HSBC Holdings Regulatory News (HSBA)

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HSBC HOLDINGS PLC

3Q19 EARNINGS RELEASE

Noel Quinn, Group Chief Executive, said:

"Parts of our business, especially Asia, held up well in a challenging environment in the third quarter. However, in some parts, performance was not acceptable, principally business activities within continental Europe, the non-ring-fenced bank in the UK, and the US. Our previous plans are no longer sufficient to improve performance for these businesses, given the softer outlook for revenue growth. We are therefore accelerating plans to remodel them, and move capital into higher growth and return opportunities."

Highlights

• Reported profit before tax in Asia up 4% to $4.7bn in 3Q19, with a resilient performance in Hong Kong.

• Growth in both loans and advances to customers and customer accounts, up 4% and 2% respectively on a reported basis compared with 3Q18, and up 7% and 5% on a constant currency basis.

• Commercial Banking ('CMB') and Retail Banking delivered revenue growth compared with 3Q18. Continued momentum in Global Private Banking ('GPB') with net new money of $19bn in 9M19. Performance in Retail Banking and Wealth Management ('RBWM') in HSBC UK in 3Q19 was adversely impacted by additional customer redress charges.

• Global Banking and Markets ('GB&M') performance continued to reflect low levels of client activity in Global Markets, although our transaction banking franchises delivered a resilient performance. In 3Q19, GB&M's adjusted revenue in Asia increased by 9% compared with 3Q18 and represented over 50% of total GB&M adjusted revenue.

• Continued strong capital levels, with common equity tier 1 ('CET1') ratio of 14.3%, including the completion of a $1bn share buy-back.

Financial performance (vs. 3Q18)

• Profit attributable to ordinary shareholders in 3Q19 down 24% to $3.0bn, reflecting challenging market conditions. Return on tangible equity (annualised) ('RoTE') for 3Q19 of 6.4%.

• Reported profit before tax down 18% to $4.8bn, which included additional customer redress provisions of $606m and $120m of severance costs. Adjusted profit before tax down 12% to $5.3bn.

• Reported revenue down 3% to $13.4bn, due to lower client activity in Global Markets, compared with a strong 3Q18. In RBWM, continued growth in Retail Banking was broadly offset in insurance manufacturing due to higher adverse market impacts of $177m, while revenue increased in CMB and GPB. Adjusted revenue down 2% to $13.3bn.

• The reduction in revenue included an adverse movement in credit and funding valuation adjustments in GB&M of $196m, while the adverse impact of hyperinflation accounting in Argentina in 3Q19 was $132m, compared with $304m in 3Q18.

• Reported operating expenses up 2% due to significant items. Adjusted operating expenses up 0.8%, reflecting cost discipline while continuing to invest.

• Reported change in expected credit losses ('ECL') increased by $0.4bn, mainly on unsecured lending in RBWM and higher charges in CMB in the UK and Hong Kong. ECL in 3Q19 included a charge to reflect the economic outlook in Hong Kong.

Financial performance (vs. 9M18)

• Reported profit before tax up 4% to $17.2bn, including an $828m dilution gain recognised in Saudi Arabia, customer redress provisions of $1.2bn, and $407m of severance costs. Adjusted profit before tax up $50m to $17.9bn.

• Reported revenue up 4%. Adjusted revenue up 4.8%, which reflected strong performances in RBWM and CMB, notably in the first half of 2019. Adjusted revenue in GB&M down 7% from lower market activity due to ongoing economic uncertainty.

• Reported operating expenses down 1%. Adjusted operating expenses up 2.6%, which is a slower growth rate than the 5.6% at FY18 (compared with FY17) while we have continued to invest. 9M19 positive adjusted jaws of 2.2%.

Outlook

• The revenue environment is more challenging than in the first half of 2019, and the outlook for revenue growth is softer than we anticipated at the half-year. As a result, we no longer expect to reach our RoTE target of more than 11% in 2020.

• We will act to rebalance our capital away from low-return businesses and adjust the cost base in line with the actions we take.

• These actions, or any continuing deterioration in the revenue environment, could result in significant charges in 4Q19 and subsequent periods, including the possible impairment of goodwill and additional restructuring charges.

• Addressing low-return businesses and reducing risk-weighted assets ('RWAs') will allow redeployment of capital and resources into higher growth and return opportunities.

• We intend to sustain the dividend and maintain a CET1 ratio of above 14%.

Registered office and Group Head office: 8 Canada Square , London, E14 5HQ, United Kingdom Web: www.hsbc.com

Incorporated in England with limited liability. Registered number 617987

Key financial metrics

Nine months ended Quarter ended

At

1 The definition of net asset value per ordinary share is total shareholders' equity less non-cumulative preference shares and capital securities, divided by the number of ordinary shares in issue excluding shares the company has purchased and are held in treasury.

2 Unless otherwise stated, regulatory capital ratios and requirements are calculated in accordance with the transitional arrangements of the Capital Requirements Regulation in force in the EU at the time, including the regulatory transitional arrangements for IFRS 9 'Financial Instruments' in article 473a. The capital ratios and requirements at 30 September 2019 and 30 June 2019 apply the revisions to the Capital Requirements Regulation ('CRR II'), whereas prior periods apply the Capital Requirements Regulation and Directive ('CRD IV'). Leverage ratios are calculated using the end point definition of capital.

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

65 countries and territories in our geographical regions: Europe, Asia, North America, Latin America, and Middle East and North Africa. With assets of $2,728bn at 30 September 2019, HSBC is one of the world's largest banking and financial services organisations.

Adjusted performance

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 understand better the underlying trends in the business.

The tables on pages 37 to 51 detail the effects of significant items on each of our global business segments and geographical regions during 9M19, 3Q19 and 3Q18.

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.

Customer redress provisions

Customer redress charges of $606m in 3Q19 included provisions for payment protection insurance ('PPI') of $388m as well as other customer redress programmes, notably in HSBC UK Bank plc. The increase in PPI provisions was mainly driven by the volume of information requests and inbound complaints received in the period to 29 August 2019, which significantly exceeded that forecast at 30 June 2019 (for further information, see page 103 of our Interim Report 2019). This was partly offset by the lower quality of the information requests. Other customer redress provisions include amounts recognised in respect of fees, charges and interest arising from collection and recovery activities.

The customer redress provisions include significant judgement in respect of the assumptions used and represent the best estimates at the reporting date. The assumptions used will continue to be reviewed and this may result in changes to the amounts provided in future reporting periods.

Global business performance

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

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

A reconciliation of the Group's adjusted results to the Group's reported results is presented below. Supplementary reconciliations of adjusted to reported results by global business are presented on pages 37 to 41 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.

Reconciliation of reported and adjusted results Nine months ended Quarter ended 

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 debit value adjustments ('DVA') on derivative contracts.

3 Comprises costs associated with preparations for the UK's exit from the European Union, costs to establish the UK ring-fenced bank (including the UK ServCo group) and costs associated with establishing an intermediate holding company in Hong Kong.

Financial performance commentary

Distribution of results by global business

Nine months ended Quarter ended

Distribution of results by geographical region

Nine months ended Quarter ended

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 37 to 51 reconcile reported to adjusted results for each of our global business segments and geographical regions.

Group

3Q19 compared with 3Q18 - reported results

Quarter ended

Reported profit

Reported profit after tax of $3.8bn was $0.7bn or 16% lower than in 3Q18, reflecting challenging market conditions.

Reported profit before tax of $4.8bn was $1.1bn or 18% lower than in 3Q18. The 3Q19 results included a provision of $0.6bn in respect of customer redress programmes and $140m of restructuring and other related costs, of which $120m related to severance. Reported results also included adverse credit and funding valuation adjustments in GB&M of $160m (3Q18: $36m favourable), adverse market impacts in insurance manufacturing in RBWM of $225m (3Q18: $48m adverse), and favourable valuation differences on long-term debt and associated swaps in Corporate Centre of $76m (3Q18: $15m adverse). The effects of hyperinflation accounting in Argentina resulted in a $67m decrease in profit before tax, compared with a $145m decrease in 3Q18.

The reduction in reported profit before tax reflected lower revenue, primarily as GB&M generated less income in Global Markets from reduced client activity due to ongoing economic uncertainty, which compared with a strong 3Q18. This decrease was partly offset by higher revenue in CMB, mainly reflecting higher balances in Credit and Lending ('C&L') and Global Liquidity and Cash Management

('GLCM'). In RBWM, growth in our Retail Banking business was broadly offset by adverse market impacts on insurance manufacturing. In addition, ECL increased in both RBWM and CMB.

Excluding net adverse movements in significant items of $0.3bn and adverse foreign currency translation differences of $0.1bn, profit before tax decreased by $0.7bn or 12%.

Reported revenue

Reported revenue of $13.4bn was $0.4bn or 3% lower than in 3Q18.

The reduction in reported revenue included adverse foreign currency translation differences of $0.4bn, partly offset by a net favourable movement in significant items of $0.1bn, primarily from favourable fair value movements on financial instruments.

Excluding foreign currency translation differences and significant items, revenue decreased by $0.2bn or 2%.

Reported ECL

Reported ECL of $0.9bn were $0.4bn higher than in 3Q18, with increases in RBWM driven by higher impairments on unsecured lending in the UK, the US, Hong Kong and Mexico, and also in CMB reflecting higher charges in the UK and Hong Kong.

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

Reported operating expenses

Reported operating expenses of $8.1bn was $0.2bn or 2% higher than in 3Q18. This was driven by higher charges associated with customer redress programmes, of which $388m related to additional charges for the mis-selling of PPI, and $140m for restructuring and other related costs arising from cost efficiency measures across our global businesses and functions. The increase also reflected expenditure from near- and medium-term investments to grow the business.

The increase in operating expenses was partly offset by a reduction in performance-related pay and the favourable effect of foreign currency translation differences of $0.3bn.

Excluding significant items and foreign currency translation differences, operating expenses increased by $0.1bn or 1%.

Reported share of profit from associates and JVs

Reported income from associates of $0.5bn decreased by $0.1bn or 14%, mainly from a reduction in income from The Saudi British Bank ('SABB') as a result of higher ECL charges and other expenses relating to the merger with Alawwal bank, based on its latest published results.

Third interim dividend for 2019

On 2 October 2019, the Board announced a third interim dividend for 2019 of $0.10 per ordinary share in respect of the period. Further details are set out at the end of this release.

Group

3Q19 compared with 3Q18 - adjusted results

Quarter ended

Adjusted profit before tax

On an adjusted basis, profit before tax of $5.3bn was $0.7bn or 12% lower than in 3Q18. This was primarily from lower revenue in GB&M due to reduced client activity resulting from ongoing economic uncertainty compared with a strong 3Q18, as well as higher ECL in both RBWM and CMB.

The effects of hyperinflation accounting in Argentina resulted in a $67m decrease in profit before tax, compared with $145m in 3Q18.

Adjusted revenue

Adjusted revenue of $13.3bn was $0.2bn or 2% lower than in 3Q18, mainly in GB&M, while there was a favourable movement in revenue in Corporate Centre and higher revenue in CMB.

• In GB&M, revenue decreased by $0.6bn or 15%, which included a net adverse movement on credit and funding valuation adjustments of $196m. Revenue was $0.4bn lower in Global Markets from reduced client activity, reflecting economic uncertainty, compared with a strong 3Q18. In Global Banking, revenue increased as we grew lending balances and benefited from wider credit spreads on portfolio hedges, partly offset by prior year gains on corporate restructuring and lower event-driven revenue. Investment in GLCM, Securities Services and Global Trade and Receivables Finance ('GTRF') supported continued momentum as we delivered single-digit growth in average balances.

• In RBWM, revenue was broadly unchanged. In Retail Banking, higher revenue (up $0.1bn) reflected balance growth in lending and deposits, primarily in the UK and Hong Kong, while revenue growth in investment distribution was driven by higher sales of mutual funds and FX products. These increases were broadly offset by adverse market impacts in insurance manufacturing in 3Q19 of $225m (3Q18: $48m adverse).

• In CMB, revenue increased by $0.1bn or 4%, primarily in C&L from balance sheet growth of 5%, with increases in all regions. In GLCM, revenue increased as we benefited from wider margins, notably in Hong Kong, and higher average balances in North America and the UK.

• In GPB, revenue increased by $45m or 11%, mainly in Asia from growth in investment and lending revenue.

• In Corporate Centre, a net favourable movement in revenue of $194m mainly reflected a favourable effect of hyperinflation accounting in Argentina of $172m, and favourable movements of $91m relating to the economic hedging of interest rate and exchange rate risk on our long-term debt with long-term derivatives. Balance Sheet Management ('BSM') also recorded higher revenue, although this was partly offset by lower revenue in legacy credit due to higher losses on portfolio disposals.

Adjusted ECL

Adjusted ECL of $0.9bn were $0.4bn higher due to increased charges in RBWM and CMB. In addition, ECL in 3Q19 included a charge to reflect the economic outlook in Hong Kong. In 3Q19, adjusted ECL as a percentage of average gross loans and advances to customers was 0.34%, compared with 0.20% at 3Q18.

In RBWM, ECL were $0.4bn, an increase of $0.2bn, mainly against unsecured lending in the UK, the US, Hong Kong and Mexico.

In CMB, ECL rose by $0.2bn to $0.4bn. The increase reflected higher ECL in the UK and Hong Kong, which included charges related to specific customers. This increase was partly offset by lower ECL in MENA.

ECL remain sensitive to forward economic guidance, which has the potential to result in significant additional charges, given the current level of uncertainty in a number of the markets in which we operate.

Adjusted operating expenses

Adjusted operating expenses of $7.5bn were $0.1bn or 1% higher than in 3Q18. This included an increase in costs from investments (up

$0.1bn), notably from near- and medium-term investments to grow the business, mainly in RBWM and CMB, and continued investment in digital across all global businesses. These increases were partly offset by a $0.2bn reduction in performance-related pay.

Adjusted share of profit from associates and JVs

Adjusted share of income from associates of $0.5bn was $70m or 12% lower than in 3Q18, mainly from a reduction in income from SABB as a result of higher ECL charges and other expenses relating to the merger with Alawwal bank, based on its latest published results.

Group

9M19 compared with 9M18 - reported results

Nine months ended

Reported profit

Reported profit after tax of $13.7bn was $0.8bn or 6% higher than in 9M18.

Reported profit before tax of $17.2bn was $0.6bn or 4% higher, mainly due to revenue growth, notably in the first half of the year. This increase in revenue was in RBWM from balance sheet growth and the impact of previous interest rate increases on margins in Retail Banking, and in CMB from growth across all our major products, while in GB&M revenue fell. Revenue growth included an $828m dilution gain recognised on the completion of the merger of SABB with Alawwal bank in Saudi Arabia, the non-recurrence of a 9M18 adverse swap mark-to-market loss of $177m on a bond reclassification in Corporate Centre, and 9M19 disposal gains in RBWM and CMB of $157m.

Profit growth was adversely impacted by higher ECL, largely from an increase in charges against a small number of exposures in CMB and GB&M, as well as an increase in RBWM. Operating expenses also rose.

Results in 9M19 included additional customer redress provisions of $1.2bn, restructuring and other related costs of $427m, of which

$407m related to severance, adverse credit and funding valuation adjustments in GB&M of $147m (9M18: $4m adverse), and adverse market impacts in insurance manufacturing in RBWM of $72m (9M18: $140m adverse). The effects of hyperinflation accounting in Argentina resulted in a $129m decrease in profit before tax, compared with a $145m decrease in 9M18.

Excluding net favourable movements in significant items of $1.1bn and adverse foreign currency translation differences of $0.5bn, profit before tax increased by $50m.

Reported revenue

Reported revenue of $42.7bn was $1.6bn or 4% higher than in 9M18, reflecting growth in RBWM and CMB, as discussed above, and in Corporate Centre, partly offset by lower revenue in GB&M.

Net favourable movements in significant items of $1.3bn, which largely comprised the $828m dilution gain recognised on the merger of SABB with Alawwal bank and favourable fair value movements on financial instruments of $0.5bn, were more than offset by adverse foreign currency translation differences of $1.5bn.

Excluding significant items and currency translation differences, revenue increased by $1.9bn or 5%.

Reported ECL

Reported ECL of $2.0bn were $1.1bn higher than in 9M18, primarily driven by increased charges against specific exposures in CMB and GB&M. This also included favourable foreign currency translation differences of $68m.

Reported operating expenses

Reported operating expenses of $25.3bn were $0.2bn or 1% lower than in 9M18 and included favourable foreign currency translation differences of $1.0bn, partly offset by net adverse movements in significant items of $0.2bn, which included:

• customer redress programme costs of $1.1bn, of which $1.0bn related to PPI, compared with $0.2bn in 9M18; and

• restructuring and other related costs of $0.4bn, which included $407m of severance costs. These were partly offset by:

• the non-recurrence of settlements and provisions in connection with legal and regulatory matters of $0.8bn in 9M18; and

• structural reform costs of $0.1bn, compared with $0.3bn in 9M18.

Excluding significant items and foreign currency translation differences, operating expenses increased by $0.6bn or 3%.

Reported share of profit from associates and JVs

Reported share of profit in associates of $1.8bn was $0.1bn or 7% lower than in 9M18. This included adverse foreign currency translation differences of $83m. The reduction also reflected lower share of profit from SABB as a result of higher ECL charges and other expenses relating to the merger with Alawwal bank, partly offset by higher income from Bank of Communications Co., Limited ('BoCom').

Tax expense

The effective tax rate for 9M19 of 20.4% was lower than the 22.3% for 9M18. The 9M18 period contained a non-deductible regulatory settlement. The rate at 9M19 was reduced due to a change in profit mix and a non-taxable dilution gain in 1H19, partly offset by non- recognition of UK tax losses and non-deductible UK customer redress expenses.

Group

9M19 compared with 9M18 - adjusted results

Nine months ended

Adjusted profit before tax

Adjusted profit before tax of $17.9bn was marginally higher than in 9M18 (up $0.1bn).

Adjusted revenue increased by $1.9bn, primarily reflecting growth in RBWM and CMB, although revenue in GB&M fell. The increase in revenue was broadly offset by higher adjusted ECL (up $1.2bn) and a rise in adjusted operating expenses of $0.6bn, which included investments to grow the business and investments in digital capabilities.

The effects of hyperinflation accounting in Argentina resulted in a $129m decrease in profit before tax, compared with a $145m decrease in 9M18.

Adjusted revenue

Adjusted revenue of $41.8bn was $1.9bn or 5% higher than in 9M18, reflecting continued growth in RBWM and CMB, notably in the first half of 2019. Adjusted revenue also increased in GPB and Corporate Centre. These increases were partly offset by lower revenue in GB&M.

• In RBWM, revenue increased by $1.3bn or 8%, mainly in Retail Banking, reflecting growth in deposit and lending balances, primarily in Hong Kong and the UK. We also benefited from wider margins due to previous interest rate rises. In Wealth Management, revenue growth reflected higher insurance manufacturing revenue, which included favourable actuarial assumption changes of $0.1bn and lower adverse market impact of $67m, as 9M19 recorded an adverse movement of $72m compared with an adverse movement of

$140m in 9M18. These increases were partly offset by lower investment distribution revenue.

• In CMB, revenue increased by $0.8bn or 8%, with growth in all major products and regions. Growth was primarily in GLCM, arising from wider deposit margins, notably in Hong Kong and the UK, and in Latin America from wider margins and growth in average deposit balances. Revenue increased in C&L due to balance sheet growth in most markets, partly offset by margin compression.

• In GB&M, revenue decreased by $0.8bn or 7%, mainly in Global Markets as economic uncertainty resulted in lower market activity, and in Global Banking as 9M18 benefited from gains on corporate lending restructuring. These decreases were partly offset by continued momentum in our transaction banking products as we increased client mandates and grew balances.

• In GPB, revenue increased by $0.1bn or 5%, mainly reflecting growth in investment revenue and lending revenue, primarily in Asia. These increases were partly offset by lower deposit revenue, notably in the US.

• In Corporate Centre, revenue increased by $0.6bn. This was mainly in Central Treasury from favourable fair value movements in 9M19 of $0.2bn relating to the economic hedging of interest rate and exchange rate risk on our long-term debt with long-term derivatives (9M18: $0.2bn adverse), and from a non-repeat of a 9M18 swap mark-to-market loss on a bond reclassification of $177m. In addition, the adverse impact of hyperinflation accounting in Argentina was lower than in 9M18. These movements were partly offset by lease expenses of $127m following the adoption of IFRS 16 'Leases', which were recorded within operating expenses in 9M18.

Adjusted ECL

Adjusted ECL of $2.0bn were $1.2bn higher than in 9M18.

• In CMB, ECL increased by $0.6bn, primarily in the UK and Hong Kong.

• In GB&M, ECL of $0.1bn primarily related to a specific corporate exposure in Europe. This compared with net releases of $0.1bn in 9M18, mainly in the US against exposures in the oil and gas sector.

• In RBWM, ECL of $1.0bn increased by $0.2bn compared with 9M18, notably against unsecured lending, mainly in the UK, the US and Mexico.

• In Corporate Centre, there was an adverse movement of $0.1bn, reflecting lower net releases in 9M19 mainly related to our legacy portfolios.

Adjusted ECL as a percentage of average gross loans and advances to customers was 0.27%, compared with 0.12% at 9M18.

Adjusted operating expenses

Adjusted operating expenses of $23.7bn were $0.6bn or 3% higher than in 9M18. This increase included higher expenditure on investments (up $0.4bn), notably investments to grow the business, mainly in RBWM and CMB, as well as continued investment in our digital capabilities across all global businesses. In addition, volume-related growth increased by $0.1bn. Cost inflation was broadly offset by the impact of our cost-saving efficiencies.

The number of employees expressed in full-time equivalent staff at 30 September 2019 was 237,412, an increase of 2,195 from 31 December 2018. This was primarily driven by investments in business growth programmes, notably in RBWM and CMB. Additionally, the number of contractors at 30 September 2019 was 9,045, a decrease of 1,809 from 31 December 2018.

The effect of hyperinflation accounting in Argentina resulted in an increase in adjusted operating expenses of $105m compared with 9M18.

Adjusted share of profit from associates and JVs

Adjusted share of income from associates of $1.8bn was $0.1bn or 3% lower than in 9M18 as a result of higher ECL charges and other expenses relating to the merger with Alawwal bank, partly offset by higher income from BoCom.

Retail Banking and Wealth Management 9M19 compared with 9M18 - adjusted results

Management view of adjusted revenue Nine months ended Quarter ended

1 'Other' 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 changes in expected credit losses and other credit impairment charges (also referred to as 'Revenue').

Adjusted profit before tax of $6.1bn was $0.5bn or 8% higher than in 9M18. This increase reflected strong balance sheet growth and the impact of previous interest rate increases on margins in Retail Banking, higher revenue in life insurance manufacturing, and disposal gains in Argentina and Mexico. This was partly offset by increased adjusted operating expenses driven by higher staff costs and inflation, together with strategic investments.

RBWM's reported results include customer redress programme costs, notably in respect of the mis-selling of PPI. These are excluded from our adjusted performance.

Adjusted revenue of $17.5bn was $1.3bn or 8% higher, which included disposal gains in Argentina and Mexico of $133m.

• In Retail Banking, revenue of $11.9bn was up $0.9bn or 8%. The increase reflected deposit balance growth of $33bn or 5%, particularly in Hong Kong and the UK, and lending balance growth of $31bn or 9% compared with 9M18, notably in mortgages in Hong Kong and the UK. In addition, revenue benefited from the impact of previous interest rate increases.

• In Wealth Management, revenue of $5.1bn was up $0.2bn or 5%, reflecting higher life insurance manufacturing revenue (up $0.4bn or 25%), driven by growth in the value of new business written (up $0.1bn or 15%), favourable actuarial assumption changes of $0.1bn and lower adverse market impacts of $67m, as 9M19 recorded an adverse movement of $72m compared with an adverse movement of $140m in 9M18. This was partly offset by lower investment distribution revenue (down $0.1bn or 4%), driven by less favourable market conditions in Hong Kong, compared with 9M18, and a change in the product mix of clients' investments to lower risk and lower margin products.

Adjusted ECL were $1.0bn, up 24% from 9M18, reflecting our strategy to grow unsecured lending, notably in the UK, the US and Mexico. In addition, ECL in 9M19 included charges related to the current economic uncertainties in the UK and Hong Kong. The net write-off in 9M19 remained stable compared with 9M18.

Adjusted operating expenses of $10.5bn were $0.6bn or 6% higher. This was mainly driven by higher staff costs and inflation (up $0.2bn), particularly in Asia, to support business growth and the impact of investment in strategic initiatives (up $0.1bn) to grow the Wealth Management business in Asia, enhance digital capabilities, and drive growth in key markets through lending.

Commercial Banking

9M19 compared with 9M18 - adjusted results

Management view of adjusted revenue Nine months ended Quarter ended

1 Includes revenue from Foreign Exchange, insurance manufacturing and distribution, interest rate management and Global Banking products.

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

Adjusted profit before tax of $5.7bn was $0.2bn or 3% lower than in 9M18. Adjusted revenue growth across all products, notably in GLCM and C&L, was more than offset by higher adjusted ECL charges and higher adjusted operating expenses, as we continued to invest.

Adjusted revenue of $11.6bn was $0.8bn or 8% higher, with growth in all regions, particularly in our largest markets, Hong Kong (up 8%) and the UK (up 8%), and across all major products.

• In GLCM, revenue was $0.4bn or 10% higher, with growth in all regions. The increase was mainly in Hong Kong and the UK, primarily reflecting wider margins, and in Latin America from wider margins and growth in average deposit balances.

• In C&L, revenue growth of $0.3bn or 7% reflected continued lending growth in all regions, partly offset by the effects of margin compression.

• In GTRF, revenue increased by $42m or 3%, with growth across all regions except Asia. The increase was mainly from higher volumes in the UK, fee growth in MENA and wider margins in Asia.

• Revenue growth in 'Other' products included a disposal gain of $24m in Latin America.

Corporate customer value from our international subsidiary banking proposition grew by 8%. (This relates to corporate client income, covering all CMB products, as well as total income from GB&M synergy products, including FX and debt capital markets, used by international CMB subsidiaries. This measure differs from reported revenue in that it excludes Business Banking and Other and internal cost of funds.)

Adjusted ECL of $0.9bn were $0.6bn higher than in 9M18, driven by an increase in the UK, partly offset by a reduction in MENA. In addition, there were ECL charges in 9M19, notably in Asia, compared with 9M18 where we recorded minimal charges in Hong Kong and net releases in North America.

Adjusted operating expenses of $5.0bn were $0.3bn or 7% higher, reflecting increased investment in digital capabilities (up $0.2bn), including Real Time Payments, which provides clients with a faster, simpler and more secure payment experience.

Global Banking and Markets

9M19 compared with 9M18 - adjusted results

Management view of adjusted revenue Nine months ended Quarter ended

1 'Other' in GB&M includes allocated funding costs and gains resulting from business disposals. Within the management view of total operating income, notional tax credits are allocated to the businesses to reflect the economic benefit generated by certain activities that is not reflected within operating income, such as notional credits on income earned from tax-exempt investments where the economic benefit of the activity is reflected in tax expense. In order to reflect the total operating income on an IFRS basis, the offset to these tax credits is included within 'Other'.

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

Adjusted profit before tax of $4.1bn was $1.1bn lower than in 9M18, mainly due to lower revenue in Global Markets, as economic uncertainty resulted in reduced market activity. In addition, ECL charges increased by $0.2bn, compared with a net release in 9M18.

Adjusted revenue of $11.2bn fell by $0.8bn compared with 9M18, and included higher adverse movements on credit and funding valuation adjustments of $143m.

• Global Markets revenue decreased by $0.7bn or 13%, driven by low market volatility, reduced client activity due to ongoing economic uncertainty and continued spread compression.

• Global Banking revenue fell $0.1bn or 5%, reflecting a non-repeat of gains in 9M18 on corporate lending restructuring, lower event- driven activity and the impact of tightening credit spreads on portfolio hedges. These reductions were partly offset by higher lending revenue as we continued to grow balances, notably in Asia.

• Revenue grew in our transaction banking products. GLCM revenue rose by $0.2bn or 9%, primarily driven by higher average deposit balances and wider margins. Securities Services revenue increased by $0.1bn or 5% from continued growth in average assets under custody (up 5%) and average assets under administration (up 7%) from increased client mandates, as well as higher interest rates. GTRF revenue increased by $21m or 4% from growth in lending and higher fees from commodity and structured trade deals, particularly in MENA.

Adjusted ECL were $0.1bn, up $217m compared with 9M18. The charges in 9M19 primarily related to a specific corporate exposure in Europe, compared with net releases in 9M18 that were largely related to exposures within the oil and gas sector in the US.

Adjusted operating expenses of $7.0bn were $0.1bn or 2% higher, as we invested in GLCM and Securities Services to support business growth as well as in regulatory programmes.

Global Private Banking

9M19 compared with 9M18 - adjusted results

Management view of adjusted revenue

Nine months ended Quarter ended

1 'Net operating income' means net operating income before changes in expected credit losses and other credit impairment charges (also referred to as 'Revenue').

Adjusted profit before tax of $0.3bn increased by $39m or 14% compared with 9M18, reflecting higher adjusted revenue in Asia where we continued to invest in business growth initiatives, partly offset by higher adjusted ECL.

Adjusted revenue of $1.4bn increased by $62m or 5%, mainly reflecting growth in Asia.

• Investment revenue increased by $45m or 8%, mainly in Asia from higher brokerage and trading revenue and from increased annuity fee income as a result of growth in discretionary client mandates.

• Lending revenue was $23m or 8% higher, with growth in Asia and most of our markets in Europe, with the exception of the UK, which was adversely affected by margin compression.

• Deposit revenue fell by $14m or 4%, as lower revenue in the US from compressed margins and repositioning actions was partly offset by growth in Asia from balance growth and wider margins.

In 9M19, we attracted $19bn of net new money inflows, mainly in Asia and Europe.

Adjusted ECL were $25m, mainly in the UK. This compared with a net release of $16m in 9M18, mainly in the UK, the US and France.

Adjusted operating expenses of $1.1bn were $18m or 2% lower. This was mainly due to reductions in Europe and the US following actions to mitigate lower revenue, and a partial release of a provision associated with the wind-down of our operations in Monaco. These reductions were partly offset by an increase in Asia, driven by investments to support business growth.

Corporate Centre

9M19 compared with 9M18 - adjusted results 

Management view of adjusted revenue

Nine months ended Quarter ended

1 Central Treasury includes revenue relating to BSM in 9M19 of $1.8bn (9M18: $1.8bn; 3Q19: $626m; 2Q19: $586m; 3Q18: $528m), interest expense in 9M19 of $1.0bn (9M18: $978m; 3Q19: $321m; 2Q19: $348m; 3Q18: $358m) and favourable valuation differences on issued long-term debt and associated swaps in 9M19 of $219m (9M18: adverse $380m; 3Q19: favourable $76m; 2Q19: favourable $93m; 3Q18: adverse $15m). Revenue relating to BSM includes other internal allocations to reflect the economic benefit generated by certain activities, which is not reflected within operating income, such as notional credits on income earned from tax-exempt investments where the economic benefit of the activity is reflected in tax expense. In order to reflect the total operating income on an IFRS basis, the offset to these tax credits is included in other Central Treasury.

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

Adjusted profit before tax of $1.7bn was $0.8bn higher than in 9M18.

Adjusted revenue was $0.6bn favourable compared with 9M18, largely reflecting higher revenue in Central Treasury. Central Treasury revenue of $0.9bn was $0.6bn higher than in 9M18. This included:

• favourable fair value movements relating to the economic hedging of interest rate and exchange rate risk on our long-term debt with long-term derivatives of $219m in 9M19, compared with adverse movements of $203m in 9M18; and

• the non-recurrence of a $177m loss in 9M18 arising from adverse swap mark-to-market movements following a bond reclassification under IFRS 9 'Financial Instruments'.

Other income decreased by $20m. In 9M19, this included $127m of lease expenses following the adoption of IFRS 16 'Leases' from

1 January 2019. In 9M18, lease expenses were recorded within operating expenses. This decrease was broadly offset by a lower adverse impact of hyperinflation accounting in Argentina.

A net release of adjusted ECL of $19m compared with a net release of $113m in 9M18, mainly relating to our legacy portfolios.

Adjusted operating expenses of $0.2bn decreased by $0.4bn or 74%. This partly reflected a change in the allocation of certain costs to global businesses, which reduced costs retained in Corporate Centre, as well as the impact of the adoption of IFRS 16 'Leases'. In addition, costs relating to legacy portfolios reduced, while 9M18 also included a $41m charge in relation to the 2017 UK bank levy.

Adjusted share of income from associates of $1.8bn decreased by $0.1bn or 5%, primarily due to a lower share of profit from SABB.

Balance sheet - 30 September 2019 compared with 30 June 2019

At 30 September 2019, our total assets of $2.7tn were $23bn lower on a reported basis. On a constant currency basis, our total assets were $30bn higher, reflecting targeted lending growth, notably in Asia.

Loans and advances to customers as a percentage of customer accounts were 74%, which was in line with the prior quarter.

Loans and advances to customers

Reported loans and advances to customers were $3.8bn lower. This included adverse effects of foreign currency translation differences of

$19.7bn. On a constant currency basis, customer lending increased by $15.9bn or 2%.

Customer lending growth was primarily in Asia (up $9.8bn), reflecting an increase in GB&M (up $6.8bn), due to higher term lending from our continued strategic focus on growth throughout Asia. Customer lending increased in RBWM by $3.8bn, primarily in Hong Kong (up

$3.0bn), where we maintained a leading position in mortgages. This was partly offset by a decrease in CMB (down $1.8bn).

In Europe, customer lending increased by $6.6bn, with HSBC UK up $2.8bn, primarily reflecting growth in mortgage balances (up

$2.0bn), due to our focus on broker-originated mortgages. We also increased lending to our corporate clients within HSBC UK mainly through term lending. The remaining increase in Europe primarily reflected growth in the UK in GB&M.

Customer accounts

Customer accounts fell by $6.4bn on a reported basis, including adverse foreign currency translation differences of $25.2bn. On a constant currency basis, customer accounts increased by $18.8bn or 1%.

On an adjusted basis, customer accounts increased in Europe by $9.2bn. This was driven by an increase in CMB and RBWM balances, notably in HSBC UK (up $5.7bn) within current accounts and savings. In addition, current accounts increased in GB&M mainly in the UK.

Customer accounts also increased in North America (up $7.9bn), primarily in GB&M (up $3.9bn), reflecting an increase in interest-bearing demand deposits, and in CMB (up $2.1bn), from an increase mainly in time deposits. In addition, customer accounts grew in RBWM (up

$1.7bn), reflecting an increase in savings deposits arising from promotional rates.

Risk-weighted assets

Risk-weighted assets ('RWAs') totalled $865.2bn at 30 September 2019, a $20.8bn decrease during 3Q19. This included a decrease of

$12.8bn due to foreign currency translation differences. The $8.0bn decrease (excluding foreign currency translation differences) comprised reductions of $14.4bn due to methodology and policy changes and $1.5bn due to model updates, partly offset by increases of

$4.9bn from changes in asset quality and of $3bn from asset size growth.

The decrease due to methodology and policy changes included a $7.0bn reduction from risk parameter refinements and improved collateral recognition and a $6.3bn impact from a change to our best estimate of expected loss on corporate exposures. The increase due to asset quality changes included growth of $2.4bn caused by the effect of the credit downgrade of Argentina, as well as changes in the portfolio mix of GB&M assets. Asset size movements included $4.7bn lending growth in CMB and RBWM and a $2.4bn increase in market risk RWAs, partly offset by a $3.7bn fall in Corporate Centre exposures.

Net interest margin

Nine months ended Full year to

1 Gross interest yield is the average annualised interest rate earned on average interest-earning assets ('AIEA'). Cost of funds is the average annualised interest cost as a percentage on 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 income for 9M19 was $22.8bn, broadly unchanged compared with 9M18. This reflected higher yields and an increase in average interest-earning assets ('AIEA'), offset by increased funding costs.

The Group's net interest margin ('NIM') in 9M19 was 1.59%, which was 8 basis points ('bps') lower compared with 9M18. The decline in NIM reflected an increase in net funding costs of 7bps and 1bp impact of significant items.

Notes

• Income statement comparisons, unless stated otherwise, are between the quarter ended 30 September 2019 and the quarter ended 30 September 2018. Balance sheet comparisons, unless otherwise stated, are between balances at 30 September 2019 and the corresponding balances at 30 June 2019.

• The financial information on which this Earnings Release is based, and the data set out in the appendix to this statement, are unaudited and have been prepared in accordance with HSBC's significant accounting policies as described on pages 224 to 237 of our Annual Report and Accounts 2018.

• The Board has adopted a policy of paying quarterly interim dividends on ordinary shares. Under this policy, it is intended to have a pattern of three equal interim dividends with a variable fourth interim dividend. Dividends are declared in US dollars and, at the election of the shareholder, paid in cash in one of, or in a combination of, US dollars, sterling and Hong Kong dollars or, subject to the Board's determination that a scrip dividend is to be offered in respect of that dividend, may be satisfied in whole or in part by the issue of new shares in lieu of a cash dividend.

Cautionary statement regarding forward-looking statements

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

Statements that are not historical facts, including statements about HSBC's beliefs, targets and expectations, are forward-looking statements. Words such as 'expects', '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, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made. HSBC makes no commitment to revise or update any forward-looking statements to reflect events or circumstances occurring or existing after the date of any forward-looking statements.

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

Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement.

These include, but are not limited to:

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

• changes in government policy and regulation, including the monetary, interest rate and other policies of central banks and other regulatory authorities; initiatives to change the size, scope of activities and interconnectedness of financial institutions in connection with the implementation of stricter regulation of financial institutions in key markets worldwide; revised capital and liquidity benchmarks, which could serve to deleverage bank balance sheets and lower returns available from the current business model and portfolio mix; imposition of levies or taxes designed to change business mix and risk appetite; the practices, pricing or responsibilities of financial institutions serving their consumer markets; expropriation, nationalisation, confiscation of assets and changes in legislation relating to foreign ownership; changes in bankruptcy legislation in the principal markets in which we operate and the consequences thereof; general changes in government policy that may significantly influence investor decisions; extraordinary government actions as a result of current market turmoil; other unfavourable political or diplomatic developments producing social instability or legal uncertainty, which in turn may affect demand for our products and services; the costs, effects and outcomes of product regulatory reviews, actions or litigation, including any additional compliance requirements; and the effects of competition in the markets where we operate including increased competition from non-bank financial services companies, including securities firms; and

• factors specific to HSBC, including our success in adequately identifying the risks we face, such as the incidence of loan losses or delinquency, and managing those risks (through account management, hedging and other techniques). Effective risk management depends on, among other things, our ability through stress testing and other techniques to prepare for events that cannot be captured by the statistical models it uses; our success in addressing operational, legal and regulatory, and litigation challenges; and the other risks and uncertainties we identify in 'Top and emerging risks' on pages 69 to 73 of the Annual Report and Accounts 2018 and on pages 16 and 17 of the Interim Report 2019.

For further information contact:

Investor Relations Media Relations

UK - Richard O'Connor UK - Heidi Ashley

Tel: +44 (0) 20 7991 6590 Tel: +44 (0) 20 7992 2045

Hong Kong - Mark Phin Hong Kong - Patrick Humphris

Tel: +852 2822 4908 Tel: +852 2822 2052

Summary consolidated income statement

Nine months ended Quarter ended

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'.

Summary consolidated balance sheet

At

Credit risk

A summary of our current policies and practices for the management of credit risk is set out in 'Credit risk management' on page 79 of the Annual Report and Accounts 2018.

Summary of credit risk

Summary of financial instruments to which the impairment requirements in IFRS 9 are applied