HSBC Holdings Regulatory News (HSBA)

HSBC HOLDINGS PLC

3Q18 EARNINGS RELEASE - HIGHLIGHTS

Financial performance

• Reported profit before tax for 9M18 of $16.6bn was 12% higher than for 9M17, reflecting revenue growth in all of our global businesses, partly offset by higher operating expenses. Adjusted profit before tax of $18.3bn was 4% higher than for 9M17, excluding the effects of foreign currency translation differences and movements in significant items.

• Reported revenue for 9M18 of $41.1bn was 5% higher, notably driven by a rise in deposit revenue across our global businesses, primarily in Asia, as we benefited from wider margins and grew our balances. These increases were partly offset by lower revenue in Corporate Centre. Adjusted revenue of $41.4bn was 4% higher, excluding the effects of foreign currency translation differences and movements in significant items.

• Reported operating expenses for 9M18 of $25.5bn were 2% higher, primarily reflecting investments to grow the business and enhance our digital capabilities, and the effects of foreign currency translation differences, partly offset by a favourable movement in significant items. Adjusted operating expenses of $24.1bn were 6% higher, excluding the effects of foreign currency translation differences and movements in significant items.

• Adjusted jaws for 9M18 was negative 1.6%.

• Reported profit before tax for 3Q18 of $5.9bn was 28% higher than for 3Q17, reflecting strong revenue growth and lower operating expenses. Adjusted profit before tax of $6.2bn was 16% higher, excluding the effects of foreign currency translation differences and movements in significant items.

• Reported loans and advances to customers increased by $8.0bn during 3Q18. Excluding foreign currency translation differences, loans and advances grew by $14bn or 1% from 2Q18.

• Capital base remained strong with a common equity tier 1 ('CET1') ratio of 14.3% and a CRD IV leverage ratio of 5.4%.

John Flint, Group Chief Executive, said:

"These are encouraging results that demonstrate the revenue potential of HSBC. We are doing what we said we would - delivering growth from areas of strength, and investing in the business while keeping a strong grip on costs. We remain committed to growing profits, generating value for shareholders and improving the service we offer our customers around the world."

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 9M18.

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 GMT. 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 3,800 offices in 66 countries and territories in our geographical regions: Europe, Asia, North America, Latin America, and Middle East and North Africa. With assets of $2,603bn at 30 September 2018, HSBC is one of the world's largest banking and financial services organisations.

Our June 2018 Strategy Update outlined how we intend to bring HSBC back to growth and create value for shareholders. We are starting to see progress. We grew both reported and adjusted profits significantly compared with 3Q17, thanks largely to strong revenue growth in our three main global businesses.

Retail Banking and Wealth Management and Commercial Banking built on the momentum generated in the first half of the year, with both using the benefits of past investment to grow lending and deposit balances. Adjusted revenue growth in Retail Banking and Wealth Management came primarily from current accounts, savings and deposits, particularly in Hong Kong. In Commercial Banking, all of our transaction banking businesses generated higher adjusted revenue, including a sixth consecutive quarter of double-digit year-on-year adjusted revenue growth in Global Liquidity and Cash Management.

Global Banking and Markets had a very good quarter on the back of our strength in transaction banking and Foreign Exchange. Our differentiated Global Banking and Markets business model continues to deliver for our clients, leverage our strengths and generate stable, balanced revenue returns for the Group.

The strong revenue environment continues to enable us to invest in growth and in the simplification of the organisation to make it easier for our customers to bank with us and for colleagues to do their jobs.

HSBC adopted the requirements of IFRS 9 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 from 1 January 2017. The adoption of IFRS 9 reduced our net assets at 1 January 2018 by $1.6bn.

Under IFRS 9, the recognition and measurement of expected credit losses differs from the approach under IAS 39. The change in expected credit losses relating to financial assets under IFRS 9 is recorded in the income statement as the '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 as 'loan impairment charges and other credit risk provisions' ('LICs') and are therefore not necessarily comparable to ECL recorded for the current period.

Further explanation of the impact of the implementation of IFRS 9 is provided in Note 1 on the Financial Statements on page 82 of the Interim Report 2018.

From 1 July 2018, Argentina was deemed a hyperinflationary economy for accounting purposes.

The results of HSBC's operations with a functional currency of the Argentine peso have been prepared in accordance with IAS 29 'Financial Reporting in Hyperinflationary Economies' as if the economy had always been hyperinflationary. The results of those operations for the nine-month period ended 30 September 2018 are stated in terms of current purchasing power using the Indice de Precios al Consumidor at 30 September 2018 with the corresponding adjustment presented in 3Q18. In accordance with IAS 21 'The Effects of Changes in Foreign Exchange Rates', the results have been translated and presented in US dollars at the prevailing rate of exchange on 30 September 2018, and the Group's comparative information presented in US dollars with respect to the three-month and nine-month periods ended 30 September 2017 have not been restated.

The impact of applying IAS 29 and the hyperinflation provisions of IAS 21 in the current period was a decrease in the Group's profit before tax of $145m, comprising a decrease in revenue of $304m, a decrease in ECL of $20m, and a decrease in operating expenses of $139m.

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 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 36 to 46 detail the effects of significant items on each of our global business segments and geographical regions during 9M18, 3Q18 and the respective comparatives in 2017, as well as 2Q18.

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 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 on page 5. Supplementary reconciliations of adjusted to reported results by global business are presented on pages 36 to 40 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 Includes fair value movements on non-qualifying hedges and debit value adjustments ('DVA') on derivative contracts.

2 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.

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 36 to 46 reconcile reported to adjusted results for each of our global business segments and geographical regions.

Group

3Q18 compared with 3Q17 - reported results

Reported profit before tax

Reported profit before tax of $5.9bn in 3Q18 was $1.3bn or 28% higher than in 3Q17. The increase included net favourable movements in significant items of $0.5bn, which were partly offset by an adverse impact of foreign currency translation differences of $0.1bn.

Excluding the effects of significant items and foreign currency translation differences, profit before tax rose by $0.9bn or 16% as revenue growth of $1.1bn was partly offset by a $0.2bn increase in operating expenses.

Reported revenue

Reported revenue of $13.8bn in 3Q18 was $0.8bn or 6% higher than in 3Q17, reflecting growth in our RBWM, CMB and GB&M global businesses, partly offset by a reduction in Corporate Centre.

Foreign currency translation differences reduced revenue growth by $0.3bn, while movements in significant items between the periods were minimal. Excluding foreign currency translation differences and significant items, revenue increased by $1.1bn or 9%.

Reported ECL/LICs

The reported change in expected credit losses and other credit impairment charges ('ECL') was $0.5bn in 3Q18. This mainly related to charges in RBWM ($0.3bn) and CMB ($0.2bn). There were minimal net releases of ECL in GB&M, Corporate Centre and GPB.

In 3Q17, reported loan impairment charges and other credit risk provisions ('LICs') of $0.4bn were mainly related to RBWM ($0.2bn) and CMB ($0.2bn), partly offset by net releases in Corporate Centre. The effect of foreign currency translation differences between the periods was minimal.

Reported operating expenses

Reported operating expenses of $8.0bn were $0.6bn or 7% lower than in 3Q17 and included a favourable movement in significant items of $0.5bn and favourable currency translation differences of $0.2bn.

The favourable movement in significant items included the non-recurrence of costs to achieve, which were $0.7bn in 3Q17. This was partly offset by a lower net release related to settlements and provisions in connection with legal and regulatory matters (down $0.1bn).

Excluding significant items and foreign currency translation differences, operating expenses increased by $0.2bn or 2%.

Reported share of profit from associates and JVs

Reported income from associates of $0.6bn decreased by $39m or 6%. Excluding unfavourable foreign currency translation differences of $10m, income from associates decreased by $29m.

Third interim dividend for 2018

On 2 October 2018, the Board announced a third interim dividend for 2018 of $0.10 per ordinary share.

Group

3Q18 compared with 3Q17 - adjusted results

Adjusted profit before tax

On an adjusted basis, profit before tax of $6.2bn was $0.9bn or 16% higher than in 3Q17. This reflected revenue growth, which was partly offset by a rise in operating expenses. In addition, ECL in 3Q18 were $0.5bn compared with LICs of $0.4bn in 3Q17.

From 1 July 2018, Argentina was deemed a hyperinflationary economy for accounting purposes. The impact of applying IAS 29 'Financial Reporting in Hyperinflationary Economies' from 1 July 2018 and presenting in accordance with IAS 21 'The Effects of Changes in Foreign Exchange Rates' resulted in a $0.1bn decrease in profit before tax.

Adjusted revenue

Adjusted revenue of $13.8bn was $1.1bn or 9% higher than in 3Q17, driven by RBWM, CMB and GB&M, although revenue fell in Corporate Centre and was broadly unchanged in GPB.

• In RBWM, revenue increased by $0.7bn or 14%, driven by growth in Retail Banking, which benefited from wider margins and balance growth in current accounts, savings and deposits. However, personal lending revenue fell mainly due to mortgage spread compression, notably in Hong Kong and the UK. In Wealth Management, revenue was broadly unchanged as the increase in insurance manufacturing revenue was mostly offset by a decrease in investment distribution revenue, notably in Hong Kong.

• In CMB, revenue increased by $0.5bn or 15%, primarily in Global Liquidity and Cash Management ('GLCM') as we benefited from wider deposit margins, notably in Hong Kong, as well as growth in average balances across most regions. In addition, revenue increased in Credit and Lending ('C&L'), reflecting balance sheet growth across all regions. In Global Trade and Receivables Finance ('GTRF'), revenue increased from growth in Asia and Europe.

• In GB&M, revenue increased by $0.4bn or 10%. Strong growth in GLCM and Securities Services reflected interest rate rises and deposit balance growth, primarily in Hong Kong. Despite lower primary corporate issuances and reduced secondary client activity, revenue in Global Banking was broadly unchanged, while Global Markets revenue increased by 5%. In Global Banking, growth in lending balances was offset by lower event-driven business and narrower lending spreads. In Global Markets, revenue rose in Foreign Exchange, as we capitalised on higher volatility in emerging markets and increased client flow, and revenue in Credit increased from higher client activity. Revenue fell in Rates and Equities, reflecting reduced client flow and spread compression.

• In GPB, revenue was broadly unchanged. Higher deposit revenue resulting from interest rate rises and growth in annuity fees from strong mandate flows were offset by the effects of our client repositioning actions, primarily in the US, and lower brokerage and trading revenues, mainly in Hong Kong due to a weaker market sentiment.

• In Corporate Centre, we recorded negative adjusted revenue of $0.3bn in 3Q18 compared with adjusted revenue of $0.2bn in 3Q17. This reduction included the adverse effects of hyperinflation accounting in Argentina of $0.3bn and adverse fair value movements in 3Q18, compared with favourable fair value movements in 3Q17, relating to the hedging of our long-term debt (down $0.1bn). These factors were partly offset by higher revenue from our legacy credit portfolio (up $45m), reflecting gains from asset sales in 3Q18.

Adjusted ECL/LICs

Adjusted ECL of $0.5bn in 3Q18 mainly related to charges in RBWM ($0.3bn) and CMB ($0.2bn). In RBWM, the charges were mainly in Mexico and the UK against unsecured lending balances, and to a lesser extent in Hong Kong, also against unsecured lending. In CMB, ECL were mainly against a small number of customers in Asia and in MENA, as well as charges reflecting the challenging economic conditions in Turkey.

The Group applied a charge in the period reflecting concerns over possible impacts of escalating tariffs and other trade restrictions, primarily in Hong Kong, across RBWM, CMB and GB&M.

In 3Q17, adjusted LICs of $0.4bn related to charges in RBWM ($0.2bn), mainly in Mexico, reflecting growth in unsecured lending together with an associated rise in delinquency.

Adjusted operating expenses

Adjusted operating expenses of $7.7bn were $0.2bn or 2% higher than in 3Q17. This reflected investments in business growth programmes mainly in RBWM and GB&M, and continued investment in digital across all global businesses. The effects of hyperinflation accounting in Argentina resulted in a $0.1bn decrease in adjusted operating expenses.

Adjusted share of profit from associates and JVs

Adjusted income from associates of $0.6bn decreased by $29m or 5%.

Group

9M18 compared with 9M17 - reported results

Reported profit before tax

Reported profit before tax of $16.6bn in 9M18 was $1.8bn or 12% higher than in 9M17. The increase included a net favourable movement in significant items of $1.0bn and favourable foreign currency translation differences of $0.2bn. Excluding these items, profit before tax increased by $0.6bn to $18.3bn.

Reported revenue

Reported revenue of $41.1bn in 9M18 was $1.9bn or 5% higher than in 9M17, which primarily reflected revenue growth in all global businesses, although revenue fell in Corporate Centre.

The increase in reported revenue included favourable foreign currency translation differences of $0.6bn, partly offset by a net adverse movement in significant items of $0.3bn.

Significant items included a net loss on disposals, acquisitions and investment in new businesses of $0.1bn in 9M18, mainly relating to the early redemption of subordinated debt in the US. This compared with a net gain of $0.4bn in 9M17, largely related to the disposal of our membership interest in Visa Inc.

This was partly offset by lower adverse fair value movements on financial instruments (up $0.1bn).

Excluding significant items and currency translation differences, revenue increased by $1.7bn or 4%.

Reported ECL/LICs

ECL were $0.9bn in 9M18. These mainly related to charges of $0.8bn in RBWM and $0.3bn in CMB, partly offset by net releases of ECL in GB&M and Corporate Centre.

LICs in 9M17 were $1.1bn and were mainly incurred in RBWM ($0.8bn) and CMB ($0.3bn). These charges were partly offset by a net release of $0.1bn in Corporate Centre.

The effect of foreign currency translation differences between the periods was minimal.

Reported operating expenses

Reported operating expenses of $25.5bn were $0.5bn or 2% higher than in 9M17. The increase included an adverse impact of foreign currency translation differences of $0.5bn and a favourable movement in significant items of $1.3bn, which included:

• the non-recurrence of costs to achieve, which were $2.3bn in 9M17; and

• customer redress programme costs of $0.2bn in 9M18, compared with $0.4bn in 9M17.

These were partly offset by:

• settlements and provisions in connection with legal matters of $0.8bn in 9M18. This compared with a net release of $0.4bn in 9M17.

Excluding significant items and foreign currency translation differences, operating expenses increased by $1.3bn or 6%.

Reported share of profit from associates and JVs

Reported income from associates of $2.0bn was $0.2bn or 9% higher than in 9M17, primarily reflecting an increase in income from Bank of Communications Co., Limited ('BoCom').

Excluding favourable foreign currency translation differences of $0.1bn, income from associates increased by $0.1bn.

Tax expense

The effective tax rate for 9M18 of 22.3% was unchanged compared with 22.3% in 9M17. This reflected a decrease arising from a change in profit mix, modifications to the UK rules governing the utilisation of tax losses and a lower level of non-deductible customer redress expense, offset by the impact of higher non-deductible regulatory settlements and the effects of hyperinflation accounting with respect to Argentina.

Group

9M18 compared with 9M17 - adjusted results

Adjusted profit before tax

On an adjusted basis, profit before tax of $18.3bn was $0.6bn or 4% higher, reflecting strong revenue growth from our global businesses. Operating expenses rose, reflecting the ongoing impact of a number of investments to grow the business. In addition, ECL in 9M18 were $0.9bn compared with LICs of $1.1bn in 9M17.

The impact of applying IAS 29 'Financial Reporting in Hyperinflationary Economies' from 1 July 2018 and presenting in accordance with IAS 21 'The Effects of Changes in Foreign Exchange Rates' resulted in a $0.1bn reduction in profit before tax.

The growth in adjusted operating expenses exceeded the growth in adjusted revenue, resulting in negative adjusted jaws of 1.6%. The Group remains on track to achieve positive adjusted jaws for the full year based on our current operating plans, while noting the sensitivity of the impact on adjusted jaws of any differences between actual and currently expected revenue and cost growth during the final quarter of the year.

Adjusted revenue

Adjusted revenue of $41.4bn increased by $1.7bn or 4% compared with 9M17, reflecting strong revenue growth in all our global businesses, partly offset by lower revenue in Corporate Centre.

• In RBWM, revenue increased by $1.5bn or 10% with growth in both Retail Banking and Wealth Management. In Retail Banking, revenue increased in current accounts, savings and deposits, reflecting wider margins and balance growth, primarily in Hong Kong, the UK and Mexico. This was partly offset by lower personal lending revenue, reflecting mortgage spread compression, notably in Hong Kong, the US and the UK. In Wealth Management, higher investment distribution revenue, reflecting increased investor confidence, more than offset lower life insurance manufacturing revenue, which included a net adverse movement in market impacts.

• In CMB, revenue increased by $1.3bn or 13%, notably in GLCM as we benefited from wider deposit margins, primarily in Hong Kong, and growth in average balances, notably in the UK. In addition, revenue increased in C&L, notably in the UK and Hong Kong, driven by higher average balances.

• In GB&M, revenue was $0.4bn or 4% higher mainly due to strong growth in GLCM and Securities Services, reflecting interest rate rises and deposit balance growth, primarily in Asia. These increases were partly offset by lower revenue in Global Markets as revenue growth in Foreign Exchange was more than offset by reductions in Rates and Credit due to lower volatility and reduced client activity.

• In GPB, revenue was $0.1bn or 4% higher, mainly in Hong Kong from higher deposit revenue as we benefited from wider margins and from higher investment revenue, reflecting strong mandate flows. This increase was partly offset by lower revenue resulting from client repositioning.

These increases were partly offset:

• In Corporate Centre, negative adjusted revenue of $0.4bn in 9M18 compared with adjusted revenue of $1.1bn in 9M17. This reduction included the adverse effects of hyperinflation accounting in Argentina of $0.3bn, lower revenue in Central Treasury due to adverse fair value movements relating to the hedging of our long-term debt compared with favourable movements in 9M18, a reduction in Balance Sheet Management ('BSM') revenue and a loss arising from swap mark-to-market movements following a bond reclassification under IFRS 9 'Financial Instruments'. Revenue from our legacy portfolios also decreased, mainly driven by losses on portfolio disposals.

Adjusted ECL/LICs

Adjusted ECL of $0.9bn were mainly related to charges in RBWM ($0.8bn), notably in Mexico against our unsecured lending balances, and in the UK and Hong Kong, also against unsecured lending. The overall allowance for ECL remained broadly unchanged compared with 1 January 2018 as these new allowances broadly offset releases, mainly from write-offs.

In CMB, ECL of $0.3bn were mainly in Turkey, the UAE and Mexico across multiple sectors, and in Asia there were charges against a small number of customers. These charges were partly offset by a net release in GB&M ($0.1bn), mainly relating to a small number of clients in the US. There was also a net release of ECL in Corporate Centre ($0.1bn) related to our legacy credit portfolio.

The Group applied a charge in the period reflecting concerns over possible impacts of escalating tariffs and other trade restrictions, primarily in Hong Kong, across RBWM, CMB and GB&M.

In 9M17, adjusted LICs of $1.1bn mainly related to RBWM ($0.8bn). These included LICs in Mexico, reflecting our strategic growth in unsecured lending and an associated rise in delinquency, and in the UK against unsecured lending. In CMB, LICs of $0.3bn in 9M17 included charges in Hong Kong and MENA relating to a small number of customers across various sectors. These were partly offset by net releases in Canada and in the US.

Adjusted operating expenses

Adjusted operating expenses of $24.1bn were $1.3bn or 6% higher. This primarily reflected an increase in investments to grow the business ($0.6bn), notably in RBWM and GB&M. We also increased investment in both our digital capabilities across all of our global businesses ($0.2bn), and in our productivity programmes ($0.3bn), mainly in Technology and Operations. In addition, performance-related pay was $0.2bn higher. The impact of our cost-saving efficiencies more than offset inflation.

We have maintained our momentum to grow the business, including:

• in RBWM, we have continued strong growth in new credit card accounts, notably in the US, Asia and the UK. Issuance of HSBC sole-branded credit cards in the Pearl River Delta continued to grow;

• in GB&M, we have made strategic hires in Global Markets and Global Banking, and continued to invest in the securities joint venture in mainland China; and

• in CMB, we have made relationship manager hires, primarily in Hong Kong and mainland China.

The number of employees expressed in full-time equivalent staff ('FTEs') at 30 September 2018 was 233,731, an increase of 5,044 from 31 December 2017. This was primarily driven by investments in business growth programmes across RBWM, GB&M and CMB, supported by Technology.

The effect of hyperinflation accounting in Argentina resulted in a $0.1bn decrease in adjusted operating expenses.

Adjusted share of profit from associates and JVs

Adjusted share of income from associates of $2.0bn was $0.1bn or 5% higher than in 9M17, reflecting an increase in share of income from BoCom.

Retail Banking and Wealth Management

9M18 compared with 9M17 - adjusted results

For footnotes, see page 15.

Adjusted profit before tax of $5.7bn was $0.6bn or 13% higher, reflecting strong revenue growth in both Retail Banking and Wealth Management. This was partly offset by higher operating expenses (up $0.8bn), which included investments in digital capabilities and investments to grow the business.

Adjusted revenue of $16.8bn was $1.5bn or 10% higher.

In Retail Banking (up $1.2bn or 12%), the growth reflected:

• higher revenue from current accounts, savings and deposits (up $1.6bn or 34%), due to wider spreads and balance growth in Hong Kong, the UK and Mexico.

This was partly offset by:

• lower personal lending revenue (down $0.3bn or 6%), reflecting mortgage spread compression, notably in Hong Kong, the US and the UK, despite strong balance growth.

In Wealth Management (up $0.1bn or 3%), the growth reflected:

• higher investment distribution revenue (up $0.2bn or 8%), mainly in Hong Kong, driven by increased investor confidence in the equity markets, higher mutual fund distribution and higher wealth insurance distribution; and

• life insurance manufacturing new sales growth, albeit this was more than offset by net adverse market impacts of $0.4bn, which resulted in a net decrease in life insurance manufacturing revenue of $0.1bn or 5%.

In 9M18, the credit quality of our loan portfolio remained stable. Adjusted ECL of $0.8bn were mainly related to charges in Mexico and the UK, notably against unsecured lending as new allowances broadly offset write-offs.

In 9M17, adjusted LICs of $0.8bn were mainly related to targeted unsecured lending growth in Mexico and increased allowances against mortgage and card exposures in the UK. Adjusted operating expenses of $10.3bn were $0.8bn or 9% higher, primarily reflecting a $0.6bn increase relating to investments. This included $0.4bn of investments in digital capabilities and marketing to help deliver improved customer service, as well as investments to grow the business, particularly in the UK, Hong Kong, mainland China (including the Pearl River Delta) and the US. We also invested an additional $0.2bn in staff to support front-line growth and technology initiatives, including in Hong Kong, the Pearl River Delta and Mexico.

Commercial Banking

9M18 compared with 9M17 - adjusted results

For footnotes, see page 15.

Adjusted profit before tax of $6.0bn was $0.8bn or 16% higher as strong revenue growth was partly offset by higher operating expenses, while ECL remained stable.

Adjusted revenue was $1.3bn or 13% higher, driven by increases in GLCM and C&L across all regions. Revenue also increased in Other products, notably in Asia and the UK, as well as in GTRF.

• In GLCM, revenue increased by $0.7bn or 21%, notably in Asia reflecting wider margins in Hong Kong and to a lesser extent in mainland China, as well as growth in average balances notably in the UK. Revenue was also higher in North America, which reflected wider margins and average balance sheet growth.

• In C&L, revenue was $0.2bn or 5% higher as we grew average balances, notably in the UK and Hong Kong, partly offset by the effects of margin compression.

• In GTRF, revenue increased by $31m or 2%, reflecting average balance sheet growth in Asia and the UK.

Adjusted ECL were $0.3bn in 9M18 as charges in MENA, Asia and Latin America were partly offset by net releases in North America.

In 9M17, adjusted LICs of $0.3bn, notably in Hong Kong and MENA across various sectors, were partly offset by net releases in North America.

Adjusted operating expenses of $4.9bn were $0.5bn or 11% higher, reflecting increased staff costs (up $0.1bn), including performance-related pay, continued investment in digital capabilities (up $0.1bn), regulatory and compliance costs, and inflation.

Global Banking and Markets

9M18 compared with 9M17 - adjusted results

For footnotes, see page 15.

Adjusted profit before tax of $5.4bn was $0.3bn or 7% higher, reflecting increased revenue (up $0.4bn) and a net release of ECL of $0.1bn in 9M18 compared with LICs of $0.1bn in 9M17. This was partly offset by higher operating expenses as we continued to invest in the business.

Adjusted revenue of $12.4bn was $0.4bn or 4% higher, which included a net favourable movement of $0.2bn on credit and funding valuation adjustments.

• We grew revenue across all our transaction banking products. GLCM rose by $0.3bn or 20% and Securities Services by $0.2bn or 13% as we grew average balances since 3Q17, reflecting continued momentum in winning customer mandates, and from higher interest rates, notably in Asia. GTRF revenue increased as we grew lending balances by 6% since 3Q17, although margins remained stable compared with 9M17.

• Global Banking revenue was broadly unchanged as we continued to grow lending balances, partly offset by narrower spreads in Asia and Europe, and from lower capital markets and advisory fees.

• Global Markets revenue decreased by $0.4bn. In fixed income, Rates revenue fell by $0.6bn and Credit fell by $0.1bn, reflecting narrower margins and lower activity in emerging markets. By contrast, Foreign Exchange revenue grew by $0.4bn or 19%, notably within emerging markets, as higher volatility resulted in increased client volumes.

In 9M18, a net release of ECL of $0.1bn related to a small number of clients in the US, notably in the oil and gas sector. This more than offset charges in the UK against exposures in the retail and construction sectors.

In 9M17, adjusted LICs of $0.1bn were primarily in the US, reflecting net charges against specific clients, notably in the oil and gas, and mining sectors.

Adjusted operating expenses of $7.2bn were $0.3bn or 4% higher, driven by higher regulatory costs, higher volume-related transaction costs and investments to grow the business. Our continued cost management, efficiency improvements and reductions of FTEs broadly offset the impact of inflation.

Global Private Banking

9M18 compared with 9M17 - adjusted results

For footnotes, see page 15.

Adjusted profit before tax of $285m was $85m or 43% higher, reflecting revenue growth and a net release of ECL, while operating expenses were broadly unchanged.

Adjusted revenue of $1.4bn increased by $52m or 4%, mainly in Hong Kong from higher deposit revenue as margins widened following interest rate rises, and from higher investment revenue from strong mandate flows. Other income decreased, notably as a result of client repositioning.

In 9M18, we attracted net new money inflows of $11.5bn in key markets targeted for growth, of which more than 60% was from collaboration with our other global businesses. Net new money inflows were mainly in key geographies in Asia and Europe.

In 9M18, there was a net release of ECL of $16m. This compared with LICs of $17m in 9M17.

Adjusted operating expenses of $1.1bn were broadly unchanged, as an increase in staff costs was offset by lower costs following the wind-down of our operations in Monaco.

Corporate Centre

9M18 compared with 9M17 - adjusted results

For footnotes, see page 15.

Adjusted profit before tax of $0.9bn was $1.3bn or 57% lower, mainly reflecting a reduction in revenue. The reduction in adjusted profit before tax included the net adverse effect of $0.1bn from hyperinflation accounting in Argentina.

We recorded negative adjusted revenue of $0.4bn in 9M18 compared with adjusted revenue of $1.1bn in 9M17. This reduction reflected lower revenue in Central Treasury and legacy credit portfolios, as well as a reduction in Other income.

In Central Treasury, revenue was $1.1bn lower, reflecting:

• adverse fair value movements of $0.2bn in 9M18, compared with favourable movements of $0.2bn in 9M17, relating to the economic hedging of interest rate and exchange rate risk on our long-term debt with long-term derivatives;

• lower revenue in BSM (down $0.3bn), mainly as a result of de-risking activities undertaken during 2017 in anticipation of interest rate rises, together with lower reinvestment yields and lower gains from available-for-sale ('AFS') disposals;

• higher interest expense on debt issued by HSBC Holdings plc (up $0.3bn), driven by an increase in issuances and higher average cost of debt issued to meet regulatory requirements; and

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

Lower revenue from legacy portfolios (down $0.1bn) reflected losses related to portfolio disposals.

Other income decreased by $0.4bn, mainly due to the adverse effects of hyperinflation accounting in Argentina. In addition, the reduction reflected a change in the allocation of liquidity costs in anticipation of a change in regulatory environment.

A net release of adjusted ECL of $0.1bn in 9M18 and the prior year's net LICs releases were both primarily related to our legacy credit portfolio.

Adjusted operating expenses of $0.7bn decreased by $0.2bn or 27% due to the favourable impact from hyperinflation accounting in Argentina and the lower costs in relation to the run-off of the Consumer and Mortgage Lending ('CML') portfolio, which was completed during 2017.

Adjusted income from associates of $2.0bn increased by $0.1bn or 4%.

Balance sheet commentary compared with 30 June 2018

At 30 September 2018, our total assets of $2.6tn decreased by $4.3bn on a reported basis. On a constant currency basis our total assets increased by $11.0bn.

Our ratio of customer advances to customer accounts was 73%, up from 72%, reflecting targeted lending growth. On a reported basis, loans and advances to customers increased by $8.0bn, and customer accounts decreased by $10.9bn.

Loans and advances to customers

Reported loans and advances to customers grew by $8.0bn or 1%, and included adverse foreign currency translation differences of $6.4bn.

Excluding foreign currency translation differences and a reduction in corporate overdraft balances of $0.8bn, which primarily related to GB&M customers in the UK that settled their overdraft and deposit balances on a net basis, loans and advances to customers grew by $15.2bn.

This growth was primarily in Europe (up $10.6bn), notably in UK mortgages (up $4.0bn), reflecting our focus on broker-originated mortgages. We also grew balances in GB&M (up $3.3bn) and in CMB (up $2.4bn), reflecting higher term lending and overdraft balances, notably in the UK.

In North America, loans and advances to customers increased by $1.5bn, primarily from increased term lending to CMB customers in the US, which reflects our strategic focus on growth in the US. In Latin America, we grew lending by $1.4bn, notably in term lending in Mexico, mainly in GB&M.

Customer lending increased in Asia (up $1.1bn). This included a rise in mortgage lending in Hong Kong (up $2.3bn), which was consistent with our strategy to maintain our market share. Customer lending also increased in CMB (up $1.1bn), reflecting higher term lending across the region from our continued strategic focus on growth in Asia. These increases were partly offset by lower lending in GPB in Hong Kong (down $1.3bn), driven by reduced leverage due to weaker market sentiment. In GB&M, lending fell by $0.9bn, notably in GTRF reflecting challenging market conditions.

Customer accounts

Customer accounts decreased by $10.9bn or 1% on a reported basis, including adverse foreign currency translation differences of $7.4bn.

Excluding foreign currency translation differences and a reduction in corporate current account balances of $0.8bn, primarily relating to GB&M customers in the UK that settled their overdraft and deposit balances on a net basis, customer accounts decreased by $2.7bn.

This decrease was notably in North America (down $5.4bn), mainly in the US. This reflected a reduction in GB&M in the US (down $3.1bn) from lower balances of interest- and non-interest-bearing demand deposits, along with lower savings deposits. CMB customer accounts fell (down $2.7bn), mainly in the US and Bermuda.

In Asia, customer accounts decreased by $2.7bn, reflecting lower customer demand and a reduction in short-term deposits from our corporate clients. These decreases were partly offset by growth in GPB (up $1.4bn), driven by large inflows from a small number of individual customers.

Customer accounts in MENA were higher (up $2.6bn), including an increase in the UAE in GB&M (up $1.2bn), driven by a large deposit from a single customer.

Customer accounts also increased in Latin America (up $1.7bn), notably in Argentina, reflecting higher savings and term deposits, and the impact of currency devaluation on foreign currency deposits booked on our Argentina balance sheet.

Risk-weighted assets

RWAs totalled $862.7bn at 30 September 2018, a $2.8bn decrease during the third quarter that included a reduction of $5.4bn due to foreign currency translation differences. The $2.6bn increase (excluding foreign currency translation differences) was primarily due to an increase in asset size of $7.9bn less a decrease of $5.0bn due to methodology and policy changes.

Net interest margin

The net interest margin in 9M18 was 1.67%, which was 4 basis points ('bps') higher compared with the year ended 2017. This was driven by a 27bps increase in gross yields, partly offset by a 25bps increase in the cost of funds, following interest rate rises during 9M18.

Gross yields benefited from rate rises in Hong Kong, the US and the UK, in particular term lending in Asia but also in most regions. Gross yields on surplus liquidity also increased in most 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 the adverse effect from hyperinflation accounting in Argentina in 9M18.

The cost of funds rose by 25bps from the increased cost of customer accounts; this was driven by deposit accounts in Asia reflecting the rate rises in Hong Kong while deposit margins continued to improve. The cost of Group debt also rose, primarily relating to the higher cost of issuances of senior debt by HSBC Holdings plc.

Average interest-earning assets increased, driven by loan portfolio growth mainly in Asia and Europe. Surplus liquidity also increased in Europe to meet the liquidity requirements of the non-ring-fenced bank.

Compared with the first half of 2018, net interest margin in 9M18 rose by 1bp, reflecting higher gross yields, driven mainly by rising lending yields and increased yields on surplus liquidity in most regions. This was partly offset by a higher cost of funds, notably from increased cost of customer accounts in Asia.

Events after the balance sheet date

On 26 October 2018, the High Court of Justice of England and Wales issued a judgment in a claim between Lloyds Banking Group Pension Trustees Limited as claimant and Lloyds Bank plc and others as defendants regarding the rights of female members of certain pension schemes to equality of treatment in relation to pension benefits.

The judgment concluded that the claimant is under a duty to amend the schemes in order to equalise benefits for men and women in relation to guaranteed minimum pension benefits. The judgment also provided comments on the method to be adopted in order to equalise benefits, on the period during which a member can claim in respect of previously underpaid benefits, and on what should be done in relation to benefits that have been transferred into, and out of, the relevant schemes.

The issues determined by the judgment arise in relation to many other occupational pension schemes. The extent to which the judgment will increase the liabilities of the HSBC Bank (UK) Pension Scheme and reduce the net accounting surplus of $8.1bn as at 30 September 2018 is under consideration. Any adjustment necessary will be recognised by the Group in the fourth quarter of 2018.

Notes

• Income statement comparisons, unless stated otherwise, are between the quarter ended 30 September 2018 and the quarter ended 30 September 2017. Balance sheet comparisons, unless otherwise stated, are between balances at 30 September 2018 and the corresponding balances at 30 June 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 is 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.

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, targets and expectations, are forward-looking statements. Words such as 'expects', 'anticipates', 'intends', 'targets', '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, including the accounting impact resulting from financial reporting in respect of hyperinflationary economies; 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; consumer perception as to the continuing availability of credit and price competition in the market segments we serve; and deviations from the market and economic assumptions that form the basis for our ECL measurements;

• 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 and on pages 16 and 17 of the Interim Report 2018.

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