HSBC Holdings Regulatory News (HSBA)

HSBC Holdings plc - Earnings Release

HSBC Holdings plc ('HSBC') will be conducting a trading update conference call with analysts and investors today to coincide with the publication of its Earnings Release. The trading update call will take place at 11.30am BST, and details of how to participate in the call and the live audio webcast can be found at www.hsbc.com/investor-relations.

Table of contents

Terms and abbreviations

Note to editors

HSBC Holdings plc

HSBC Holdings plc, the parent company of the HSBC Group, is headquartered in London. The Group serves customers worldwide from over 6,100 offices in 73 countries and territories in Europe, Asia, North and Latin America, and the Middle East and North Africa. With assets of $2,670bn at 31 March 2015, HSBC is one of the world's largest banking and financial services organisations.

Highlights

· Reported PBT up 4% in the first quarter of 2015 ('1Q15') at $7,059m compared with $6,785m in the same period in 2014 ('1Q14').

· Adjusted PBT up $349m or 5% in 1Q15 at $6,892m, compared with $6,543m in 1Q14, primarily reflecting higher revenue of $661m and lower loan impairment charges of $136m, partly offset by higher operating expenses of $483m.

· Reported PBT of $7,059m is up by $5,328m compared with $1,731m in 4Q14. Adjusted PBT of $6,892m is up by $3,988m or 137% compared with $2,904m in 4Q14, led by higher revenue in GB&M following a challenging fourth quarter in 2014.

· Earnings per share and dividends per ordinary share for 1Q15 were $0.26 and $0.10, respectively, compared with $0.27 and $0.10 for the equivalent period in 2014.

· Return on average ordinary shareholders' equity (annualised) was 0.2ppts lower at 11.5%, compared with 11.7% for the equivalent period in 2014.

· Adjusted revenue of $15,406m was higher by $661m or 4% from 1Q14 driven by revenue growth in GB&M, including an 8% rise in Markets, in CMB primarily in Hong Kong and the UK, and in Principal RBWM.

· Adjusted operating expenses of $8,526m were up by $483m or 6% from 1Q14 due to higher staff costs, partly reflecting an increase in staff numbers in customer-facing roles and in Regulatory Programmes and Compliance, and increased marketing expenditure to support growth.

· Loans and advances to customers, excluding foreign exchange movements, increased by $17,353m from 31 December 2014.

· Capital - The CRD IV end point CET1 capital ratio was 11.2%, up from 11.1% at 31 December 2014.

· Leverage ratio - The leverage ratio was 4.9%, up from 4.8% at 31 December 2014.

1 From 1 January 2015 the CRD IV transitional CET1 and end point CET1 capital ratios became aligned for HSBC Holdings plc due to the recognition of unrealised gains on investment property and available-for-sale securities.

Group Chief Executive, Stuart Gulliver, commented:

Our business recovered well in the first quarter following a difficult 4Q14. Global Banking & Markets had its usual strong start to the year, with a notable increase in year-on-year revenue in our Markets businesses. Commercial Banking continued to perform well, particularly in the UK and Hong Kong, and Principal Retail Banking & Wealth Management generated increased revenue. Loan impairment charges were significantly lower compared to the same period in 2014, particularly in Europe and North America.

Adjusted operating expenses increased, as expected. We continue to work on initiatives to deliver cost-savings over the remainder of 2015 and beyond.

We generated $4.6bn of capital from profit in the period which enabled us to fund the first interim dividend, strengthen the CET1 capital ratio, and support asset growth.

As previously announced, we will hold an Investor Update on 9 June.

Adjusted performance

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

Foreign currency translation differences are computed by retranslating into US dollars for non-US dollar branches, subsidiaries, joint ventures and associates:

· the income statements for prior periods at the average rates of exchange for Q1 2015; and

· the closing prior period balance sheets at the prevailing rates of exchange on 31 March 2015.

No adjustment has been made to the exchange rates used to translate foreign currency denominated assets and liabilities into the functional currencies of any HSBC branches, subsidiaries, joint ventures or associates. Whenreference is made to foreign currency translation differences in tables or commentaries, comparative data reported in the functional currencies of HSBC's operations have been translated at the appropriate exchange rates applied in the current period on the basis described above.

We use the term 'significant items' to collectively describe the group of individual adjustments which are excluded from reported results when arriving at adjusted performance. Significant items, which are detailed below, are those items which management and investors would ordinarily identify and consider separately when assessing performance in order to better understand the underlying trends in the business.

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

Reconciliation of reported to adjusted PBT

Adjusted PBT by global businesses and regions

The tables on pages 24 to 28 reconcile the difference between reported and adjusted items by disclosing the impact of significant items and currency translation adjustments in 1Q15, 1Q14 and 4Q14 for each of our geographical segments and global businesses.

Financial performance commentary

1Q15 compared with 1Q14

· Reported PBT of $7.1bn in 1Q15 was $274m or 4% higher than in 1Q14 with adverse movements in foreign currency between the periods broadly offsetting the positive net movement in significant items.

· On an adjusted basis, PBT was $349m or 5% higher than in 1Q14. This was primarily driven by higher revenue and lower LICs, partly offset by higher operating expenses.

· Reported revenue was $15.9bn in 1Q15, broadly unchanged from 1Q14. Revenue in 1Q15 included a $363m gain on the partial sale of our shareholding in Industrial Bank and higher favourable fair value movements on our own debt designated at fair value resulting from changes in credit spreads of $298m compared with $148m in 1Q14. This was partly offset by adverse fair value movements on non-qualifying hedges of $285m in 1Q15 compared with $142m in 1Q14.

· On an adjusted basis, revenue of $15.4bn was $661m or 4% higher:

- in GB&M, total revenue was $0.4bn or 8% higher, driven by a rise in Balance Sheet Management, in part reflecting increased gains on disposal of available-for-sale debt securities. Revenue also rose in Foreign Exchange by $0.2bn, which benefited from increased volatility, as well as in Credit and Equities from increased client flows while Credit was also affected by favourable movements in credit spreads. We also recorded strong growth in Payments and Cash Management and Securities Services due to increased balances across both businesses. By contrast, there was a reduction in Rates reflecting difficult market conditions. In addition, there was lower revenue in Legacy Credit, as 1Q14 included higher revaluation gains, and in Principal Investments from reduced gains on disposal;

- in CMB, revenue rose by $0.2bn driven by Credit and Lending and Payments and Cash Management, primarily due to higher net interest income, mainly in Hong Kong and the UK. In Hong Kong, this reflected average balance sheet growth together with wider lending and deposit spreads and, in the UK, continued balance sheet growth. In addition, revenue also increased in the US, mainland China and Argentina, largely due to balance sheet growth;

- in RBWM, revenue was broadly unchanged. In our Principal RBWM business revenue increased by $0.2bn, mainly driven by higher revenues across all wealth management products, notably in Asia from Life Insurance Manufacturing, in part due to improved equity market performance, and Investment distribution. This was partly offset by lower personal lending revenues, mainly due to lower overdraft fees in the UK. In addition, revenue decreased in the US run-off portfolio, driven by lower average balances which in part reflected the impact of portfolio sales in 2014; and

- in GPB, revenue was broadly unchanged as lower revenue reflecting the managed reduction in client assets from our continued repositioning of the business was offset by higher revenue in Asia. We continued to grow the parts of the business that fit our desired model, attracting net new money of $3bn since the end of 2014, with over 40% from collaboration with other global businesses.

· Reported LICs of $0.6bn were $0.2bn lower than in 1Q14. On an adjusted basis, LICs were $0.1bn lower, primarily from reductions in North America and Europe:

- in North America LICs were lower, mainly in the CML portfolio reflecting reduced levels of new impaired loans and delinquency and a decrease in lending balances from the continued run-off and loan sales, partly offset by lower favourable market value adjustments of the underlying properties as improvements in housing market conditions were less pronounced in 1Q15 than in 1Q14; and

- in Europe, the decrease of $0.1bn was mainly in GB&M driven by lower individually assessed charges.

· Reported operating expenses in 1Q15 of $8.8bn were broadly unchanged from 1Q14. Operating expenses in 1Q15 included regulatory provisions in GPB of $139m and UK customer redress of $137m, up from $83m in 1Q14. The increase in significant items in 1Q15 was more than offset by favourable foreign currency movements between the periods.

· On an adjusted basis, operating expenses were $483m (6%) higher than in 1Q14. This was driven by higher staff costs, in part reflecting an increase in the number of customer-facing staff to support growth in RBWM, notably in Asia where we have invested in our branch network and contact centres, and in GB&M mainly relating to our Payments and Cash Management business. Higher staff costs also reflected wage inflation, notably in Asia and Latin America, and an increase in Regulatory Programmes and Compliance expenditure. In addition, marketing costs increased as we delivered a high number of marketing campaigns to support growth in our business. In RBWM these included the Big Start initiatives related to personal lending products, mainly in our priority markets, and the re-launch of Advance in the UK and in the US.

· Adjusted jaws was negative 1.5% as adjusted revenue growth was more than offset by an increase in adjusted operating expenses.

· The effective tax rate of 19.3% was lower than the UK corporation tax rate of 20.25%. This reflected the recurring benefits from tax exempt income from government bonds held in a number of Group entities and the recognition of our share of post-tax profits of associates and joint ventures within our pre-tax income. The effective tax rate in 1Q14 was marginally lower at 18.8%.

· On 5 May 2015, the Board announced a first interim dividend for 2015 of $0.10 per ordinary share.

1Q15 compared with 4Q14

· Reported PBT was $5.3bn higher than in 4Q14. This partly reflected lower significant items including fines, settlements, UK customer redress and associated provisions.

· On an adjusted basis, PBT was $4.0bn or 137% higher than in 4Q14, reflecting higher revenue and lower operating expenses and LICs.

· Reported revenue of $15.9bn in 1Q15 was $1.6bn (11%) higher than in 4Q14. This included a 1Q15 gain on the partial sale of our shareholding in Industrial Bank of $363m, partly offset by lower favourable fair value movements on our own debt designated at fair value resulting from changes in credit spreads of $298m compared with $432m in 4Q14. On an adjusted basis, revenue was $1.8bn or 13% higher, driven by GB&M. This was mainly in our Markets businesses as 4Q14 was affected by a particularly challenging backdrop, notably for Credit and Rates, including a charge of $263m relating to the adoption of FFVA.

· Reported LICs were $0.7bn lower than in 4Q14 and $0.6bn lower on an adjusted basis. Adjusted LICs fell in the majority of our regions, notably in Europe ($0.3bn) mainly reflecting collective impairment releases in CMB and GB&M compared with charges in 4Q14. In Asia, LICs fell by $0.2bn mainly in GB&M reflecting net releases compared with charges in 4Q14 on a small number of exposures. In Latin America, LICs fell by $0.2bn, mainly driven by lower specific and collective impairments in CMB in Brazil.

· Operating expenses for 1Q15 were $3.0bn lower than in 4Q14 on a reported basis. This primarily reflected a number of significant items including settlements and provisions in connection with foreign exchange investigations of $809m in 4Q14 and lower UK customer redress charges of $137m in 1Q15 compared with $340m booked in 4Q14. On an adjusted basis, operating expenses were $1.6bn lower, primarily due to the UK bank levy recorded in 4Q14.

· The number of FTEs at the end of the quarter was 260,074, an increase of 2,471 on 31 December 2014, reflecting continued investment in our Regulatory Programme and Compliance, primarily within Global Standards, and business growth initiatives including Wealth Management.

Balance sheet commentary

· Reported loans and advances to customers decreased by $18bn during 1Q15, driven by adverse foreign exchange movements of $35bn. Excluding these movements, loans and advances to customers increased by $17bn, primarily in Europe, Asia and North America. In Europe, lending grew in GB&M from higher corporate overdraft balances and from an increase in short-term client financing. In addition, lending rose in CMB, notably term lending in the UK and Germany. In Asia, growth was driven by RBWM in Hong Kong, where we recorded increased short-term lending to support our customers' investment aspirations and higher mortgage balances. In North America, term lending to CMB and GB&M customers continued to grow.

· Reported customer accounts decreased by $32bn, or 2% during 1Q15 driven by adverse foreign exchange movements of $45bn. Excluding these movements, customer accounts increased by $13bn, with growth in North America, Europe and Asia. In North America, balances grew in GB&M from a rise in certificates of deposit and in RBWM following promotional campaigns. In Europe, balances increased in the UK in both RBWM, reflecting continued risk-averse sentiment from our customers, and in CMB from targeted deposit acquisition. In Asia, balances rose in RBWM, primarily relating to savings accounts, and in GB&M, although to a lesser extent. These increases were partly offset by reductions in CMB, notably in Hong Kong and mainland China, reflecting increased investment opportunities in the region.

· Other significant balance sheet movements in the quarter included an increase in derivative assets and liabilities, notably in Europe, reflecting continued shifts in major yield curves. Trading assets and liabilities also rose due to an increase in settlement balances in the quarter, the former including increases in equity securities in Europe, reflecting valuation movements.

Capital and risk-weighted assets

At 1Q15, the CRD IV end point CET1 capital ratio increased to 11.2% from 11.1% at 31 December 2014.

At 1Q15, under the PRA's implementation of CRD IV, HSBC's transitional CET1 and end point CET1 capital ratios became aligned due to the recognition of unrealised gains on investment property and available-for-sale securities from 1 January 2015. Transitional provisions however continue to apply for additional tier 1 and tier 2 capital; comparatives are shown accordingly for these.

Capital generation contributed $4.1bn to CRD IV end point CET1 capital, being profits attributable to shareholders of the parent company after regulatory adjustment for own credit spread, debit valuation adjustment, deconsolidation of insurance entities and net of the first interim dividend after planned scrip. This also included the benefit of a higher fourth interim dividend scrip take-up.

Foreign exchange movements reduced risk-weighted assets ('RWAs') by $26.6bn. After adjusting for the effect of foreign exchange movements, RWAs increased by $19.4bn, of which $3.4bn was credit risk RWA. The following comments describe the RWA movements, excluding foreign exchange translation effects.

Credit risk standardised approach RWAs decreased by $9.5bn due to the partial disposal of our investment in Industrial Bank, in 'Other' global business.

Under the IRB approach, RWAs increased by $12.9bn; within this, business growth in CMB and GB&M in North America, Europe and Asia due to higher term lending to corporate customers increased RWAs by $9.4bn.

GB&M continued to dispose of securitisation positions, lowering RWAs by $3.8bn. This was partially offset by the application of a scaling factor to the securitisation positions risk-weighted at 1250%, increasing RWAs by $2.1bn in methodology and policy updates.

In CMB, selected portfolios in Europe were migrated from the advanced IRB approach to the foundation IRB approach, as a result of a change in permission, increasing RWAs by $1.7bn in model updates.

In RBWM US retail run-off portfolio RWAs reduced by $2.5bn due to the continued wind-down of the portfolio and favourable shifts in portfolio quality, as lower quality loans continue to run-off. In Principal RBWM, a change in the methodology in the calculation of defaulted mortgage exposures, in Europe, resulted in an increase in RWAs of $2.0bn which was offset in the capital ratio by a reduction in the capital deduction for expected loss. Additionally, lending growth in Asia and Europe increased RWAs by $1.0bn while improved credit quality reduced RWAs by $1.0bn.

Counterparty credit risk RWAs increased by $3.9bn mainly driven by organic growth and MTM movements.

Market risk RWAs increased by $12.1bn principally driven by an increase in incremental risk charge as a result of a macroeconomic hedge position.

Net interest margin

Net interest margin has remained broadly unchanged since both 1Q14 and 4Q14. We recorded reductions in gross yields on customer lending, notably in Europe, reflecting both movements in interest rates in continental Europe as well as lower yields on mortgages in the UK. Gross yields on customer lending also fell in North America and Latin America, both reflecting the effects of changes in the composition of their lending portfolios, as secured, lower-yielding balances made up a greater proportion of their portfolios. These movements were offset by increased yields on reverse repurchase agreements. Our overall cost of funds was unchanged.

Notes

· As previously disclosed, various tax administration, regulatory and law enforcement authorities around the world are conducting investigations and reviews of HSBC Private Bank (Suisse) SA ('HSBC Swiss Private Bank') in connection with allegations of tax evasion or tax fraud, money laundering and unlawful cross border banking solicitation. In the UK, the Financial Conduct Authority issued a request for information to HSBC Bank plc and HSBC Holdings plc in relation to HSBC Swiss Private Bank. In April 2015, HSBC Holdings plc was informed that it has been placed under formal criminal investigation by the French magistrates in connection with the conduct of HSBC Swiss Private Bank in 2006 and 2007 for alleged tax offences, and a €1bn bail was imposed. HSBC Holdings plc has appealed the magistrates' decision.

· A decision of the UK Supreme Court held that, judged on its own facts, non-disclosure of the amount of commissions payable in connection with the sale of payment protection insurance ('PPI') to a customer created an unfair relationship under the provisions of the UK Consumer Credit Act. HSBC is assessing any possible impact of such decision on its historical sales of PPI.

· 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 in the Annual Report and Accounts 2014.

· The Board has adopted a policy of paying quarterly interim dividends on the 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.

Cautionary statement regarding forward-looking statements

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

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

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

Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement. These include, but are not limited to:

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

· changes in government policy and regulation, including the monetary, interest rate and other policies of central banks and other regulatory authorities; initiatives to change the size, scope of activities and interconnectedness of financial institutions in connection with the implementation of stricter regulation of financial institutions in key markets worldwide; revised capital and liquidity benchmarks which could serve to deleverage bank balance sheets and lower returns available from the current business model and portfolio mix; imposition of levies or taxes designed to change business mix and risk appetite; the practices, pricing or responsibilities of financial institutions serving their consumer markets; 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; the costs, effects and outcomes of product 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, including securities firms; and

· factors specific to HSBC, including discretionary risk-weighted asset growth and 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 it uses; and our success in addressing operational, legal and regulatory, and litigation challenges, notably compliance with the Deferred Prosecution Agreements with US authorities.

For further information contact:

Summary consolidated income statement

1 Return on average risk-weighted assets ('RWAs') is calculated using average RWAs on a CRD IV end point basis.

Summary consolidated balance sheet

Capital

Capital and RWA movements by major driver - CRD IV end point basis

1 This includes dividends on ordinary shares, quarterly dividends on preference shares and coupons on capital securities, classified as equity.

2 The basis of presentation for foreign exchange translation differences has changed to reflect the total amount in CET1 capital. Previously this only included foreign exchange translation differences recognised in other comprehensive income.

Composition of regulatory capital

1 Includes externally verified profits for the period ended at the reporting date.

Risk-weighted assets

RWAs by risk type

RWAs by global businesses

RWAs by geographical regions

1 RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.

Credit risk exposure - RWAs by geographical region

Credit risk exposure - RWAs by global businesses