HSBC Holdings plc (HSBC) Q4 2011 Earnings Report, Transcript and Summary

Douglas Jardine Flint - Chairman, Chief Executive of Global Asset Management Arm and Director of Hsbc Finance Corporation Stuart T. Gulliver - Chairman of The Group Management Board, Group Chief Executive Officer and Executive Director Iain James Mackay - Group Finance Director, Member of Group Management Board and Director

Alastair Ryan - UBS Investment Bank, Research Division Chris Manners - Morgan Stanley, Research Division Rohith Chandra-Rajan - Barclays Capital, Research Division Michael Helsby - BofA Merrill Lynch, Research Division Christopher Wheeler - Mediobanca Securities, Research Division Ian Gordon - Investec Securities (UK), Research Division Ronit Ghose - Citigroup Inc, Research Division Bruce Packard - Seymour Pierce Limited, Research Division Alistair Scarff - BofA Merrill Lynch, Research Division Robert Law - Nomura Securities Co. Ltd., Research Division Gary Greenwood - Shore Capital Group Ltd., Research Division Thomas Rayner - Exane BNP Paribas, Research Division Raul Sinha - JP Morgan Chase & Co, Research Division

Good morning, ladies and gentlemen, and welcome to the Investors and Analyst Conference Call for HSBC Holdings plc's 2011 Annual Results. For your information, this conference call is being recorded. And at this time I'll hand the call over to your host for today, Mr. Douglas Flint, Group Chairman.

Thank you very much. Hello, and a very warm welcome to everyone who has joined us today. As I was introduced, this is -- it's Douglas Flint, Group Chairman. With me is Stuart Gulliver, Group Chief Executive, and Iain Mackay, Group Finance Director. Before we start, can I just say that at our board meeting on Friday, both I and the board expressed to management our satisfaction with the progress made during 2011. We have begun to execute the strategy that we set out in May last year, reshaping the group, positioning the business for growth and continuing to build sustainable long-term value for shareholders. In a moment, Stuart will talk through you the highlights for the year, then Iain will take a detailed look at our financial performance. And finally, Stuart will cover the performance of the business against our strategic objectives in more detail. Stuart, over to you.

Thanks, Douglas. We'll cover the detailed financials in a moment, but I want to start by pulling out the key points for 2011. As you can see, reported profit before tax was $21.9 billion, up 15% on 2010. But on an underlying basis, profit before tax was $17.7 billion, down 6% on 2010. We have increased dividends paid to our shareholders by 14% to $0.41, paying $7.3 billion to our owners. And as you will see later on, this is less than the amount we retained to strengthen the capital base of the bank and reinvest for the future, but more than the total variable pay for all of our staff worldwide. We think these proportions are correct. We also increased earnings per share by 26% to $0.92 compared with 2010. Moving onto the key highlights. First, you may recall we announced an overhaul and redesign of HSBC last May, and I'm pleased to be able to say that we gained traction in the first 7 months of a 3-year journey, designed to simplify the structure and improve the management and control of the firm thereby improving returns and positioning HSBC for growth. We got off to a quick start, announcing the disposal or closure of 19 nonstrategic businesses, of which 16 were during 2011, including 2 large transactions in the United States. When completed, these transactions should represent a reduction of around $50 billion of risk-weighted assets and the transfer to the acquirers of the equivalent of around 12,000 full-time employees. The capital will be redeployed in our growth businesses. We also have began to delayer the bank with 4 programs to improve our efficiency and effectiveness. These are designed not only to reduce costs and bureaucracy, but also to improve controls. All 3 aims are equally important. Second,…

Thanks, Stuart. This slide shows the reported results, highlighting pressures in revenue and costs, although as Stuart has indicated, there are signs of real progress in both areas, a significant improvement in loan impairment charges, increased income from our associates mainly driven by our Chinese associates and a reduction in the effective tax rate. Now looking at numbers on an underlying basis. Revenue was $68.1 billion, broadly in line with the prior year. We saw a strong revenue growth in faster-growing regions. This included a significant contribution from Commercial Banking and Retail Banking and Wealth Management outside North America and over half of our Global Banking and Markets business lines. In each case, growth has been driven by targeted investment. We experienced headwinds from the turmoil in the Eurozone, which impacted on credit and rates revenue, most notably in Europe, lower income in Balance Sheet Management as expected and the continued managed reduction of our runoff portfolio in the U.S. Loan impairment charges were down, notably in the U.S. Consumer Finance portfolios. More broadly, credit costs remained stable. Although where we have realized significant growth in Commercial Banking and Lending in Latin America and Hong Kong, we have experienced slightly higher loan impairment charges. Operating expenses were $41.5 billion, up 8% on the prior year. This was due in part to an increase in staff compensation and inflation in faster-growing markets, increased compliance and regulatory costs in Europe and North America and in part a number of notable items, which are detailed in the Appendix of this slide pack. Looking at revenues. In the faster growing markets, revenues grew by 10%, accounting for 49% of group revenues, up from 44% in 2010. We saw record revenues in Commercial Banking with higher lending in Asia and Latin America, which helped deliver…

Thanks, Iain. I want to take you quickly through our strategic scorecard exactly as I set it out at the Investors Strategy Day. We said we would improve our capital deployment through the use of the 5 filters framework. And since then, we have announced the disposal or closure of 19 businesses, 16 of which were announced during 2011 and 3, so far, this year and we do have a number of further transactions in the pipeline. We also set out to improve our cost efficiency. Since May, we have achieved $900 million of sustainable savings, which annualizes at about $1.3 billion. To improve our organizational efficiency and effectiveness, we've developed consistent global business models in Commercial Banking and Retail Banking and Wealth Management, and we have redesigned and reengineered our global functions, processes and IT. We are creating a leaner group, removing layers of management to give staff greater responsibility, improve decision making and controls and to reduce bureaucracy. This delayering process has already begun in our major markets. We have identified a strong pipeline of further sustainable cost savings to deliver at the upper end of our target range of $2.5 billion to $3.5 billion by the end of 2013. We've also made material progress in positioning the business for growth, particularly in the faster-growing markets and in Commercial Banking, and these are already paying dividends. We have set a 12% to 15% target return on average shareholders equity. In 2011, we came in at 10.9%, which included favorable fair value movements on our own debt. As I've explained, we are putting our operational focus on improving our return on risk-weighted assets, which obviously is a key driver of ROE. And here, it's important to note in the lower table that our return on risk-weighted assets, excluding the…

[Operator Instructions] We'll now move to our first question today, which comes from Alastair Ryan of company UBS.

A couple of things. First, just the mix of higher dividend on a somewhat lower capital base. Now clearly, you've got plenty of capital and the distributions have been relatively low historically, which is whether we can read anything into the regulatory environment that you've been facing, which has been very aggressive in the past couple of years whether there's any signs of moderations or, I guess, once they're developed [ph] and then for perhaps ensure that the pace of the legacy portfolios declining in significance, fourth quarter was perhaps better at [indiscernible] than we all -- others had expected whether that rundown is now smoother than the sort of choppy we all saw in the second half. And also the legacy credit portfolio, down to $35 billion, but whether you have an aspiration to get that out quickly, so your balance sheet's clean or whether it’s more about not impacting revenues too greatly, so just as you say, underlying revenue?

Alastair, Douglas. On the dividend, I mean I think as far as the regulatory environment is concerned, we did get some good progress last year in terms of the ICB and the U.S. and CRD4 in Europe. And some of the aspects that look more troubling have been moderated at least, in principle, so far. So I think while there's an awful long way to go, there was some progress made in 2011. I think one of the other things that impacts thinking about the dividend, is as Stuart has said in relation to the legacy business both in North America and elements of credit portfolios in Global Banking and Markets, these will run off over some years from now. And that releases capital, which I think is one of the factors in the board's mind as we think about the opportunity to have a progressive dividend. But that really takes you into the question about how fast will this business run down, so I'll pass over to Stuart.

I think also, Alastair, we've set 2012 at [indiscernible], which is the same obviously as the first 3 of 2011, which gives us a bit of flexibility in terms of the regulatory environment. So yes, there is capital release as these run down, but the regulatory environment is getting more clear. But equally, we want to retain some flexibility in that regard, which is why we set it at 3 lots [ph] of 9. On the runoff portfolios, I mean I'll let Iain talk in a little bit of detail in a moment, but to your point about -- and I think which is you're asking is, would we look to sell down some of those portfolios if the opportunity arose. Actually, we've been looking at doing this anyway and we've been doing it in Global Banking and Markets for quite some time. It's a very simple mathematical calculation to whether the RWA is so large and the cost of capital, therefore, is greater than effectively the market -- mark-to-market loss to be taken to just clear it off the books. And we've set up a team of people now around, for household portfolio, to be able deal with reverse inquiries that maybe coming in from investors who are probably outside the banking industry that may be looking to take pockets of residential property. And as I say, for some time now, in Global Banking and Markets, we've had a team doing exactly the same thing with the legacy books there. It's a very simple mathematical calculation. So if we could accelerate it and use some of the gains from various disposals as it made more sense to take losses to get them off the book than to continue to pay for the capital against such large risk-weighted assets, we'll choose to do that.

Alastair, in terms of how the runoff portfolio in the U.S. is running down, the pace has remained fairly consistent when compared to last year. We run down those portfolios by a little bit over $9 billion, nearly $10 billion this year, which is reasonably comparable to what we did 2010 over 2009. We're sitting at $49.5 billion at end of the year. That's compared to about $80 billion at the end of 2009, the rate at which it's running down is reasonably consistent even -- although our portfolio continues to mature and in a pretty horrible U.S. housing market. The way that runs down continues to be fairly consistent even from 2009 where the proportion that's charged off versus the proportion that's paid down is actually fairly consistent as well. In terms of how that reflects on our capital base, offloaded book values have come down by nearly $10 billion. The risk-weighted asset reduction was less than $4 billion and within that, the FSA asked us to put a little bit of a capital override in this book as well, how far we continue to work with them on some of the modeling around the rundown in the portfolio. So though we see the book values run down quite -- very much in a consistent manner, we're not getting the full benefit of that coming through capital. But as we continue to run it down, we'd expect to see capital release build over time.

We now move to our next question from Chris Manners of Morgan Stanley.

I just had a sort of couple of questions for you on Asia. And firstly, just on the loan growth. In Hong Kong, you'd had sort of flat loans in the third quarter and the fourth quarter. Rest of Asia Pacific also had quite slow loan growth. So I was just interested in how you saw that loan growth continuing going forward. I mean do you see more opportunities there to increase the GDP [ph] ratio? And secondly, just on the impairment charges, I know the -- obviously, you're running below the normalized level. Are we seeing any -- an uptick in impairment charge in Asia, or are we actually still seeing quite a benign environment? Just those 2 comments would be helpful.

We're still seeing quite of a benign environment. There's no sign of an uptick. And indeed, even if we normalize to sort of averages over the last 5, 6, 7 years, actually they're still at quite low levels compared to other parts of the world. So even the normalized charge is quite manageable. And then on loan growth, we'll continue to build our business up there as opportunities arise. There's no override either coming from the center to slow down growth. It will be driven by business opportunities as they arise. And we're expecting positive GDP growth in Asia Pacific, so I'd expect the book to continue to grow.

We now move to our next question from Rohith Chandra-Rajan from Barclays Capital.

A couple of questions on costs, if I could, please. Just trying to look at the quarter-on-quarter trend in the costs and stripping out some of the notable items that you highlight, although not quite sure about the quarterly allocation of those. So just wanted to confirm whether this was consistent with your thinking that if we strip out the additional PPI charge, restructuring and U.S. mortgage servicing costs, the fourth quarter costs were broadly flat on the third quarter or down if you also stripped out the bank levy. So that was the first question. And then secondly, you highlighted $1.3 billion run rate of cost savings, confident of getting towards the upper end of the $2.5 billion to $3.5 billion target range. I'm just wondering how should we think about the trajectory to get there, so particularly how much might be achieved in 2012?

Yes, I mean if you make those adjustments, yes, the third, fourth quarters were flat. And the thing, I think to look at in terms of trajectory, and this is why we put the slide in, is the decline in headcount. So you can see, basically, if you think about it, we started -- we had the strategy day in May, we started effectively restructuring the firm. A lot of the acceleration effectively takes place in the fourth quarter and continues on into this year. So one of the reasons we gave you that chart on headcount is clearly that informs a lot of where the costs come from, so we would expect to show more progress in this area during 2012.

Could I ask an unrelated question, actually? Just on the U.S., if there's any update on the sale of the Cards business, and when that is sold, any further comment you can provide on ability to repatriate that capital?

We need to close the transaction, first and foremost, and then really then see how the regulator is positioned. I don't think there's any more clarity we can provide today on that. I certainly don't think you should be penciling in for 2012 that capital coming out of United States. As you also bear in mind, that we are looking to develop the Commercial Banking in the U.S., which will consume some of that capital.

The next question now comes from Michael Helsby from Merrill Lynch.

I just want to follow up on the question Chris asked on loan growth. I noticed that Commercial Banking loan growth was negative. If you looked at the second half versus first half and that's a clearly a very, very notable slowdown and that revenue actually fell Q-on-Q in the fourth quarter. And also just, again, there was a huge slowdown in the rate of growth in Hong Kong and in rest of Asia in the second half. So I was just wondering, I appreciate that you clearly want to grow those business, but what went on that was special in the second half, which broke that trend very significantly. Then just on costs. I was looking at Slide 11, I just wanted to clarify the comment that you just made on flat Q-on-Q where you strip out the notable items. The fourth quarter cost line of 9.7% versus 9.4%, is there something else in that 9.7% that we need to be aware of? And I was actually quite surprised that it was running a little bit higher, given the weaker revenue environment. Clearly, that's the -- the way if I look at that slide, that's the second highest quarter in the last 8. So if you could just give us a little bit more color on what went on in the fourth quarter, please.

Yes. Sure, on CMB, actually, lending continued to grow. So I'm not sure quite what you're looking at there. It might be a currency translation effect coming out of currency local balance sheet, so that is an actual -- whatever you picked up isn't exactly what's happening. Well, loans and advances to customers on the data we all have is -- has continued to grow. And Asia Pacific, or Hong Kong in particular, obviously, we've grown it at a very aggressive pace, as I think you've remarked on a couple of times as we caught up on the fact that we've put our foot off the gas in sort of 2008, 2009 when we did the rights issue. Obviously, what we now have is we believe we've caught up. So any future growth is really dependent on GDP and business opportunities that come up rather than taking back market share that we may have lost. And that, by definition, is at a lower rate. On the costs, there's a big restructuring cost number in there.

There is. There is higher restructuring within the fourth quarter that are slightly higher, legal and compliance costs in the fourth quarter, mostly in the United States. And those are probably the 2 features that you're picking up there, Michael.

Okay. So there are not any notable items?

No, because individually they're not that particularly significant.

Our next question now comes from Christopher Wheeler from Mediobanca.

A couple of questions. Perhaps the first one, to go back to the U.S. business and to talk about the settlement on U.S. foreclosures and perhaps could you tell us your position in terms of the settlement that's taken place with the big banks? Are you now moving towards the situation where you can start to foreclose again? How long will it take for you to get your procedures agreed? And then perhaps talk a little bit about what you think that might do, both to the speed of the runoff and obviously any additional costs that you may have to take through the P&L in terms of that agreement. That's the first question. And the second one is a pretty simple one. Just want to confirm on Slide 14 where you've really kindly given us the Basel III update. I assume the 0.1 adjustment to Basel III capital means that this is without the additional capital deductions that will be phased in between '13 and '19. I think that's the case, but we just appreciate the clarification.

So I'll take your last question, first, Chris. What we've shown you on Page 14 takes you only through the end of 2013. It does not take you the whole way through to 2018 and '19 for the simple reason that the world and the regulatory environment remains particularly uncertain, whether it's with respect to calibration of CRD4, the possible impact of capital requirements and PLAC requirements under ICB, G-SIBs, so on and so forth. So we take it through to '13 because we've got reasonable line of sight to '13. We did not take it beyond simply because of the uncertainty on that point. As relates to the U.S. settlement, the big 5 as it were, have reached a settlement. We, as you see in the financial statements, we did take a provision in the fourth quarter for settlement as it relates to similar conditions as the top 5. However, those discussions are still in a very early stage with the Department of Housing and Urban Development, which is the agency that the U.S. government has assigned to settle with the other 9 banks that were involved in this. There were 14 in total, as you'll recall. In terms of the specific details about how that settlement works out, it's still very, very fluid. And frankly, the reserve that we took was based on the best possible information that we had based on the stage of progress within those discussions. I think, overall, the fact that we are reaching as an industry, the stage of development in the U.S., it's good for recovery of the housing market. Clearly, the amount of work that we and others have done in terms of improving the quality of administrative procedures around foreclosure processes has us back doing foreclosures in 48 out of the 49 states in which we operate in the U.S. This is all good. It will ultimately lead to some form of sustainability in the recovery of the U.S. marketplace, but I think that's still some time to take. But I think, as I mentioned earlier, the runoff of our book continues to progress very much in line with our expectations and as we learn more in participating in the settlement processes with the Department of Housing and Urban Development, we'll keep people posted. But I think we've taken a view based on all the information we've got available at this point, and are reasonably happy with that.

Our next question comes from Ian Gordon from Investec. Ian Gordon - Investec Securities (UK), Research Division: It's Ian Gordon from Investec. Just 2, please. Obviously, I can see the group net interest dollar are still edging down, but could you just update me on your views in terms of the developments of the margin in Hong Kong and Asia Pacific, in particular, where you certainly referenced some asset spread expansion at the Q3 call? And then the second question, forgive me for raising it again, but just in relation to the $3.5 billion reduction in CMB lending in Hong Kong in the second half of 2011, I see in the text you referenced a reduction in certain trade-financed loans in CMB. So is it x that item that, Stuart, you're referencing the underlying growth?

Let me take the net interest margin in Asia for the moment. Comparing 2011 and 2010, net interest margin expanded from 180 basis points to 191 basis points. There's a number of factors that bear that out. Certainly if you look specifically at Hong Kong, it was a slightly higher instance if high board-based lending products, margins tend to narrow very slightly in Hong Kong over the course of the year. Outside the Hong Kong market, the opportunity to reprice assets, movements in policy rates in some countries like China, India, Australia, for example, certainly, helped both in terms of asset pricing as well as the yield that we can pick up on the liability side of the balance sheet. So overall, performance in net interest margin in the Asia Pacific region was fairly positive and continue the trend that we talked about at the third quarter. So that's about it in the net interest margin front. On the Commercial Banking front, I think, broadly, we saw a continued growth as far as lending, so -- and acknowledged at the third quarter that we had slowed the rate of growth in the second half of the year, partly because of, frankly, some moves taken by regulators in Mainland China and Hong Kong to slow down the supply of credit or the constraints in the supply of credit in those marketplaces, and our businesses were a function of that. But we very much continue to focus on the growth of the businesses.

If I may, the 2 things. The Hong Kong one is a particular piece of trade finance kind of that went backwards with forwards between the Mainland and Hong Kong, which was then discouraged by the regulators. So this was taking place in all bank's balance sheet. It's a specific item that doesn't really inform anything about the underlying trend of growth of Commercial Banking. And then if you look at that footings overall, the reported CMB lending down in the second half is due to currency. So if you look at places like India, Latin America and bear in mind that we're reporting in dollars, actually there's a currency decline that comes through in the dollar numbers. The underlying is actually up 2%. So the Hong Kong, specifically, kind of build-base financing thing between the Mainland and Hong Kong that's kind of gone away, but didn't really inform a huge amount of our P&L anyway. And the overall footing is due to currency moves in Latin America and India, in particular, local currency against U.S. dollar.

Our next question now comes from Ronit Ghose from Citi.

I had a couple of questions on capital. First of all, thanks for the Basel III guidance for 2013. When we try to estimate fully looked-through number, we get to slightly below 9% in 2013 on Basel III. I wonder if you could share any thoughts on that? Secondly, on the dividend, you set the first 3 quarters the same as this year or 2011, are you committed to a progressive dividend policy? And finally, on Hong Kong, with the risk of irritating management here, can you just confirm that, that sort of back and forth to the Mainland is all done now and that rundown in trade finance, particularly in Hang Seng Bank, is basically an '11 event?

So we are still committed to a progressive dividend policy, but we obviously want to retain the optionality to see how 2012 evolves. And then about re-capital.

Certainly, re-capital, as I mentioned earlier, Ronit, we've really given a view through the end of 2013 and have not gone beyond that, based primarily on the fact that there's still enormous amounts of uncertainty. However, certainly, as we reflect on the out years, our guidance that we gave you back in the Investor Day around how we saw the impact in our capital base coming from the broader implementation of Basel III remains highly consistent even as we update it with our ability to generate mitigating actions as well as further interpretive guidance comes around the implementation of those capital requirements, the guidance remains very consistent with what we gave you back in May of last year.

And on the trade financing, yes.

Our next question now comes from Bruce Packard from Seymour Pierce.

Just looking on the face of the balance sheet, there's some quite large movements in trading assets and also derivatives. And I'm just wondering, is there something fundamental going on there, or is that just noise?

Well, there was a concerted effort over the second half of the year and particularly the fourth quarter to manage down trading asset exposures, and I think that's what you're seeing coming through. In terms of derivative valuations, it's really a function of market movements as you looked at spreads widening in the -- well, narrowing and then widening again in the fourth quarter. That particular informs the valuation of derivatives, principally interest rates -- interest rate derivatives, that we have both in the trading portfolios as well as the broader management of the business. So overall, the -- what is informed the trading, the reduction was, a purposeful effort in the part of Samir and the team to move down their exposure to trading assets in the fourth quarter, which, by the way, tends to be a function that we undertake at the end of each year as we close out particular positions.

And we move to our next question from Alistair Scarff from Bank of America Merrill Lynch.

Just wondered if I can ask 2 quick questions. Firstly, in regard to dollar liquidity in your faster-growing markets, we're hearing from various banks that there has been a tightening. Is that something you've observed and if so, are you seeing a better pricing environment for dollar liquidity? And second question relates to trade finance. Is trade finance under the new Basel 2.5 and III? Is the risk weighting going to change materially? And if so, how that will affect the bank's position, obviously, with a 9% market share in that space? How will the capital be impacted?

Okay, in terms of liquidity, we continue everywhere to operate with a very conservative AD ratio, so it hasn't really had an impact on us. So we haven't really seen a particular squeeze on margins in U.S. dollars. Where we've seen a margin squeeze on the liability side has been in places like Brazil because rates went up. And in places like the U.K. where the state-owned banks are looking to deal with AD ratios substantially above 100, but we haven't seen effectively margin compression because of competition for dollar liquidity in the emerging markets.

Absolutely, Stuart. I mean when you look at trade financing in Basel III, this is, actually, Alistair, one of those areas, which is still open to pretty broad interpretation and discussion as it relates to CRD4 and the development of that. As you're probably well aware, there is a fairly healthy level of consultation and debate around possible impact on, specifically, that guidance on growth and the growth agenda, particularly in European environments. So it's one of those areas of uncertainty, but I think we're making real headway in terms of persuading the powers that be that from a trade finance perspective, they need to seriously revisit and are revisiting the implementation of Basel III through CRD4.

Great. And if I can have just one final follow-up in relation to your FTE count. Is the momentum that you've shown since the first quarter of 2011, is this trajectory something which we'd expect to see as you intensify the execution of your strategy? Or has the lion's share of the headcount aspect, net, of course, net headcount aspect being taken out and we'll look for a more of a stabilization of headcount around current levels on an aggregate basis?

No, you should have seen that there are further reductions to come.

And we'll move to our next question from Robert Law from Nomura.

I have 2 questions, please. Firstly, on the targets that you've restated for 2013, and I know you give these targets serious consideration when you put them out, and if I look at the cost-income ratio, it's -- whether you make it underlying or reported or whatever, you've just reported about 60%. And I then look at where our consensus is for 2013 and again consensus is somewhere around the 56% type level, so well above the top end of your target range. And I just wanted to ask, invite you to comment on what you think the market might be missing in terms of the assumption that the kind of cost-income ratio targets that you've got for 2013, that's the first one. Second one, more briefly, could you comment on the outlook this year and then in subsequent years for the BSM revenues, please?

Yes, sure. Bob, on BSM, I think the kind of rough guidance will be $2.5 billion to $3 billion for 2012 would be a reasonable place to put BSM.

Beyond that?

Sorry?

And beyond that?

$2.5 billion. And then on the cost efficiency ratio, clearly, you're right, in the sense that we have somewhat trapped ourselves by putting a ratio in as opposed to an expense target. But actually, in order to keep the pressure up within the firm, we will have to stick to aiming to that $52 million. But actually what we think will happen is that we'll hit the cost side and the revenue side to some extent's in our control and the revenue side, to some extent's not in our control because it depends on what happens in things like the Eurozone. But as things stand at the moment, we stick to it. We'll revisit this at the Strategy Day in May. But you're right, we've got a ratio that, at this moment, appears to be somewhat heroic compared to where we are. But we are absolutely determined to get the $2.5 billion to $3.5 billion of sustainable cost saves out of the firm and that's what we were programmed to do. What we'll need to think is whether we, in fact, bring alongside the cost efficiency ratio an absolute expense target and whether that might be a sensible thing to introduce in addition to the cost efficiency ratio.

All right. Okay, as a supplementary to that, the restructuring charges you've taken over, they're at a $1 billion last year. Any assumptions you've made in the targets? Do those go to 0 by the time the targets come into effect?

I think, Robert, I mean as we gave a little more detail what's inside that $1.1 billion, we've got $542 million relates to people and about $320-odd million, $325 million that relates to software programs. We have very much dealt with legacy software issues, I think in the numbers that we put in there. So I think it would be unlikely to see that to recur. And if you equate the $542 million to the actions we've already taken in terms of delayering the firm and striking the right focus around deployment of our human resources, then it probably helps inform a little bit what sort of restructuring charges might look like as we continue to work through the reshaping of the firm. But certainly, by the time we reach the middle tail end of 2013, we would have expected to have worked through the majority of restructuring charges.

Our next question now comes from Gary Greenwood from Shore Capital.

Just had 2 brief questions, the first was on Asia. You mentioned that you're taking market share in GBM as European banks withdrew capacity. Are you doing that whilst maintaining prices? Are you seeing opportunities to reprice it as well? And then the second question was just following on from Robert's question on cost income ratio. I think your previous guidance when you talked about return on equity, you'd guided towards the bottom end of the range by the end of 2013. I'm guessing from what you're saying on cost income ratio, that, that's probably still true that you were looking towards the bottom end of the range on the ROE guidance?

Yes, in November I actually said on both that we'd have to go to the bottom end of both ranges, say 12 on the ROE, 52 on the cost efficiency. And nothing's changed in terms of those being the logical ends of the ranges to aim for. In terms of European bank and taking market share, there, at the moment, is no ability to flex pricing because we're not the only guys -- the American banks, the regional banks, regional Asians and the Chinese banks are all in good shape and are competing for the business.

And I move to our next question from Tom Rayner from Exane BNP Paribas.

It's Tom Rayner from BNP here. Just a couple of questions, please. One, just on the dividend payout slide where you show the pie charts with the variable pay, the retained earnings and the dividend, just want to make sure I do understand how that links to a sort of desired payout ratio in terms of ordinary dividends relative to earnings in any particular year. So I think if I understand it rightly the pro forma number you referred to is before variable pay and the dividend number includes dividends to non-ordinary equity. So I'm just trying to get a sense versus, I think, what was a 44% payout ratio in 2011? What are you trying to tell us, if anything, with that slide? And I have a second question, please.

Right. So on the dividend payout ratio, we have 42.4% as the payout ratio, which is in the range that we talked about at Strategy Day of 40% to 60% of our payout ratio. When you track across to the slide in the deck, which gives you a broad framework for the distribution or, if you like, the allocation of our profitability and this reflects, if you like, our philosophy, which in many of the previous years in HSBC, not all, admittedly, but in many previous years has been a faithful reflection of what we've done where we focus on retaining the majority of the profits that we generate in any given year to retained earnings, to build capital and reinvest back into the business; as a distribution in any given year, somewhere in the range of 35% of that profit attributable to the year; and then 15% in an after-tax basis for variable compensation. So there is not a direct mathematical link between the dividend payout ratio that we've reflected in our financial statements and that which is reflected on this chart. I think one thing to note is that in each year we tend to get a fairly healthy contribution by script take-up within our business. And generally speaking, that probably contributes for the difference between what we have in the page of 35% and the payout ratio between 40% to 60% within our targets, okay?

Okay. So if we add the script in -- so if we added the script, you'd be -- yes, okay, okay. Fair enough. So just the second one, sorry, to just go back to the loan growth. But I mean, I can tell it seems somewhat irritating that people are trying to draw the wrong conclusions about what the volume growth is doing in different parts. But if you look at the disclosure you've set, I think it's quite hard to sort of get back to an underlying constant currency sort of growth, certainly in the second half. I mean, the full year underlying that you report was minus 1% for the group loan growth and obviously there's a U.S. runoff within that and there's all sorts of currency issue. I mean, is there anything you can tell us or any way you can point us to within your release or the presentation?

That's a bit technical is the Hong Kong -- there was a significant pop-up in 2011 that you can see in HSBC in Hong Kong and in Hang Seng in Hong Kong. But basically, U.S. dollar loans is back with R&B collateral, which the Hong Kong Monetary Authority then cracks down on, for want of a better expression, because it obviously involved significant kind of onshore, offshore arbitrage between Hong Kong and the Mainland. So therefore, a chunk of the trade-related lending in Hang Seng and HSBC in Hong Kong increased from Dec '10 to June '11 and then back down again to Dec '11 is that phenomenon. But if, again, if you look at Hong Kong, 31st December '10 to 31st December '11, the total growth loans and advances go from $49.2 billion to $55.5 billion. It's just that they were $59.1 billion at the half year and came back down again because of this one technical aspect. So then you're left with the runoff of the loan portfolio in the United States and currency adjustment. And there's one other element in the U.S. is that the Cards and Retail Services business and the branch network, those loans and advances as well as associated liabilities have been classified as held for sale, so they've come out of the loans and advances number. So when you look at the loans and advances number in the overall balance sheet, you've got to look at other to get back to the customer loans and advances that, if you like, you first thought of. So if you go to the balance sheet stuff on Page 104 of the annual report and accounts and also the balance sheet page, which is on Page 32, you'll see in it that loans and advances to customers are $940 billion and what you're looking at is $958 billion at the end of '10. But of course, we've reclassified the businesses that are up for sale and they sit in other assets, which has gone up from $145 billion to $156 billion. $40 billion has been reclassified, so that's why we're kind of talking at cross purposes, I think.

I think so. I mean, in terms of where you think underlying sort of clean...

It’s up 3.3% excluding reclassification year-on-year and excluding the bit in the middle of the year due to particular activity in Hong Kong.

Absolutely. And would that have been stronger in the second half than the first?

No, first half is stronger than the second. So the massive confusing thing is the reclassification of the businesses now held for sale and the RMB-U.S. dollar bit in Hong Kong.

Last question now comes from Raul Sinha from JPMorgan. Raul Sinha - JP Morgan Chase & Co, Research Division: If I can have 2 just to wrap up then, firstly, one for Stewart. So can we have your thoughts on the LTRO, please. I mean what was the reason for the tick-up and what do you plan to do with the proceeds? And secondly, if you could comment on GBM performance, how you finished the year in Q4 and how you started the year in 2012 particularly credit was a very difficult -- credit and rates were quite difficult areas for you in Q3 and Q4. Do expect some of that to alleviate in 2012?

Yes, certainly. So the LTRO, in the first round of the LTRO, we took $5.2 billion, of which $5 billion was in France and the remainder was in Greece and in Spain. The reason that we took the money was quite straightforward. So clearly we don't need it. We've got $129.9 billion line with central banks at the end of the year and our advanced deposit ratio of $75 billion means that we have $313 billion more deposits than we have customer advances. The reason we did it is actually, frankly, because we think it adds -- the LTRO, we think, is a great move by the ECB, which helped stabilize the European situation. We felt that actually it did not contain any stigma and indeed, by ourselves going into it, it actually helps remove the stigma. What we've also done with it is -- so what are we using it for? So it sits in France, the 5 -- the biggest chunk and effectively it is financing lending to French corporates and our participation in the French short-term government bond market. And what we've also done with it is we've ring fenced it so that it does not contribute to bonus pools. What it will do is after positive carry, and that positive carry will add to the capital base of the French bank, which will increase the ability of the French bank to lend to French companies. So we've done it really in line with the authorities because we think it was a very, very significant stabilization of the Eurozone system and that's why we did it. We've ring fenced it so it doesn't benefit any bonus pool and it basically helps us build up capital within France, which we'll use to expand our business. And as I…

Thank you, ladies and gentlemen. That concludes the HSBC Holdings plc Annual Results Call. You may now disconnect.