HSBC Holdings Regulatory News (HSBA)

2 MAY 2023

HSBC HOLDINGS PLC

1Q23 EARNINGS RELEASE

Noel Quinn, Group Chief Executive, said:

"Our strong first quarter performance provides further evidence that our strategy is working. Our profits were spread across our major geographies, and all three global businesses performed well as we continued to meet our customers' needs through our internationally connected franchises. Our return on tangible equity was 19.3%, excluding the impact of strategic transactions. As a result, we have announced our first quarterly dividend since 2019 of $0.10 per share, as well as a share buy-back of up to $2bn. With the good momentum we have in our business, we expect to have substantial future distribution capacity for dividends and share buy-backs.

We remain focused on continuing to improve our performance and maintaining tight cost discipline, but we also saw an opportunity to invest in SVB UK to accelerate our growth plans. For 158 years, HSBC has banked the entrepreneurs who have created today's industrial base. With the SVB UK acquisition, we have access to more of the entrepreneurs in the technology and life sciences sectors who will create the businesses of tomorrow. We believe they're a natural fit for HSBC, and that we're uniquely placed to take them global."

Financial performance (1Q23 vs. 1Q22)

• Profit before tax rose by $8.7bn to $12.9bn. This included a $2.1bn reversal of an impairment relating to the planned sale of our retail banking operations in France, as the completion of the transaction has become less certain, and a provisional gain of $1.5bn on the acquisition of Silicon Valley Bank UK Limited ('SVB UK') in March. On a constant currency basis, profit before tax increased by $9.0bn to $12.9bn. Profit after tax increased by $7.6bn to $11.0bn.

• Revenue increased by 64% to $20.2bn. The increase was driven by higher net interest income in all of our global businesses due to interest rate rises. It also included the gains related to the transactions in France and the UK. On a constant currency basis, revenue rose by 74% to $20.2bn.

• Net interest margin ('NIM') of 1.69% increased by 50 basis points ('bps') compared with 1Q22, and by 1bps compared with 4Q22.

• Expected credit losses and other credit impairment charges ('ECL') of $0.4bn were down by $0.2bn. The reduced 1Q23 charge reflected a favourable change in the probability weightings of economic scenarios and a low stage 3 charge of $0.4bn. The 1Q22 charge reflected economic uncertainty mainly due to the Russia-Ukraine war and inflationary pressures.

• Operating expenses of $7.6bn were $0.6bn or 7% lower than in 1Q22. The reduction was primarily due to lower restructuring and other related costs following the completion of our cost-saving programme at the end of 2022, and ongoing cost discipline. Higher technology costs and the impacts of rising inflation continued to affect our operating expenses. On a constant currency basis, and excluding notable items and the impact of retranslating the 1Q22 results of hyperinflationary economies at constant currency, operating expenses rose by 2%.

• Customer lending balances increased by $40bn in the quarter. On a constant currency basis, lending balances grew by $32bn, mainly as $25bn of balances associated with our retail banking operations in France were reclassified from held for sale during the period. In addition, the growth included $7bn of additional balances following our acquisition of SVB UK during the quarter. Excluding these factors, customer lending was stable.

• Customer accounts increased by $34bn in the quarter. On a constant currency basis, customer accounts increased by $21bn, mainly as $23bn of balances associated with our retail banking operations in France were reclassified from held for sale during the period. In addition, our acquisition of SVB UK resulted in growth of $8bn. Excluding these factors, deposits fell by $10bn or 0.6%, reflecting outflows in HSBC UK as customers utilised surplus deposits, as well as in Commercial Banking ('CMB') and Global Banking and Markets ('GBM') in Hong Kong.

• Common equity tier 1 ('CET1') capital ratio of 14.7% increased by 0.5 percentage points compared with 4Q22, which was driven by capital generation net of the dividend accrual and included an approximately 25bps impact from the reversal of an impairment on the planned sale of our retail banking operations in France. The acquisition of SVB UK had a minimal impact on the CET1 ratio.

• The Board has approved a first interim dividend of $0.10 per share. We also intend to initiate a share buy-back of up to $2bn, which we expect to commence following our 2023 Annual General Meeting ('AGM'). The share buy-back is expected to have an approximately 25bps impact on the CET1 capital ratio.

• From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated. For further details of our adoption of IFRS 17, see page 3.

Outlook

• We remain confident of achieving our return on average tangible equity ('RoTE') target of at least 12% for 2023 onwards, which is not dependent on the impact of material acquisitions and disposals. Our 1Q23 annualised RoTE of 27.4% 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 19.3%. The annualised RoTE in the first quarter is likely to be higher than in other quarters due to revenue seasonality, and as we do not expect certain favourable tax impacts to recur in subsequent quarters.

• Based on the current market consensus for global central bank rates, our net interest income expectations are unchanged from our full-year guidance. After including an approximately $2bn reduction due to the implementation of IFRS 17 'Insurance Contracts', we expect to achieve net interest income of at least $34bn in 2023. While the interest rate outlook remains positive, we expect continued pressure from increased migration to term deposits as interest rates rise.

• We continue to use a range of 30bps to 40bps of average loans for planning our ECL charges over the medium to long term. While the ECL charge in 1Q23 was relatively benign, given current macroeconomic uncertainty we maintain the guidance provided at our full-year 2022 results of around 40bps of average gross loans in 2023 (including lending balances transferred to held for sale). We continue to monitor risks related to our exposures in mainland China's commercial real estate sector.

• We remain highly focused on maintaining cost discipline. Our acquisition of SVB UK, and the related investments internationally, are expected to add approximately 1% to the Group's operating expenses. This is in addition to our 2023 target of keeping 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. We expect the up to $300m severance costs announced at our 2022 full-year results to be concentrated in the second quarter of 2023, with the benefits expected to be realised towards the end of 2023 and into 2024.

• Our current intention is to manage the CET1 ratio within our medium-term target range of 14% to 14.5%, with a dividend payout ratio of 50% for 2023 and 2024, excluding material notable items. Given the strength of our capital position, we have announced a first interim dividend of $0.10 per share and intend to initiate a share buy-back of up to $2bn, which we expect to commence following our 2023 AGM, subject to approval of the relevant resolutions. Our intention is for this to be completed in around three months, although with an expected contractual term of five months. Further buy-backs for 2023 and beyond will be subject to appropriate capital levels. Our capital distributions are independent of both the reversal of the impairment of our retail banking operations in France and our provisional gain on the acquisition of SVB UK.

•

Business highlights

Our strategy

HSBC's purpose is 'Opening up a world of opportunity'. Our strategy, announced in February 2021, aims to deliver against our purpose and our ambition of being the preferred international financial partner for our clients. It has four key pillars:

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

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

• energise for growth - building a strong culture, introducing simpler ways of working, and by equipping staff with the future skills they need; and

• transition to net zero - becoming a net zero bank and helping our customers capture the opportunities presented by the transition to a net zero future.

Our strategy is based on transforming our business and services to customers to create a strengthened platform for enhanced growth and returns on a sustainable basis, across the interest rate cycle. We have taken actions to grow non-interest revenue, increase capital allocation to Asia-Pacific, exit non-core businesses in the West, reduce risk-weighted assets ahead of target, and maintain strict cost discipline despite inflation and significant investment in technology. We are committed to ensuring that shareholders share the benefits of improved performance. We have established a dividend payout ratio of 50% for 2023 and 2024, excluding material significant items, and are confident that we will return the dividend per share to pre-Covid-19 levels.

While interest rates remain elevated in most of our major markets, current market expectations indicate that policy tightening may be close to its peak, and global inflation appears to be levelling out. Notwithstanding these factors, during the first quarter of 2023 the banking industry experienced a period of turbulence, although we continued to demonstrate a strong capital and liquidity position, which resulted in the interim dividend we have announced and the buy-back we expect to commence following our 2023 AGM.

Strategic transactions

During 1Q23, the unexpected interest rate rises in France resulted in the completion of the planned sale of our retail operations in France becoming less certain, as the capital required to be held by the purchaser at completion of the transaction will increase significantly. If the transaction does proceed, it is expected that the closing will be delayed. As a result we are required to change the accounting classification of our retail banking operations in France to no longer be classified as held for sale. We remain committed to pursuing the sale, providing appropriate terms can be agreed, and to supporting our clients and colleagues in France at all times.

In March 2023, we acquired SVB UK. This acquisition strengthens our CMB franchise and enhances our ability to serve innovative and fast-growing firms in the technology and life science sectors in the UK, and internationally.

The plan to sell our banking business in Canada remains a key priority, as we reshape the organisation to focus on our international customer base. The transaction is now expected to complete in the first quarter of 2024 to ensure a smooth transition, and we continue to classify these operations as held for sale. We remain committed to consider the payment of a special dividend of $0.21 per share as a priority use of the proceeds in the first half of 2024. The remaining proceeds will accrue into CET1 capital, we intend to use excess capital to supplement share buy-backs.

For further details of the financial impacts of these transactions, see 'Strategic transactions' on page 4.

ESG highlights

We continue to make progress on our net zero ambition, including on our net zero transition plan which we expect to publish in 2023. This plan will provide further details of our strategic approach to net zero, and how we plan to transform our organisation and execute on our commercial ambition.

In December 2022, we published an updated energy policy, which covers our approach for the wider energy sector. We also updated our thermal coal phase-out policy with new financed emissions targets, and extended the policy to exclude finance for the specific purposes of new metallurgical coal mines.

In 2022, we requested and assessed transition plans for EU and OECD managed clients in scope of our thermal coal phase-out policy. We also requested and are assessing transition plans for our major oil and gas clients. In 2023, we expect to complete assessments for remaining clients in scope of our thermal coal phase-out policy and for major oil and gas, and power and utilities clients globally, as well as other clients in EU and OECD markets in scope of our energy policy.

We have set on-balance sheet 2030 financed emissions targets for the following sectors: oil and gas; power and utilities; cement; iron, steel and aluminium; aviation; automotive; and thermal coal. We also plan to extend our analysis to four new sectors - shipping, agriculture, commercial real estate and residential real estate - and set baselines and targets for those in future disclosures.

We have made progress on our disclosures related to thermal coal exposures and facilitated emissions. We expect that our updated thermal coal exposures will be made available for reporting as soon as practicable in 2023, although this remains dependent on the availability and quality of data. We plan to publish our facilitated emissions from our capital markets activities, through our underwriting in debt and equity capital markets and syndicated lending, for the oil and gas, and power and utilities sectors for 2019 and 2020, as soon as practicable in 2023. We also plan to set targets for facilitated emissions once the PCAF standard for capital markets is published, which is expected in 2023.

Basis of preparation

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. Under IFRS 17 there is no present value of in-force business ('PVIF') asset recognised up front. Instead the measurement of the insurance contract liability takes into account fulfilment cash flows and a contractual service margin representing the unearned profit. In contrast to the Group's previous IFRS 4 accounting where profits are recognised up front, under IFRS 17 they are deferred and systematically recognised in revenue as services are provided over the life of the contract. The contractual service margin also includes attributable cost, which had previously been expensed as incurred and which is now incorporated within the insurance liability measurement and recognised over the life of the contract.

The impact of the transition was a reduction of $159m on the Group's 1Q22 reported revenue and a reduction of $22m to reported profit before tax. Revenue in 1Q22 included adverse market impacts in Wealth and Personal Banking ('WPB') of $275m, which are largely absorbed by the contractual service margin under IFRS 17. The Group's total equity reduced by $10.5bn to $196.3bn on the transition at 1 January 2022 and tangible equity reduced by $2.4bn to $155.8bn. For further details, see our Report on Transition to IFRS 17 'Insurance Contracts' at www.hsbc.com/investors.

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. This will enable users to understand the impact of foreign currency translation differences on the Group's performance. 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. While our primary segmental reporting by global business remains unchanged, effective from 1 January 2023, the Group changed the supplementary presentation of results from geographical regions to main legal entities to better reflect the Group's structure.

Cost target

At our full-year 2022 results, we set a target for our 'adjusted' operating expenses of approximately 3% growth for 2023 compared with 2022. Under our new reporting framework we no longer present 'adjusted' results. The exception to this is for operating expenses, where we will adjust reported results for notable items and the period-on-period effects of foreign currency translation differences. We also exclude the impact of re-translating comparative period financial information at the latest rates of foreign exchange in hyperinflationary economies, which is not within our control. We consider that this measure provides useful information to investors by quantifying and excluding the items that management considered when setting and assessing cost-related targets.

Resegmentation

In the first quarter of 2023, following an internal review to assess which global businesses were best suited to serve our customers' respective needs, a portfolio of our Global Banking customers within our entities in Latin America was transferred from GBM to CMB for reporting purposes. Comparative data have been re-presented accordingly. Similar smaller transfers from GBM to CMB were also undertaken within our entities in Australia and Indonesia, where comparative data have not been re-presented.

Notes

• Income statement comparisons, unless stated otherwise, are between the quarter ended 31 March 2023 and the quarter ended 31 March 2022. Balance sheet comparisons, unless otherwise stated, are between balances at 31 March 2023 and the corresponding balances at 31 December 2022.

• The financial information on which this Earnings Release is based is unaudited. Other than the adoption of IFRS 17 described above, it has been prepared in accordance with our significant accounting policies as described on pages 335 to 348 of our Annual Report and Accounts 2022.

Strategic transactions

France

During 1Q23, the completion of the planned transaction to sell our retail banking operations in France became less certain. This was due to an unexpected rise in interest rates in France, which will increase the amount of capital required by the buyer on completion of the transaction. Given the completion of the sale has become less certain, we are required to change the accounting classification of our retail banking operations in France to be no longer classified as held for sale. This has resulted in a $2.1bn reversal of the previously recognised impairment in respect of the sale of our retail banking operations in France. The previously recognised $0.4bn impairment of goodwill has not been reversed.

Silicon Valley Bank UK Limited

In March 2023, HSBC UK acquired SVB UK. The acquisition will be funded from existing resources and brings the staff, assets and liabilities of SVB UK into the HSBC portfolio.

On acquisition, we performed a preliminary assessment of the fair value of the assets and liabilities purchased. We established an opening balance sheet on 13 March 2023 and applied the result of the fair value assessment, which resulted in a reduction in net assets of $0.2bn. The provisional gain on acquisition of $1,511m represents the difference between the consideration paid of £1 and the net assets acquired. This gain could change as further due diligence is performed. At 31 March 2023, the funding provided to SVB UK by HSBC UK was $2.8bn. After initial deposit outflows following our acquisition of SVB UK, deposits are now stabilising, and client exits have been minimal.

Amounts above have been translated at rates of foreign exchange on 13 March 2023.

Canada

In November 2022, we announced the planned sale of our banking business in Canada. We regularly reassess the progress of our strategic transactions and continue to classify this business as held for sale. However, we now expect the transaction to complete in 1Q24.

Key financial metrics

For reconciliation and analysis of our reported results on a constant currency basis, including lists of notable items, see page 34. Definitions and calculations of other alternative performance measures are included in 'Alternative performance measures' on page 31.

1 At 1Q23, earnings per share included the impact of the provisional gain recognised in respect of the acquisition of SVB UK of $0.08 (4Q22: nil; 1Q22: nil); the reversal of the impairment loss related to the planned sale of the retail banking operations in France of $0.08 (4Q22: nil; 1Q22: nil); and gains in relation to the planned sale of the banking business in Canada of $0.01 (4Q22: $0.01; 1Q22 nil). Additionally, the earnings per share at 4Q22 included the impact of recognition of certain tax assets of $0.01 (1Q23: nil; 1Q22: nil).

2 Includes average gross loans and advances to customers reported within 'assets held for sale'.

3 Excludes impacts of the reversal of the impairment loss of $1.6bn (net of tax) relating to the planned sale of the retail banking operations in France, recognised in 3Q22, 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.

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

5 Average interest earning assets for 31 December 2022 are stated on a year-to-date basis, which differs from the quarter-to-date basis of $2,116,018m presented in the 'net interest margin' section on page 12.

6 Unless otherwise stated, regulatory capital ratios and requirements are based on the transitional arrangements of the Capital Requirements Regulation in force at the time. Leverage metrics exclude central bank claims in accordance with the Prudential Regulation Authority's ('PRA') UK leverage framework. 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.

7 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.

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

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.

About HSBC

HSBC Holdings plc

HSBC Holdings plc, the parent company of HSBC, is headquartered in London. HSBC serves customers worldwide from offices in 62 countries and territories. With assets of $2,990bn at 31 March 2023, HSBC is one of the world's largest banking and financial services organisations.

Constant currency performance

Constant currency performance is computed by adjusting reported results 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.

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 to better understand the underlying trends in the business.

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 35 to 41 detail the effects of notable items on each of our global business segments and legal entities during 1Q23, 4Q22 and 1Q22.

Global business performance

The Group Chief Executive, supported by the rest of the Group Executive Committee ('GEC'), 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 legal entities. Our global businesses - Wealth and Personal Banking, Commercial Banking and Global Banking and Markets - along with Corporate Centre are our reportable segments under IFRS 8 'Operating Segments'. Global business results are assessed by the CODM on the basis of constant currency performance, which removes the effects of currency translation impacts from reported results. Therefore, we present these results on a constant currency basis.

As required by IFRS 8, reconciliations of the constant currency results to the Group's reported results are presented on page 34. Supplementary reconciliations of constant currency to reported results by global business are presented on pages 35 to 37 for information purposes.

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.

Summary consolidated income statement

1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been re-presented accordingly.

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

3 Provisional gain of $1.5bn recognised in respect of the acquisition of SVB UK.

4 Reversal of the $2.1bn impairment loss relating to the planned sale of the retail banking operations in France, recognised in 3Q22, which is no longer classified as held for sale.

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

Distribution of results by global business and legal entity

1 Constant currency net operating income before change in expected credit losses and other credit impairment charges including the effects of foreign currency translation differences, also referred to as constant currency revenue.

2 In the first quarter of 2023, following an internal review to assess which global businesses were best suited to serve our customers' respective needs, a portfolio of our customers within our markets in Latin America was transferred from GBM to CMB for reporting purposes. Comparative data have been re-presented accordingly.

1 Other trading entities includes the results of entities located in Oman, Türkiye, Egypt and Saudi Arabia (including our share of the results of Saudi Awwal Bank) which do not consolidate into HSBC Bank Middle East Limited. Supplementary analysis is provided on page 42 for a fuller picture of the MENA regional performance.

Tables showing constant currency profit before tax by global business and legal entity are presented to support the commentary on constant currency performance on pages 10 and 11.

The tables on pages 35 to 41 reconcile reported to constant currency results for each of our global business segments and legal entities.

Income statement commentary

Group

1Q23 compared with 1Q22 - reported results

1 Fair value movements on non-qualifying hedges in HSBC Holdings.

Reported profit

Reported profit after tax of $11.0bn was $7.6bn higher than in 1Q22.

Reported profit before tax of $12.9bn was $8.7bn higher, which 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 also included continued growth in net interest income, reflecting the impact of interest rate rises. Reported operating expenses were lower, mainly reflecting reduced restructuring and other related costs following the completion of our cost-saving programme. Reported ECL charges were also lower, reflecting a favourable change in the probability weightings of economic scenarios, as well as low levels of stage 3 charges.

Reported revenue

Reported revenue of $20.2bn was $7.9bn or 64% higher, and included a 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 Commercial Banking ('CMB') and Global Banking and Markets ('GBM'), and in Personal Banking and Global Private Banking in Wealth and Personal Banking ('WPB'). In GBM, higher Global Foreign Exchange revenue reflected increased client activity and market volatility, while growth in Global Debt Markets revenue reflected favourable market conditions and a better trading performance.

These increases were partly offset by lower Credit and Lending revenue in CMB, primarily driven by margin compression, and by lower revenue in GBM, reflecting disciplined balance sheet management. Additionally, revenue fell in Markets Treasury from lower net interest income due to the impact of rising interest rates on our funding costs and flattening yield curves, as well as from lower disposal gains related to risk management activities. This revenue is allocated to our global businesses.

The increase in reported revenue compared with 1Q22 included an adverse impact of foreign currency translation differences between the periods of $0.7bn.

Reported ECL

Reported ECL of $0.4bn were $0.2bn or 32% lower than in 1Q22. In 1Q23, the ECL charge reflected a favourable change in the probability weightings of economic scenarios, as well as low levels of stage 3 charges of $0.4bn. The ECL charge in 1Q22 included allowances related to the Russia-Ukraine war and heightened inflationary risks, as well as allowances related to direct Russia exposures and the commercial real estate sector in mainland China.

Reported operating expenses

Reported operating expenses of $7.6bn were $0.6bn or 7% lower, mainly reflecting a reduction in restructuring and other related costs following the completion of our cost-saving programme, which concluded at the end of 2022, and from ongoing cost discipline. These were partly offset by a rise in technology costs, continued inflationary impacts, investment in wealth in Asia and higher operations costs due to business volume growth.

The reduction in reported operating expenses compared with 1Q22 included a favourable impact of foreign currency translation differences between the periods of $0.5bn.

Reported share of profit from associates and JVs

Reported share of profit from associates and joint ventures of $0.7bn was $0.1bn or 12% higher than in 1Q22, primarily driven by a higher share of profit from Saudi Awwal Bank ('SAB'), formerly The Saudi British Bank.

Tax expense

Tax in 1Q23 was a charge of $1.9bn, representing an effective tax rate of 14.4%, which was 3.0 percentage points lower than the effective tax rate of 17.4% for 1Q22. The effective tax rate for 1Q23 was decreased by 3.2 percentage points by the non-taxable provisional gain on the acquisition of SVB UK and by 3.3 percentage points by the release of provisions for uncertain tax positions. The effective tax rate for 1Q22 was decreased by 4.4 percentage points by the impact of remeasuring deferred tax balances for a change in the UK statutory tax rate. Excluding these items, the effective tax rate was 20.9% for 1Q23 and 21.8% for 1Q22.

In 1Q23, we adjusted our annualised RoTE of 27.4% to exclude 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. This resulted in a RoTE of 19.3%. The release of provisions for uncertain tax positions in 1Q23 had an approximately 1 percentage point favourable impact on the Group's RoTE.

First interim dividend for 2023

On 2 May 2023, the Board announced a first interim dividend for 2023 of $0.10 per ordinary share. For further details, see page 43.

Group

1Q23 compared with 1Q22 - constant currency basis

Profit before tax of $12.9bn was $9.0bn higher than in 1Q22 on a constant currency basis. Revenue increased by $8.6bn or 74%, 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 Markets and Securities Services ('MSS') in GBM. ECL charges were $0.2bn lower, and operating expenses decreased by $0.1bn or 2%, mainly driven by a reduction in restructuring and other related costs following the completion of our cost-saving programme at the end of 2022, which more than offset cost growth in technology and inflationary impacts. The impact of retranslating the prior year results of our operations in hyperinflationary economies at 1Q23 average rates of foreign exchange resulted in cost growth of $59m.

Group

1Q23 compared with 4Q22 - reported results

1 Fair value movements on non-qualifying hedges in HSBC Holdings.

Reported profit

Reported profit after tax of $11.0bn was $6.4bn higher than in 4Q22.

Reported profit before tax of $12.9bn was $7.8bn higher. The increase reflected higher revenue, which 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. Revenue also increased in GBM's MSS business. Reported operating expenses decreased, primarily reflecting a reduction in restructuring and other related costs and a lower performance-related pay accrual, while lower ECL reflected a favourable change in the probability weightings of economic scenarios, and lower stage 3 charges.

Reported revenue

Reported revenue of $20.2bn was $5.6bn or 38% higher, driven by a 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 growth also reflected an increase in client activity and market volatility resulting in revenue growth in GBM's MSS business, notably in Global Foreign Exchange and Global Debt Markets, as well as higher Capital Markets and Advisory revenue. In GBM, there was also a favourable movement in credit and funding valuation adjustments. In WPB, wealth revenue increased, partly reflecting the rise in customer activity following the reopening of the mainland China border.

These increases were partly offset by a marginal fall in net interest income, notably in WPB from the migration of deposits from current and savings accounts to term deposits in our main entity in Hong Kong. However, net interest income grew in GPS in CMB and GBM as rising interest rates continued to benefit deposit margins.

Reported ECL

Reported ECL of $0.4bn were $1.0bn lower. The 1Q23 charge reflected a favourable change in the probability weightings of economic scenarios, as well as low levels of stage 3 charges of $0.4bn. This compared with a charge of $1.4bn in 4Q22, which included stage 3 charges related to the commercial real estate sector in mainland China and charges relating to a worsening global economic outlook.

For further details of the calculation of ECL, including the measurement uncertainties and significant judgements applied to such calculations, the impact of the economic scenarios and management judgemental adjustments, see pages 23 to 26.

Reported operating expenses

Reported operating expenses of $7.6bn were $1.2bn or 14% lower, primarily due to a reduction in restructuring and other related costs following the completion of our cost-saving programme and a lower performance-related pay accrual. These reductions were partly offset by an increase in technology costs.

The number of employees expressed in full-time equivalent staff ('FTE') at 31 March 2023 was 221,656, an increase of 2,456 compared with 31 December 2022. The number of contractors at 31 March 2023 was 5,564, a decrease of 483 due to the completion of our cost-saving programme.

Reported share of profit from associates and JVs

Reported share of profit from associates and joint ventures of $0.7bn was $40m or 6% higher, primarily from an increase in the share of profit from Bank of Communications Co., Limited ('BoCom').

Group

1Q23 compared with 4Q22 - constant currency basis

Profit before tax of $12.9bn was $7.7bn higher than in 4Q22 on a constant currency basis. Growth reflected an increase in revenue of $5.3bn or 36%, primarily driven by 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. In addition, the increase in revenue included growth in MSS in GBM and Wealth in WPB. The reduction in operating expenses of $1.4bn or 15% reflected lower restructuring and other related costs following the completion of our cost-saving programme, and a lower performance-related pay accrual, while a $1.0bn reduction in ECL was mainly as 4Q22 included an increase in stage 3 charges related to the commercial real estate sector in mainland China.

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 1.69% was 50 basis points ('bps') higher compared with 1Q22, driven by higher market interest rates. The yield on AIEA increased by 247bps, partly offset by a 232bps rise in the funding cost of average interest-bearing liabilities. The increase in NIM in 1Q23 included the adverse impact of foreign currency translation differences. Excluding these, NIM increased by 52bps.

In 1Q23, net interest income included a $1.4bn interest expense representing a component of centrally allocated funding costs associated with generating 'net income from financial instruments held for trading or managed on a fair value basis'. This compared with an interest expense of $0.1bn in 1Q22 and $1.3bn in 4Q22.

NIM was up 1bps compared with 4Q22, predominantly driven by improved asset yields as a result of higher interest rates in most of our markets, partly offset by lower margins in Asia due to higher term deposit migration and a reduction in the Hong Kong Interbank Offered Rate ('HIBOR'). The increase in NIM in 1Q23 included the adverse impact of foreign currency translation differences. Excluding these, NIM increased by 2bps compared with 4Q22.

The impact of the adoption of IFRS 17 'Insurance Contracts' was a reduction in net interest income in 4Q22 of $592m and $62bn lower AIEA. This had a dilutive impact on our NIM, which fell by 6bps from 1.74% to 1.68%. The impact of IFRS 17 is dilutive due to the fact that these AIEA are funded primarily by policyholders' funds and not by interest-bearing liabilities.

Summary consolidated balance sheet

1 From 1 January 2023, we adopted IFRS 17 'Insurance Contracts', which replaced IFRS 4 'Insurance Contracts'. Comparative data have been re-presented accordingly.

Balance sheet commentary

Balance sheet - 31 March 2023 compared with 31 December 2022

At 31 March 2023, our total assets of $3.0tn were $40bn higher on a reported basis and included favourable effects of foreign currency translation differences of $26bn. On a constant currency basis, total assets were $15bn higher due to growth in financial investments, a seasonal increase in settlement accounts as customers aim to settle their trades at 31 December, and growth in lending balances following the acquisition of SVB UK. These increases were partly offset by lower derivative asset balances reflecting adverse revaluation movements on foreign exchange and interest rate contracts.

Loans and advances to customers as a percentage of customer accounts was 60.1%, which was higher than 58.8% at 31 December 2022.

Loans and advances to customers

Loans and advances to customers of $1.0tn were $40bn higher on a reported basis. This included the following items:

• adverse effects of foreign currency translation differences of $8bn;

• an increase from the reclassification of $25bn of lending balances from 'assets held for sale' relating to the planned sale of our retail banking operations in France; and

• an increase in lending balances through the acquisition of SVB UK of $7bn.

Excluding these factors, customer lending balances remained broadly stable, reflecting the following movements:

In WPB, customer lending increased by $3bn, primarily from mortgage balance growth in Hong Kong, Australia and Singapore.

In CMB, customer lending was $1bn higher, including the transfer of a portfolio of Global Banking clients to CMB in our legal entities in Australia and Indonesia. This was partly offset by lower balances in our legal entity in Hong Kong.

In GBM, lending fell by $5bn, including the transfer of a portfolio of Global Banking clients to CMB referred to above. The reduction also reflected lower term lending in our main legal entity in Asia, partly offset by an increase in overdraft balances in HSBC Bank plc. 

Customer accounts

Customer accounts of $1.6tn increased by $34bn on a reported basis. This included the following items:

• adverse effects of foreign currency translation differences of $12bn;

• an increase from the reclassification of $23bn of customer account balances from 'liabilities of disposal groups held for sale' relating to the planned sale of our retail banking operations in France; and

• an increase in customer accounts through the acquisition of SVB UK of $8bn.

Excluding these factors, customer accounts fell by $10bn, reflecting the following movements:

In WPB, customer accounts rose by $3bn, notably due to an increase in our entity in Hong Kong driven by higher term deposit balances, partly offset by a decrease in interest-bearing current accounts. There were also net outflows in HSBC UK.

In CMB, the reduction in customer accounts of $6bn reflected net outflows in our legal entities in Hong Kong, HSBC UK and HSBC Bank plc. These factors were partly offset by the impact of a transfer of a portfolio of Global Banking clients to CMB in our legal entities in Australia and Indonesia.

In GBM, customer accounts decreased by $7bn, including the transfer of clients to CMB referred to above. The reduction also included lower interest-bearing and non-interest-bearing balances in our Hong Kong entity, partly offset by balance growth in HSBC Bank plc.

Financial investments

As part of our interest rate hedging strategy, we hold a portfolio of debt instruments, reported within financial investments, which are classified as hold-to-collect-and-sell. As a result, the change in value of these instruments is recognised through 'debt instruments at fair value through other comprehensive income' in equity.

At 31 March 2023, we had recognised a cumulative unrealised loss of $5.9bn on these hold-to-collect-and-sell positions through other comprehensive income, which included a $0.6bn gain in 1Q23, inclusive of movements on related fair value hedges. This excluded insurance assets. Overall, the Group is positively exposed to rising interest rates through net interest income, although there is an adverse impact on our capital base in the early stages of a rising interest rate environment due to the fair value of hold-to-collect-and-sell instruments. After the initial negative effect materialising through reserves, the net interest income of the Group is expected to result in a net benefit over time, provided policy rates follow market implied rates.

Over time, these adverse movements will unwind as the instruments reach maturity, although not all will necessarily be held to maturity.

We also hold a portfolio of financial investments measured at amortised cost, which are classified as hold-to-collect. At 31 March 2023, there was a cumulative unrealised loss of $1.4bn related to this portfolio, excluding insurance assets. During 1Q23 there was a $0.5bn improvement in the unrealised loss balance. At 31 December 2022, a significant portion of this portfolio was related to our insurance business, which after the adoption of IFRS 17 is now classified as fair value through profit and loss.

Risk-weighted assets - 31 March 2023 compared with 31 December 2022

Risk-weighted assets ('RWAs') rose by $14.7bn during the quarter, including an increase of $3.4bn from foreign currency translation differences. Excluding foreign currency translation differences, RWAs increased by $11.3bn. This was primarily due to:

• a $11.3bn asset size increase, primarily due to growth in sovereign exposures and retail lending, additional RWAs related to HSBC Canada disposal hedges, and higher structural foreign exchange exposures on market risk RWAs; and

• a $9.6bn increase through the acquisition of SVB UK.

These were partly offset by:

• a $7.0bn drop in RWAs due to methodology and policy changes, which included a $7.7bn fall due to a regulatory change related to the risk weighting of residential mortgages in Hong Kong, partly offset by changes to risk weights on certain exposures in our associate SAB; and

• a $2.3bn decrease driven by portfolio mix changes in our global businesses.

•

Global businesses

Wealth and Personal Banking - constant currency basis

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').

3 RoTE (annualised) in 1Q23 included a 21.3 percentage point favourable impact of the reversal of the impairment losses relating to the planned sale of our retail banking operations in France. RoTE for the 31 December 2022 period represents the full-year RoTE for 2022.

1Q23 compared with 1Q22

Profit before tax of $5.3bn was $4.2bn higher than in 1Q22 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 also included an increase in revenue of $1.9bn in Personal Banking from higher net interest income due to rising interest rates, higher wealth revenue of $0.2bn, a reduction of $26m in operating expenses and a fall in ECL of $0.1bn.

Revenue of $9.0bn was $4.0bn or 82% 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 also strong growth in Personal Banking net interest income of $1.9bn from rising interest rates and balance sheet growth, a rise of $0.1bn in Global Private Banking net interest income and a $0.1bn increase in revenue in life insurance. These were partly offset by a reduction in revenue allocated from Corporate Centre of $0.2bn, including from Markets Treasury.

In Wealth, revenue of $2.0bn was up $0.2bn or 13%.

• Global Private Banking revenue was $0.1bn or 26% higher due to the positive impact of rising interest rates on net interest income.

• Life insurance revenue rose by $0.1bn or 18%. The new business contractual service margin written of $0.4bn in 1Q23 was up $0.1bn, mainly in Hong Kong due in part to the mainland China border reopening and the launch of new products in 1Q23. 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.

In Personal Banking, revenue of $5.0bn was up $1.9bn or 64%.

• Net interest income was $1.9bn or 71% higher due to the benefit of interest rate rises and wider margins. This was supported by moderate lending growth in HSBC UK, and our main legal entities in Asia, Mexico, the US and the Middle East. Mortgage lending rose in HSBC UK by $7bn and in our main legal entity in Asia by $3bn. Compared with 1Q22, retail deposit balances in our main legal entity in Asia increased by $4bn or 1%, offset by a reduction of $5bn or 2% in retail deposits in HSBC UK.

Other revenue increased by $1.9bn, mainly due to a $2.0bn reversal of the impairment relating to the planned sale of our retail banking operations in France.

ECL were $0.2bn, compared with $0.3bn in 1Q22. The reduction in the charge was primarily in HSBC UK due to a favourable shift in economic scenario probability weightings, while 1Q22 included charges related to the Russia-Ukraine conflict and inflationary pressures.

Operating expenses of $3.5bn were 1% lower on a constant currency basis, reflecting ongoing cost discipline and a reduction in the number of branches. These were partly offset by continued investments, notably in wealth in Asia, and the impact of higher inflation.

Commercial Banking - constant currency basis

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').

3 RoTE (annualised) in 1Q23 included a 13.3 percentage point favourable impact of the provisional gain on the acquisition of Silicon Valley Bank UK Limited. RoTE for the 31 December 2022 period represents the full-year RoTE for 2022.

1Q23 compared with 1Q22

Profit before tax of $4.8bn was $3.1bn higher than in 1Q22 on a constant currency basis. This was driven by an increase in revenue across all our main legal entities, primarily from a $1.9bn or 282% increase in Global Payments Solutions ('GPS') net interest income. It also included a provisional gain of $1.5bn from HSBC UK's acquisition of SVB UK. These were partly offset by a net ECL charge compared with a net release of ECL in 1Q22, while operating expenses remained broadly stable.

Revenue of $6.7bn was $3.3bn or 99% higher on a constant currency basis:

• In GPS, revenue increased by $1.9bn, with growth in all main legal entities driven by an increase in margins reflecting interest rate rises and business actions while average balances were broadly flat. There was also a 14% increase in fee income, notably in cards and payments, with growth across most of our main legal entities, notably in the UK.

• In Global Trade and Receivables Finance ('GTRF'), revenue was broadly stable. There were lower balances reflecting the softer trade cycle, notably in our main legal entity in Asia, while balances increased in HSBC UK. This was largely offset by higher margins and a 2% increase in fee income.

• In Credit and Lending, revenue decreased by $0.1bn or 5%, notably in the Asia and European legal entities, primarily due to higher funding costs.

• In GBM products, Insurance and Investments, and Other, revenue increased by $1.5bn, primarily reflecting the provisional gain of $1.5bn on the acquisition of SVB UK, and a 12% increase in collaboration revenue from GBM products, notably Foreign Exchange. These were partly offset by a fall of $0.3bn from revenue allocated from Corporate Centre, notably Markets Treasury revenue and the adverse impacts of hyperinflation accounting.

ECL were a net charge of $0.2bn, compared with a net release of $7m in 1Q22 on a constant currency basis. The charge in 1Q23, primarily related to stage 3 charges, was partly offset by a net release of stage 1 and stage 2 allowances reflecting a favourable shift in economic scenario probability weightings. The net release in 1Q22 primarily reflected the release of Covid-19-related allowances.

Operating expenses of $1.7bn were broadly stable on a constant currency basis. The continued investment in technology and higher transactional costs resulting from business growth were largely mitigated by the impact of our continued cost discipline around hiring and lower discretionary expenditure.

Global Banking and Markets - constant currency basis

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

2 Includes notional tax credits and Markets Treasury, HSBC Holdings interest expense and 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').

4 RoTE for the 31 December 2022 period represents the full-year RoTE for 2022.

1Q23 compared with 1Q22  

Profit before tax of $2.0bn was $0.9bn or 86% higher than in 1Q22 on a constant currency basis. This was driven by an increase in revenue of $0.7bn or 20%, notably from higher net interest income in GPS, strong performances across various asset classes in Markets and Securities Services and a lower ECL charge. Operating expenses increased marginally.

Revenue of $4.4bn was $0.7bn or 20% higher on a constant currency basis.

In Markets and Securities Services, revenue increased by $0.3bn or 12%.

• In Global Debt Markets, revenue increased by $0.2bn or 78% from favourable market conditions and a better trading performance. The 1Q22 period was impacted by challenging market conditions and muted primary activity.

• In Global Foreign Exchange, revenue growth of $0.2bn or 20% reflected strong client hedging activity driven by market-wide volatility related to inflation and interest rate expectations.

• In Securities Services, revenue grew by $0.1bn or 27% from higher net interest income as global interest rates rose. This was partly offset by reduced fee income from lower market levels.

• In Securities Financing, revenue increased by $0.1bn or 24%, driven by favourable market conditions and a strong prime trading performance.

• In Equities, revenue fell by $0.3bn or 64% in the context of a strong 1Q22, and due to lower client volumes in 1Q23.

In Banking, revenue increased by $0.6bn or 44%.

• In GPS, revenue increased by $0.6bn, driven by margin growth from rising global interest rates and as a result of business pricing actions.

• Credit and Lending revenue decreased by $45m or 8%, reflecting disciplined balance sheet management.

• Capital Markets and Advisory revenue, which includes Issuer Services, increased by $31m or 11%.

In GBM Other, Principal Investments revenue declined by $0.1bn, as 1Q23 included lower revaluation gains compared with 1Q22. There was also a $0.1bn reduction in revenue allocated from Corporate Centre, notably Markets Treasury revenue and the adverse impacts of hyperinflationary accounting.

ECL were $32m in 1Q23, reflecting a favourable shift in economic scenario probability weightings. This compared with ECL of $0.3bn in 1Q22 on a constant currency basis, primarily from the deterioration in the economic outlook due to the Russia-Ukraine war and inflationary pressures.

Operating expenses of $2.4bn increased by $0.1bn or 2% on a constant currency basis from the impact of inflation, which was partly offset by disciplined cost management.

Corporate Centre - constant currency basis

1 Central Treasury comprises valuation differences on issued long-term debt and associated swaps.

2 Other comprises consolidation adjustments, funding charges on property and technology assets, revaluation gains and losses on investment properties and property disposals and other revenue items not allocated to global businesses.

3 Revenue from Markets Treasury, HSBC Holdings net interest expense and 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 1Q23 was $243m (1Q22: $472m; 4Q22: $298m).

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

5 RoTE for the 31 December 2022 period represents the full-year RoTE for 2022.

1 Fair value movements on non-qualifying hedges in HSBC Holdings.

1Q23 compared with 1Q22

Profit before tax of $0.8bn was $0.8bn higher than in 1Q22 on a constant currency basis. This increase primarily reflected the non-recurrence of adverse fair value movements on financial instruments and lower restructuring and other related costs, together with an increase in the share of profit from associates and joint ventures.

Revenue was $0.5bn higher on a constant currency basis. This reflected the non-recurrence of adverse fair value movements on financial instruments and favourable valuation differences on long-term debt and associated swaps in Central Treasury (up $0.3bn), and transactional foreign currency-related valuation gains. These were partly offset by adverse fair value movements in 1Q23 of $0.1bn relating to the foreign exchange hedging of the proceeds from the planned sale of our banking business in Canada.

Operating expenses decreased by $0.2bn or 89% on a constant currency basis, primarily driven by lower restructuring and other related costs following the completion of our cost-saving programme at the end of 2022.

Share of profit from associates and joint ventures of $0.7bn increased by $0.1bn or 19% on a constant currency basis, primarily driven by an increase in the share of profit from SAB.

Approach to risk management

We aim to use a comprehensive risk management approach across the organisation and across all risk types, underpinned by our culture and values. This is outlined in our risk management framework, including the key principles and practices that we employ in managing material risks, both financial and non-financial. The framework fosters continual monitoring, promotes risk awareness and encourages sound operational and strategic decision making. It also supports a consistent approach to identifying, assessing, managing and reporting the risks we accept and incur in our activities. We continue to actively review and develop our risk management framework, and enhance our approach to managing risk with clear accountabilities.

We operate a wide-ranging stress testing programme, which is a valuable forward-looking risk management tool that forms a key component of our risk management, capital and liquidity planning. Stress testing provides senior management with key insights into the impacts of severely adverse conditions and events on the Group, and helps provide confidence to regulators on the Group's financial stability.

We plan to run an internal climate scenario analysis in the second half of 2023 as we continue to develop our capabilities and methodologies for analysing the challenges and opportunities of climate change to our net zero strategy, as well as to inform capital planning and risk appetite.

At 31 March 2023, our CET1 ratio increased to 14.7%, from 14.2% at 31 December 2022, and our liquidity coverage ratio ('LCR') was 132%.

Geopolitical and macroeconomic risks

The Russia-Ukraine war has continued to have far-reaching geopolitical and economic implications. It has resulted in the imposition of significant sanctions and trade restrictions against Russia by the UK, the US and the EU, as well as other countries. Russia has implemented certain countermeasures in response.

The relationship between China and several countries, including the UK and the US, also continues to remain complex. The UK, the US, the EU and other countries have imposed various sanctions and trade restrictions on Chinese persons and companies. In response China has imposed sanctions and introduced new laws and trade restrictions that could impact the Group and its customers. Further sanctions or counter-sanctions, whether in connection with Russia or China, may affect the Group and its customers by creating regulatory, reputational and market risks.

Amid rising inflation, central banks in both developed and emerging markets tightened monetary policy in 2022. Interest rates continued to increase in the first quarter of 2023, although following uncertainty concerning the US and Swiss banking sectors, market expectations indicate that policy tightening may be close to its peak. Global inflation appears to be levelling out, although recent unexpected oil output reductions have resulted in continued uncertainty.

Fiscal deficits are likely to remain high in both developed and emerging markets as public spending is extended to provide help to vulnerable households and businesses, against a backdrop of slower growth, high energy prices and higher interest rates. This could increase the strains on highly leveraged sovereigns, corporates and households. While the average maturity of sovereign debt in developed markets has lengthened, rising interest rates may eventually bring into question the sustainability of debt levels in some countries. Among emerging markets, countries that need to refinance maturing US dollar-denominated debt, in the context of a strong dollar, higher interest rates and greater risk aversion, may face increasing difficulties.

The Chinese government has progressively introduced policy measures that helped increase liquidity and the supply of credit to the mainland China commercial real estate sector. A recovery in Chinese domestic demand for residential real estate and improved customer sentiment are necessary developments to support the ongoing health of the sector. There are some early but growing signs of stabilisation in property transaction volumes and prices in mainland China, but the benefits of the positive developments appear to be favouring state-owned enterprises and the stronger privately owned enterprises in the sector. We will continue to monitor the sector closely, notably the risk of real estate sector defaults and payment extension requests, along with the associated impact on market sentiment. We expect the restructuring of the China commercial real estate sector and resolution of the impacts to be protracted.

Our businesses continue to consider the impact of the increasing cost of living on our retail customers. We are engaging closely with our key regulators to help ensure we continue to meet their expectations of financial institutions' activities at a time of market volatility.

During the first quarter of 2023, there was an improvement in the economic outlook compared with 31 December 2022. While our approach to macroeconomic scenarios remained unchanged, inflation and interest rate risks are still key concerns for most markets. Management adjustments to ECL were applied to reflect persisting uncertainty in certain sectors driven by these risks, where these were not fully captured by our models.

We continue to monitor, and seek to manage, the potential implications of all the above developments on our customers and our business.

Ibor transition

The publication of sterling, Swiss franc, euro and Japanese yen Libor interest rate benchmarks, as well as Euro Overnight Index Average ('Eonia'), ceased from the end of 2021. Our interbank offered rate ('Ibor') transition programme - which is tasked with the development of new near risk-free rate ('RFR') products and the transition of legacy Ibor products - continues to support the transition of a limited number of remaining contracts that reference three-month sterling Libor, which will continue to be published using a 'synthetic' interest rate methodology until 31 March 2024.

Prior to the cessation of the publication of US dollar Libor from 30 June 2023, we have implemented the majority of required processes, technology and RFR product capabilities throughout the Group. We have participated in Libor to RFR market conversion events and are steadily progressing with the transition of legacy US dollar Libor and other demising Ibor contracts. Some US dollar Libor contracts that are proving more difficult to transition may be aided by the April 2023 announcement from the UK Financial Conduct Authority that ICE Benchmark Administration Limited will be compelled to publish one-month, three-month and six-month US dollar Libor settings using an alternative methodology until 30 September 2024.

We continue to be exposed to risks associated with Ibor transition, which include regulatory compliance risk, resilience risk, financial reporting risk, legal risk, model risk and market risk. The level of these key risks is diminishing in line with our process implementation and the transition of our legacy contracts. We have implemented mitigating controls, where required, and continue to actively manage and monitor these risks.

Credit risk

Summary of credit risk

At 31 March 2023, gross loans and advances to customers and banks of $1,086bn increased by $46.3bn on a reported basis. This included:

• an increase from the reclassification of $22.6bn of personal loans and advances to customers from 'assets held for sale', as the completion of the planned sale of our retail banking operations in France has become less certain and no longer meets the definition of held for sale;

• favourable foreign exchange movements of $8.1bn; and

• an increase in wholesale loans and advances to customers of $7.4bn, and loans and advances to banks of $1.0bn through the acquisition of SVB UK in March.

Excluding these factors, loans and advances to customers and banks increased by $7.2bn, mainly driven by wholesale lending in France (up $4.0bn) and personal lending in Asia, particularly Hong Kong (up $2.3bn).

At 31 March 2023, the allowance for ECL of $12.7bn comprised $12.1bn in respect of assets held at amortised cost, $0.4bn in respect of loan commitments and financial guarantees, and $0.2bn in respect of debt instruments measured at fair value through other comprehensive income ('FVOCI').

On a reported basis, the allowance for ECL increased by $0.1bn including adverse foreign exchange movements of $0.1bn. Allowances for ECL in wholesale and personal loans and advances to customers were broadly unchanged.

The ECL charge for the first three months of 2023 of $0.4bn, inclusive of recoveries, was driven by an improved economic outlook, reduced uncertainty and low levels of stage 3 charges. The ECL charge comprised: $0.2bn in respect of wholesale lending, of which the stage 3 charge was $0.3bn, and $0.2bn in respect of personal lending, of which the stage 3 charge was $0.2bn.

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 $74,108m gross carrying amounts and $256m allowances for ECL related to the planned sale of our banking business in Canada (31 December 2022: $74,482m and $254m), and nil gross carrying amounts and nil allowances for ECL related to the planned sale of our retail banking operations in France (31 December 2022: $25,267m and $92m).

3 Includes only those financial instruments that are subject to the impairment requirements of IFRS 9. 'Other assets' as presented within the summary consolidated balance sheet on page 13 comprises both financial and non-financial assets, including cash collateral and settlement accounts.

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

5 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.