HSBC Holdings Regulatory News (HSBA)

28 APRIL 2020

HSBC HOLDINGS PLC

1Q20 EARNINGS RELEASE

Noel Quinn, Group Chief Executive, said:

"The economic impact of the Covid-19 pandemic on our customers has been the main driver of the change in our financial performance since the turn of the year. The resultant increase in expected credit losses in the first quarter contributed to a material fall in reported profit before tax compared with the same period last year.

HSBC has always been there for our customers in times of crisis, and we are working hard to support them during this unprecedented period of disruption. We do so from a position of strength, with robust levels of capital, funding and liquidity. The market-specific support measures that we are offering our personal and business customers have had strong take-up, and we remain responsive to their changing needs. We are also working closely with governments around the world to channel fiscal support to the real economy quickly and efficiently.

I take the well-being of our people extremely seriously. We have therefore paused the vast majority of redundancies related to the transformation we announced in February to reduce the uncertainty they are facing at this difficult time. We continue to press forward with the other areas of our transformation with the aim of delivering a stronger and leaner business that is better equipped to help our customers prosper in the recovery still to come."

Financial performance (vs. 1Q19)

• Reported profit before tax down 48% to $3.2bn from higher expected credit losses and other credit impairment charges ('ECL') and lower revenue. The reduction primarily reflected the global impact of the Covid-19 outbreak and weakening oil prices.

• Reported revenue down 5% as a result of adverse market impacts in life insurance manufacturing and adverse valuation adjustments in Global Banking and Markets ('GB&M'), offsetting a resilient revenue performance, notably in Asia, Global Markets, Retail Banking and Global Private Banking ('GPB').

• Net interest margin ('NIM') of 1.54%, down 2 basis points ('bps') from 4Q19 and down 5bps from 1Q19. We expect material downward pressure on NIM in future quarters as we incur the full impact of 1Q20 market interest rate reductions.

• Reported ECL increased by $2.4bn to $3.0bn due to the impact of Covid-19 and weakening oil prices on the forward economic outlook and a significant charge related to a corporate exposure in Singapore. Allowance for ECL increased from $9.2bn at 31 December 2019 to $11.1bn at 31 March 2020.

• During the quarter, lending increased by $41bn and deposits grew by $47bn on a constant currency basis. Lending and deposit growth included the effects of corporate customers drawing on existing and new credit lines and re-depositing these to increase cash balances. Deposit balances also reflected continued growth in Retail Banking and Wealth Management ('RBWM').

• Reported operating expenses down 5% and adjusted operating expenses down 3%, despite continued investment, due to lower performance-related pay and reduced discretionary costs.

• Common equity tier 1 capital ('CET1') ratio of 14.6% (4Q19: 14.7%), including the impact of the cancellation of the final dividend in respect of 2019. Liquidity coverage ratio ('LCR') of 156% (4Q19: 150%) and a deposit surplus - the excess of deposit balances over lending balances - of over $400bn.

2020 outlook

• The outlook for world economies in 2020 has substantially worsened in the past two months. The impact and duration of the Covid-19 crisis will likely lead to higher ECL and put pressure on revenue due to lower customer activity levels and reduced global interest rates. We plan to reduce operating expenses to partly mitigate the reduction in revenue and we intend to continue to exercise cost discipline, while maintaining strategic investment. These factors are expected to lead to materially lower profitability in 2020, relative to 2019.

• We have temporarily delayed parts of our transformation, including some elements of our cost and risk-weighted asset ('RWA') reduction programme, and expect restructuring costs for 2020 to be lower than indicated in our 2019 annual results.

• We also expect mid-to-high single digit percentage growth in RWAs in 2020, including as a result of the effects of negative credit rating migration movements, impacting our CET1 ratio.

• During 2020, we will continue to assess the impact of the Covid-19 crisis and review our financial performance and business plan accordingly. We will assess the appropriateness of our medium-term financial targets during that period, and will review our dividend policy at, or ahead of, our year-end results for 2020.

1 The definition of net asset value per ordinary share is total shareholders' equity, less non-cumulative preference shares and capital securities, divided by the number of ordinary shares in issue excluding shares the company has purchased and are held in treasury.

2 Unless otherwise stated, regulatory capital ratios and requirements are calculated in accordance with the transitional arrangements of the Capital Requirements Regulation in force in the EU at the time, including the regulatory transitional arrangements for IFRS 9 'Financial Instruments' in article 473a. The capital ratios and requirements are reported in accordance with the revised Capital Requirements Regulation and Directive ('CRR II'), as implemented. Leverage ratios are calculated using the end point definition of capital.

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/investors.

Note to editors

HSBC Holdings plc

HSBC Holdings plc, the parent company of HSBC, is headquartered in London. HSBC serves customers worldwide from offices in 64 countries and territories in its geographical regions: Europe, Asia, North America, Latin America, and Middle East and North Africa. With assets of $2,918bn at 31 March 2020, HSBC is one of the world's largest banking and financial services organisations.

Impact on our business

The outbreak of Covid-19 has had, and continues to have, a material impact on businesses around the world and the economic environments in which they operate. The outbreak has caused disruption to our customers, suppliers and staff globally. A number of jurisdictions in which we operate have implemented severe restrictions on the movement of populations, with a resultant significant impact on economic activity. These restrictions are being determined by the governments of individual jurisdictions, including through the implementation of emergency powers. The impacts of these restrictions, including the subsequent lifting of restrictions, may vary from jurisdiction to jurisdiction. We have invoked our business continuity plans at many of our sites to help ensure the safety and well-being of our staff, as well as our ability to support our customers and maintain our business operations. Many of our staff have continued to provide critical services in branches, contact and service centres, and in offices, all with heightened safety measures, and we have equipped the majority of our staff to work remotely. It remains unclear how this will evolve through 2020 and we continue to monitor the situation closely.

In many of our markets we have initiated market-specific measures to support our personal and business customers through these challenging times, including mortgage assistance, payment holidays, the waiving of certain fees and charges, and liquidity relief for businesses facing market uncertainty and supply chain disruption. These measures have been well received and we remain responsive to our customers' changing needs. We are also working closely with governments and supporting national schemes that focus on the parts of the economy most impacted by Covid-19.

The actions taken by the various governments and central banks, in particular in the UK, mainland China, Hong Kong and the US, provide an indication of the potential severity of the downturn and post-recovery environment, which from a commercial, regulatory and risk perspective could be significantly different to past crises and persist for a prolonged period. An immediate financial impact of the outbreak is an increase in ECL, driven by a change in the economic scenarios used to calculate ECL. The outbreak has led to a weakening in GDP in many of our markets, a key input used for calculating ECL, and the probability of a more adverse economic scenario for at least the short term is substantially higher than at 31 December 2019. Furthermore, ECL will arise from other parts of our business impacted by the disruption to supply chains. The impact will vary by sectors of the economy, with heightened risk to the oil and gas, transport and discretionary consumer sectors being observed in the first stages of the outbreak. The impact of the outbreak on the long-term prospects of businesses in these sectors is uncertain and may lead to significant ECL charges on specific exposures, which may not be fully captured by ECL modelling techniques. In addition, in times of crisis, fraudulent activity is often more prevalent, leading to potentially significant ECL charges.

Should the Covid-19 outbreak continue to cause disruption to economic activity globally through 2020, there could be further adverse impacts on our income due to lower lending and transaction volumes and lower wealth and insurance manufacturing revenue due to equity markets volatility. Lower interest rates globally will negatively impact net interest income and increase the cost of guarantees for insurance manufacturing, and there could also be adverse impacts on other assets, such as our investment in Bank of Communications Co., Limited.

The Covid-19 outbreak will also have material impacts on capital and liquidity. This may include downward customer credit rating migration, which could negatively impact our risk-weighted assets and capital position, and potential liquidity stress due, among other factors, to increased customer drawdowns, notwithstanding the significant initiatives that governments and central banks have put in place to support funding and liquidity. Central banks in some markets have also initiated a series of capital measures, including the reduction of certain regulatory capital buffers, to support the ability of banks to supply credit to businesses and households through this period of economic disruption.

Central bank and government actions and support measures may result in restrictions in relation to capital. These may limit management's flexibility in managing the business and taking action in relation to capital distribution and capital allocation. In response to a written request from the UK's Prudential Regulation Authority ('PRA'), we cancelled the fourth interim dividend of $0.21 per ordinary share. Similar requests were also made to other UK incorporated banking groups. We also announced that until the end of 2020 we will make no quarterly or interim dividend payments or accruals in respect of ordinary shares. As previously disclosed in our Annual Report and Accounts 2019, we also plan to suspend share buy-backs in respect of ordinary shares in 2020 and 2021.

Approach to risk management

We have maintained a consistent approach to risk throughout our history and have in place a comprehensive risk management framework to manage such risks. We operate a wide-ranging stress testing programme at legal entity, regional and overall Group level that is a key part of our capital and liquidity risk management and planning. Stress testing provides management with key insights into the impact of severely adverse events on the Group, and provides confidence to regulators on the Group's financial stability. As well as undertaking regulatory-driven stress tests, we conduct our own stress tests to understand the nature of material risks, quantify the impact of such risks and develop plausible business-as-usual mitigating actions. Given the novel or prolonged nature of the current crisis, additional mitigating actions may be required.

At 31 March 2020, our common equity tier 1 ('CET1') ratio was 14.6%, compared with 14.7% at 31 December 2019, and our liquidity coverage ratio ('LCR') was 156%. Our capital, funding and liquidity position will help us to continue supporting our customers throughout the Covid-19 outbreak.

There remain significant uncertainties in assessing the duration of the Covid-19 outbreak and its impact. A prolonged period of significantly reduced economic activity as a result of the impact of the outbreak would have a material adverse effect on our financial condition, results of operations, prospects, liquidity, capital position and credit ratings. This would, in turn, have an impact on our ability to meet our financial targets as set out in our business update in February 2020 and also adversely affect our future dividend policy.

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. 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 understand better 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 22 to 24 detail the effects of significant items on each of our global business segments during 1Q20, 4Q19 and 1Q19.

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 Executive Committee ('GEC') (previously the Group Management Board), 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 GEC 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 the CODM on the basis of adjusted performance, which 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 below. Supplementary reconciliations of adjusted to reported results by global business are presented on pages 22 to 24 for information purposes.

Management view of adjusted revenue

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

1 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue.

2 Includes fair value movements on non-qualifying hedges and debt valuation adjustments on derivatives.

3 Comprises costs associated with preparations for the UK's exit from the European Union.

Tables showing adjusted profit before tax by global business and region are presented to support the commentary on adjusted performance on the following pages.

The tables on pages 22 to 24 reconcile reported to adjusted results for each of our global business segments.

Group

1Q20 compared with 1Q19 - reported results

Reported profit

Reported profit after tax of $2.5bn was $2.4bn or 49% lower than in 1Q19.

Reported profit before tax of $3.2bn was $3.0bn or 48% lower, reflecting higher reported ECL and lower reported revenue. While performance in the first two months delivered good results, the global impact of the Covid-19 outbreak and weakening oil prices had a significant adverse impact on performance in March.

Results in 1Q20 included adverse market impacts in insurance manufacturing in RBWM of $689m following a weakening of global equity prices and lower interest rates (1Q19: $183m favourable), while GB&M included an adverse movement in credit and funding valuation adjustments of $346m (1Q19: $46m favourable), adverse bid-offer adjustments of $310m (1Q19: $3m favourable) and losses in Principal Investments of $235m (1Q19: gains of $83m). Results also included favourable fair value movements on our long-term debt and associated swaps in Corporate Centre of $259m (1Q19: $50m favourable). In 1Q19, results included gains on disposals in Latin America of $157m and a release of a provision in Equities in GB&M of $106m.

The reduction in reported profit before tax included a net favourable movement in significant items between the periods of $0.3bn, mainly from favourable fair value movements on financial instruments of $0.3bn. Significant items in reported operating expenses were broadly unchanged and included higher restructuring and other related costs of $0.1bn, which were broadly offset by lower structural reform costs of $0.1bn and a decrease in customer redress programmes of $0.1bn.

Excluding net favourable movements in significant items of $0.3bn and adverse foreign currency translation differences of $0.1bn, profit before tax decreased by $3.2bn or 51%.

Reported revenue

Reported revenue of $13.7bn was $0.7bn or 5% lower than in 1Q19, and included a net favourable movement in significant items of $0.3bn, mainly from fair value movements on financial instruments, which were broadly offset by adverse foreign currency translation differences of $0.3bn. The remaining reduction reflected decreases in RBWM, GB&M and Commercial Banking ('CMB'), partly offset by higher revenue in Corporate Centre.

Lower revenue in RBWM was primarily driven by adverse market impacts in life insurance manufacturing of $689m following a weakening of global equity prices and lower interest rates. This compared with favourable market impacts in 1Q19. In GB&M, lower revenue was due to adverse movements in credit and funding valuation adjustments of $346m (1Q19: $46m favourable), and losses in Principal Investments of $235m, compared with gains in 1Q19 of $83m. These reductions were partly offset by growth in Global Markets, reflecting increased client activity as a result of higher volatility, notwithstanding adverse bid-offer adjustments of $310m (1Q19: $3m favourable). In CMB, lower revenue was mainly in Global Liquidity and Cash Management ('GLCM') due to the effects of lower interest rates. These decreases were partly offset by higher revenue in Corporate Centre, driven by favourable fair value movements on our long-term debt and associated swaps and from higher revenue in Balance Sheet Management.

Excluding foreign currency translation differences and significant items, revenue decreased by $0.8bn or 6%.

Reported ECL

Reported ECL of $3.0bn were $2.4bn higher than in 1Q19, mainly from charges relating to the global impact of Covid-19 and weakening oil prices on the forward economic outlook. ECL in 1Q20 included a significant charge related to a corporate exposure in Singapore, which was the primary driver of the $0.7bn increase in ECL in CMB in Asia. We also incurred ECL charges relating to a small number of clients in GB&M.

Adjusted ECL (annualised) as a percentage of average gross loans and advances to customers was 1.18%, compared with 0.24% at 1Q19.

The estimated impact of Covid-19 was incorporated in the ECL through additional scenario analysis, which considered differing severity and duration assumptions relating to the global pandemic. This included probability-weighted shocks to annual GDP and consequential impacts on unemployment and other economic variables, with differing economic recovery assumptions. The impact of using additional scenarios to address the impact of Covid-19 was an additional ECL charge of $1.5bn, consisting of $630m in the retail portfolio and $882m in the wholesale portfolio.

Applying a range of weightings to our sensitivity analysis, our severe ECL scenario, together with historical loss experience for the remaining quarters, could result in an ECL charge for 2020 in the range of $7bn to $11bn. The severe ECL scenario is described on page 18 and considers a longer period of negative economic impacts. However, as noted on pages 3 and 4, there is significant uncertainty over the path of the pandemic, the range and duration of economic impacts (including the effects of various government support packages), and its impact on customers' ability to repay their debt obligations and, therefore, the ECL charge for the year.

For more information on the economic scenarios, see page 18.

Reported operating expenses

Reported operating expenses of $7.9bn were $0.4bn or 5% lower than in 1Q19 and included favourable foreign currency translation differences of $0.2bn. The remaining reduction reflected lower performance-related pay of $0.4bn and a reduction of $0.2bn from our cost-saving initiatives, partly offset by increased investment in business growth, including investment in digital.

Significant items remained broadly unchanged compared with 1Q19, and included restructuring and other related costs of $0.2bn, which included $125m in relation to our cost reduction plan, of which $22m related to severance.

Excluding significant items and foreign currency translation differences, operating expenses of $7.7bn were $0.2bn or 3% lower than in 1Q19. We continue to manage our costs closely and have reduced discretionary expenditure, and we are reviewing and reprioritising our spending plans in response to the current economic uncertainty resulting from Covid-19.

The number of employees expressed in full-time equivalent staff ('FTEs') at 31 March 2020 was 235,047, a decrease of 304 from 31 December 2019. Additionally, the number of contractors at 31 March 2020 was 6,979, a decrease of 432 from 31 December 2019.

Reported share of profit from associates and JVs

Reported share of profit from associates and joint ventures of $0.4bn decreased by $0.2bn or 29%, primarily from a reduction in income from an associate in the UK reflecting the impact of Covid-19.

Tax expense

The effective tax rate for 1Q20 of 22.3% was higher than 21.0% in 1Q19 as a result of the effect of changes in profit mix and the remeasurement of deferred tax balances in light of the cancellation of the planned reduction in the UK corporation tax rate from 19% to 17% from 1 April 2020.

Group

1Q20 compared with 4Q19 - reported results

Reported profit

Reported profit after tax of $2.5bn compared with a loss of $5.0bn in 4Q19, primarily due to the non-recurrence of a goodwill impairment of $7.3bn.

Reported profit before tax of $3.2bn compared with a loss of $3.9bn in 4Q19, reflecting lower reported operating expenses from the non-recurrence of a goodwill impairment of $7.3bn, and as 4Q19 included the UK bank levy of $1.0bn. These movements were partly offset by an increase in ECL, mainly from charges relating to the global impact of Covid-19 and weakening oil prices on the forward economic outlook.

Reported revenue in 1Q20 included adverse market impacts in insurance manufacturing in RBWM of $689m following a weakening of global equity prices and lower interest rates (4Q19: $202m favourable), while GB&M included an adverse movement in credit and funding valuation adjustments of $346m (4Q19: $189m favourable), adverse bid-offer adjustments of $310m (4Q19: $15m favourable) and losses in Principal Investments of $235m (4Q19: gains of $45m). Results also included favourable fair value movements on our long-term debt and associated swaps in Corporate Centre of $259m (4Q19: $73m adverse).

Excluding net favourable movements in significant items of $8.4bn and a minimal effect of foreign currency translation differences, profit before tax decreased by $1.3bn or 30%.

Reported revenue

Reported revenue of $13.7bn was $0.3bn or 2% higher than in 4Q19, mainly due to a net favourable movement in significant items of $0.6bn, primarily from favourable fair value movements on financial instruments, partly offset by adverse foreign currency translation differences of $0.1bn.

Excluding foreign currency translation differences and significant items, revenue decreased by $0.3bn or 2%.

This reduction was mainly in RBWM due to adverse movements in market impacts in life insurance manufacturing following a weakening of global equity prices and lower interest rates. This compared with favourable market impacts in 4Q19. In addition, revenue in GB&M was lower from adverse movements in credit and funding valuation adjustments and losses in Principal Investments, partly offset by higher revenue in Global Markets reflecting increased client activity as a result of higher volatility, notwithstanding adverse bid-offer adjustments of $310m (4Q19: $15m favourable). In Corporate Centre, revenue increased from favourable fair value movements on our long-term debt and associated swaps and from a rise in revenue in Balance Sheet Management.

Reported ECL

Reported ECL of $3.0bn were $2.3bn higher than in 4Q19, mainly from charges relating to the global impact of Covid-19 and weakening oil prices on the forward economic outlook. In addition, ECL in 1Q20 included a significant charge in CMB related to a corporate exposure in Singapore.

Adjusted ECL (annualised) as a percentage of average gross loans and advances to customers was 1.18%, compared with 0.28% at 4Q19.

Reported operating expenses

Reported operating expenses of $7.9bn were $9.2bn or 54% lower than in 4Q19, reflecting a $7.8bn decrease in significant items. These included the non-recurrence of a goodwill impairment of $7.3bn and charges related to customer redress programmes, which were $182m lower.

Excluding significant items and foreign currency translation differences, operating expenses of $7.7bn decreased by $1.4bn or 15%, with the reduction mainly attributable to the non-recurrence of a 4Q19 charge of $1.0bn related to the UK bank levy, a reduction in performance-related pay of $0.2bn and lower discretionary expenditure. The impact of our cost-saving initiatives contributed a further $0.1bn reduction.

Reported share of profit from associates and JVs

Reported income from associates and joint ventures of $0.4bn decreased by $97m or 19%, primarily from a reduction in income from a UK associate reflecting the impact of the Covid-19 outbreak.

Retail Banking and Wealth Management

1Q20 compared with 1Q19 - adjusted results

1 'Other' includes the distribution and manufacturing (where applicable) of retail and credit protection insurance, disposal gains and other non-product-specific income.

2 'Net operating income' means net operating income before changes in expected credit losses and other credit impairment charges (also referred to as 'Revenue').

Adjusted profit before tax of $0.4bn was $1.8bn or 84% lower than in 1Q19. This reflected a reduction in adjusted revenue of $1.0bn, driven by adverse market impacts in life insurance manufacturing in 1Q20 of $689m following a weakening of global equity prices and lower interest rates (1Q19: $183m favourable), while retail banking and investment distribution performance remained resilient in difficult economic conditions. In addition, adjusted ECL increased by $0.8bn, mainly due to the global impact of Covid-19 on the forward economic outlook. Adjusted operating expenses rose by $0.1bn as the impact of inflation and continued investment in the business was partly offset by lower discretionary expenditure.

Commercial Banking

1Q20 compared with 1Q19 - adjusted results

1 Includes revenue from Foreign Exchange, insurance manufacturing and distribution, interest rate management and Global Banking products.

2 'Net operating income' means net operating income before changes in expected credit losses and other credit impairment charges (also referred to as 'Revenue').

Adjusted profit before tax of $0.6bn was $1.4bn or 69% lower than in 1Q19. Adjusted revenue fell by $0.2bn, mainly in GLCM (down $0.2bn) due to the lower interest rate environment, partly offset by a 6% growth in average balances. Revenue was higher in Credit and Lending, reflecting balance growth from increased customer drawdowns. Adjusted ECL increased by $1.1bn, reflecting the global impact of Covid-19 on the forward economic outlook, and from a significant charge related to a corporate exposure in Singapore. Adjusted operating expenses were $0.1bn higher, reflecting increased investment in digital capabilities to improve the client experience, partly offset by lower discretionary expenditure.

Global Banking and Markets

1Q20 compared with 1Q19 - adjusted results

1 'Other' in GB&M includes allocated funding costs. Additionally, within the management view of total operating income, notional tax credits are allocated to the businesses to reflect the economic benefit generated by certain activities that are not reflected within operating income, such as notional credits on income earned from tax-exempt investments where the economic benefit of the activity is reflected in tax expense. In order to reflect the total operating income on an IFRS basis, the offset to these tax credits is included within 'Other'.

2 'Net operating income' means net operating income before changes in expected credit losses and other credit impairment charges (also referred to as 'Revenue').

Adjusted profit before tax of $0.8bn was $0.8bn or 49% lower than in 1Q19. Adjusted revenue fell by $0.3bn, mainly from adverse movements in credit and funding valuation adjustments of $0.4bn and from a reduction in Principal Investments revenue of $0.3bn, mainly due to valuation losses in 1Q20. Revenue in Global Markets increased by $0.4bn, primarily due to increased client activity as a result of higher volatility, partly offset by adverse bid-offer adjustments of $0.3bn. Adjusted ECL were $0.5bn higher from charges relating to the global impact of Covid-19 on the forward economic outlook, and from charges against a small number of clients. Adjusted operating expenses fell by $0.1bn, primarily from lower performance-related pay.

Global Private Banking

1Q20 compared with 1Q19 - adjusted results

1 'Net operating income' means net operating income before changes in expected credit losses and other credit impairment charges (also referred to as 'Revenue').

Adjusted profit before tax of $0.1bn increased by $23m or 23% compared with 1Q19. Adjusted revenue increased by $60m, mainly from growth in investment and lending revenue in Asia and in Europe, driven by high volatility in equity markets. This increase was partly offset by higher adjusted ECL from a charge relating to a single client. Adjusted operating expenses were $10m lower as we invested in the business in Asia, while reducing costs in Switzerland.

In 1Q20, we attracted $5.3bn of net new money inflows, mainly in Asia and Europe.

Corporate Centre

1Q20 compared with 1Q19 - adjusted results

1 Balance Sheet Management revenue includes other internal allocations to reflect the economic benefit generated by certain activities, which is not reflected within operating income, such as notional credits on income earned from tax-exempt investments where the economic benefit of the activity is reflected in tax expense. In order to reflect the total operating income on an IFRS basis, the offset to these tax credits is included in 'other central treasury'.

2 'Net operating income' means net operating income before changes in expected credit losses and other credit impairment charges (also referred to as 'Revenue').

Adjusted profit before tax of $1.1bn was $0.8bn higher than in 1Q19. Adjusted revenue increased by $0.6bn, primarily reflecting higher disposal gains in Balance Sheet Management and favourable fair value movements of $209m relating to the economic hedging of interest rate and exchange rate risk on our long-term debt with associated swaps. Adjusted operating expenses decreased by $0.3bn due to lower discretionary expenditure. Share of profit from associates and joint ventures fell by $0.1bn, mainly from a reduction in income from a UK associate due to the impact of the Covid-19 outbreak.

Balance sheet - 31 March 2020 compared with 31 December 2019

At 31 March 2020, our total assets of $2.9tn were $203bn higher on a reported basis.

The increase in total assets included growth in derivative assets (up $128bn), mainly in Europe, reflecting mark-to-market gains on interest rate and foreign exchange derivatives and increased client activity. The increase in derivative assets was consistent with the increase in derivative liabilities as the underlying risk is broadly matched. In addition, cash collateral and settlement accounts, included within other assets, increased by $73bn due to the seasonal reduction at 31 December 2019, as clients settled trades prior to the year end.

On a constant currency basis, our total assets were $289bn higher.

Loans and advances to customers as a percentage of customer accounts were 72.2%, an increase of 0.2% compared with 31 December 2019.

Loans and advances to customers

Reported loans and advances to customers of $1,040bn were $4bn higher, which included adverse effects of foreign currency translation differences of $37bn. On a constant currency basis, customer lending increased by $41bn or 4% as we continued to support new and existing customers during the current economic uncertainty.

In GB&M, lending of $262bn was $24bn higher, mainly in the UK, Hong Kong and the US from increased term lending. In CMB, lending of $351bn was $16bn higher, mainly in term lending in the US, UK and across Asia. The growth in GB&M and CMB included the effect of customers drawing down on credit facilities and partially redeploying these funds into their customer accounts to increase cash balances during the Covid-19 outbreak. In RBWM, lending of $379bn was broadly unchanged as growth in mortgages was offset by a reduction in credit card balances.

Customer accounts

Customer accounts of $1,441bn increased by $1bn on a reported basis, including adverse foreign currency translation differences of $45bn. On a constant currency basis, customer accounts increased by $47bn or 3%. Customer accounts grew in all our global businesses and regions as corporate and personal customers consolidated their funds and redeployed them into cash, and as corporate clients drew down on credit facilities and partially redeployed the funds into their customer accounts, as a result of uncertainty due to the Covid-19 outbreak.

In GB&M, customer accounts of $307bn were $26bn higher, reflecting growth in Europe, Asia and the US. In RBWM, balances increased by $13bn to $683bn, with growth notably in the UK, Hong Kong and North America. In CMB, balances increased by $4bn to $378bn, as increases in Europe of $13bn and North America of $2bn were largely offset by a reduction in Hong Kong of $12bn due to a managed reduction in short-term time deposits and a seasonal outflow.

Risk-weighted assets - 31 March 2020 compared with 31 December 2019

Risk-weighted assets ('RWAs') totalled $857.1bn at 31 March 2020, a $13.7bn increase compared with 4Q19. Excluding foreign currency translation differences, RWAs increased by $40.0bn.

A $35.8bn increase in RWAs due to asset size movements reflected lending growth in GB&M and CMB, including an increase in the drawdown of facilities as a result of the Covid-19 outbreak, and increased market risk. Changes in asset quality increased RWAs by $4.3bn.

Net interest margin

1 Gross interest yield is the average annualised interest rate earned on average interest-earning assets ('AIEA'). Cost of funds is the average annualised interest cost as a percentage of average interest-bearing liabilities.

2 Net interest spread is the difference between the average annualised interest rate earned on AIEA, net of amortised premiums and loan fees, and the average annualised interest rate payable on average interest-bearing funds.

3 Net interest margin is net interest income expressed as an annualised percentage of AIEA.

Net interest margin ('NIM') of 1.54% was down 2bps from 4Q19. Market interest rates have fallen during 1Q20 and we expect material downward pressure on NIM in future quarters as we incur the full impact of these reductions. As disclosed in our Annual Report and Accounts 2019, a 100bps reduction in market interest rates would reduce projected net interest income by over $3bn (for more information on net interest income sensitivity, see page 140 of the Annual Report and Accounts 2019). This sensitivity does not incorporate projections of changes in balance sheet size, product mix nor product pricing strategies.

Notes

• Income statement comparisons, unless stated otherwise, are between the quarter ended 31 March 2020 and the quarter ended 31 March 2019. Balance sheet comparisons, unless otherwise stated, are between balances at 31 March 2020 and the corresponding balances at 31 December 2019.

• 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 our significant accounting policies as described on pages 240 to 251 of our Annual Report and Accounts 2019.

• On 31 March 2020, HSBC announced that, in response to a request from the Bank of England through the UK's Prudential Regulation Authority ('PRA'), the Board had cancelled the fourth interim dividend of $0.21 per ordinary share, which was scheduled to be paid on 14 April 2020. The Board also announced that until the end of 2020 HSBC will make no quarterly or interim dividend payments or accruals in respect of ordinary shares. As previously disclosed on 18 February 2020 in the Annual Report and Accounts 2019, we also plan to suspend share buy-backs in respect of ordinary shares in 2020 and 2021.

• The Board will review our dividend policy at or ahead of the year-end results for 2020, when the economic impact of the pandemic is better understood. We will also take into account the views of our shareholders, the interests of our other stakeholders and other factors, including our financial performance and capital position.

This Earnings Release contains certain forward-looking statements with respect to HSBC's financial condition, results of operations and business, including the strategic priorities and 2020 financial, investment and capital targets described herein.

Statements that are not historical facts, including statements about HSBC's beliefs and expectations, are forward-looking statements. Words such as 'expects', 'targets', '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 and creditworthy customers beyond those factored into consensus forecasts (including, without limitation, as a result of the Covid-19 outbreak); the Covid-19 outbreak, which could have adverse impacts on our income due to lower lending and transaction volumes, lower wealth and insurance manufacturing revenue, and lower interest rates globally, as well as, more generally, material adverse impacts on our financial condition, results of operations, prospects, liquidity, capital position and credit ratings; deviations from the market and economic assumptions that form the basis for our ECL measurements (including, without limitation, as a result of the Covid-19 outbreak); potential changes in future dividend policy; changes in foreign exchange rates and interest rates, including the accounting impact resulting from financial reporting in respect of hyperinflationary economies; volatility in equity markets; lack of liquidity in wholesale funding or capital markets, which may affect our ability to meet our obligations under financing facilities or to fund new loans, investments and businesses; other unfavourable political or diplomatic developments producing social instability or legal uncertainty, such as the unrest in Hong Kong, which in turn may affect demand for our products and services; climate change, which may cause both idiosyncratic and systemic risks resulting in potential financial impacts; 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; consumer perception as to the continuing availability of credit; exposure to counterparty risk, including third parties using us as a conduit for illegal activities without our knowledge; the expected discontinuation of certain key Ibors and the development of alternative risk-free benchmark rates, which may require us to enhance our capital position and/or position additional capital in specific subsidiaries; 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 in the principal markets in which we operate and the consequences thereof (including, without limitation, actions taken as a result of the Covid-19 outbreak); 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 practices, pricing or responsibilities of financial institutions serving their consumer markets; expropriation, nationalisation, confiscation of assets and changes in legislation relating to foreign ownership; the UK's exit from the EU, which may result in a prolonged period of uncertainty, unstable economic conditions and market volatility, including currency fluctuations; general changes in government policy that may significantly influence investor decisions; the costs, effects and outcomes of regulatory reviews, actions or litigation, including any additional compliance requirements; and the effects of competition in the markets where we operate including increased competition from non-bank financial services companies; 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); our ability to achieve our targets which may result in our failure to achieve any of the expected benefits of our strategic initiatives; model limitations or failure, which may require us to hold additional capital and incur losses; changes to the judgments, estimates and assumptions we base our financial statements on; changes in our ability to meet the requirements of regulatory stress tests; a reduction in the credit rating assigned to us or any of our subsidiaries, which could increase the cost or decrease the availability of our funding and affect our liquidity position and net interest margin; changes to the reliability and security of our data management, data privacy, information and technology infrastructure, including threats from cyber-attacks, which may impact our ability to service clients and may result in financial loss, business disruption and/or loss of customer services and data; changes in insurance customer behaviour and insurance claim rates; our dependence on loan payments and dividends from subsidiaries to meet our obligations; changes in accounting standards, which may have a material impact on the way we prepare our financial statements; changes in our ability to manage third-party, fraud and reputational risks inherent in our operations; employee misconduct, which may result in regulatory sanctions and/or reputational or financial harm; and changes in skill requirements, ways of working and talent shortages, which may affect our ability to recruit and retain senior management and skilled personnel. 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 it uses; and our success in addressing operational, legal and regulatory, and litigation challenges; and other risks and uncertainties we identify in 'Top and emerging risks' on pages 76 to 81 of the Annual Report and Accounts 2019.

For further information contact:

1 The debt instruments, issued for funding purposes, are designated under the fair value option to reduce an accounting mismatch.

2 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue.

3 Dividends recorded in the financial statements are dividends per ordinary share declared in a period and are not dividends in respect of, or for, that period.

1 Net of impairment allowances.

A summary of our current policies and practices for the management of credit risk is set out in 'Credit risk management' on page 84 of the Annual Report and Accounts 2019.

Summary of credit risk