HSBC Holdings Regulatory News (HSBA)

27 APRIL 2021

 HSBC HOLDINGS PLC

1Q21 EARNINGS RELEASE

Noel Quinn, Group Chief Executive, said:

"We had a good start to the year in support of our customers, while achieving materially enhanced returns for our shareholders. I am pleased with our revenue and cost performance, but particularly with our significantly lower expected credit losses. Global Banking and Markets had a good quarter, and we saw solid business growth in strategic areas, including Asia Wealth and trade finance, and mortgages in Hong Kong and the UK. We also strengthened our lending pipelines in our retail and wholesale businesses.

The execution of our growth and transformation plans is proceeding well. We made further progress in reducing both costs and risk-weighted assets, and launched new products and capabilities in areas of strength.

The economic outlook has improved, although uncertainties remain. We carry good momentum into the second quarter, while maintaining conservative positions on capital, funding, liquidity and credit."

Financial performance (vs. 1Q20)

• Reported profit after tax up 82% to $4.6bn and reported profit before tax up 79% to $5.8bn. Reduced revenue continued to reflect low interest rates. This impact was partly offset as 1Q20 included materially adverse market impacts in life insurance manufacturing and valuations in Global Banking and Markets ('GBM'). In addition, there were releases of allowances for expected credit losses in the quarter, reflecting the improved economic outlook. Adjusted profit before tax up 109% to $6.4bn.

• All regions profitable in 1Q21, notably HSBC UK Bank plc reported pre-tax profits of over $1.0bn in the quarter. While there continues to be interest rate headwinds, expected credit losses and other credit impairment charges ('ECL') fell, reflecting the improved economic outlook.

• Reported revenue down 5% to $13.0bn due to the impact of 2020 interest rate reductions in all global businesses. This was partly offset by market impacts in life insurance manufacturing and valuations in GBM.

• Net interest margin ('NIM') of 1.21%, down 33 basis points ('bps') from 1Q20. NIM broadly stable with 4Q20.

• Reported ECL were a net release of $0.4bn, compared with a $3.0bn charge in 1Q20. The net release in 1Q21 primarily reflected an improvement in the economic outlook from 2020. Stage 3 ECL were lower, in part as 1Q20 included a large charge related to a corporate exposure in Singapore.

• Reported operating expenses up 9% from higher restructuring and other related costs from our transformation programme and increased investment in technology. Adjusted operating expenses up 3% due to a higher performance-related pay accrual, partly offset by the impact of our cost-saving initiatives.

• Lending increased by $2bn on a reported basis and $6bn on a constant currency basis in the quarter. Lending growth was in Wealth and Personal Banking ('WPB'), notably mortgages in the UK and Hong Kong, and in Commercial Banking ('CMB') in areas of strategic focus.

• Return on average tangible equity ('RoTE') (annualised) of 10.2%, up 6.0 percentage points from 1Q20.

• Common equity tier 1 ('CET1') capital ratio of 15.9%, unchanged from 31 December 2020.

Outlook

• The economic outlook has improved, giving us increasing confidence in our revenue growth plans. While early signs are positive, with evidence of growth in strategic areas, including improved lending pipelines, there remain uncertainties.

• Our 1Q21 results were favourably impacted by net ECL releases, particularly in the UK, reflecting improved economic forecasts. There remains a high degree of uncertainty as countries emerge from the pandemic at different speeds and as government support measures unwind. Based on the current consensus economic forecasts trajectory, we expect our ECL charge for 2021 to be below the medium-term range of 30bps to 40bps of average loans that we indicated at our 2020 annual results. 

• We expect mid-single-digit percentage growth in customer lending during 2021. This growth remains highly dependent on the speed at which economies recover from the Covid-19 pandemic, together with the duration of various government support measures and restrictions.

• We continue to make progress against the strategic plan we announced in February 2021, which responds to the fundamental changes in our operating environment and aligns to our refreshed purpose, values and ambition. We expect to provide an update at our 2021 interim results in August.

• As indicated at our 2020 annual results in February 2021, we do not intend to pay quarterly dividends during 2021. The Group will consider whether to announce an interim dividend at our 2021 half-year results in August.

For reconciliation of our reported results to an adjusted basis, including lists of significant items, see page 6. Definitions and calculations of other alternative performance measures are included in our 'Reconciliation of alternative performance measures' on page 30.

1 Profit attributable to ordinary shareholders, excluding impairment of goodwill and other intangible assets and changes in present value of in-force insurance contracts ('PVIF') (net of tax), divided by average ordinary shareholders' equity excluding goodwill, PVIF and other intangible assets (net of deferred tax).

2 Unless otherwise stated, regulatory capital ratios and requirements are based on the transitional arrangements of the Capital Requirements Regulation in force at the time. These include the regulatory transitional arrangements for IFRS 9 'Financial Instruments', which are explained further on page 28. Leverage ratios are calculated using the end point definition of capital and the IFRS 9 regulatory transitional arrangements. Following the end of the transition period after the UK's withdrawal from the EU, any reference to EU regulations and directives (including technical standards) should be read as a reference to the UK's version of such regulation and/or directive, onshored into UK law under the European Union (Withdrawal) Act 2018, as amended.

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

Note to editors

HSBC Holdings plc

HSBC Holdings plc, the parent company of HSBC, is headquartered in London. HSBC serves customers worldwide from offices in64 countries and territories in its geographical regions: Europe, Asia, North America, Latin America, and Middle East and North Africa. With assets of $2,959bn at 31 March 2021, HSBC is one of the world's largest banking and financial services organisations.

On 23 February 2021, we announced the next phase of our strategic plan, which responds to the fundamental changes in the operating environment and aligns to our refreshed purpose, 'Opening up a world of opportunity', as well as to our values and ambition.

Our strategy centres around four key areas:

• focusing on our strengths and investing in the areas where we see significant opportunities for growth;

• digitising at scale by increasing our investment in technology to improve how we serve customers and increase efficiency;

• energising for growth, through a strong culture, simple ways of working, and by equipping staff with the future skills they need; and

• helping our customers and communities to capture the opportunities presented by the transition to a low-carbon economy.

In 1Q21, we saw good progress in our Wealth business, increasing Wealth balances in the quarter by 3% to over $1.6tn, which included net new money in Global Private Banking of $13bn and in Asset Management of $11bn.

In France, as part of our strategic review of our retail banking operations, we are continuing with negotiations in relation to a potential sale, although no decision has yet been taken. If any sale is implemented, given the underlying performance of these operations, a loss on sale is expected. In the US, we continue to explore both organic and inorganic options for our retail banking franchise.

We continue to work towards our environmental, social and governance ('ESG') agenda, including our climate commitments announced in 2020. We are proposing a climate change resolution at our Annual General Meeting, which focuses on actions we propose to take in connection with our ambition to align our provision of finance with a net zero outcome by 2050. The resolution includes a commitment to publish and implement a policy to phase out the financing of coal-fired power and thermal coal mining by 2030 in EU and OECD markets, and by 2040 in other markets. For the purposes of the resolution, 'finance' and 'financing' means providing project finance or direct lending to, or underwriting capital markets transactions for, corporate clients of our Global Banking and Commercial Banking businesses. In addition, as part of our increasing engagement on climate, in April 2021 we became a founding signatory to the Net Zero Banking Alliance.

We will continue to target an adjusted cost base of $31bn or less in 2022 and plan to deliver $5bn to $5.5bn of cost saves for 2020 to 2022, while spending $7bn in costs to achieve. We also continue to target a gross RWA reduction of more than $100bn by the end of 2022. We will target a RoTE of greater than or equal to 10% in the medium term (defined as a period of three to four years), while maintaining a CET1 ratio above 14%, managing in the range of 14% to 14.5% in the medium term. We also announced our updated dividend policy, which included our intention to transition towards a target payout ratio of between 40% and 55% of reported earnings per share ('EPS') from 2022 onwards, with the flexibility to adjust EPS for non-cash significant items such as goodwill or intangibles impairments.

We have in place a comprehensive risk management framework covering the whole organisation and incorporating all risk types, which is underpinned by our culture and values. This outlines the key principles, policies and practices that we employ in managing material risks, both financial and non-financial. We operate a wide-ranging stress testing programme, which is a key part of our risk management and capital and liquidity planning. Stress testing provides management with key insights into the impacts of severely adverse events on the Group, and provides confidence to regulators on the Group's financial stability.

At 31 March 2021, our CET1 ratio was 15.9%, unchanged from 31 December 2020, and our liquidity coverage ratio ('LCR') was 143%. Our capital, funding and liquidity positions are expected to help us to continue supporting our customers throughout the current geopolitical and macroeconomic uncertainty.

The Covid-19 outbreak and its effect on the global economy have continued to impact our customers and our performance, and the future effects of the pandemic remain uncertain. The outbreak necessitated governments to respond at unprecedented levels to protect

public health, support local economies and protect livelihoods. It has affected regions at different times and to varying degrees as it has developed.

The varying government support measures and restrictions in response to the outbreak have created additional challenges, given the rapid pace of change and significant operational demands. The speed at which countries and territories are able to return to pre-Covid-19 levels of economic activity will vary based on the levels of continuing government support offered, the level of infection, and access to and ability to roll out vaccines. Renewed outbreaks, including as a result of the emergence of new variants of the virus, emphasise the ongoing threat of Covid-19. We continue to monitor the situation.

The development of Covid-19 vaccines has raised hopes of widespread immunisation being achieved across developed countries by the end of 2021 and government restrictions being lifted. However, there is significant divergence in the speed at which vaccines have been deployed. While some developed countries have managed to offer vaccines to a large proportion of their respective populations quickly, others have lagged. Many less developed countries have struggled to secure supplies and are only just beginning their vaccination programmes. There remains uncertainty regarding the efficacy and side effects of the vaccines over various time horizons. Tensions have been evident and may continue to persist as countries compete for access to the array of vaccines either under development, pending approval or already approved.

The outbreak has also resulted in changes in the behaviours of our retail and wholesale customers, leading some to require payment holidays and others to miss or delay payments on loan balances. Together, these factors have impacted the performance of our ECL models, requiring enhanced monitoring of model outputs and use of compensating controls. These include management judgemental adjustments based on the expert judgement of senior credit risk managers and the recalibration of key loss models to take into account the impacts of Covid-19 on critical model inputs. In addition, we have been responding to complex conduct considerations and heightened risk of fraud related to the varying government support measures and restrictions. The continued economic uncertainty from the Covid-19 outbreak could adversely impact our revenue assumptions, notably volume growth.

The geopolitical and economic landscape continues to be dominated by the Covid-19 pandemic, and this is likely to remain a key driver throughout 2021. The trade and regulatory environment is increasingly fragmented as markets lay out recovery plans from the Covid-19 outbreak and look to strengthen supply chain networks. Heightened geopolitical tensions will continue to impact business sentiment, while the relationship between the UK and the EU may take time to settle following the UK's departure from the EU, despite the conclusion of a Trade and Cooperation Agreement at the end of 2020. Interest rates remain at historically low levels, although hopes for an economic recovery led by vaccine programmes have contributed to a rise in interest rate yields and a steepening of yield curves in our major markets in early 2021. Despite central bank rates remaining largely unchanged during the first quarter of 2021, the probability of interest rates falling into negative territory has receded. The steepening of yield curves has led to some changes in our interest rate risk profile particularly as the duration of our mortgage portfolios has extended.

Potential changes to tax legislation and tax rates in the countries in which we operate could increase the Group's effective tax rate in future periods as governments in many countries seek revenue sources to pay for the Covid-19 support packages that they have implemented. Additionally, an OECD initiative to introduce a global minimum tax rate is gaining momentum and could significantly increase the Group's tax cost if implemented.

Geopolitical tensions could have potential ramifications for the Group and its customers. Evolving developments in Hong Kong, US policy on strategic Chinese industries, claims of human rights violations and other potential areas of tension may affect the Group in terms of the impact of sanctions, as well as regulatory, reputational and market risks. The US has imposed a range of sanctions and trade restrictions on Chinese persons and companies. Certain US measures are of particular relevance, including the Hong Kong Autonomy Act. China has subsequently announced a number of sanctions and trade restrictions that target or provide authority to target foreign officials and companies, including those in the US, UK and EU. How the US-China relationship will evolve over the coming months is as yet unclear. The US has recently indicated that it will cooperate with China on issues of mutual interest, such as climate change, but has also pledged to partner with its allies to confront China on certain issues. We continue to monitor the situation.

Business sentiment in some sectors in Hong Kong remains dampened, although the financial services sector has remained strong and has benefited from stable liquidity conditions.

The financial impact to the Group of geopolitical risks in Asia is heightened due to the strategic importance of the region, and Hong Kong in particular, in terms of profitability and prospects for growth.

The EU and the UK agreed a Trade and Cooperation Agreement just before the end of the transition period on 31 December 2020. The agreement mainly focuses on goods and services but also covers a wide range of other areas, including competition, state aid, tax, fisheries, transport, data and security. It addressed financial services in a limited manner and, as a result, did not change HSBC's planning in relation to the UK's withdrawal from the EU.

The EU and UK agreed through a joint declaration to establish structured regulatory cooperation on financial services, with the aim of establishing a durable and stable relationship between autonomous jurisdictions.

Bilateral discussions to agree a memorandum of understanding to establish the framework for this cooperation have now concluded at a technical level and will be formalised in due course.

Once approved, the memorandum of understanding is expected to create the framework for voluntary regulatory cooperation in financial services between the UK and EU through the establishment of a Joint UK-EU Financial Regulatory Forum, which will provide a platform within which both parties will be able to discuss financial services-related issues including future equivalence determinations.

Our global presence and diversified customer base should help mitigate the direct impacts on our financial position of the absence of a comprehensive agreement on financial services between the UK and EU. Our existing wholesale and markets footprint in the EU, and in particular our subsidiary in France, provides a strong foundation for us to build upon. Over the medium to long term the UK's withdrawal from the EU may impact markets and increase economic risk, particularly in the UK, which could adversely impact our profitability and prospects for growth in this market.

For further information on the risks that the Group faces, see pages 110 to 117 of the Annual Report and Accounts 2020.

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

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

Foreign currency translation differences

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

Significant items

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

The tables on pages 33 to 38 detail the effects of significant items on each of our global business segments and geographical regions during 1Q21, 4Q20 and 1Q20.

Adjusted performance - foreign currency translation of significant items

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

Global business performance

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

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

A reconciliation of the Group's adjusted results to the Group's reported results is presented below. Supplementary reconciliations of adjusted to reported results by global business are presented on pages 33 to 35 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.

With effect from the first quarter of 2021, the Global Banking and Markets management view of adjusted revenue has been revised to align with changes to the management responsibilities of the business and how we assess business performance. Comparative data have been re-presented accordingly. Refer to page 11 for the updated financial performance summary.

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

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

3 Comprises losses associated with the RWA reduction commitments and gains relating to the business update in February 2020.

4 Tax on significant items, at reported rates of foreign exchange, was a charge of $74m in 1Q21 (4Q20: $381m charge, 1Q20: $4m credit). 4Q20 included tax-only significant item charges of $117m.

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 33 to 38 reconcile reported to adjusted results for each of our global business segments and geographical regions.

Group

1Q21 compared with 1Q20 - reported results

Reported profit

Reported profit after tax of $4.6bn was $2.1bn or 82% higher than in 1Q20, while reported profit before tax of $5.8bn was $2.6bn or 79% higher.

Reported revenue fell, reflecting the continued impact of lower global interest rates, despite the favourable impact on certain volatile items in WPB and GBM after the material adverse mark-to-market losses in 1Q20. This reduction was more than offset by a net release of reported ECL in 1Q21 due to an improvement in the forward economic outlook, mainly in the UK, compared with the significant build-up of stage 1 and stage 2 allowances in 1Q20, and as our share of profit from associates and joint ventures in Corporate Centre increased. Reported operating expenses rose due to higher restructuring and other related costs and continued investment in our digital capabilities.

The net favourable mark-to-market movements discussed above resulted primarily from materially adverse movements in 1Q20. These included:

• In WPB, there were favourable market impacts in life insurance manufacturing of $76m in 1Q21. This compared with materially adverse market impacts of $689m in 1Q20.

• In GBM, Markets and Securities Services ('MSS') included favourable credit and funding valuation adjustments of $33m and favourable bid-offer adjustments of $18m in 1Q21. This compared with adverse credit and funding valuation adjustments of $346m and adverse bid-offer adjustments of $310m in 1Q20. In Principal Investments, income of $173m in 1Q21 compared with losses of $235m in 1Q20.

These were partly offset:

• In Corporate Centre, the 1Q21 period included adverse fair value movements on our long-term debt and associated swaps of $28m, compared with favourable movements of $259m in 1Q20.

The increase in reported profit also included a net adverse movement in significant items of $0.8bn, primarily related to fair value movements on financial instruments and higher restructuring and other related costs.

Reported revenue

Reported revenue of $13.0bn was $0.7bn or 5% lower than in 1Q20. The reduction primarily reflected a fall in net interest income as a result of the impact of lower global interest rates, notably affecting our deposit franchises in WPB and in Global Liquidity and Cash Management ('GLCM') in CMB and GBM. While we grew average interest-earning assets compared with 1Q20, interest-bearing liabilities also increased, resulting in continued downward pressure on NIM.

These reductions were partly offset by market impacts in life insurance manufacturing, notably as 1Q20 included materially adverse movements, as discussed above. In GBM, revenue increased in MSS as favourable movements in credit and funding valuation adjustments and in bid-offer adjustments were partly offset by lower trading volatility in 1Q21. GBM revenue also benefited from valuation gains in Principal Investments, compared with losses in 1Q20.

There was a net adverse movement in significant items of $0.7bn, which was partly offset by favourable foreign currency translation differences of $0.4bn. The movement in significant items primarily related to fair value movements on financial instruments of $0.6bn. In addition, 1Q21 included restructuring and other related costs of $0.1bn associated with disposal losses related to our RWA reduction commitments. We expect to incur additional disposal losses in future quarters as we progress with these reductions.

Reported ECL

Reported ECL were a net release of $0.4bn in 1Q21, which compared with a charge of $3.0bn in 1Q20. The net release in 1Q21 reflected an improvement in the economic outlook, notably in the UK. This compared with the significant build-up of stage 1 and stage 2 allowances in 1Q20 due to the worsening economic outlook at the onset of the Covid-19 outbreak. In addition, stage 3 charges were lower, in part as 1Q20 included a significant charge related to a corporate exposure in Singapore.

While we expect the full-year ECL charge for 2021 to be materially lower than in 2020, there remains a high degree of uncertainty as countries emerge from the pandemic at different speeds and as government support measures unwind. Based on the current consensus economic forecasts trajectory, we expect our ECL charge for 2021 to be below the medium-term range of 30bps to 40bps of average loans that we indicated at our 2020 annual results.

For further details on the calculation of ECL, including the measurement uncertainties and significant judgements applied to such calculations, the impact of additional scenarios and post model-adjustments, see page 20.

Reported operating expenses

Reported operating expenses of $8.5bn were $0.7bn or 9% higher than in 1Q20. The increase included adverse foreign currency translation differences of $0.3bn and an adverse movement in significant items of $0.1bn. Significant items largely comprised an increase of $0.2bn in restructuring and other related costs, of which $0.1bn related to severance payments.

The remaining increase reflected higher performance-related pay, which is accrued based on the profile of our profit performance, and continued investment in technology, including investments in our digital capabilities. These increases were partly offset by reductions from our cost-saving initiatives of $0.4bn during 1Q21.

Reported share of profit from associates and JVs

Reported share of profit from associates and joint ventures of $0.9bn was $0.5bn higher than in 1Q20. This reflected an increased share of profit from Bank of Communications Co., Limited ('BoCom') and a recovery in asset valuations of a UK associate relative to 1Q20.

In relation to BoCom, we continue to be subject to a risk of impairment in the carrying value of our investment. For further details of our impairment review process, see page 311 of our Annual Report and Accounts 2020.

Tax expense

The effective tax rate for 1Q21 of 21.0% was lower than 22.3% in 1Q20, as 1Q20 included a charge arising from the remeasurement of deferred tax balances due to the cancellation of the planned reduction in the UK corporation tax rate from 19% to 17% from 1 April 2020 and from a greater adverse impact of the non-recognition of deferred tax on losses arising during the period.

It was announced in the UK Budget on 3 March 2021 that the main rate of UK corporation tax will increase with effect from 1 April 2023. The Group's UK deferred tax assets and liabilities will be remeasured to reflect this increase when the Finance Act 2021 is substantively enacted, which is expected to be either the second or third quarter of 2021. Based on the closing balances at 31 March 2021, this remeasurement would result in an increase in the Group's net deferred tax liability of approximately $150m, the majority of which would be recorded in other comprehensive income.

Deferred tax balances will be remeasured if and when changes to statutory tax rates are substantively enacted in other jurisdictions in the year. In particular, President Biden's Made in America Tax Plan, published in April 2021, proposes an increase in the US federal rate of corporation tax from 21% to 28%.

Group

1Q21 compared with 1Q20 - adjusted results

Adjusted profit

Adjusted profit before tax of $6.4bn was $3.3bn higher than in 1Q20.

Adjusted revenue fell, mainly reflecting the continued impact of lower global interest rates, despite the favourable impact of certain volatile items in WPB and GBM after the large mark-to-market losses incurred in 1Q20. However, this decrease was more than offset by a net release of adjusted ECL in 1Q21 due to an improvement in the forward economic outlook, mainly in the UK, compared with the significant build-up of stage 1 and stage 2 allowances in 1Q20. Adjusted operating expenses were higher, while our share of profit from associates and joint ventures increased.

Adjusted revenue

Adjusted revenue of $13.3bn was $0.4bn or 3% lower than in 1Q20. The reduction was primarily in net interest income due to the impact of lower global interest rates, mainly affecting our deposit franchises within WPB and in GLCM in CMB and GBM. These decreases were partly offset by net favourable movements in market impacts in life insurance manufacturing in WPB of $790m, notably as 1Q20 included materially adverse movements reflecting the sharp fall in equity markets in March 2020. In GBM, MSS revenue increased, reflecting a net favourable movement in credit and funding valuation adjustments of $397m and favourable bid-offer adjustments of $18m (1Q20: $310m adverse), partly offset by lower volatility resulting in a comparatively muted trading performance in 1Q21. In addition, GBM revenue benefited from favourable revaluations in Principal Investments, compared with losses in 1Q20.

Adjusted ECL

Adjusted ECL were a net release of $0.4bn in 1Q21, compared with a charge of $3.1bn in 1Q20. The net release in 1Q21 was across all global businesses and reflected an improvement in the economic outlook, notably in the UK. This compared with the build-up of stage 1 and stage 2 allowances in 1Q20 due to the worsening economic outlook at the onset of the Covid-19 outbreak. Stage 3 charges also fell, in part due to a significant charge in 1Q20 related to a corporate exposure in Singapore.

Adjusted operating expenses

Adjusted operating expenses of $8.2bn were $0.2bn or 3% higher than in 1Q20, reflecting a higher performance-related pay accrual and continued investment in technology, including our digital capabilities. These were partly offset by the effects of our cost-saving initiatives and lower marketing and travel costs.

We expect adjusted costs for 2021, excluding the UK bank levy, to be broadly in line with 2020, but reserve the option to adjust our performance-related pay accrual to reflect the performance of the Group.

The number of employees expressed in full-time equivalent staff ('FTE') at 31 March 2021 was 224,652, a decrease of 1,407 compared with 31 December 2020. The number of contractors at 31 March 2021 was 7,005, an increase of 1,313 compared with 31 December 2020.

Adjusted share of profit from associates and JVs

Adjusted share of profit from associates and joint ventures of $0.9bn increased by $0.4bn or 97%. This reflected an increased share of profit from BoCom and a recovery in asset valuations of a UK associate relative to 1Q20.

Wealth and Personal Banking - adjusted results

1 With effect from the first quarter of 2021, certain items within the management view of adjusted revenue have been renamed. 'Wealth Management' has been renamed 'Wealth' and 'Retail Banking' has been renamed 'Personal Banking'.

2 'Other' includes the distribution and manufacturing (where applicable) of retail and credit protection insurance, disposal gains and othernon-product specific income. It also includes Markets Treasury, HSBC Holdings interest expense and Argentina hyperinflation.

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

1Q21 compared with 1Q20

Adjusted profit before tax of $1.9bn was $1.2bn higher than in 1Q20. This reflected a net release in adjusted ECL as the economic outlook improved, compared with the build-up of allowances in 1Q20. The impact of lower global interest rates resulted in a decrease in net interest income, which was largely offset by an increase in Wealth revenue due to a net favourable movement of $790m in market impacts in insurance and growth in investment distribution.

Adjusted revenue of $5.7bn was $0.1bn or 1% lower.

In Personal Banking, revenue of $3.1bn was down $0.9bn or 23%.

• Net interest income was $0.9bn lower due to narrower margins as global interest rates fell in 2020 as a result of the Covid-19 outbreak. This reduction was partly mitigated by deposit balance growth of $61bn or 9% across all markets, particularly in the UK and Hong Kong, and higher mortgage lending of $23bn or 7%, mainly in the UK.

• Non-interest income fell by $10m or 3%, as since March 2020 we moved from charging fees on unarranged overdrafts to an interest-based charging model, consistent with market practice.

In Wealth, revenue of $2.4bn was up $0.9bn or 65%.

• In life insurance manufacturing, revenue was $0.8bn higher, which included a net favourable movement in market impacts of $790m, primarily as 1Q20 included a materially adverse movement of $714m reflecting the sharp fall in equity markets in March 2020 (1Q21 included a favourable movement of $76m). The value of new business written was stable compared with 1Q20, as we broadened how we engage with customers, including through our improved digital capabilities, to mitigate the ongoing impact of the Covid-19 pandemic.

• In investment distribution, revenue was $0.1bn or 14% higher, reflecting strong equity market conditions in Hong Kong, which resulted in growth in brokerage fees as transaction volumes increased by 75% and higher mutual fund sales.

These were partly offset:

• In Global Private Banking, revenue was $42m or 8% lower, as net interest income fell by $65m or 29% as a result of the impact of lower global interest rates. This was partly offset by growth in non-interest income of $23m or 7%, as investment revenue increased reflecting market volatility and higher fees from advisory and discretionary mandates.

Adjusted ECL were a net release of $18m, compared with a charge of $1.1bn in 1Q20. ECL in 1Q21 reflected a release of allowances as the economic outlook improved, notably in the UK. This compared with the significant build-up of allowances in 1Q20 as a result of the adverse economic outlook due to the Covid-19 outbreak. Stage 3 charges in 1Q21 remained broadly consistent with the average quarterly charge during 2020, as a reduction in unsecured lending balances was offset by a slight deterioration in credit quality.

Adjusted operating expenses of $3.8bn were $0.1bn or 4% lower, as a reduction in discretionary expenditure more than offset the impact of inflation and our continued investment in digital and wealth initiatives.

Commercial Banking - adjusted results

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 adjusted revenue. Also includes allocated revenue from Markets Treasury, HSBC Holdings interest expense and Argentina 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').

1Q21 compared with 1Q20

Adjusted profit before tax of $1.8bn was $1.1bn higher than in 1Q20, primarily from lower adjusted ECL, as 1Q21 included a partial release of the build-up of allowances during 2020, and as 1Q20 included a significant charge related to a corporate exposure in Singapore. This was partly offset by a decline in adjusted revenue, mainly due to the impact of lower global interest rates.

Adjusted revenue of $3.3bn was $0.5bn or 14% lower.

• In GLCM, revenue decreased by $0.5bn or 36%, reflecting the impact of lower global interest rates, mainly in Hong Kong and the UK. This was partly offset by a 22% increase in average deposit balances, with growth across all regions, particularly in the UK, Hong Kong and the US.

• In Global Trade and Receivables Finance ('GTRF'), revenue decreased by $27m or 6% from lower fees and lending balances, notably in Asia and the UK, reflecting the continued impact of reduced global trade volumes as a result of the Covid-19 outbreak.

• In Markets products, Insurance and Investments, and Other, revenue reduced by $37m or 6%, reflecting the impact of lower global interest rates on income earned on capital held in the business.

These decreases were partly offset:

• In Credit and Lending, revenue increased by $32m or 2%, reflecting growth in average balances driven by the uptake of government-backed lending schemes.

Adjusted ECL were a net release of $0.2bn, compared with a charge of $1.4bn in 1Q20. ECL in 1Q21 reflected a release of stage 1 and stage 2 allowances as the economic outlook improved, notably in the UK. This compared with the significant build-up of stage 1 and stage 2 allowances in 1Q20 as a result of the adverse economic outlook due to the Covid-19 outbreak. The reduction in ECL also included lower stage 3 charges, mainly as 1Q20 included a significant charge related to a corporate exposure in Singapore.

Adjusted operating expenses of $1.8bn were broadly unchanged. This was driven by continued cost discipline, partly offset by an increase in the performance-related pay accrual while we continued to invest in our digital and transactional banking capabilities.

Global Banking and Markets - adjusted results

1 With effect from the first quarter of 2021, management view of adjusted revenue has been revised to align with changes to the management responsibilities of the business and how we assess business performance. Comparative data have been re-presented accordingly.

2 Includes portfolio management, earnings on capital and other capital allocations on all Banking products.

3 Includes notional tax credits and Markets Treasury, HSBC Holdings interest expense and Argentina hyperinflation.

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

1Q21 compared with 1Q20

Adjusted profit before tax of $1.9bn was $1.1bn higher than in 1Q20. This mainly reflected lower adjusted ECL, as 1Q21 included a partial release of the build-up of allowances from 2020, as well as an increase in adjusted revenue.

Adjusted revenue of $4.3bn increased by $0.4bn compared with 1Q20.

• In Markets and Securities Services, revenue increased by $0.1bn or 6% due to favourable movements in credit and funding valuation adjustments of $0.4bn and as 1Q20 included a $310m adverse bid-offer adjustment. Revenue in Global Debt Markets and Equities increased, particularly in wealth and private credit, reflecting robust client activity. These increases more than offset lower revenue in Global Foreign Exchange, which was in the context of a particularly strong performance in 1Q20. Securities Services revenue fell by $0.1bn or 14% due to lower interest rates, notably in Asia and Europe, while fees were up 6%, mainly in Asia.

• In Banking, revenue decreased by $0.2bn or 9%, mainly in GLCM, which fell by $0.2bn or 28% due to the impact of lower global interest rates, although average balances grew, notably in the US, the UK and Asia. The reduction in 'Other' reflected the non-recurrence of gains in 1Q20 due to widening credit spreads on portfolio hedges. These decreases were partly offset by an increase in Capital Markets and Advisory due to a strong performance in equity underwriting, leveraged finance and advisory in 1Q21, as we grew investment banking fees, and from the non-recurrence of mark-to-market losses on syndicated positions in 1Q20.

• In GBM Other, Principal Investments revenue increased by $0.4bn, reflecting revaluation gains on a number of funds in 1Q21, and as 1Q20 included large revaluation losses incurred as a result of the Covid-19 outbreak, mainly in Europe.

Adjusted ECL were a net release of $0.2bn, compared with a charge of $0.6bn in 1Q20. ECL in 1Q21 reflected a release of allowances as the economic outlook improved. This compared with the significant build-up of allowances in 1Q20 as a result of the Covid-19 outbreak.

Adjusted operating expenses of $2.5bn were $85m or 3% higher, as reductions related to our cost-saving initiatives were more than offset by increased performance-related pay of approximately $100m, which is accrued based on the profile of our profit performance, and higher regulatory costs of around $50m.

At 31 March 2021, our cumulative GBM RWA reductions as part of our transformation programme, which included accelerated saves in 4Q19, were $54bn (31 December 2020: $47bn). This mitigated RWA growth from asset quality deterioration, elevated market volatility and regulatory changes that have occurred since the start of the programme in January 2020.

Corporate Centre - adjusted results

1 Central Treasury includes valuation differences on issued long-term debt and associated swaps (1Q21: losses of $28m; 4Q20: losses of $12m; 1Q20: gains of $259m).

2 Revenue from Markets Treasury, HSBC Holdings net interest expense and Argentina hyperinflation are allocated out to the global businesses, to align them better with their revenue and expense. The total Markets Treasury revenue component of this allocation for 1Q21 was $805m (4Q20: $609m; 1Q20: $781m).

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

1Q21 compared with 1Q20

Adjusted profit before tax of $0.7bn was $0.1bn lower than in 1Q20 due to a fall in adjusted revenue and higher adjusted operating expenses, partly offset by higher income from the share of profit from associates and joint ventures.

Adjusted revenue decreased by $0.2bn, mainly in Central Treasury, from a net adverse fair value movement of $287m relating to the economic hedging of interest rate and exchange rate risk on our long-term debt with associated swaps. This was partly offset by higher revenue from our legacy portfolios, as 1Q20 included valuation losses as a result of the Covid-19 outbreak.

Adjusted operating expenses, which are stated after recovery of costs from our global businesses, increased by $0.3bn due to a higher performance-related pay accrual.

Adjusted share of profit from associates and joint ventures of $0.9bn increased by $0.4bn. This reflected increases in Asia of $0.2bn, as our share of profit from BoCom grew, and in Europe of $0.2bn, mainly from a UK associate reflecting a recovery in asset valuations relative to 1Q20.

Group

1Q21 compared with 4Q20 - reported results

Reported profit

Reported profit after tax of $4.6bn was $3.6bn higher than in 4Q20.

Reported profit before tax of $5.8bn was $4.4bn higher than in 4Q20, driven by lower reported ECL, primarily as 1Q21 included a net release of ECL allowances due to an improvement in the economic outlook, compared with a net ECL charge in 4Q20. In addition, reported operating expenses were lower, primarily as 4Q20 included the UK bank levy, and reported revenue increased.

Results in 1Q21 included an adverse movement of certain volatile items, notably favourable movements in market impacts in life insurance manufacturing in WPB of $76m (4Q20: $298m favourable) and favourable credit and funding valuation adjustments in GBM of $33m (4Q20: $70m favourable). Results also included adverse movements on our long-term debt and associated swaps in Corporate Centre of $28m (4Q20: $12m adverse).

Reported profit before tax included a favourable movement of $0.2bn in significant items, mainly due to lower restructuring and other related costs partly offset by adverse fair value movements on financial instruments.

Reported revenue

Reported revenue of $13.0bn was $1.2bn or 10% higher than in 4Q20, primarily reflecting increases in GBM and WPB.

In GBM, growth was driven by MSS, reflecting a seasonal increase in client activity relative to 4Q20, while in WPB, the increase was mainly due to higher investment distribution revenue.

The change in reported revenue also included net adverse movements in significant items of $0.2bn, driven by a net adverse fair value movement on financial instruments of $0.2bn. Foreign currency translation differences resulted in a favourable effect on the movement of reported revenue of $0.2bn.

Reported ECL

Reported ECL were a net release of $0.4bn in 1Q21, compared with a charge of $1.2bn in 4Q20. The release in 1Q21 reflected an improvement in the economic outlook, notably in the UK. There were also lower stage 3 charges in 1Q21 compared with 4Q20.

Reported operating expenses

Reported operating expenses of $8.5bn were $1.3bn or 14% lower than in 4Q20, primarily due to the UK bank levy charge of $0.8bn recorded in 4Q20 and a net favourable movement of $0.5bn in significant items. These were driven by a reduction of $0.5bn in restructuring and other related costs.

This reduction was partly offset by adverse foreign currency translation differences of $0.2bn.

Reported share of profit from associates and JVs

Reported share of profit from associates and joint ventures of $0.9bn increased by $0.2bn or 33%, primarily reflecting profit growth from BoCom.

Group

1Q21 compared with 4Q20 - adjusted results

Adjusted profit

Adjusted profit before tax of $6.4bn was $4.1bn higher than in 4Q20, driven by lower ECL, primarily as 1Q21 included a net release of ECL allowances due to an improvement in the forward economic outlook, compared with a net ECL charge in 4Q20. In addition, adjusted operating expenses were lower as 4Q20 included the UK bank levy, while adjusted revenue increased.

Adjusted revenue

Adjusted revenue of $13.3bn was $1.2bn or 10% higher than in 4Q20, reflecting increases in GBM (up $0.7bn) and WPB (up $0.3bn).

In GBM, the revenue increase was driven by MSS, reflecting a seasonal increase in client activity and higher volatility. In Banking, performance was broadly unchanged as an increase in Capital Markets and Advisory fees and a favourable movement on portfolio hedges after a tightening of credit spreads in 4Q20 were offset by lower net interest income in Credit and Lending as balances fell.

In WPB, the increase reflected seasonally higher investment distribution revenue compared with 4Q20 and higher investment revenue in Global Private Banking, partly offset by a reduction in life insurance manufacturing, as a net adverse movement in market impacts of $0.2bn was in part mitigated by a rise in the value of new business.

These increases were in part offset by the continued impact of lower interest rates in many of the key markets in which we operate, which had an adverse impact on net interest income in Personal Banking within WPB, and in GLCM within CMB and GBM.

Adjusted ECL

Adjusted ECL were a net release of $0.4bn in 1Q21, compared with a charge of $1.2bn in 4Q20. The release in 1Q21 reflected an improvement in the economic outlook, notably in the UK. There were also lower stage 3 charges in 1Q21 compared with 4Q20.

Adjusted operating expenses

Adjusted operating expenses of $8.2bn were $1.1bn or 11% lower, primarily as 4Q20 included the UK bank levy charge of $0.8bn.

The decrease also reflected the continued impact of our cost reduction programme of $0.1bn, a non-recurrence of commercial real estate impairment charges of $0.2bn and a $0.1bn reduction in marketing and travel costs. These decreases were partly offset by an increase of $0.2bn in investments in technology to enhance our digital and automation capabilities to improve how we serve our customers.

Adjusted share of profit from associates and JVs

Adjusted share of profit from associates and joint ventures of $0.9bn increased by $0.2bn or 30% compared with 4Q20, primarily reflecting profit growth from BoCom.

Balance sheet - 31 March 2021 compared with 31 December 2020

At 31 March 2021, our total assets of $3.0tn were $26bn lower on a reported basis and included adverse effects of foreign currency translation differences of $11bn. On a constant currency basis, our total assets were $14bn lower.

The decrease in total assets on a constant currency basis reflected lower derivative asset balances due to adverse revaluation movements on interest rate contracts. In addition, there were decreases in reverse repurchase agreements and financial investments as we redeployed our commercial surplus into cash, which increased by $83bn. Other assets also increased due to the seasonal reduction in settlement accounts at 31 December 2020, as clients settled trades prior to the year end.

Reported loans and advances to customers as a percentage of customer accounts was 63.0%, which was broadly unchanged compared with 31 December 2020.

Loans and advances to customers

Reported loans and advances to customers of $1.0tn were $2bn higher, which included adverse effects of foreign currency translation differences of $4bn. On a constant currency basis, customer lending balances were $6bn higher.

Customer lending increased in WPB by $6bn to $474bn, reflecting higher mortgage balances, notably in the UK (up $2bn), Canada (up $1bn) and Hong Kong (up $1bn) as activity in housing markets globally continued to increase. There was also an increase in term lending

in Hong Kong (up $3bn), driven by higher secured lending and as customers borrowed to fund investments in initial public offerings. In CMB, customer lending of $344bn was $2bn higher, reflecting growth in trade and term balances in Asia, partly offset by a reduction of term balances in the UK. In GBM, customer lending of $221bn fell by $2bn, as customers repaid their credit facilities, primarily in the UK.

Customer accounts

Customer accounts of $1.7tn increased by $7bn on a reported basis, including adverse foreign currency translation differences of $5bn. On a constant currency basis, customer accounts were $12bn higher, with growth across all of our global businesses. The increase was primarily in WPB in the UK, as Covid-19 restrictions continued to result in lower consumer spending and higher deposit and savings balances.

There continued to be a movement of funds from term accounts to call accounts as customers showed a preference for liquidity while interest rates are low.

Risk-weighted assets - 31 March 2021 compared with 31 December 2020

Risk-weighted assets ('RWAs') totalled $846.8bn at 31 March 2021, a $10.7bn decrease compared with 31 December 2020. Excluding foreign currency translation differences, RWAs decreased by $6.0bn, reflecting the following movements:

• a $3.6bn reduction in RWAs due to updates to methodology and models. Risk parameter refinements in GBM and CMB drove a $2.2bn decrease due to changes in methodology and policy. A recently implemented model under market risk was the main factor behind a $1.4bn reduction from model updates; and

• a $3.0bn fall in RWAs due to changes in asset quality. This was primarily driven by favourable portfolio mix changes across the global businesses, most significantly in North America.

The RWA impacts of asset size movements largely offset each other across the global businesses. A reduction in GBM credit risk RWAs of $2.8bn was largely due to management initiatives, and a $2.9bn fall in market risk RWAs followed emerging market bond portfolio actions and a fall in foreign exchange risk. These reductions were partly offset in the other global businesses by lending growth in Asia, and a rise in sovereign and money market exposures.

Net interest margin

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

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

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

Net interest margin ('NIM') of 1.21% was 33 basis points ('bps') lower compared with 1Q20, as the market interest rates-driven reduction in the yield on AIEA of 88bps was partly offset by the fall in funding cost of average interest-bearing liabilities of 63bps. Excluding the impact of foreign currency translation differences, NIM fell by 31bps.

NIM was down 1bp compared with the previous quarter, predominantly driven by increased balances in low-yielding short-term funds and loans to banks, as well as further market interest rate reductions predominantly in Asia.

Notes

• Income statement comparisons, unless stated otherwise, are between the quarter ended 31 March 2021 and the quarter ended31 March 2020. Balance sheet comparisons, unless otherwise stated, are between balances at 31 March 2021 and the corresponding balances at 31 December 2020.

• The financial information on which this Earnings Release is based, and the data set out in the appendix to this statement, are unaudited and have been prepared in accordance with our significant accounting policies as described on pages 288 to 299 of our Annual Report and Accounts 2020.

• On 23 February 2021, the Directors approved an interim dividend for 2020 of $0.15 per ordinary share. The interim dividend will be payable on 29 April 2021 in cash in US dollars, or in sterling or Hong Kong dollars at exchange rates determined on 19 April 2021.

• As previously disclosed on 23 February 2021 in the Annual Report and Accounts 2020, in December 2020, the PRA announced that it intends to transition back to its standard approach to capital setting and shareholder distributions through 2021. In the meantime, for 2021 dividends the PRA is content for appropriately prudent dividends to be accrued but not paid out. The PRA aims to provide a further update ahead of the 2021 half-year results of large UK banks. The Group will not pay quarterly dividends during 2021 but will consider whether to announce an interim dividend at the 2021 half-year results in August. The Group will review whether to revert to paying quarterly dividends at or ahead of its 2021 results announcement in February 2022.

•

This Earnings Release 1Q21 contains certain forward-looking statements with respect to HSBC's financial condition; results of operations and business, including the strategic priorities; financial, investment and capital targets; and ESG targets/commitments described herein.

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

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

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

• changes in general economic conditions in the markets in which we operate, such as continuing or deepening recessions and fluctuations in employment and creditworthy customers beyond those factored into consensus forecasts (including, without limitation, as a result of the Covid-19 pandemic); the Covid-19 pandemic, which is expected to continue to have adverse impacts on our income due to lower lending and transaction volumes, lower wealth and insurance manufacturing revenue, and lower or negative interest rates in markets where we operate, as well as, more generally, the potential for material adverse impacts on our financial condition, results of operations, prospects, liquidity, capital position and credit ratings; deviations from the market and economic assumptions that form the basis for our ECL measurements (including, without limitation, as a result of the Covid-19 pandemic or the UK's exit from the EU); potential changes in dividend policy; changes in foreign exchange rates and interest rates, including the accounting impact resulting from financial reporting in respect of hyperinflationary economies; volatility in equity markets; lack of liquidity in wholesale funding or capital markets, which may affect our ability to meet our obligations under financing facilities or to fund new loans, investments and businesses; geopolitical tensions or diplomatic developments producing social instability or legal uncertainty, such as the unrest in Hong Kong, the continuing US-China tensions and the emerging challenges in UK-China relations, which in turn may affect demand for our products and services and could result in (among other things) regulatory, reputational and market risks for HSBC; the efficacy of government, customer, and HSBC's actions in managing and mitigating climate change and in supporting the global transition to net zero carbon emissions, which may cause both idiosyncratic and systemic risks resulting in potential financial and non-financial impacts; illiquidity and downward price pressure in national real estate markets; adverse changes in central banks' policies with respect to the provision of liquidity support to financial markets; heightened market concerns over sovereign creditworthiness in over-indebted countries; adverse changes in the funding status of public or private defined benefit pensions; societal shifts in customer financing and investment needs, including consumer perception as to the continuing availability of credit; exposure to counterparty risk, including third parties using us as a conduit for illegal activities without our knowledge; the expected discontinuation of certain key Ibors and the development of near risk-free benchmark rates, which may result in (among other things) regulatory compliance, legal, conduct, financial, resilience and operational risks for HSBC; and price competition in the market segments we serve;

• changes in government policy and regulation, including the monetary, interest rate and other policies of central banks and other regulatory authorities in the principal markets in which we operate and the consequences thereof (including, without limitation, actions taken as a result of the Covid-19 pandemic); 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; changes to tax law and tax rates; the practices, pricing or responsibilities of financial institutions serving their consumer markets; expropriation, nationalisation, confiscation of assets and changes in legislation relating to foreign ownership; the UK's exit from the EU, which may result in a prolonged period of uncertainty, unstable economic conditions and market volatility, including currency fluctuations; the imposition of a number of sanctions and trade restrictions by China and the US, including the US Hong Kong Autonomy Act, which continues to cause tensions between China and the US; general changes in government policy that may significantly influence investor decisions; the costs, effects and outcomes of regulatory reviews, actions or litigation, including any additional compliance requirements; and the effects of competition in the markets where we operate including increased competition from non-bank financial services companies; and

• factors specific to HSBC, including our success in adequately identifying the risks we face, such as the incidence of loan losses or delinquency, and managing those risks (through account management, hedging and other techniques); our ability to achieve our financial, investment, capital and ESG targets/commitments that we set or adhere to, which may result in our failure to achieve any of the expected benefits of our strategic priorities; model limitations or failure, including, without limitation, the impact that the consequences of the Covid-19 pandemic have had on the performance and usage of financial models, which may require us to hold additional capital, incur losses and/or use compensating controls, including management judgemental adjustments based on the expert judgement of senior credit risk managers to address model limitations; changes to the judgements, estimates and assumptions we base our financial statements on; changes in our ability to meet the requirements of regulatory stress tests; a reduction in the credit ratings assigned to us or any of our subsidiaries, which could increase the cost or decrease the availability of our funding and affect our liquidity position and net interest margin; changes to the reliability and security of our data management, data privacy, information and technology infrastructure, including threats from cyber-attacks, which may impact our ability to service clients and may result in financial loss, business disruption and/or loss of customer services and data; changes in insurance customer behaviour and insurance claim rates; our dependence on loan payments and dividends from subsidiaries to meet our obligations; changes in accounting standards, which may have a material impact on the way we prepare our financial statements; changes in our ability to manage third-party, fraud and reputational risks inherent in our operations; employee misconduct, which may result in regulatory sanctions and/or reputational or financial harm; changes in skill requirements, ways of working and talent shortages, which may affect our ability to recruit and retain senior management and diverse and skilled personnel; and changes in our ability to develop sustainable finance products and our capacity to measure the climate impact from our financing activity, which may affect our ability to achieve our climate ambition. Effective risk management depends on, among other things, our ability through stress testing and other techniques to prepare for events that cannot be captured by the statistical models it uses; and our success in addressing operational, legal and regulatory, and litigation challenges; and other risks and uncertainties we identify in 'Top and emerging risks' on pages 110 to 115 of the Annual Report and Accounts 2020.

•

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

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

1 Net of impairment allowances.

Summary of credit risk

At 31 March 2021, gross loans and advances to customers and banks of $1,138bn increased by $3.6bn, compared with31 December 2020. This included adverse foreign exchange movements of $4.6bn.

Excluding foreign exchange movements, growth was driven by a $5.3bn increase in personal loans and advances to customers and a $3.2bn increase in loans and advances to banks. Wholesale loans and advances to customers decreased by $0.3bn.

The increase in personal loans and advances to customers was driven by mortgage growth of $3.9bn, mainly in the UK (up $2.0bn), Canada (up $0.8bn) and Hong Kong (up $0.7bn). Personal loans and overdrafts increased by $3.1bn, mainly in Hong Kong (up $3.5bn). This was partly offset by a decrease of $1.7bn in credit cards, mainly in the UK (down $0.8bn) and Hong Kong (down $0.4bn).

During the first three months of 2021, the Group experienced a release in allowances for ECL, which was driven by improving economic forecasts. Excluding foreign exchange movements, the allowance for ECL in relation to loans and advances to customers decreased by $0.8bn from 31 December 2020. This was attributable to:

• a $0.5bn decrease in wholesale loans and advances to customers, of which $0.4bn was driven by stages 1 and 2; and

• a $0.3bn decrease in personal loans and advances to customers, of which $0.3bn was driven by stages 1 and 2.

At 31 March 2021, the allowance for ECL of $14.6bn decreased by $1.1bn compared with 31 December 2020, including favourable foreign exchange movements of $0.1bn. The $14.6bn allowance comprised $13.8bn in respect of assets held at amortised cost, $0.7bn in respect of loan commitments and financial guarantees, and $0.1bn in respect of debt instruments measured at fair value through other comprehensive income ('FVOCI').

Stage 3 balances at 31 March 2021 remained broadly stable compared with 31 December 2020.

The ECL release for the first three months of 2021 was $435m, inclusive of recoveries. This comprised: $383m in respect of wholesale lending, of which the stage 3 and purchased or originated credit impaired ('POCI') charge was $180m; $36m in respect of personal lending, of which the stage 3 charge was $117m; and $16m in respect of other financial assets measured at amortised cost and debt instruments measured at FVOCI. There remains a high degree of uncertainty in relation to ECL as countries emerge from the Covid-19 pandemic at different speeds and as government support measures unwind.

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

2 Includes only those financial instruments that are subject to the impairment requirements of IFRS 9. 'Prepayments, accrued income and other assets' as presented within the summary consolidated balance sheet on page 17 includes both financial and non-financial assets.

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

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