HSBC Holdings Regulatory News (HSBA)

Financial performance in the first half of 2023 benefited from the impact of interest rate rises while operating expenses continued to reflect ongoing cost discipline, despite inflationary pressures.

Reported profit before tax of $21.7bn increased by $12.9bn compared with 1H22. This included a $2.1bn reversal of an impairment relating to the planned sale of our retail banking operations in France, and a provisional gain of $1.5bn on the acquisition of SVB UK in March. The increase in reported profit before tax also reflected revenue growth from the impact of interest rate rises. Lower reported operating expenses mainly reflected reduced restructuring costs following the completion of our cost-saving programme at the end of 2022 and favourable foreign currency translation differences. Meanwhile ECL increased, with 1H23 including charges relating to the commercial real estate sector in mainland China and to CMB in the UK, while 1H22 benefited from releases of Covid-19-related allowances.

Our annualised return on average tangible equity ('RoTE') for 1H23 was 22.4%, which included the annualised impact of our provisional gain on the acquisition of SVB UK and the reversal of an impairment on the planned sale of our retail banking operations in France. After excluding these transactions, annualised RoTE was 18.5%. The annualised RoTE in 1H23 is expected to be higher than in the second half of 2023, due to the impacts of these transactions, as well as other seasonal factors.

At 30 June 2023, the Group's CET1 ratio of 14.7% increased by 0.5 percentage points from 31 December 2022. The Board has announced a second interim dividend of $0.10 per ordinary share.

Return on average tangible equity (annualised) (%)

22.4%

(1H22: 10.6%)

We achieved an annualised RoTE of 22.4%, compared with 10.6% in 1H22. Our 1H23 RoTE annualised the impact of our provisional gain on the acquisition of SVB UK and the reversal of an impairment on the planned sale of our retail banking operations in France. Excluding the impacts related to these transactions, annualised RoTE was 18.5%.

Our strategy has enabled us to further strengthen our balance sheet, providing us with a good platform for growth in the current interest rate cycle, while maintaining cost discipline. This has given us the confidence to revise our returns guidance for 2023 and 2024. Based on the current path implied by the market for global policy rates, we are now targeting a RoTE in the mid-teens for 2023 and 2024, which excludes the impact of material acquisitions and disposals.

Target basis operating expenses growth compared with 1H22  <>

4.3%

(1H23: $15.3bn; 1H22: $14.7bn)

In 2023, the Group is targeting to limit cost growth to approximately 3%, excluding the impact of foreign currency translation differences, notable items and the impact of retranslating the 2022 results of hyperinflationary economies at constant currency. Our target also excludes the impact of our acquisition of SVB UK, and the related investments internationally, which are expected to add approximately 1% to the Group's operating expenses.

On this basis, the Group's operating expenses increased by $0.6bn or 4.3% compared with 1H22.

We announced at our 2022 full-year results that we intend to incur up to $0.3bn severance costs during 2023, with the benefits expected to be realised towards the end of 2023 and into 2024. During 1H23, we incurred severance costs of $0.2bn.

Capital and dividends

CET1 ratio

14.7%

(31 December 2022: 14.2%)

At 30 June 2023, our CET1 ratio was 14.7%, up 0.5 percentage points from 31 December 2022. This was driven by capital generation net of the dividend accrual, and included an approximately 0.3 percentage point impact from the reversal of an impairment on the planned sale of our retail banking operations in France and the provisional gain on the acquisition of SVB UK. This was partly offset by increased RWAs and the impact of the share buy-back announced with our 1Q23 results in May 2023.

We intend to manage the CET1 ratio within our medium term target range of 14% to 14.5%, and we aim to manage this range down in the long term. We intend to continue to manage capital efficiently, returning excess capital to shareholders where appropriate. Our capital distributions remain independent of the reversal of the impairment of our retail banking operations in France and our provisional gain on the acquisition of SVB UK.

Alongside our 1H23 results, the Board has announced a second interim dividend of $0.10 per ordinary share. The total dividend in respect of 1H23 was $0.20 per ordinary share. We also intend to initiate a share buy-back of up to $2bn, which we expect to commence shortly and complete within three months.

Given our current forecast returns trajectory, we are targetting a dividend payout ratio of 50% for 2023 and 2024, excluding material notable items, comprising the impacts of the planned sale of our retail banking operations in France, the agreed sale of our banking business in Canada and the provisional gain following the acquisition of SVB UK. Our dividend payout ratio also excludes the earnings of our Canada business from 30 June 2022 until completion of the agreed sale.

Second interim dividend per ordinary share in respect of 2023

 $0.10

Key financial metrics

For reconciliations of our reported results to a constant currency basis, including lists of notable items, see page 39. Definitions and calculations of other alternative performance measures are included in our 'Reconciliation of alternative performance measures' on page 57.

1 At 2Q23, earnings per share included the impact of the provisional gain recognised in respect of the acquisition of SVB UK of $0.08 (2Q22: nil); the reversal of the impairment loss related to the planned sale of our retail banking operations in France of $0.08 (2Q22: nil); and the agreed sale of our banking business in Canada of $nil (2Q22: $nil). Additionally, the earnings per share at 2Q22 included the impact of the recognition of certain tax assets of $0.11.

2 Excludes impacts of the reversal of the impairment loss of $1.6bn (net of tax) relating to the planned sale of our retail banking operations in France, which is no longer classified as held for sale, and the provisional gain of $1.5bn recognised in respect of the acquisition of SVB UK, both recognised in 1Q23.

3 Excluding the impact of retranslating prior year costs of hyperinflationary economies at constant currency.

4 Unless otherwise stated, regulatory capital ratios and requirements are based on the transitional arrangements of the Capital Requirements Regulation in force at the time. At 30 June 2023, the IFRS 9 add-back to CET1 capital was immaterial. References to EU regulations and directives (including technical standards) should, as applicable, be read as references to the UK's version of such regulation or directive, as onshored into UK law under the European Union (Withdrawal) Act 2018, and as may be subsequently amended under UK law.

5 Regulatory numbers and ratios are as presented at the date of reporting. Small changes may exist between these numbers and ratios and those subsequently submitted in regulatory filings. Where differences are significant, we will restate in subsequent periods.

6 The liquidity coverage ratio is based on the average month-end values over the preceding 12 months.

Basis of presentation

IFRS 17 'Insurance Contracts'

On 1 January 2023, HSBC adopted IFRS 17 'Insurance Contracts'. As required by the standard, the Group applied the requirements retrospectively with comparative data previously published under IFRS 4 'Insurance Contracts' restated from the 1 January 2022 transition date.

For more information, see 'Changes to presentation from 1 January 2023' on page 28.

Changes to our reporting framework

On 1 January 2023, we updated our financial reporting framework. We no longer report 'adjusted' results, which exclude the impact of both foreign currency translation differences and significant items. Instead, we compute constant currency performance by adjusting comparative reported results only for the effects of foreign currency translation differences between the relevant periods.

Constant currency performance

Constant currency performance is computed by adjusting reported results of comparative periods for the effects of foreign currency translation differences, which distort period-on-period comparisons.

We consider constant currency performance to provide useful information for investors by aligning internal and external reporting, and reflecting how management assesses period-on-period performance.

Notable items

We separately disclose 'notable items', which are components of our income statement that management would consider as outside the normal course of business and generally non-recurring in nature.

The tables on pages 39 to 41 and pages 51 to 54 detail the effects of notable items on each of our global business segments and legal entities during 1H23 and 1H22.

Management view of revenue on a constant currency basis

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

Reported results

1H23 compared with 1H22 - reported performance

1H23 compared with 1H22 - reported performance continued

Reported profit

Reported profit before tax of $21.7bn was $12.9bn higher than in 1H22. This was primarily driven by an increase in revenue due to continued growth in net interest income, reflecting the impact of interest rate rises. Revenue growth also included a $2.1bn reversal of an impairment relating to the planned sale of our retail banking operations in France, and a provisional gain of $1.5bn recognised on the acquisition of SVB UK. Reported operating expenses were lower, mainly reflecting reduced restructuring and other related costs following the completion of our cost-saving programme at the end of 2022.

Reported profit after tax of $18.1bn was $9.1bn higher than in 1H22. This included a higher tax expense, notably as 1H22 included a net $1.8bn gain, mainly on the recognition of a deferred tax asset.

Reported revenue

Reported revenue of $36.9bn was $12.3bn or 50% higher, and included the reversal of an impairment relating to the planned sale of our retail banking operations in France and a provisional gain on the acquisition of SVB UK, as described above.

The increase also reflected the impact of interest rate rises, mainly in Global Payments Solutions ('GPS') in CMB and GBM, and in Personal Banking and Global Private Banking in WPB.

In GBM, revenue increased in Markets and Securities Services ('MSS'), mainly in Global Debt Markets reflecting favourable primary market conditions and a better trading performance, and also in Securities Services and Global Foreign Exchange.

There was a good performance in our insurance business in WPB, while the increase in revenue in Corporate Centre included higher revenue in Central Treasury and lower losses relating to the restructuring of our business in Europe.

These factors were partly offset by lower Credit and Lending revenue in CMB, primarily driven by margin compression, and in GBM, reflecting an enhanced focus on returns and weaker client demand. In MSS in GBM, Equities revenue fell due to lower customer activity. Revenue also reduced in Markets Treasury due to the impact of rising interest rates on our funding costs and flattening yield curves. This revenue is allocated to our global businesses.

Reported ECL

Reported ECL of $1.3bn were $0.3bn or 24% higher. The 1H23 charge included stage 3 charges of $1.1bn. There were charges of $0.3bn related to the commercial real estate sector in mainland China and charges in CMB in the UK. The 1H23 charge reflected a more stable outlook in most markets, although inflationary pressures remain.

In 1H22, ECL included charges of $0.3bn relating to the commercial real estate sector in mainland China, as well as Russia-related exposures. It also included additional stage 1 and stage 2 allowances to reflect heightened levels of economic uncertainty and inflationary pressures, in part offset by the release of most of our remaining Covid-19-related allowances.

Reported operating expenses 

Reported operating expenses of $15.5bn were $0.7bn or 4% lower, mainly due to a reduction in restructuring and other related costs of $1.1bn following the completion of our cost-saving programme, which concluded at the end of 2022. The reduction also included a $0.2bn impact from the reversal of historical asset impairments, the impact of our continued cost discipline, and favourable foreign currency translation differences between the periods of $0.6bn.

These factors were partly offset by higher technology spend of $0.5bn, an increase in our performance-related pay accrual of $0.2bn and severance payments of $0.2bn. Our operating expenses also rose due to the impact of higher inflation and incremental costs following our acquisition of SVB UK.

Reported share of profit from associates and JVs

Reported share of profit from associates and joint ventures of $1.6bn was $0.1bn or 9% higher, reflecting an increase in the share of profit from Saudi Awwal Bank ('SAB'), formerly The Saudi British Bank, and Bank of Communications Co., Limited ('BoCom').

Tax expense

Tax in 1H23 was a charge of $3.6bn, representing an effective tax rate of 16.6%. The effective tax rate for 1H23 was reduced by 1.9 percentage points by the non-taxable provisional gain on the acquisition of SVB UK and by 2.1 percentage points by the release of provisions for uncertain tax positions. Tax in 1H22 was a credit of $151m. This was mainly due to a $2.1bn credit arising from the recognition of a deferred tax asset on historical tax losses of HSBC Holdings as a result of improved profit forecasts for the UK tax group and a charge of $0.3bn for uncertain tax positions. Excluding these items, the effective tax rate for 1H22 was 18.4%.

Return on average tangible equity

In 1H23, our annualised RoTE was 22.4%. Excluding the impact of the reversal of an impairment relating to the planned sale of our retail banking operations in France and the provisional gain of $1.5bn on the acquisition of SVB UK, annualised RoTE was 18.5%.

Reported profit after tax in 1H23

$18.1bn

(1H22: $8.9bn)

Reported net interest income in 1H23

$18.3bn

Up 36% compared with 1H22.

Reported performance - 2Q23 vs 2Q22

Reported profit

Reported profit before tax of $8.8bn was $4.1bn higher than in 2Q22, reflecting an increase in revenue driven by rising interest rates. Growth also reflected the non-recurrence of losses related to the planned restructure of our businesses in Europe.

Reported profit after tax of $7.0bn was $1.5bn higher than in 2Q22. This included a higher tax expense, notably as 2Q22 included a $1.8bn deferred tax gain.

Reported revenue

Reported revenue grew by $4.5bn to $16.7bn. Net interest income increased in all global businesses, mainly as a result of higher interest rates, a good performance in life insurance manufacturing in WPB and increased activity in debt capital markets in GBM.

These increases were partly offset by reductions in revenue in Global Foreign Exchange, compared with a strong 2Q22, and in Equities. There was also a reduction in Markets Treasury revenue from lower net interest income due to the impact of rising interest rates on our funding costs and flattening yield curves. This revenue is allocated to our global businesses.

'Disposals, acquisitions and related costs' in 2Q23 primarily related to fair value losses on the foreign exchange hedging of the proceeds from the agreed sale of our banking business in Canada.

Reported ECL

Reported ECL in 2Q23 of $0.9bn were $0.5bn higher. ECL in 2Q23 included $0.3bn of charges against exposures in the commercial real estate sector in mainland China and charges in the UK in CMB.

Reported operating expenses

Reported operating expenses of $7.9bn were $0.1bn lower, mainly due to the favourable impact of foreign currency translation differences of $0.1bn. The non-recurrence of restructuring and other related costs following the completion of our cost-reduction programme at the end of 2022 and a $0.2bn impact from the reversal of historical asset impairments, together with continued cost discipline, broadly offset increases in technology spend, a higher performance-related pay accrual, increased severance costs and inflationary impacts.

Reported profit after tax in 2Q23

$7.0bn

(2Q22: $5.5bn)

Net interest margin in 2Q23

1.72%

Up 3 basis points from 1Q23.

Constant currency results

1H23 compared with 1H22 - constant currency basis

Profit before tax of $21.7bn was $13.3bn higher than in 1H22 on a constant currency basis.

Revenue increased by $13.2bn or 56%, and included a $2.1bn reversal of an impairment relating to the planned sale of our retail banking operations in France, and a provisional gain of $1.5bn recognised on the acquisition of SVB UK. The increase in revenue was also due to higher net interest income reflecting the impact of global interest rates rises and revenue growth in MSS in GBM, despite a weaker performance in Equities. There was also a good performance from our insurance business in WPB and higher revenue in Corporate Centre.

ECL were $0.3bn higher. In 1H23, ECL included charges relating to the commercial real estate sector in mainland China and stage 3 charges in CMB in the UK. This compared with 1H22 charges, which reflected heightened economic uncertainty mainly due to the Russia-Ukraine war, inflationary pressures and charges related to the commercial real estate sector in mainland China, although it benefited from releases of Covid-19-related allowances.

Operating expenses remained stable, as the non-recurrence of restructuring and other related costs following the completion of our cost-saving programme at the end of 2022 broadly offset other cost growth. The impact of retranslating the prior year results of our operations in hyperinflationary economies at 1H23 average rates of foreign exchange resulted in cost growth of $160m.

Balance sheet and capital

Balance sheet strength

Total assets of $3.0tn were $92bn higher than at 31 December 2022 on a reported basis, and included the favourable impact of foreign currency translation differences of $46bn. On a constant currency basis, total assets increased by $46bn, mainly from an increase in financial investments and higher trading asset balances. In addition, there was growth in loans and advances to customers.

Reported loans and advances to customers of $1.0tn increased by $36bn. On a constant currency basis, loans and advances to customers grew by $23bn including the reclassification of lending balances from 'assets held for sale' relating to the planned sale of our retail banking operations in France and increases following the acquisition of SVB UK. While our near-term outlook on lending growth remains cautious, we expect mid-single-digit percentage annual loan growth in the medium to long term.

Reported customer accounts of $1.6tn increased by $25bn. On a constant currency basis, customer accounts increased by $3bn, which also included the reclassification of balances from held for sale relating to the planned sale of our retail banking operations in France and increases following the acquisition of SVB UK. These increases were partly offset by reductions in deposit balances in HSBC UK.

Loans and advances to customers as a percentage of customer accounts was 60%, compared with 59% at 31 December 2022.

Distributable reserves

The distributable reserves of HSBC Holdings at 30 June 2023 were $25.7bn, compared with $35.2bn at 31 December 2022. The decrease was primarily driven by ordinary dividend payments and additional tier 1 coupon distributions of $7.1bn, a share buy-back programme of $2bn and a reduction in other reserves of $0.4bn. The profits generated of $6.3bn in 1H23 will be reflected in the distributable reserves as at 31 December 2023.

Capital position

We actively manage the Group's capital position to support our business strategy and meet our regulatory requirements at all times, including under stress, while optimising our capital efficiency. To do this, we monitor our capital position using a number of measures. These include our capital ratios and the impact on our capital ratios as a result of stress.

Our CET1 ratio at 30 June 2023 was 14.7%, up from 14.2% at 31 December 2022, reflecting an increase in CET1 capital of $7.1bn including the reversal of an impairment on the planned sale of our retail banking operations in France and the provisional gain on the acquisition of SVB UK. This was partly offset by an increase in RWAs of $19.8bn and the impact of the share buy-back announced with our 1Q23 results.

Liquidity position

We actively manage the Group's liquidity and funding to support our business strategy and meet regulatory requirements at all times, including under stress. To do this, we monitor our position using a wider set of measures, including the liquidity coverage ratio ('LCR') and the net stable funding ratio. At 30 June 2023, the Group's LCR was 132% and we held high-quality liquid assets of $631bn. For further details, see page 99.

Wealth and Personal Banking

We serve around 40 million customers globally,including over 6 million who are international, from retailcustomers to ultra high net worth individuals and their families.

Contribution to Group 1H23

profit before tax <>

To meet our customers' needs, we offer a full suite of products and services across transactional banking, lending and wealth.

WPB continued to make strategic investments in our digital capabilities and colleagues, to expand our Wealth franchise in Asia, and enhance our offering to customers with international needs. Performance benefited from our product diversification, as the rise in interest rates, and growth in lending and wealth deposits, as well as a good performance in our insurance business, offset lower revenue in equities and mutual funds.

Divisional highlights

$34bn

WPB net new invested assets, a decrease of 13% compared with 1H22.

Constant currency profit before tax <> ($bn)

$8.6bn

Half-year to

6.3 million

International customers at 30 June 2023, an increase of 8% compared with 1H22.

Constant currency net operating income <> ($bn)

$16.2bn

Half-year to

> International customers are those who bank in more than one market, those whose address is different from the market we bank them in and customers whose nationality, or country of birth for non-resident Indians and overseas Chinese, is different to the market we bank them in. Customers may be counted more than once when banked in multiple countries. Customer numbers include 1.7 million customers acquired through our purchase of L&T Investment Management.

1 'Other' includes Markets Treasury, HSBC Holdings interest expense and hyperinflation. It also 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 change in expected credit losses and other credit impairment charges (also referred to as 'revenue').

Financial performance 

Profit before tax of $8.6bn was $6.1bn higher than in 1H22 on a constant currency basis, including a $2.0bn reversal of an impairment relating to the sale of our retail banking operations in France. The growth in profit before tax reflected an increase in revenue of $6.1bn, notably from higher net interest income due to wider margins from rising interest rates, and a fall in ECL of $0.1bn, partly offset by a $0.1bn increase in operating expenses.

Revenue of $16.2bn was $6.1bn or 61% higher on a constant currency basis. This included the impact of a reversal of an impairment relating to the planned sale of our retail banking operations in France included within 'Other'. There was strong growth in Personal Banking net interest income of $3.7bn, due to wider margins from rising interest rates, higher revenue of $0.2bn in life insurance, a rise of $0.2bn in Global Private Banking net interest income and a $0.1bn increase in revenue in asset management. These were partly offset by a reduction in revenue allocated from Corporate Centre of $0.4bn, including from Markets Treasury.

In Wealth, revenue of $3.9bn was $0.5bn or 16% higher.

- Life insurance revenue was $0.2bn or 34% higher.1 The new business contractual service margin written of $0.7bn in 1H23 was up $0.1bn, mainly in Hong Kong due to the mainland China border reopening and the launch of new products in 1H23.

- Global Private Banking revenue was $0.2bn or 21% higher due to the positive impact of wider margins from rising interest rates on net interest income.

- Asset management revenue was $0.1bn or 18% higher, driven by increased assets under management and positive market movements in the seed investment portfolio. Performance continued to be impacted by market volatility.

In Personal Banking, revenue of $10.2bn was up $3.7bn or 57%.

- Net interest income was $3.7bn or 63% higher due to the benefit of wider margins following interest rate rises and balance sheet growth, excluding the impact of transfers to held for sale. Lending grew in HSBC UK, and in Hong Kong, Mexico and the US. Mortgage lending rose in HSBC UK by $5bn and in Hong Kong by $5bn. Compared with 1H22, unsecured lending increased by $1bn, notably in Mexico by $1bn, and in Hong Kong by $1bn, partly offset by the closure of the John Lewis cards portfolio.

ECL of $0.5bn were $0.1bn lower than in 1H22 on a constant currency basis. The modest reduction was primarily due to higher charges in 1H22 relating to the Russia-Ukraine war. Credit performance in 1H23 remained resilient as delinquencies and write-offs remained broadly stable, despite a significant rise in inflationary pressures.

Operating expenses of $7.1bn were 2% higher on a constant currency basis, reflecting continued investment in Wealth in Asia, higher technology spend and from the impact of higher inflation. These were partly offset by continued cost discipline, the non-recurrence of restructuring and other related costs following the completion of our cost-saving programme at the end of 2022, and a $0.1bn reversal related to historical asset impairments.

1.From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Under IFRS 17, the future profits from new business are capitalised in the contractual service margin, and not recognised immediately in the income statement, as was the case for the value of new business measure under IFRS 4.

Commercial Banking

We support businesses in 55 countries and territories,ranging from small enterprises to large corporates operating globally.

Contribution to Group 1H23

profit before tax

We help businesses grow by supporting their financial needs, facilitating cross-border trade and payments, and providing access to products and services. We help them access international markets, provide expert financial advice and offer access to a full suite of HSBC solutions from across the Group's other businesses.

In the first half of 2023, CMB acquired SVB UK, demonstrating our continued commitment to the UK economy.

The subsequent launch of HSBC Innovation Banking has strengthened our Commercial Banking franchise by enhancing our ability to serve innovative and fast-growing firms in the innovation ecosystem with an international proposition for businesses in the technology and life science sectors.

CMB delivered a strong revenue performance in 1H23, reflecting interest rate rises and growth in collaboration revenue with GBM, while ECL and operating expenses both increased.

Divisional highlights

154%

Increase in GPS revenue.

Constant currency profit before tax <>

($bn)

$7.9bn

Half-year to

11%

Increase in collaboration income from the sale of products to CMB clients.

Constant currency net operating income <>

($bn)

$12.2bn

Half-year to

1 Includes CMB's share of revenue from the sale of Markets and Securities Services and Banking products to CMB customers. GBM's share of revenue

from the sale of these products to CMB customers is included within the corresponding lines of the GBM management view of revenue. Also

includes allocated revenue from Markets Treasury, HSBC Holdings interest expense and hyperinflation.

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

'revenue').