This presentation and subsequent discussion may contain certain forward-looking statements with respect to the financial condition, results of operations, capital position and business of the group. These forward-looking statements represent the group's expectations or beliefs concerning future events and involve known and unknown risks and uncertainty that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Additional detailed information concerning important factors that could cause actual results to differ materially is available in our interim management statement. Past performance cannot be relied on as a guide to future performance. This presentation contains non-GAAP financial information. Reconciliation of non-GAAP financial measurements to the most directly comparable measures under GAAP are provided in the reconciliations of non-GAAP financial measures supplement available at www.hsbc.com. [Operator Instructions] Good morning, ladies and gentlemen, and welcome to the Investor and Analyst Conference Call for HSBC Holdings plc's Interim Management Statement for Third Quarter 2014. For your information, this conference is being recorded. At this time, I will hand the call over to your host, Mr. Stuart Gulliver, Group Chief Executive.

Thanks very much. And good evening from Hong Kong, and welcome to our Third Quarter Results Call for Analysts and Investors. With me today is Iain, who's going to talk through the detailed financial performance. And we'll both take questions, but let me start by pulling out a few highlights. Reported profit before tax for the third quarter were $79 million higher than the third quarter of 2013. And our underlying profit before tax, excluding significant items, was up by $873 million. Excluding significant items, we increased underlying profit before tax in all of our global businesses. Revenue continued to grow in Commercial Banking, dominated by our home markets of Hong Kong and the United Kingdom. Global Banking and Markets contributed a strong revenue performance. And Global Private Banking has now attracted USD 10 billion of net new money in areas targeted for growth since the start of the year. Meanwhile, the remodeling of Retail Banking and Wealth Management and Global Private Banking remains ongoing. Loan impairment charges were also lower, but operating expenses were up, for 3 principal reasons. One, we continue to build essential infrastructure to deliver against our risk and compliance commitments and fulfill our regulatory obligations. Secondly, we experienced cost inflation, particularly in Asia and Latin America. And lastly, there were a number of significant items, including the settlement with the U.S. Federal Housing Finance Agency, our provision for the U.K. FCA investigation into foreign exchange and additional provisions for U.K. customer redress. Finally, we maintained both a strong balance sheet and robust capital ratios over the quarter. I'm now going to hand over to Iain to go through the details.

Thanks, Stuart. For the third quarter, reported profit before tax was $4.6 billion, compared to $4.5 billion in the third quarter of 2013. Underlying profit before tax was $4.4 billion, compared to $5 billion. This included the adverse movements of $1.5 billion on significant items, which I'll come back to shortly. For the first 9 months of the year, reported profit before tax was $16.9 billion, compared to $18.6 billion in the prior year period. Underlying profit before tax was $17 billion, compared to $18 billion last year, also affected by a number of significant items. You'll find a lot more detail on the underlying adjustments and significant items in the appendix to the presentation. Looking at some key metrics. The reported return on average ordinary shareholders' equity was 9.5%. Our cost efficiency ratio was 62.5%. On an underlying basis, we had a negative jaws of 9.2%. The advances-to-deposit ratio was broadly unchanged at 73.7%. And our common equity tier 1 capital ratio on an endpoint basis was 11.4%, reflecting a strong capital position. Next slide shows the breakdown of profit before tax for the third quarter and preceding 6 quarters, separating underlying adjustments and significant items. As you can see, there were $2.2 billion of significant items in the third quarter of this year. These included a charge of $550 million in the U.S. relating to a settlement agreement with the Federal Housing Finance Agency; a provision of around $380 million for the U.K. FCA investigation into foreign exchange; an impairment of $271 million on our investment in Industrial Bank; and a provision for U.K. customer redress programs of $701 million, which included additional PPI provisions of $589 million. Excluding underlying adjustments and significant items, profit before tax for the quarter increased by $873 million compared to the prior…

Thanks, Iain. So to recap: a good revenue performance in Global Banking and Markets; increased revenue in Commercial Banking; $10 billion of net new money in Global Private Banking since the start of the year; ongoing remodeling of Retail Banking and Wealth Management to Global Private Banking; sustained growth in customer lending; low loan impairment charges, notably in Europe and North America; but increased operating expenses due to risk compliance and related costs, inflation and a number of significant items. So overall, we remain highly capital generative and profitable and we remain confident that we will deliver a progressive dividend. We will now be happy to take your questions. Operator?

[Operator Instructions] We will now take our first question today from Alastair Ryan from Bank of America.

A couple, if I may. First, and thank you for the volume growth figures, which sort of demands that I ask whether, now that margins are stabilizing, loans are growing 6% to 7%, there's a sort of pace of revenue growth you have in mind and whether that should be clearly above cost growth to get back to your mid-50s cost-income target over time. And then secondly, now that leverage has landed and you look better capitalized than ever, any thoughts about how progressive the dividend might be under those circumstances?

Okay, so look, I'll start, and then Iain, I'm sure, will add for more accuracy. So look, the fact of the matter is that I think that the operating costs to run a global bank of our size and scale today are higher than they were a year or 2 years ago. So notwithstanding the fact that we should be able to see continued growth in revenue coming from the increases in loans and advances that we've seen and that may well cause the jaws to tighten back up from obviously the unacceptable minus 9%, we think actually the cost efficiency ratio is more likely to be in the high-50s, because I think that the cost of running a global bank is higher than it was previously. If you look at the -- just the headcount that we've added in compliance and regulation since I became Group CEO, it gives you an idea about what the cost now is to run one of these things. So we had 1,730 people, this is just compliance, okay, in 2010. And also, we're now at 6,700 or thereabouts and probably finish the year closer to 7,000. And I think that that's frankly a fixed cost of running this business model. Now as you say, we are starting and continue to throw off significant amounts of cash. And we continue to add to our capital ratios and we continue to be able to support a dividend, so I don't think it invalidates the business model. I just think the costs of running this business model are higher than they were before. So actually, what you've just suggested will probably get us back into the high-50s, but won't get us to the mid-50s. Yes, we continue to add to capital, but obviously, we still have uncertainty around the output of the PRA stress test. And we also need, I guess, some clarity around TLAC. And therefore, we are going to have to be -- I think, continue to be rather mealy-mouthed about what progressive actually means at this moment in time, even though you're right to say we're sitting here at 11.4%.

Yes, I think -- Alastair, I think Stuart is right on the money there. I think there's a couple of areas on the reg front. The leverage ratio, as you quite rightly pointed out, I think, probably strikes a reasonable balance between the dual objectives that the FPC and the PRA have around financial stability and supporting economic growth, so that was certainly encouraging. And I think it's fair to say that we find ourself well positioned in that regard. The TLAC is an area where I think everybody is a little bit in the dark. Well hopefully, we learn considerably more about that as Brisbane unfolds later this month. And then we are, I think, and the industry is led to believe, that there'll be a sort of consultation and a detailed QIS conducted over the succeeding months, which will work us through what that actually means for a deposit-funded bank working off a multiple point of entry approach to resolution. And the last, but by no mean least element, which Stuart referred to in terms of a stress test, is principally a consultation around the PRA buffer, which I think we'll hopefully see, if not later this year, early in January, in terms of how the PRA is reflecting on that, what we assume to be an idiosyncratic risk assessment that will be applied to each firm. So as we get through that, again, I think we are hopeful that, that will provide us greater clarity around capital requirements and then allow us to be, hopefully, considerably more clear about what progressive dividend actually means, but there's a little bit more work to be done in this space.

And can I just come back to just, quarter 4 [ph] analysis on regulatory challenges and cost challenges? Could I encourage you at all to say anything more about the revenues?

No, I don't think we really want to give a kind of guidance on revenue growth. You can see the growth in loans and advances. Given that we believe our underwriting standards are reasonably good, they should hopefully lead not to higher loan impairment charges, but higher revenue going forward. And we continue to be reasonably optimistic about what we think Chinese GDP will be, U.K. GDP will be. In Commercial Banking, there was revenue growth in the U.K., in Hong Kong, also in China and Germany, so that was reasonably widespread. But I don't really want to give you a kind of forecast on numbers as to where revenue growth will be, but what you can see, Alastair, is that we've turned the corner in terms of growing year-on-year loans and advances. Commercial Banking has got good momentum. Our Global Banking and Markets model is differentiated. We had a good third quarter in foreign exchange, although year-to-date 9 months, 9 months, it's still lagging, but there was a good catch-up in the third quarter. Equities is -- which we've invested in over the last couple of 3 years, is having a very good year. And our Retail Banking and Wealth Management business, which is going through substantial change, remember, we've changed all the commission structures, repriced a lot of stuff, is again picking up momentum. So I don't want to get drawn to a percentage forecast, but we -- as I signaled at the half year, I think some of the revenue headwinds are falling away, and you can see that in the progress that's coming through.

Our next question today comes from Chintan Joshi from Nomura.

I have 2 questions, 1 on costs and 1 on capital. On costs, just to push you a little bit further, if I back out the significant items and the own credit movement this quarter, if I use your mid-50s, let's call it 55%, cost-to-income ratio, I get a rate of about $8.9 billion. And you reported a clean number of something like $9.4 billion, so is this the kind of cost saving that you can work towards despite regulatory pressures going forward? And then one on capital.

So I think, Chintan, I think there's -- as Stuart said, we -- and you see it coming through these numbers. There is continued upward pressure from a reg and compliance perspective. We see that as investment in terms of protecting the future of the firm, but what we do see is that, that represents, probably for the next -- certainly the next few quarters, probably a significant number of quarters, a higher cost efficiency ratio than the mid-50s. So following your logic in normalizing that out, I would see for the third quarter a cost efficiency ratio just over the 58% mark. And I think that we're going to continuously give you line of sight for whether it's fines, penalties, regulatory settlements, you will have line of sight to those items, as well as PPI and the like. The other point I would make in balancing this is that, in the first 9 months of this year, we've generated sustainable saves just under the $900 million mark. Just over $300 million of that was generated in the third quarter of this year. There remains a very strong focus within the firm on cost management and generating saves through the P&L that help us deal with some of the headwinds, whether it's inflation, whether it's the continued investment in regulatory compliance and related matters. So that focus is absolutely not dropping off, but recognizing some of the pressures that we deal with, not so much on the revenue line, but clearly from the cost line, I think we are looking at a slightly higher cost efficiency ratio for the next few quarters.

And then on capital, you mentioned the PRA buffer. If I look at the EBA stress test and even if I was to be more onerous on the U.K. element, it doesn't look like the drawdown of your capital ratio is that large. You've got a 5% buffer against the stress test requirements through capital conservation and G-SIB. Do you really think you'll need more than that? Like looking at the EBA stress test, it doesn't feel like it. And also, a quick update on where the consultation on the LGDs for the Financial Institutions portfolio is.

So what I think is utterly immaterial. I would love if it really mattered a great deal, Chintan. I couldn't help agree with you, that I think we're at...

I think we furiously agree with you.

I'm not sure that matters, so but I do -- I think you know we did come through. As you saw, the EBA stress test, I think, revealed the capital strength of HSBC and its ability to resist and -- or to withstand some stress. And the PRA stress test was obviously calculated in a different basis and had a U.K. variant into it. And until the FPC has finished its deliberations with the PRA, none of us know what the outcome of that is, but I think it would be hopeful that again, we would demonstrate resilience to stress testing. I think the element that we -- would help when we learn more from the PRA is what the PRA buffer means. I think that's enormously important. It would seem to be focused on idiosyncratic risk and the PRA's assessment of that risk for each institution. So we'll get some insight on that as they work through the consultation. I believe it will now be January before we actually see anything on that front. And hopefully, hopefully, by the time we are talking to you at the end of February about the full year results, we'll know a little bit more in that respect. And I would love to think, that if not by the end of the year, certainly by the time we do the first quarter results, we'll have greater insight in that front.

And a quick word on the LGD consultation on Financial Institutions portfolio?

Well, I think, certainly as far as the -- as LGD floors in the Financial Institutions, that is already in place in our portfolio, so there's not per se a consultation that's completed. There has been an LGD floor applied to FIG exposures, and I think that went in the first quarter of this year, I think it was.

I thought that was on sovereigns, but I can take that offline.

Sovereigns was last year. Sovereigns was June of '13, sovereigns outside the EEA, which added about $33 billion to RWAs because of weighting a 45% LGD on China and Japan and the U.S.A.

Yes, I -- if I misspeak on the timing, we'll correct, but I'm pretty certain that we've got our FIG LGD, which came in definitely in the first half. It's not...

Okay. It was just that one of your peers was talking about that coming through in the future, so just checking.

Our next question today comes from John-Paul Crutchley from UBS.

JP here. Two quick ones, if I can. The first was actually just on the associates contribution in BoCom, something which I had some expectation would have diminished into the first quarter from what we're talking about in terms of the profit contribution versus carrying value early in the year. I just wonder if you can update us on where we stand on that, whether we can now actually expect that contribution to continue for the rest of the year or whether that's something which will fall out later. And then secondly, I just wonders if you can give a bit more color on 2 aspects of the impairment charge. Lat Am, and I know you highlight some aspects of it, but it's obviously still a large proportion of the overall group charge, and I -- I mean, larger than we normally expect. And just when we can expect some normalization there. And second, the net release in the U.S., is that something we can expect to continue, or was that a bit of a one-off quarter?

So on BoCom, I think I bore you to tears and refer you back to our half year and year-end statements. We continue to assess the performance of BoCom on a value-in-use basis against the carrying value of our investment. And to boil it down to the simple realities, BoCom, the performance of BoCom during this year has been somewhat better than expectations. That means, from a value-in-use perspective, it continues to perform ahead of where we are from a carrying value standpoint. So until that crossover point is reached, I'm hoping, of course, that it never is, but until that crossover point is reached, we will continue to recognize our share of the increase in the net asset value of our investment in BoCom. Looking beyond that, to loan impairment charges, dealing first with the net release in the U.S., that is largely a reflection of the continued improvement of the performance of the portfolio overall. I would not expect to see recoveries coming through on a quarter-by-quarter basis against that portfolio. We reassess real estate values on a regular basis and obviously monitor delinquencies on a very regular basis. And we have seen a reduced charge coming through the P&L on a monthly basis over the course of this quarter. That correction, that recovery, is truly a reflection of an assessment in the asset values and the overall quality of the book, but it's not something that we'd expect to sustain. From a Lat Am perspective, I think the main factor to realize in terms of the reduction is, as you will recall, in the third quarter of last year, we had a significant charge which reflected a reassessment of the performance of -- or actually, our modeling in terms of dealing with restructured loans within principally the Brazilian, but also the Mexican portfolios. And having made that correction in the third quarter, that was not a recurring item, so the charge that we've seen coming through, I think it is fair to say is more a reflection of the performance of the underlying assets, although as commented, there was a single charge coming through Global Banking and Markets this quarter in Brazil, which knocks it up, but by the same token, we had a lower charge this quarter in Mexico as it related to homebuilders.

Our next question today comes from Chira Barua from Sanford Bernstein.

Just have 2 questions. One on household risk rates. Iain, in the past, I've been amazed at the 3x kind of risk density on the book. And now with the results that you have in the quarter, when are those models up for revalidation? How long do you have to carry that kind of 3x exposure? That is number one, on household. And the second is, if you could Stuart, give an -- just an update on the Hong Kong situation, with the headline political risk, and how it has gone into retail and commercial loan volumes and risk appetite for you.

Yes, sure. So on -- Chira, it's a great question on risk-weighted assets. We actually introduced over the course of last year and early this year, the benefit of what we call gen 2 models in the U.S., which was the rebasing of those models. However, that -- there are a number of restrictions in terms of how we are required to model that run-off portfolio. One, we are dealing with downturn LGDs, so when you reflect the lowest point in -- from a loss given default perspective, that is pretty much locked into the modeling. And similarly, downturn PDs. So what moves down the overall risk-weighted assets in absolute terms in the U.S. is the reduction of the exposure of default, which means running-down the portfolio. In terms of the concentration of RWAs, in reality, that is not going to change significantly while we have this portfolio in the book. So today, we still have a risk-weighted assets density of about 3x the nominal value of the net book value that sits on the balance sheet. That is unlikely -- well, not unlikely, that will not change for the foreseeable future, unless there is a change in attitude of our regulators on both sides of the Atlantic as it relates to how those are to be modeled from an RWA perspective. We're sitting with an [indiscernible] probably of about $25 billion in the U.S., and we continue to carry risk-weighted assets of about $75 billion.

So that -- so Iain, just a quick one on that. So if I was not a bank and I were to buy out that portfolio right now, so will my risk-weighted assets be again ratified exactly at the same historical LGDs and PDs, which means that these guys will never get any lending?

So if you are not a bank and you bought those, so to be clear, most of the buyers of our -- of the small tranches that we're selling are not banks. They tend to be specialized investors in the U.S. that might broadly be characterized as hedge funds, but they are specialized in this space in terms of distressed residential property. What their capital requirements are and how the risk weighted, I couldn't possibly comment. I don't know.

And Iain, is the bottling the U.S. regulator, or the U.K. regulator?

Both sides of the Atlantic.

So on Hong Kong, so far, there's actually been very limited impact on our business. So if you take it to sort of 2 or 3 different levels, so in wholesale banking, there has definitely been some delays of IPOs and delays of bond issues, but not because the market couldn't digest them, but more that the issue is a pausing and waiting to see whether sentiment might sort of improve. So I wouldn't say there's been failed transactions at all. The equity index, as you know, is broadly unchanged and hasn't sold off as a result of what's been taking place. But where we have seen -- and this is not in the first 3 quarters numbers, where we have seen a little softness is in our Retail Banking and Wealth Management business, where activity is a little bit slower, and I mean a little bit slower. So there's a little bit less activity in Wealth Management and there's a little bit less activity in credit card sales. In the Commercial Banking space, those businesses that are in the areas that are affected obviously are affected, but the areas that are affected are fairly limited, actually, in terms of their sort of geographic space. For us as a bank, we have 1 branch that's closed and has been closed for most of the time. And that branch and its ATMs have been out of action. That's our Mongkok Branch, which is actually a significant branch in Hong Kong. And the Mongkok protests are on Argyle Street and Nathan Road. They are actually at the junction which our branch sits on. And what we did, and this is a great tribute to our staff here in Hong Kong is, we moved all of the trade processing, because our trade factory…

Our next question today comes from Manus Costello from Autonomous.

I had a couple of questions, but I just, first of all, wanted to thank you for the clarity, the way in which you're presenting your results these days, because that was actually quite a complex quarter in terms of one-offs. But due to the way that you now presented it, it's much, much clearer for analysts and investors to look at. So thank you very much for those changes. My 2 questions actually relate back to your strategy update from last year, from 2013. Can I just check on a couple of the targets? You talked about a mid-50s cost-to-income ratio target then. Can you just clarify, when you talk about it being higher-50s now for a few quarters, are you walking away from that mid-50s by '16? Or I mean, how protracted is that period of it being in the upper-50s? And secondly, in terms of the capital allocation of the group. At that time, your guidance was implying that Commercial Banking would grow as a proportion of capital allocated, which indeed it has. But that at the same time, GBM would go backwards. But actually, GBM is slightly higher the proportion of overall capital allocated now than it was then. And so I just -- and retail is lower than you were anticipating. And I just wondered whether that shift away from Retail into GBM is something we should expect to continue? Because it's quite striking also on your Slide 7, when we look at loan growth, just how strong GBM is relative to Retail.

Sure. So on the cost efficiency ratio, I think that the cost of Global Standards, cost of compliance and regulation, are going to be higher for a period of time. And I think, therefore, that we are starting to walk away from mid-50s for the 2016 number, because actually we can see ahead a continuous need to keep tightening up standards. And we can also see ahead almost an inevitable raft of further conduct and charges that will come through. So we do think, to be honest with you, that it's going to be kind of high 50s. And I think it's probably a change in the cost of running a global bank that's become more acute, basically in the last 18 months, 2 years, from when we were actually doing that work. The RWA change, and I'll let Iain talk in more detail on it, is yes, we've deliberately built up our Commercial Banking business. So a lot of the RWA change in Global Banking markets is involuntary. A lot of it's actually to do with change in RWA density brought about by regulators and not because we changed our decisions about any particular business. So a lot of it reflects that. And then in RBWM, RBWM has done more disposals than any other business, so we've exited a lot of RBWM businesses. And also, we've therefore effectively got rid of quite a lot of RWA assets from within RBWM. So CMB actually remains as we said. GBM is more involuntary. And RBWM does not reflect a lack of focus on the business at all...

Just to follow up on that...

And there have been some exchange, there have been some exchange rate movements for RBWM as well.

So I think...

Just to follow up on that, on, just to follow up on the capital point, just to follow up on the capital point briefly. They may be involuntary, and I can see how there's going to be more involuntary changes coming through over the next couple of years, with the review of the trading book, et cetera. But the net effect to shareholders is still that more of the capital ends up being allocated towards GBM. So you're saying that you're happy to have the group, when we have a strategy refresh in, whenever, 12, 24 months time, which shows GBM as a continued large proportion of the business.

So yes, so hang on a sec. So GBM's RWAs have actually gone down by 5% during the course of this year. So first quarter was 553; 2nd quarter, 537; third quarter, 527, which actually brought them down by 5% in the course of a year by conscious action to offset the RWA density increase. Secondly, what we actually said at that Investor Day, what we broadcast, was that we expected GBM to be about 40% of the P&L of the group, 30% to 40%; CMB to be 30% to 40%; and RBWM to be about 20% to 30%. That hasn't changed. And at no point did we indicate we were exiting Global Banking and Markets.

I think to be clear as well, to build on Stuart's point, Manus, notwithstanding the fact that there have been involuntary increases through regulation, and the business most significantly impacted by that is Global Banking and Markets. Throughout the Global Banking and Markets team under Samir, have been focused and continue to be focused on working down risk-weighted assets. So there has been a very concerted and ongoing effort to manage more efficiently that business model. And within that business model, manage down risk-weighted asset concentration. The capital allocations that we talked about remain consistent. But what it absolutely has done and as you would have expected it to do, some of the regulatory change challenges how that business is conducted and the concentration and the return on some of the capital within it. If I boil it down, the CMB business risk-weighted assets are growing as we grow credit and lending in that business. Global Banking and Markets continue to focus on actions to manage down risk-weighted asset intensity, which has gone up, principally as a consequence of regulation. And as Stuart mentioned, the significant repositioning of the Retail Bank Wealth Management business clearly has created some downward pressure on the capital invested in that business, but is not an articulation of a change to our risk appetite or intention from an investment standpoint.

There is 1 other point, Manus, just to bring out on RBWM. So if your argument is that RBWM has higher returns, and therefore, we should be investing all of our capital, you need to take 1 level below that. Because, put aside Conduct Risk and so on, RBWM, about 80% of it comes from 2 locations. So I don't think it's a strategy to sort of build the group out on 2 locations. Hong Kong and the U.K. account for 80-plus percent, actually, at times, more like 85% of RBWM. Remember, we're only a full-service bank, as it were, in 2 locations, so it does not make sense, even though RBWM has got very high returns, to exit anything else and put everything on 2 locations.

Our next question today comes from Martin Leitgeb from Goldman Sachs.

Just 1 question left really, it's with regards to the CCAR in the U.S., where I think submissions are due in a couple of weeks' time. Could you just update us what your focus are there? Will you plan for upstreaming the dividend? Or look at alternative ways of shifting some of the assets into the U.S. in order to utilize the capital there?

The next submission to the Federal Reserve is due in early January. The midterm submission, which is an area which isn't -- where there's a submission, but there's no real testing and assessment against it by the Fed, was completed in July. The next assessment is in January, as I say. And the team is -- as I think you probably hear from all of our U.S. counterparts, is singularly focused on making the necessary improvements to pass CCAR at our next submission. Certainly, in terms of capital constraints, I think we've always been clear that we have the surplus capital that we do have sitting in the U.S. business is very likely to be trapped there until we can see our way through substantially completing our obligations under the deferred prosecution agreement. And in the meantime, equally so, where there is an opportunity to put more assets in the U.S. business, for which there must be a clear U.S. provenance, a clear purpose for using the U.S. balance sheet. And then we take those opportunities as and when they arise. But that is really how we continue to focus from a capital management in the U.S. We know there's a surplus there. It's highly improbable that we'll be able to dividend out any part of that surplus until we make significantly greater progress on against DPA requirements. And in the meantime, we focus on growing that business and utilizing the capital within that balance sheet as effectively as we can.

Our next question today comes from Raul Sinha from JPMorgan.

Can I have 2, please? Just one to circle back on costs. I was wondering if you might be able to give us perhaps an indication or an estimate of the dollar amount in billions of additional compliance-related spend that you might be thinking or budgeting in here, which are obviously causing you to give us this new shift in the cost-to-income ratio guidance? And then secondly, related to that, how much of this would be a revenue cost, which presumably is not captured in the line on risk and compliance that we can see in the P&L? That's the first one. The second one is on PPI. I was wondering if you could talk about the provision charge that you've taken in the quarter, which was higher than the usual charges you take in this area? Have you seen the spike in claims going back? And maybe can you tell us if this is driven by reopening of already settled claims? Or is this just something you've seen from the claims management company?

If you look at the ninth chart in the deck that we put out for you this morning, we actually have gone some way to separate the cost that cover both risk compliance and related items and the impact of that on a year-to-date basis. And as you can see there, it is not insignificant, but just as we're somewhat disinclined to provide a percentage rate of increase from a revenue perspective, I think it would be unwise to provide a percentage rate of increase from a risk and compliance perspective. So I think also, you could draw on Stuart's comment, where if you looked at the increase in just headcount within the compliance space over the course of the last few years and the rate of that increase beginning to slow. There is further investment in this area required. We're not through the regulatory change agenda quite yet, I think, so it's difficult to predict. There's obviously a very sharp focus on managing this as carefully as we can. So hopefully, the details that we provided on Page 9 give you some sense as to the contribution to increasing costs from risk and compliance.

And if I may just jump in here and then pass it back to Iain. On the revenue, I think that the revenue foregone or the revenue exited has -- is in the past. I think that's part of our revenue headwinds that we faced over the last couple of years. Now clearly, what you won't be able to and nobody can factor in what revenue might we have done in a different world, like, yes, hypothetically. I don't think you need to factor that into your model. I think most of the business exits that we have done, we have completed. So therefore, I don't think there's a future revenue headwind from Global Standards. There's a cost headwind. And there is, if you like a -- there's not even really an opportunity foregone, because clearly, these aren't the types of people we want to do business with.

Going back to PPI, Raul, the step-up that we saw and when you -- I don't know if you bothered to track back in terms of the significant impact, or when we've made PPI provisions historically, but this is the most significant PPI provision step-up that we've made for the better part of a year. And it is purely a reflection of inbound claims that we see, and a significant majority of those inbound claims being sourced by claim management companies. So what we had evidenced over the last 3 or 4 quarters was a declining trend of inbound claims from our customers, which we'd either approach directly in terms of remediation, or in fact, for those customers that made contact with us. What we most definitely saw in the third quarter of this year was a renewal of the efforts made by the claims management companies to generate interest around PPI. That resulted in inbound claims. And our approach to provisioning has always been informed by the number of inbound claims and how we then deal with and manage those claims. That's what it's a factor of, and it's driven largely in our experience by a renewed vigor by the claims management companies.

Have the claims continued into Q4 at that level?

We would expect to see the level at which we evidenced it in the third quarter to be remain fairly stable for the next couple of quarters.

Our next question today comes from Ronit Ghose from Citigroup.

It's Ronit from Citi. Stuart, can I just follow up on your comments on cost-to-income ratio? Your comments make total sense about the increased cost of doing business for a global bank. And I'm just wondering what the translation for that is in ROE terms. I mean, we've kind of gotten used to mid-teens in the old days for ROE, being kind of low teens like 12% rather than 15%. Is mid-teens really going to be more like a 10% ROE going forward for a big global bank such as yourself or peers? And my second question is...

For example, Citibank, yes?

Exactly, you name it, or JPMorgan or whichever. That's my first question. The second question is the recent, so the -- kind of just late last week, the BOJ move for another round of QE. How does that impact your business, if at all, particularly in Asia?

Sure. So the BOJ QE, what QE from Japan has tended to do, is to go into countries that -- where Japan supply chain is. The Japanese QE seems to be much more directed than American was. American QE kind of went out around the world with 0 cost dollars and inflated sort of emerging markets throughout the world. What Japanese QE seems to do is to go very specifically into Asia Pacific, where the Japanese supply chain is, so it helps Malaysia, Indonesia, Thailand, Philippines, in particular. So to some extent, it provides quite a push to those economies, which more than offsets any slowing that might take place from -- actually China. So actually, it's a -- it's just kind of we're a second order beneficiary of it in the sense that it should support some of the ASEAN countries' economies. On the ROE point, I mean, this is the thing that we've got to work through in the sense of when we finally know what our core equity tier 1 is and have an idea of what that core equity tier 1 is, in a way, we can then give a, some decent thought to what then is our cost of equity. And then we can work out on the classic Stern Stewart what return on equity creates value, if you will, to shareholders. And so there's a couple of missing parts on all of this. When we set the 12% to 15% targets, we had assumed -- and actually, we were quite open about this. It was off a 10% core equity tier 1. Well, we're 11.4%. Well, funny enough, we're not doing 12% to 15% off 11.4% if we were thinking about doing 12% off 10%. So therefore, to be honest with you, we will get a better idea probably first quarter next year, because hopefully, we'll have clarity on core equity tier 1. We'll have a bit of a better feel for what our cost of equity is. Again, if we assume that Miller Modigliani actually works for banks, our cost of equity should be lower than it was in 2007, given how much more equity we're actually holding. And then from that, we can assume what is a return that delivers the classic Stern Stewart value-added. And yes, it's got -- I think it -- to answer your question, yes, it's going to be lower than 12%.

Okay, it's really hopeful. Can I just ask 1 very quick follow-up? I'm on Slide 9, which is a really useful slide. Is it possible for you to -- when you've given us the drivers, the risk compliance, $700 million year-on-year, is it possible for you to give us a base number for that?

It's not at hand here.

Our next question today comes from Mike Trippitt from Numis.

I had just 1 question, but if I could just follow up on Ronit's question, which is an obvious sort of follow-on from your cost point, Stuart. I completely understand what you're saying about the gearing of the business. But just in terms of pretax return on risk assets, presumably, what you're saying about costs is it does have an impact on those targets as well. I don't know if you -- I don't want to draw you into an update of your strategy at this point, but if you have any kind of sense of pretax return on risk assets and the sensitivities around the targets you gave last year. The next question I had was just, I see you've taken a provision on FX. There's a fairly sort of chilling warning in the outlook statement that if no resolution is agreed, [indiscernible] reached a resolution is likely to involve the payment of a significant financial penalty. I don't know if you could just, I don't know if you can [indiscernible] on that. I don't know what you can say in addition to those comments on FX.

So on return and risk-weighted assets, I mean clearly, when you have a number of -- we can sit down and go through and understand the performance of the business with and without significant items on an underlying basis. And it sort of gives you a sense as to the overall profitability of the business. But when you come back to looking at return on equity and return on risk-weighted assets, it is the harsh reality of the mathematics that significant items to the tune of $2.2 billion adversely affect the return on risk-weighted assets of the firm. However, when you look at the targets that are set for each of the global businesses, either markets in which they operate, they continue to be measured against return on risk-weighted assets, which triangulate us off a higher equity number to be able to achieve returns on equity in excess of the cost of our equity. So we continued to challenge the businesses in terms of achieving returns on risk-weighted assets, which tend, depending on the global business, which tend to be between 2.2 and 2.6 return on risk-weighted assets. The significant items, which we have flowing through the income statement this quarter, clearly and that's most notably in Global Banking and Markets, clearly adversely impact the return on risk-weighted assets that are realized. It doesn't detract from the targets that they are pricing to on a daily basis.

Okay. So I guess you're sort of still sticking to that 2.2, 2.6 range at the moment anyway?

Yes. Sorry, Mike, can you repeat the other question, because your line is really garbled. About FX, was it about...

I apologize. On FX, I see you've taken the provisions, $378 million. But you've got a statement in the outlook around a payment of a significant financial penalty, if a resolution is reached?

That is just referring to that, so what we said is, look, the FCA is the $378 million, but that's only the FCA. And I think the wording is trying to say is we've not actually reached a formal agreement with the FCA, but to lead you to expect that the $378 million, although it's a provision, will be the number. The thing to also bear in mind is this is not an omnibus settlement, so there are likely to be other regulatory bodies or judicial bodies that may well also be seeking penalties for the same thing.

Okay. Over and above the $378 million, okay, fine.

Okay. But that is the FCA one.

Our next question today comes from Tom Rayner from Exane.

Iain, can I just go back first to the Bank of Communications question? Can you tell us what the value in use is at end of Q3 versus the carrying value? I think here in my schedule it says 500...

500 carrying value.

But can you tell us what the numbers are?

No.

What is -- the headroom was about -- was less than 500 at the half year. I'm assuming that, that headroom is now virtually 0, unless you've increased the value in use again.

No, as I mentioned earlier in the call, BoCom has actually performed quite well. And if in fact we have any headroom, it has remained consistent or slightly improved.

So the DCF has just unwound as you would expect without any change to assumptions. Is that...

Well...

I mean, I guess I'm asking because it makes it impossible to forecast this line if we don't know what's going on between those 2 numbers.

Well, I'm sorry, Tom, but we can't forecast that line either, because it's largely predicated in the performance of BoCom. And...

In a way, you are at the end of...

[indiscernible] BoCom. And we get access to market information about BoCom pretty much at the same time as everybody else in the marketplace does.

Okay. So you can't tell, you wouldn't be able to tell me what the Q3 was even if you had...

No, we cannot tell any more than you can. I wish I could because I'd quite like to be able to predict it as well. But I'm afraid this is an assessment that we do every quarter. We update it. There are a number of assumptions that fit into that model. Broadly speaking, our assumptions on broad economic indicators and discount factors remain quite consistent. And the main variable is the performance of BoCom and our capital strength.

All right, okay. Can I ask you then for that, just on the revenue guidance. You are obviously quite reluctant to sort of give a forecast on revenue. It looks to me like clean of everything, that revenue was possibly growing between 3% and 4% year-on-year, which starts to feel okay. I mean, I wonder if you could maybe talk maybe more specifically on net interest income? Because volumes annualizing 5% or 6% now, and margins were stable in the third quarter. You talked a lot last time about rate sensitivity. Obviously, a few things have changed since then. I just wondered if you could update us on your thoughts on NII rather than revenue.

I think, overall, from a net interest income perspective, overall, from a group perspective, I think I mentioned earlier in the call that, broadly speaking, our margins have remained fairly stable from the beginning of the year. They're certainly down when compared to last year, but fairly stable since the beginning of the year. One adverse impact in net interest income are the consumer credit items, which we've made reference to, both this quarter and earlier quarter, and that is a net interest income, it's an interest income line item which adjusts for that. But broadly speaking, we do see progress in net interest income on a quarter-over-quarter basis. So I think in that stand, it's a fairly stable outlook. Again, hence, the comments coming from balance sheet growth that Stuart referred to earlier. As we continue to grow the balance sheet with a reasonably stable net interest margin prospect, hopefully, that will translate through to improving net interest income.

Okay. And then just 1 final one if I can on TLAC. Because I understand on a deposit-funded institution issuing obviously then a lot more sub-debt, I guess, or senior out of the holding company, becomes more of an issue than if you're less deposit-funded. But your point on multiple points of entry, I mean HSBC has a holding company, obviously, a group. And I would just like to understand a bit better why, what's being proposed wouldn't simply mean just moving everything to that holding company? Is it because of the way you've subsidiarized across your global businesses? I would just like to understand why that second aspect might be an issue for you, please, the multiple points of entry.

Tom, I don't really want to speculate on what the guys come out with at Brisbane. There was a document that was out there, which was broadly leaked, presumably to try and get some insight about how market participants felt about it, and obviously, to get some insight as to how various national regulars felt about it. And it probably succeeded in that outcome. What that translates into in terms of a final proposal, I don't know. But what we have been led to believe is that there'll be a detailed QIS and consultation period following November. And how that then translates into final recommendation around having to put in place bail-in-able instruments, I think we're a long way from having real clarity around this. What we've been clear is that our bank -- and you followed us for a long time, Tom, and you know that whether it's a subsidiary or whether a branch, we fund locally from the local deposit base. We generally carry a surplus of deposits, do loans within the vast majority of the organizations around the world. And we would draw reference to the fact that where we are -- where we carry surplus deposits, it would tend to indicate a certain inefficiency in the funding model of having to go out and issue capital. When you think issue debt, when you think about where our major debt issuances sit, it sits in the U.S., where the whole CML run-off book is wholesale funded. And as that book runs down, guess what, the funding requirement for that book goes with it. The other debt issuance has principally been in the U.S. and the European market. And that's principally been in support of either regulator requirements or funding to support certain activities through the Global Banking and Markets business. So again, we will certainly respond to any consultation on TLAC, which will be -- and that response will be a reflection of our business model.

We will take our last question today from Jason Napier from Deutsche Bank.

Just 1 question then, and it goes to Slide 9, which is extremely helpful and a repeat of a similar version at the half year. If we look at the components of operating cost growth by type and then by global business, it just looks like RBWM saw a pretty meaningful uptick in quarterly cost inflation. And I guess you've commented earlier and we would expect to hear that risk compliance and Global Standards are primarily a GB&M issue. So I wonder whether -- clearly, the return on risk-weighted assets is attractive in that business already, but I wonder whether you wouldn't mind perhaps talking about what might be driving RBWM costs and whether there is sort of a difference in trajectory for those, whether we should expect costs to continue to grow in the fashion just reported?

No, no, Jason, a lot of the compliance costs actually sit in RBWM because a very big part of the Conduct Risk agenda actually sits in RBWM. That's where the PPI sits, that's where the Consumer Credit Act in the U.K. sits. There's a chunk of it. And also what we've done as well to try and get ahead of any future Conduct Risk issues is we -- and you're probably aware of this, at the beginning of '13, removed product-based commission structures and went to a general bonus scheme. That had some negative impact on sales revenues initially, which are now being built back up. And then at the beginning of 2014, we also removed specific commissions on selling things like credit cards and mortgages, again, replaced them with a broad-based balanced scorecard. And again, revenues there are being built back up. And we've also gone through a kind of fair pricing exercise in Retail Banking to make sure that what we're charging people is fair and reasonable. So for example, in the U.K., we've changed the way we charge for unauthorized overdrafts. And that also informs why, and you can look in the actual IMS number, you'll see the personal lending line is down, that's basically U.K. overdraft charges coming out. It's actually U.K. overdraft charges. And actually, a cap on lending rates in Turkey informed those 2 specific things. So there's quite a big chunk of Conduct Risk. And therefore, if you like, compliance and risk-related costs sit in RBWM as well.

Yes, there's a couple of specifics in there this quarter as well, Jason. The FSCS levy that I mentioned, $111 million, that sits squarely within Retail Bank Wealth Management within the U.K., inflation key driver across Lat Am, principally Brazil and Argentina and then some of our Asian markets. And then exactly the points that Stuart commented on. We obviously have several million customers in our Retail Bank Wealth Management, and we have the same know-your-customer obligations as we do across any other customer base in the firm. So just as we experienced that in Commercial Bank, Global Bank and Markets and Private Bank, so we also experienced the need to ensure that we've got consistent standards within the Retail Bank.

And it's a great business. It's got great returns. It's dominated by Hong Kong and the U.K., but it actually does have exactly the same financial crime and conduct risk obligations as the other businesses.

And just to be clear. I think in an earlier question you confirmed that risk compliance and Global Standards, that is just expenses rather than revenues foregone on changed [indiscernible] practices and the like...

Yes, revenues foregone are, if you like, within the global businesses. Thank you. Okay, that concludes today's call. Thank you very much for joining us. Thank you. Thank you, operator. That brings the call to an end.

Thank you, ladies and gentlemen. That concludes the call for the HSBC Holdings plc Interim Management Statement for Third Quarter 2014. You may now disconnect.