HSBC Holdings Regulatory News (HSBA)

HSBC HOLDINGS PLC

1Q18 EARNINGS RELEASE - HIGHLIGHTS

Financial performance

• Reported revenue of $13.7bn was 6% higher, driven by higher deposit margins and balance growth in RBWM, and GLCM growth within CMB, notably in Asia. These increases were partly offset by lower revenue in Corporate Centre. Adjusted revenue of $13.9bn was 3% higher, excluding the effects of currency translation and movements in significant items.

• Reported operating expenses of $9.4bn were 13% higher, primarily reflecting investments to grow the business and enhance our digital capabilities, and the effects of currency translation. Adjusted operating expenses of $8.2bn were 8% higher, excluding the effects of currency translation and movements in significant items.

• Reported profit before tax of $4.8bn was 4% lower, as higher revenue was more than offset by higher operating expenses. Adjusted profit before tax of $6.0bn was 3% lower, excluding the effects of currency translation and movements in significant items.

• Lending growth of $17bn in 1Q18, increasing net loans and advances to customers by 2% in the quarter.

• Strong capital base with a common equity tier 1 ('CET1') ratio of 14.5% and a CRD IV leverage ratio of 5.6%.

• We intend to initiate a share buy-back of up to $2bn, which we expect to commence shortly. In light of the growth opportunities that we currently see, we expect this to be the only share buy-back that we announce in 2018.

• We intend to call two Tier 1 securities, with a nominal amount outstanding of $6bn.

John Flint, Group Chief Executive, said:

"Our global businesses performed well in the first quarter, maintaining momentum from the end of 2017. We continue to benefit from interest rate rises and economic growth, particularly in Asia. Our primary focus is to grow the businesses safely, and we have increased investment to deliver that aim. We intend to deliver positive jaws for 2018."

We use adjusted performance to understand the underlying trends in the business. The main differences between reported and adjusted figures are foreign currency translation and significant items, which include litigation and regulatory items, offset by the non-recurrence of costs-to-achieve in 1Q18.

1 Calculated using the EU's regulatory transitional arrangements for IFRS 9 in article 473a of the Capital Requirements Regulation. Figures at 31 December 2017 are reported under IAS 39.

HSBC Holdings plc will be conducting a trading update conference call with analysts and investors today to coincide with the publication of its Earnings Release. The call will take place at 07.30am BST. Details of how to participate in the call and the live audio webcast can be found at www.hsbc.com/investor-relations.

Note to editors

HSBC Holdings plc

HSBC Holdings plc, the parent company of HSBC, is headquartered in London. HSBC serves customers worldwide from approximately 3,900 offices in 67 countries and territories in our geographical regions: Europe, Asia, North America, Latin America, and Middle East and North Africa. With assets of $2,652bn at 31 March 2018, HSBC is one of the world's largest banking and financial services organisations.

Our global businesses performed well in the first quarter. Retail Banking and Wealth Management and Commercial Banking both benefited from wider deposit spreads and increased balances to deliver significant increases in adjusted revenue on last year's first quarter. Both businesses also grew lending, with Commercial Banking making notable progress in Hong Kong and the UK, and Retail Banking and Wealth Management making further headway in the UK mortgage market. Global Banking and Markets adjusted revenue was stable relative to a strong first quarter last year, as growth in transaction banking and Equities revenue balanced the impact of lower client activity on our fixed income businesses. Global Private Banking grew adjusted revenue and continued to attract net new money in its target markets.

A stronger revenue environment enabled us to invest in growing the business. In 1Q18, we increased investment in Retail Banking and Wealth Management to further grow our market share in the UK and mainland China. We also made strategic hires in our securities joint venture in mainland China, and invested to enhance our digital capabilities in all our global businesses. This targeted spending contributed to a rise in adjusted costs in the first three months of the year. We intend to deliver positive adjusted jaws for 2018.

Having received the appropriate regulatory clearances, we now plan to execute a share buy-back of up to $2bn. We expect this to commence shortly.

HSBC adopted the requirements of IFRS 9 'Financial Instruments' on 1 January 2018, with the exception of the provisions relating to the presentation of gains and losses on financial liabilities designated at fair value, which were adopted on 1 January 2017.

The classification and measurement and impairment requirements of IFRS 9 were applied retrospectively by adjusting the opening balance sheet at the date of initial application. As permitted by IFRS 9, HSBC has not restated comparative periods. Adoption is expected to reduce net assets at 1 January 2018 by $1.6bn, with the classification and measurement changes increasing net assets by $1.1bn, impairment reducing net assets by $2.2bn, impacts on our associates reducing net assets by $0.9bn, and deferred tax increasing net assets by $0.4bn. The effect of IFRS 9 on the carrying value of investments in associates has been updated from the effect disclosed in our Annual Report and Accounts 2017 and in our Report on Transition to IFRS 9 'Financial Instruments' 1 January 2018 as a result of those entities publicly reporting their expected transition impacts. The effect of adoption of IFRS 9 remains subject to change until the Group finalises its financial statements for the year ending 31 December 2018.

Under IFRS 9, the recognition and measurement of expected credit losses differs from under IAS 39. The change in expected credit losses relating to financial assets under IFRS 9 is recorded in the income statement under 'change in expected credit losses and other credit impairment charges' ('ECL'). As prior periods have not been restated, changes in impairment of financial assets in the comparative periods remain in accordance with IAS 39 and are recorded in the income statement under 'loan impairment charges and other credit risk provisions' ('LICs') and are therefore not necessarily comparable to ECL recorded for the current period.

Further information is provided in our Report on Transition to IFRS 9 'Financial Instruments' 1 January 2018.

Adjusted performance is computed by adjusting reported results for the effects of foreign currency translation differences and significant items, which both distort period-on-period comparisons.

We consider adjusted performance to provide useful information for investors by aligning internal and external reporting, identifying and quantifying items management believes to be significant, and providing insight into how management assesses period-on-period performance.

Foreign currency translation differences

Foreign currency translation differences reflect the movements of the US dollar against most major currencies during 1Q18. We exclude them to derive constant currency data, allowing us to assess balance sheet and income statement performance on a like-for-like basis and better understand the underlying trends in the business.

Significant items

'Significant items' refers collectively to the items that management and investors would ordinarily identify and consider separately to understand better the underlying trends in the business.

The tables on pages 27 to 30 detail the effects of significant items on each of our global business segments and geographical regions in 1Q18, 4Q17 and 1Q17.

Adjusted performance - foreign currency translation of significant items

The foreign currency translation differences related to significant items are presented as a separate component of significant items. This is considered a more meaningful presentation as it allows better comparison of period-on-period movements in performance.

Global business performance

The Group Chief Executive, supported by the rest of the Group Management Board ('GMB'), is considered to be the Chief Operating Decision Maker ('CODM') for the purposes of identifying the Group's reportable segments.

The Group Chief Executive and the rest of the GMB review operating activity on a number of bases, including by global business and geographical region. Global businesses are our reportable segments under IFRS 8 'Operating segments'. Global business results are assessed by CODM on the basis of adjusted performance, that removes the effects of significant items and currency translation from reported results. We therefore present these results on an adjusted basis as required by IFRSs.

A reconciliation of the Group's adjusted results to the Group's reported results is presented on page 5. Supplementary reconciliations of adjusted to reported results by global business are presented on pages 31 to 33 for information purposes.

Management view of adjusted revenue

Our global business segment commentary includes tables which provide breakdowns of revenue by major product. These reflect the basis on which revenue performance of the businesses is assessed and managed.

† Comprises costs associated with the UK's exit from the European Union, costs to establish the UK ring-fenced bank (including the UK ServCo group) and costs associated with establishing an intermediate holding company in Hong Kong.

*As previously disclosed, we are engaged in active discussions with the US Department of Justice ('DoJ') with a view toward potential resolution of civil claims based on the DoJ's investigation of HSBC's legacy RMBS securitisation activities. As discussions developed during Q1 2018, we recognised a provision with respect to this matter. There can be no assurances, however, as to how or when this matter will be resolved, or whether this matter will be resolved prior to the commencement of formal legal proceedings by the DoJ or whether the ultimate loss will exceed the provision. Also in relation to securitisation matters, HSBC Mortgage Corporation (USA) Inc. and Decision One Mortgage Company LLC engaged in court-ordered mediation discussions with Residential Funding Company LLC ('RFC') and a provision has been recognised in this regard.

Adjusted PBT by global business and region is presented to support the commentary on adjusted performance on the following pages.

The tables on pages 27 to 30 reconcile reported to adjusted results for each of our global business segments and geographical regions.

Group

1Q18 compared with 1Q17 - reported results

Reported profit before tax

Reported profit before tax of $4.8bn in 1Q18 was $0.2bn or 4% lower than in 1Q17. This included a net adverse movement in significant items of $0.2bn, partly offset by the favourable effects of foreign currency translation of $0.2bn.

Excluding the effects of significant items and foreign currency translation, profit before tax decreased by $0.2bn or 3%, as revenue growth was more than offset by a rise in operating expenses.

Reported revenue

Reported revenue of $13.7bn in 1Q18 was $0.7bn or 6% higher than 1Q17. This reflected a favourable effect of foreign currency translation of $0.7bn, partly offset by a net adverse movement in significant items of $0.3bn, which included a loss on disposals, acquisitions and investment in new businesses of $0.1bn in 1Q18 related to the early redemption of subordinated debt in the US. This compared with a gain of $0.2bn in 1Q17, largely related to the disposal of our membership interest in Visa Inc.

Excluding significant items and currency translation, revenue increased by $0.3bn or 3%.

Reported ECL/LICs

The reported change in expected credit losses and other credit impairment charges ('ECL') was $0.2bn in 1Q18. This mainly related to charges of $0.3bn in RBWM, partly offset by net releases of ECL in Corporate Centre and CMB.

In 1Q17, reported LICs of $0.2bn mainly related to RBWM ($0.3bn), partly offset by net releases, notably in GB&M and Corporate Centre. The effect of currency translation differences between the periods was minimal.

Reported operating expenses

Reported operating expenses of $9.4bn were $1.1bn or 13% higher than in 1Q17 and included an adverse impact of foreign currency translation of $0.5bn, partly offset by a favourable movement in significant items of $0.1bn.

The favourable movement in significant items was driven by:

• the non-recurrence of costs to achieve, which were $0.8bn in 1Q17; and

• customer redress programme costs of $0.1bn in 1Q18, compared with $0.2bn in 1Q17.

These were partly offset by:

• settlements and provisions in connection with legal and regulatory matters of $0.9bn.

Excluding significant items and currency translation, operating expenses increased by $0.6bn or 8%.

Reported income from associates

Reported income from associates of $0.6bn increased by $66m or 12%.

Group

1Q18 compared with 1Q17 - adjusted results

Adjusted profit before tax

Adjusted profit before tax of $6.0bn was $0.2bn or 3% lower compared with 1Q17, as revenue growth was more than offset by a rise in operating expenses.

Adjusted revenue

Adjusted revenue of $13.9bn was $0.3bn or 3% higher than 1Q17, notably driven by RBWM and CMB, partly offset by lower revenue in Corporate Centre. Revenue in GB&M was broadly unchanged.

• In RBWM, revenue increased by $0.5bn or 9%, driven by growth in Retail Banking, reflecting wider spreads and balance growth in current accounts, savings and deposits, and in Wealth Management from investment distribution due to growth in sales of retail securities and mutual funds in Asia.

• In CMB, revenue increased by $0.3bn or 10%, notably in GLCM, as we benefited from wider deposit spreads in Hong Kong and mainland China. In addition, revenue also increased in Credit and Lending ('C&L'), notably in the UK and Hong Kong as we grew balances.

• In GB&M, revenue was broadly unchanged from 1Q17. Strong growth in GLCM and Securities Services reflected interest rate rises and deposit balance growth, primarily in Asia and the US. Revenue also increased in Global Banking from growth in lending balances, and from recoveries on restructured facilities in 1Q18. By contrast, revenue fell in Rates and Credit, partly offset in Equities and Foreign Exchange.

• In GPB, revenue increased by $45m or 10%, mainly in Hong Kong, as higher investment revenue reflected increased client activity, and deposit revenue increased as we benefited from wider spreads.

• In Corporate Centre, we recorded a net loss of $0.1bn in 1Q18, compared with revenue of $0.4bn in 1Q17. This was primarily in Central Treasury, reflecting lower revenue in Balance Sheet Management (down $0.3bn) and a loss arising from swap mark-to-market movements following a bond reclassification under IFRS 9 'Financial Instruments' of $0.2bn.

Adjusted ECL/LICs

Adjusted ECL of $0.2bn in 1Q18 mainly related to charges in RBWM ($0.3bn), notably in Mexico and the UK against our unsecured lending balances, and to a lesser extent in Hong Kong, also against unsecured lending. These charges were partly offset by net releases in Corporate Centre related to our Legacy Credit portfolio, as well as in CMB.

In 1Q17, adjusted LICs of $0.2bn related to charges in RBWM mainly in Mexico reflecting growth in unsecured lending together with an associated rise in delinquency.

Adjusted operating expenses

Adjusted operating expenses of $8.2bn were $0.6bn or 8% higher than 1Q17. This reflected investments to grow the business mainly in RBWM and GB&M, and continued investment in digital across all global businesses.

Our total investment in regulatory programmes and compliance was $0.7bn, up $39m or 6%. This reflected the continued focus on our Global Standards programme to ensure that changes we have made are effective and sustainable.

The number of employees expressed in full-time equivalent staff ('FTEs') at 31 March 2018 was 228,899, an increase of 212 from 31 December 2017. This was primarily driven by investments in business growth programmes.

We expect adjusted operating expenses excluding the UK bank levy for the full year to be broadly in line with 1Q18, subject to achieving full year positive jaws.

Adjusted share of income from associates

Adjusted income from associates of $0.6bn increased by $38m or 7%.

Tax expense

The effective tax rate for 1Q18 of 21.4% was lower than the 24.2% in 1Q17, principally due to a change in profit mix and a favourable adjustment in respect of prior years in comparison to 1Q17.

First interim dividend for 2018

The Board announces a first interim dividend for 2018 of $0.10 per ordinary share, further details of which are set out at the end of this release.

Retail Banking and Wealth Management

1Q18 compared with 1Q17 - adjusted results

For footnotes see page 13.

Adjusted profit before tax of $1.9bn was $0.1bn or 5% higher than 1Q17. This primarily reflected increased revenue from deposits and investment distribution, partly offset by higher operating expenses.

Adjusted revenue of $5.7bn was $0.5bn or 9% higher than 1Q17, as we grew revenue in both Retail Banking and Wealth Management.

• In Retail Banking (up $0.3bn), the increase was driven by wider spreads and balance growth in current accounts, savings and deposits, notably in Hong Kong, and to a lesser extent in the US and Mexico. This was partly offset by lower personal lending revenue, mainly in the US, mainland China and Hong Kong, reflecting continuing mortgage spread compression from competitive pressures, although we grew our total lending balances by $25bn, or 8% compared with 1Q17.

• In Wealth Management (up $0.1bn), the increase was primarily in investment distribution, reflecting higher sales of retail securities and mutual funds in Asia, following increased investor confidence. This increase was partly offset by lower life insurance manufacturing revenue, largely from a net adverse movement in market updates of $0.2bn, notably in Asia and France.

Adjusted ECL were $0.3bn in 1Q18, mainly related to charges in Mexico, the UK and Hong Kong, primarily against unsecured lending balances.

In 1Q17, adjusted LICs of $0.3bn were notably related to charges in Mexico, as well as in the UK, Hong Kong and the UAE, against unsecured lending balances.

Adjusted operating expenses of $3.5bn increased by $0.4bn or 12% driven by investments to grow the business, particularly in cards in the Pearl River Delta and in the US, as well as continued investment in digital capabilities in our core markets. We have invested in the UK to expand our intermediary channel to exceed 30 brokers. Additionally, inflation contributed to higher operating expenses.

Commercial Banking

1Q18 compared with 1Q17 - adjusted results

For footnotes see page 13.

Adjusted profit before tax of $2.1bn was $0.2bn or 12% higher, as strong revenue growth was partly offset by higher operating expenses.

Adjusted revenue was $0.3bn or 10% higher, driven by an increase in GLCM and C&L. Revenue also increased from Markets products and Insurance and Investments, notably in Asia. In GTRF, revenue remained broadly unchanged.

• In GLCM, revenue increased by $0.2bn or 17%, reflecting wider spreads in Hong Kong and mainland China as we benefited from interest rate rises. We also grew average balances compared with 1Q17.

• In C&L, revenue increased by $45m or 4%, as we grew balances, notably in the UK and Hong Kong. This was partly offset by the effects of spread compression.

• In GTRF, revenue was unchanged as balance sheet growth in the UK and Asia was offset by lower balances in MENA reflecting the effect of repositioning.

A net release in adjusted ECL of $0.1bn reflected continuing stable credit conditions. In 1Q17, there was a net release of adjusted LICs of $10m.

Adjusted operating expenses of $1.7bn were $0.2bn or 12% higher, reflecting continued investment in Global Standards and digital capabilities, as well as higher performance-related pay.

Global Banking and Markets

1Q18 compared with 1Q17 - adjusted results

For footnotes see page 13.

Adjusted profit before tax of $1.7bn was $0.1bn or 5% lower, reflecting an increase in operating expenses, and a small charge in ECL in contrast to a net release of LICs in 1Q17.

Adjusted revenue of $4.1bn was broadly unchanged and included a net adverse movement of $65m on credit and funding valuation adjustments. Excluding these movements, revenue increased by $71m or 2%. The increase in adjusted revenue primarily reflected:

• an increase in our transaction banking products, with double digit growth in GLCM (up $0.1bn, or 17%), and in Securities Services (up $0.1bn, or 12%), driven by the impact of higher interest rates and growth of operating balances as we continued to win new client mandates in GLCM, notably in Asia and the US;

• an increase in Global Banking (up $0.1bn, or 6%), as we continued to grow lending balances, and from recoveries on restructured facilities, partly offset by muted investment banking activity compared with 1Q17.

This was partly offset by:

• a decrease in Global Markets (down $0.2bn), primarily in fixed income revenue (Rates and Credit) reflecting reduced client flows, although this was partly offset by higher revenue in Equities and Foreign Exchange.

Adjusted ECL were $22m in 1Q18. In 1Q17, there was a net release of adjusted LICs of $21m.

Adjusted operating expenses increased by $0.1bn or 2%, reflecting increased litigation expenses, and a rise in investment costs to grow the business.

Global Private Banking

1Q18 compared with 1Q17 - adjusted results

For footnotes see page 13.

Adjusted profit before tax of $113m was $39m or 53% higher, due to revenue growth, partly offset by a marginal increase in operating expenses.

Adjusted revenue of $0.5bn increased by $45m or 10%, mainly in Hong Kong from higher investment revenue due to increased client activity and higher deposit revenue as spreads widened following interest rate rises.

In 1Q18, we attracted net new money of $5.3bn in key markets targeted for growth.

Adjusted operating expenses of $0.4bn increased by 3% primarily reflecting higher performance-related pay.

Corporate Centre

1Q18 compared with 1Q17 - adjusted results

Adjusted profit before tax of $0.2bn was $0.4bn or 70% lower, driven by a decrease in revenue, while operating expenses were broadly unchanged.

We recorded a net loss of adjusted revenue of $0.1bn in 1Q18, compared with revenue of $0.4bn in 1Q17. This reduction mainly reflected decreases in Central Treasury primarily due to:

• lower revenue in Balance Sheet Management (down $0.3bn) reflecting repositioning carried out in 2017 in anticipation of higher policy rates, lower reinvestment yields and lower gains from AFS disposals; and

• a loss arising from adverse swap mark-to-market movements following a bond reclassification under IFRS 9 'Financial Instruments' ($0.2bn).

A net release of adjusted ECL of $0.1bn in 1Q18 primarily related to our Legacy Credit portfolio.

In 1Q17, we recorded a net release of LICs of $41m which included releases related to Legacy Credit, as well as our US run-off portfolio.

Adjusted operating expenses of $0.3bn were broadly unchanged from 1Q17.

Adjusted income from associates increased by $44m or 8%.

Group

1Q18 compared with 4Q17 - reported results

Reported profit before tax

Reported profit before tax of $4.8bn in 1Q18 was $2.5bn higher than in 4Q17. This included a net favourable movement in significant items of $40m.

Excluding significant items, profit before tax increased by $2.4bn to $6.0bn, reflecting higher revenue and lower operating expenses.

Reported revenue

Reported revenue of $13.7bn in 1Q18 was $1.4bn or 11% higher than in 4Q17, and reflected a favourable effect of foreign currency translation of $0.2bn. Significant items of $0.1bn were broadly in line with 4Q17.

Excluding significant items and currency translation differences, revenue increased by $1.2bn or 9% reflecting revenue growth in all global businesses, partly offset by lower revenue in Corporate Centre.

Reported ECL/LICs

ECL were $0.2bn in 1Q18. This mainly related to charges of $0.3bn in RBWM, partly offset by a net release of ECL in Corporate Centre and CMB.

LICs in 4Q17 were $0.7bn and were mainly incurred in GB&M $0.4bn. In addition we incurred charges of $0.2bn in RBWM and $0.2bn in CMB. These charges were partly offset by a net release of $0.1bn in Corporate Centre.

Reported operating expenses

Reported operating expenses of $9.4bn were $0.5bn or 5% lower. This reduction included a $35m favourable movement in significant items which included:

• the non-recurrence of costs to achieve, which were $0.7bn in 4Q17;

• customer redress programme costs of $0.1bn in 1Q18, compared with $0.3bn in 4Q17.

These were partly offset by:

• settlements and provisions in connection with legal matters of $0.9bn in 1Q18. This compared with settlements and provisions in connection with legal matters of $0.2bn in 4Q17.

Excluding significant items and an adverse effect of foreign currency translation of $0.2bn, operating expenses decreased by $0.7bn or 8%.

Reported income from associates

Reported income from associates of $0.6bn was $42m or 8% higher than in 4Q17.

Group

1Q18 compared with 4Q17 - adjusted results

Adjusted profit before tax

On an adjusted basis, profit before tax of $6.0bn was $2.4bn or 66% higher, reflecting higher revenue and lower operating expenses.

Adjusted revenue

Adjusted revenue of $13.9bn increased by $1.2bn or 9% compared with 4Q17, mainly reflecting higher revenue in all our global businesses, partly offset by lower revenue in Corporate Centre.

• In GB&M revenue increased by $0.7bn, with growth in all businesses, notably in Global Markets reflecting a seasonal increase in client activity in 1Q18, as well as continued momentum in GLCM and Securities Services.

• In RBWM, revenue increased by $0.5bn, driven by Wealth Management, notably in investment distribution and insurance manufacturing in Asia from higher sales in 1Q18 compared with 4Q17, due to seasonality.

• In CMB, revenue increased by $0.2bn, notably in GLCM as spreads widened, primarily in Asia. Revenue also increased from Insurance and Investments and Markets products, notably in Asia.

These increases were partly offset:

• In Corporate Centre, revenue decreased by $0.3bn, notably as a result of a loss arising from adverse swap mark-to-market movements following a bond reclassification under IFRS 9 'Financial Instruments' ($0.2bn).

Adjusted ECL/LICs

Adjusted ECL of $0.2bn, mainly related to charges in RBWM ($0.3bn), notably in Mexico against our unsecured lending balances, as well as in the UK and Hong Kong, also against unsecured lending. These charges were partly offset by a net release in Corporate Centre.

In 4Q17, adjusted LICs were $0.7bn and included individually assessed LICs relating to two large corporate exposures in GB&M in Europe. In addition, 4Q17 included LICs of $0.2bn in CMB, primarily related to individually assessed exposures in the UK, and in RBWM LICs of $0.2bn related mainly to our unsecured lending portfolio in Mexico.

Adjusted operating expenses

Adjusted operating expenses of $8.2bn were $0.7bn or 8% lower, primarily due to a UK bank levy charge of $0.9bn recorded in 4Q17. Excluding this charge, adjusted operating expenses increased by $0.2bn or 2%, mainly reflecting investments to grow the business and enhance our digital capabilities, and also an increase in performance-related pay.

Adjusted share of income from associates

Adjusted income from associates of $0.6bn was $24m or 4% higher than in 4Q17.

Balance sheet commentary compared with 1 January 2018

The impact of transitioning to IFRS 9 'Financial Instruments' on 1 January 2018 was a reduction in our total assets of $3.3bn from 31 December 2017, as well as the reclassification of certain items within the balance sheet. The commentary that follows compares our balance sheet as at 31 March 2018 with that as at 1 January 2018.

At 31 March 2018 our total assets were $2.7tn, an increase of $134bn or 5% on a reported basis and $95bn or 4% on a constant currency basis. The reported growth reflected an increase in short-term settlement accounts relating to Global Markets activity of $33bn, as activity increased after the seasonal reduction in December 2017, as well as an increase in loans and advances to customers (up $31bn), and trading assets (up $23bn).

Loans and advances to customers

Reported loans and advances to customers grew by $31.4bn or 3%, and included a favourable effect of currency translation of $14.6bn.

Excluding currency translation, and a small reduction in corporate overdraft balances relating to customers that settled their overdraft and deposit balances on a net basis, loans and advances to customers grew by $17.0bn, reflecting continued lending growth in Asia (up $14.2bn), primarily in Hong Kong as we increased term lending in CMB and GB&M.

We also grew lending in the Middle East and North Africa by $2.1bn, notably in term lending in GB&M.

Lending in Europe fell by $0.4bn, as growth in term lending in CMB in the UK was more than offset by a reduction in GB&M in the UK reflecting a reclassification of short-term lending by Global Markets into other assets during 1Q18. In RBWM we continued to grow our mortgage lending, notably in the UK (up $1.8bn).

Customer accounts

Reported customer accounts grew by $19.5bn, but were broadly unchanged on a constant currency basis, despite robust growth in RBWM, notably in Hong Kong and the UK.

We grew balances in Europe by $8.0bn, reflecting growth in GB&M in the UK, partly offset in CMB, as well as in GPB as we actively redeployed clients' deposits to assets under management to maximise their returns.

In Asia customer accounts fell by $3.5bn, primarily in GB&M and CMB in Hong Kong and mainland China, as seasonal customer outflows were higher than new deposit growth. The remaining reduction in customer accounts was driven by North America, notably in GB&M and CMB.

Net interest margin

The 1Q18 net interest margin of 1.67% was 4bps higher than that for 2017. This was driven by an increase of 18bps in gross yields, partly offset by an increase of 14bps in the cost of funds.

Gross yields benefited from a rate rise in Hong Kong, notably from increased lending yields on term lending in Asia. Gross yields on surplus liquidity increased in all regions, mainly on AFS securities. These benefits were partly offset by the completion of the run-off of our higher-yielding US CML portfolio in 2017 and continuing competitive pressures on lending yields in Europe, notably in mortgages and overdrafts, despite balance growth.

The cost of funds rose by 14bps from the increased cost of customer accounts, mainly deposit accounts in Asia reflecting the rate rise in Hong Kong. The cost of Group debt also rose, primarily relating to the higher cost of issuances of senior debt by HSBC Holdings.

Compared with the fourth quarter of 2017, net interest margin increased, reflecting an increase in our gross yields, driven by increased lending yields and increased yields on surplus liquidity in most regions. This was partly offset by an increase in our cost of funds, notably from increased cost of customer accounts in Asia.

Notes

• Income statement comparisons, unless stated otherwise, are between the quarter ended 31 March 2018 and the quarter ended 31 March 2017. Balance sheet comparisons, unless otherwise stated, are between balances at 31 March 2018 and the corresponding balances at 1 January 2018.

• The financial information on which this Earnings Release is based, and the data set out in the appendix to this statement, are unaudited and have been prepared in accordance with HSBC's significant accounting policies as described on pages 188 to 194 of our Annual Report and Accounts 2017 and the new policies for financial instruments as described on pages 16 to 20 of our Report on Transition to IFRS 9 'Financial Instruments' 1 January 2018. Comparative periods have not been restated. IFRS 9 does not require restatement and the impact of other new policies are not material.

• The Board has adopted a policy of paying quarterly interim dividends on ordinary shares. Under this policy, it is intended to have a pattern of three equal interim dividends with a variable fourth interim dividend. Dividends are declared in US dollars and, at the election of the shareholder, paid in cash in one of, or in a combination of, US dollars, sterling and Hong Kong dollars or, subject to the Board's determination that a scrip dividend is to be offered in respect of that dividend, may be satisfied in whole or in part by the issue of new shares in lieu of a cash dividend. Details of the first interim dividend for 2018 and the series A dollar preference share dividend are set out at the end of this release.

This Earnings Release contains certain forward-looking statements with respect to HSBC's financial condition, results of operations, capital position and business.

Statements that are not historical facts, including statements about HSBC's beliefs and expectations, are forward-looking statements. Words such as 'expects', 'anticipates', 'intends', 'plans', 'believes', 'seeks', 'estimates', 'potential' and 'reasonably possible', variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made. HSBC makes no commitment to revise or update any forward-looking statements to reflect events or circumstances occurring or existing after the date of any forward-looking statements.

Written and/or oral forward-looking statements may also be made in the periodic reports to the US Securities and Exchange Commission, summary financial statements to shareholders, proxy statements, offering circulars and prospectuses, press releases and other written materials, and in oral statements made by HSBC's Directors, officers or employees to third parties, including financial analysts.

Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement.

These include, but are not limited to:

• changes in general economic conditions in the markets in which we operate, such as continuing or deepening recessions and fluctuations in employment beyond those factored into consensus forecasts; changes in foreign exchange rates and interest rates; volatility in equity markets; lack of liquidity in wholesale funding markets; illiquidity and downward price pressure in national real estate markets; adverse changes in central banks' policies with respect to the provision of liquidity support to financial markets; heightened market concerns over sovereign creditworthiness in over-indebted countries; adverse changes in the funding status of public or private defined benefit pensions; and consumer perception as to the continuing availability of credit and price competition in the market segments we serve;

• changes in government policy and regulation, including the monetary, interest rate and other policies of central banks and other regulatory authorities; initiatives to change the size, scope of activities and interconnectedness of financial institutions in connection with the implementation of stricter regulation of financial institutions in key markets worldwide; revised capital and liquidity benchmarks which could serve to deleverage bank balance sheets and lower returns available from the current business model and portfolio mix; imposition of levies or taxes designed to change business mix and risk appetite; the conduct of business of financial institutions in serving their retail customers, corporate clients and counterparties; the standards of market conduct; the costs, effects and outcomes of product regulatory reviews, actions or litigation, including any additional compliance requirements; expropriation, nationalisation, confiscation of assets and changes in legislation relating to foreign ownership; changes in bankruptcy legislation in the principal markets in which we operate and the consequences thereof; general changes in government policy that may significantly influence investor decisions; extraordinary government actions as a result of current market turmoil; other unfavourable political or diplomatic developments producing social instability or legal uncertainty which in turn may affect demand for our products and services; and the effects of competition in the markets where we operate including increased competition from non-bank financial services companies, including securities firms; and

• factors specific to HSBC, including our success in adequately identifying the risks we face, such as the incidence of loan losses or delinquency, and managing those risks (through account management, hedging and other techniques). Effective risk management depends on, among other things, our ability through stress testing and other techniques to prepare for events that cannot be captured by the statistical models we use; our success in addressing operational, legal and regulatory, and litigation challenges; and other risks and uncertainties we identify in the 'top and emerging risks' on pages 63 to 66 of the Annual Report and Accounts 2017.

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1 Return on average risk-weighted assets is calculated using annualised profit before tax and reported average risk-weighted assets.

2 The classification and measurement requirements under IFRS 9, which was adopted from 1 January 2018, are based on an entity's assessment of both the business model for managing the assets and the contractual cash flow characteristics of the assets. The standard contains a classification for items measured mandatorily at fair value through profit or loss as a residual category. Given its residual nature, the presentation of the income statement has been updated to separately present items in this category which are of a dissimilar nature or function, in line with IAS 1 'Presentation of Financial Statements' requirements. Comparative data have been re-presented. There is no net impact on Total operating income.

3 Prior to 2018 foreign exchange exposure on some financial instruments designated at fair value was presented in the same line in the income statement as the underlying fair value movement on these instruments. In 2018 we have grouped the presentation of the entire effect of foreign exchange exposure in profit or loss and presented it within 'Net income from financial instruments held for trading or managed on a fair value basis'. Comparative data have been re-presented. There is no net impact on Total operating income and the impact on 'Changes in fair value of long-term debt and related derivatives' is $563m in 4Q17 and $84m in 1Q17.

1 Balances at 1 January 2018 have been prepared in accordance with accounting policies referred to on page 13. 31 December 2017 balances have not been represented.

Refer to pages 16 to 20 of our Report on Transition to IFRS 9 'Financial Instruments' 1 January 2018 for the new policies for financial instruments.

Summary of credit risk

1 The total ECL is recognised in the loss allowance for the financial asset unless the total ECL exceeds the gross carrying amount of the financial asset, in which case the ECL is recognised as a provision.

2 Includes only those financial instruments which are subject to the impairment requirements of IFRS 9. 'Prepayments, accrued income and other assets' as presented within the summary consolidated balance sheet on page 16 includes both financial and non-financial assets.

3 Represents the maximum amount at risk should the contracts be fully drawn upon and clients default.

4 Debt instruments measured at FVOCI continue to be measured at fair value with the allowance for ECL as a memorandum item. Change in ECL is recognised in 'Change in expected credit losses and other credit impairment charges' in the income statement.