Canada, which is allowing us to fund the growth that we want to put on in the Middle East, Asia, and Mexico. So, it’s a complex mix of costs, actions going on across the organization. But we do think that based on the work that we’ve done today, there’s pretty good bottom-up grounding for the cost targets.

And now we obviously don’t put them out lightly because Noel and I know that you’ll remind us if we miss them.

Noel Quinn

So, I’d say we got the bottom-up analysis, we got the benefit of a committed three year transformation program. Two years into it, we delivered what we said will continue there in year three this year. So it’s a combination of bottom-up and frankly, determination. I want that revenue benefit to go into the return, to go into the P&O, not just to be spent on incremental costs, and I’m trying to get a much more stable cost base of the organization over time and not have it cyclical, high rates, high costs, low rates, low costs.

I’d much rather have a much more efficient machine that is constantly reengineering itself, and technology is playing a big role in it. Hence, we spent more than $6 billion on tech last year. And if you take the guidance, we said that was 19% of our operating costs and we want to say we’re willing to take it north of 21% of operating costs. If you roll that forward over a period of time over through, two or three years, that would take $6 billion to $7 billion.

So implicit in incremental, I’d say investment is a reengineering of our fundamental processes. We saw that the impact of digitization on trade, we’ve seen the same thing in the payments arena, we’ve got a similar program running on our wealth business, reengineering our frontline internet banking capability building once rolled globally, you get scale globally. So that’s what we’re working on. Richard, there was one more in the — 

Richard O’ConnorGlobal Head of Investor Relations

I’ve got time for two more one behind you and then — 

Noel Quinn

[Inaudible] They both had their hands up a lot.

Richard O’ConnorGlobal Head of Investor Relations

And then Martin. Well, let’s see if I can fit you in, but we were have to wrap up

Unknown speaker

Hi. It’s from [Inaudible]  KBW. So thanks for the presentation. Just two questions.

One, on income, well actually loan growth, really. So you’ve delivered 1% loan growth in ’21. So what gives you the confidence that you’re going to be able to do mid-single digits in ’22? Given Hong Kong and China still very much sticking to a zero COVID policy? So putting a lid on growth there. And related to that, if you are thinking about mid-single digit loan growth and and in a rising rate environment, why are you only targeting mid-single digit revenue growth? Again, building on a previous question, so that’s on revenue side.

And then on costs, you’ve talked a lot about digitization and investment in technology. Roughly what is a split between maintenance spend and innovation spend?

Noel Quinn

I’ll do the last question on innovation and maintenance —

Ewen StevensonGroup Chief Financial Officer

You want to call on loan  growth, I think, 2021 was heavily distorted by a couple of things. Firstly, the impact of COVID in the first half of the year, which I think had a significant dampening effect on loan growth in the first half. I think what we’ve seen coming through now, we’ve had it in commercial for some time, just continued quarter-on-quarter loan growth. I think in retail, we’re seeing very, very good growth in mortgages both in the UK and Hong Kong, despite what you referred to in Hong Kong, underlined loan growth there in the mortgage sector continues to be very robust.

But, the other big offset, which is the rundown that we’ve seen in wholesale and global banking markets in particular, which is dampened that growth rate. But if you look at Q4, the Q4 growth rate, I think it doesn’t take much to get that growth rate up on an annualized basis to mid-single digits. 

Noel Quinn

[Inaudible] both rate In CMB, Q4-to-Q4. In Asia loans was — if you take trade Q4-to-Q4 gross in the balance sheet in CMB. I think it was 29%. So what you saw was a slow start in the first half of the year and then a pick up in the second half of the year.

Trade grew faster earlier than term lending and term lending started to pick up in the second half of the year as economies came out of COVID. They first went to reactivate the supply chain, and then they went to reactivate some of the term lending. I still think term lending is quite muted at the moment. I don’t think there’s a huge amount of capital investment taking place, but we’re starting to see some early signs of that come through in Q4.

I think we just have to wait and see how economic recovery continues in the first half of this year. And then your other question on how much of the investment in technology is innovation versus maintenance? This term innovation can mean many different things to many different people. So I don’t use that term necessarily for IT investment or I’m looking at is how much of that investment is fundamentally reengineering the business as opposed to doing carrier maintenance on today’s systems for regulatory reasons. And I think more and more of our technology is going into the reengineering space and less into the care and maintenance.

We don’t give a breakdown on that, but a significant proportion of our investment stack over 50% is going into the reengineering activities of the bank, not just keeping the lights on and maintaining the existing systems. We’re investing in reengineering and take trade as an example. We fundamentally replatform the whole software base for trade. So we turn off the old and turn in on the new, and that has multiple benefits.

It lowers the ongoing running costs of technology, it lowers the ongoing running costs of the bank, provides new product capability, better customer experience, better operational control. We’re doing that in many other areas as well.

Richard O’ConnorGlobal Head of Investor Relations

I’m afraid we run out of time, but members of the team will be available outside for a cup of tea or coffee after to answer your questions. Sorry about the two or three, we didn’t have time to get on. But over to Noel now to conclude the remarks, please.

Noel Quinn

Listen, thank you very much for attending today and for all of your interest in your questions. To sum up, I’m pleased with our 2021 performance. Particularly pleased with the return to revenue growth in Q4, which I think bodes well for 2022. We’ve got good cost control and we’re determined to maintain it.

Based on current interest rate assumptions, we would expect a ROTE of at least 10% in 2023, and a year earlier than previously planned. We’ve made good progress executing against our key areas of our strategy and our transformation. And I’m pleased that we were also able to provide our shareholders with healthy capital returns this year. Richard and the team are available to you if you have any questions. But in the meantime, please stay safe and have a good day, evening wherever you are.

Thank you very much.

Duration: 81 minutes

Call participants:

Noel Quinn

Ewen StevensonGroup Chief Financial Officer

Richard O’ConnorGlobal Head of Investor Relations

Raul SinhaJ.P. Morgan — Analyst

Joe DickersonJefferies — Analyst

Omar KeenanCredit Suisse — Analyst


Tom RaynerNumis Securities — Analyst

Jason NapierUBS — Analyst

Unknown speaker

Aman RakkarBarclays — Analyst

Guy StebbingsExane BNP Paribas — Analyst

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