HSBC Holdings Regulatory News (HSBA)

25 OCTOBER 2021

 HSBC HOLDINGS PLC

3Q21 EARNINGS RELEASE

Noel Quinn, Group Chief Executive, said:

"We had a good third-quarter performance, with strong growth in profits supported by additional credit provision releases. Our strategy remains on track, with good delivery in all areas. This was reflected in more consistent top-line growth, robust lending pipelines across our businesses, and rising trade and mortgage balances.

While we retain a cautious outlook on the external risk environment, we believe that the lows of recent quarters are behind us. This confidence, together with our strong capital position, enables us to announce a share buyback of up to $2bn, which we expect to commence shortly."

Financial performance (vs. 3Q20)

• Reported profit after tax up $2.2bn to $4.2bn and reported profit before tax up $2.3bn to $5.4bn. The increase was driven by a release of expected credit losses and other credit impairment charges ('ECL') and a higher share of profit from our associates.

• All regions profitable in 3Q21, demonstrating continued earnings diversity. Asia contributed $3.3bn to Group reported profit before tax, while in HSBC UK reported profit before tax increased by $1.0bn to $1.5bn.

• Reported revenue up 1% to $12.0bn, including a favourable foreign currency translation movement. Adjusted revenue down 1% to $12.2bn, primarily reflecting unfavourable market impacts in life insurance manufacturing in Wealth and Personal Banking ('WPB') and lower revenue in Markets and Securities Services ('MSS'). Notwithstanding these factors, we have seen continued good performances in areas of strategic focus, including wealth and trade finance products.

• Net interest margin ('NIM') of 1.19% was broadly stable compared with 3Q20 and 2Q21.

• Reported ECL were a net release of $0.7bn, compared with a $0.8bn ECL charge in 3Q20, reflecting continued stability in economic conditions and better than expected levels of credit performance.

• Reported and adjusted operating expenses were broadly unchanged as increases, including growth in technology investment, were offset by the impact of our cost-saving initiatives.

• Reported customer lending balances down $20bn in the quarter, including adverse foreign currency translation movements. On a constant currency basis, customer lending balances down $6bn, mainly from the repayment of $14bn of short-term borrowing to fund investments in initial public offerings in Hong Kong, partly offset by continued growth in mortgage balances of $7bn.

• Common equity tier 1 ('CET1') capital ratio of 15.9%, up 30 basis points ('bps') from 2Q21, reflecting a reduction in risk-weighted assets ('RWAs'), partly offset by a decrease in CET1 capital, net of foreseeable dividends.

Financial performance (vs. 9M20)

• Reported profit after tax up $7.5bn to $12.7bn and reported profit before tax up $8.9bn to $16.2bn. Lower revenue was more than offset by net releases in ECL. Reported profit in 9M20 included an impairment of software intangibles of $1.3bn, mainly in Europe, and our share of an impairment of goodwill recorded by an associate.

• Reported revenue down 3% to $37.6bn, primarily reflecting 2020 interest rate reductions and lower revenue in MSS in Global Banking and Markets ('GBM'). These reductions were partly offset by net favourable movements in market impacts in life insurance manufacturing and valuation adjustments in GBM.

• Reported ECL were a net release of $1.4bn, compared with a $7.6bn ECL charge in 9M20. The net release in 9M21 primarily reflected an improvement in the economic outlook since 2020. The reduction also reflected low levels of stage 3 charges in 9M21, as well as the non-recurrence of a large charge in 9M20 related to a corporate exposure in Singapore.

• Reported operating expenses up 2% as a higher performance-related pay accrual and increased investment in technology were in part mitigated by the impact of our cost-saving initiatives.

• Return on average tangible equity ('RoTE') (annualised) of 9.1%, up 5.6 percentage points from 9M20.

Outlook

• We continue to make progress on our environmental, social and governance ('ESG') agenda, including our climate commitments announced in October 2020, and work is ongoing to deliver on the commitments in the special resolution on climate change that was passed at the AGM in May 2021.

• The revenue outlook is becoming more positive, with fee growth across many of our businesses and a stabilisation of net interest income, which we expect to begin to increase in the coming quarters from lending growth and earlier than anticipated policy rate rises.

• Given current consensus economics and default experience, we expect a net release of ECL for 2021, with the potential for a further small net release of ECL in 4Q21, dependent on offsetting levels of stage 3 charges. We now have around $1.2bn remaining of the stage 1 and stage 2 ECL allowance uplift we made during 2020. We do not currently expect ECL charges to normalise towards our medium-term range of 30bps to 40bps of average loans until the second half of 2022.

• We continued to demonstrate strong cost control over the course of the year. Given inflationary pressures, continued investment and the impact and timing of recently announced acquisitions and disposals, we now expect adjusted costs of approximately $32bn for 2021 and 2022, excluding the estimated UK bank levy charge of $0.3bn. With an improved revenue outlook and the prospect of rising policy rates, we remain committed to achieving a RoTE of greater than or equal to 10% over the medium term.   

• We remain well placed to fund growth and step up capital returns, and now intend to normalise our CET1 position to be within our 14% to 14.5% target operating range by the end of 2022. We intend to achieve this through a combination of growth and capital returns, as well as from an expected $20bn to $35bn uplift in RWAs in 2022 due to regulatory developments. Given our strong capital position and notwithstanding growth opportunities available to us, we intend to initiate a share buyback of up to $2bn, which we expect to commence shortly.

For reconciliation of our reported results to an adjusted basis, including lists of significant items, see page 35. Definitions and calculations of other alternative performance measures are included in 'Alternative performance measures' on page 32.

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

2 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.

3 Unless otherwise stated, regulatory capital ratios and requirements are based on the transitional arrangements of the Capital Requirements Regulation in force at the time. These include the regulatory transitional arrangements for IFRS 9 'Financial Instruments', which are explained further on page 29. Leverage ratios are calculated using the end point definition of capital and the IFRS 9 regulatory transitional arrangements. Following the end of the transition period after the UK's withdrawal from the EU, any reference to EU regulations and directives (including technical standards) should be read as a reference to the version onshored into UK law under the European Union (Withdrawal) Act 2018, as amended.

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

This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) No 596/2014 (as it forms part of domestic law of the United Kingdom by virtue of the European Union (Withdrawal) Act 2018). This announcement is made pursuant to the Inside Information Provisions (as defined under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the 'Hong Kong Listing Rules') under Part XIVA of the Securities and Futures Ordinance (Cap. 571) and Rule 13.09(2)(a) of the Hong Kong Listing Rules.

About HSBC

HSBC Holdings plc

HSBC Holdings plc, the parent company of HSBC, is headquartered in London. HSBC serves customers worldwide from offices in 64 countries and territories in its geographical regions: Europe, Asia, North America, Latin America, and Middle East and North Africa. With assets of $2,969bn at 30 September 2021, HSBC is one of the world's largest banking and financial services organisations.

In February 2021, we refreshed our strategy, in recognition of the fundamental shifts in the operating environment.

Our strategy centres around four key pillars:

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

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

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

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

In 3Q21, we entered into an agreement to buy AXA Insurance Pte Limited (AXA Singapore). The proposed acquisition, which is subject to regulatory approval, is a key step in our ambition to becoming a leading wealth manager in Asia by expanding our insurance and wealth franchise in Singapore, a major hub for our wealth business in the ASEAN region.

To help our people to develop the skills for the changing world around us, we launched Future Skills in September 2021, which invited colleagues to explore new personal, digital, data and sustainability skills through a series of learning activities and events.

We continue to make progress on our ESG agenda, including our climate commitments announced in October 2020. Our new Group Chief Sustainability Officer, Celine Herweijer, joined in July 2021 to lead the net zero and wider sustainability agenda. Celine, who reports to the Group Chief Executive, is a Group Executive Committee member and chairs the Group ESG Steering Committee.

Work is ongoing to deliver on the special resolution on climate change backed by 99.7% of our shareholders at the AGM in May 2021. In addition, our Group Chief Executive, Noel Quinn, chairs the Financial Services Task Force, part of HRH The Prince of Wales' Sustainable Markets Initiative. We took a leading role in the formation of the Net-Zero Banking Alliance, and Noel is a principal of the Glasgow Financial Alliance for Net Zero group, an initiative founded by Mark Carney in his role as UN special envoy on climate and adviser for the UK's presidency of COP26, the United Nations Climate Change Conference of the Parties being held in Glasgow. Recognising the emerging importance of nature, we have also been appointed as a member of the Taskforce on Nature-related Financial Disclosures.

Our cost-reduction programme continues to progress. Cumulatively, since the start of the programme in 2020, we have now delivered savings of $2.6bn, with costs to achieve of $3.1bn. We now expect adjusted costs of approximately $32bn for both 2021 and 2022, excluding the UK bank levy. This compares with our previous guidance for 2022 of $31.3bn (based on average September 2021 foreign exchange rates, including the UK bank levy), with the increase in guidance reflecting inflationary pressures and continued investment, as well as costs due to the impact and timing of recently announced acquisitions and disposals.

At 30 September 2021, the Group had delivered cumulative gross RWA reductions of $93bn and we remain on track to achieve our $110bn targeted gross reduction by the end of 2022.

We maintain a strong capital position, with a CET1 ratio of 15.9% at 30 September 2021, and we intend to normalise this to be within our 14% to 14.5% target operating range by the end of 2022. We intend to achieve this through a combination of growth and capital returns, as well as from an expected $20bn to $35bn uplift in RWAs in 2022 due to regulatory developments. As signalled at our interim results in August, we now expect to move to within our target dividend payout ratio range of 40% to 55% of reported earnings per ordinary share in 2021.

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 during 2021. We exclude them to derive constant currency data, allowing us to assess balance sheet and income statement performance on a like-for-like basis and understand better the underlying trends in the business.

Significant items

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

The tables on pages 36 to 45 detail the effects of significant items on each of our global business segments and geographical regions during 9M21, 9M20, 3Q21, 2Q21 and 3Q20.

Adjusted performance - foreign currency translation of significant items

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

Global business performance

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

The Group Chief Executive and the rest of the GEC review operating activity on a number of bases, including by global business and geographical region. Our global businesses - Wealth and Personal Banking, Commercial Banking and Global Banking and Markets - along with the Corporate Centre 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 on page 35. Supplementary reconciliations of adjusted to reported results by global business are presented on pages 36 to 40 for information purposes.

Management view of adjusted revenue

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

With effect from the first quarter of 2021, the Global Banking and Markets management view of adjusted revenue has been revised to align with changes to the management responsibilities of the business and how we assess business performance. Comparative data have been re-presented accordingly. Refer to page 14 for the updated financial performance summary.

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.

3 Includes an interim dividend of $0.07 per ordinary share in respect of the financial year ending 31 December 2021, paid in September 2021, and an interim dividend of $0.15 per ordinary share in respect of the financial year ending 31 December 2020, paid in April 2021.

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

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 36 to 45 reconcile reported to adjusted results for each of our global business segments and geographical regions.

Group

3Q21 compared with 3Q20 - reported results

Reported profit

Reported profit after tax of $4.2bn was $2.2bn higher than in 3Q20.

Reported profit before tax of $5.4bn was $2.3bn or 76% higher, primarily due to a net release in reported ECL, which reflected continued stability in the economic outlook and better than expected levels of credit performance. This compared with a net charge in 3Q20. Additionally, our share of profit from associates and joint ventures benefited from the non-recurrence of our share of an impairment of goodwill recorded in The Saudi British Bank ('SABB').

Lower reported ECL resulted in an increase in reported profit before tax in all of our regions, with profit before tax in HSBC UK up $1.0bn.

Reported revenue included adverse fair value movements of certain volatile items, notably:

• In WPB, adverse market impacts in life insurance manufacturing of $40m compared with a favourable movement of $126m in 3Q20.

• In GBM, adverse credit and funding valuation adjustments of $49m compared with a favourable movement of $32m in 3Q20.

Reported revenue

Reported revenue of $12.0bn was $0.1bn or 1% higher than in 3Q20, primarily due to a favourable impact of foreign currency translation differences of $0.3bn.

Reported revenue included adverse fair value movements of certain volatile items in WPB and GBM, discussed above, and lower MSS revenue in GBM, notably in Global Debt Markets. In addition, net interest income fell, as 2020 global interest rate reductions notably impacted our deposit franchises in WPB and in Global Liquidity and Cash Management ('GLCM') in Commercial Banking ('CMB') and GBM. These reductions were partly offset by increases in Equities, Securities Services and leveraged and acquisition finance in GBM, as well as from growth in fee income across all products in CMB and a recovery in global trade volumes during 2021.

Significant items in the period included adverse fair value movements on financial instruments of $0.1bn. They also included restructuring and other related costs of $0.1bn associated with disposal losses related to our RWA reduction commitments, which were broadly unchanged from 3Q20. We expect to incur additional disposal losses in future quarters as we progress with these reductions.

Reported ECL

Reported ECL were a net release of $0.7bn, compared with a net charge of $0.8bn in 3Q20. The net release in 3Q21 reflected continued stability in economic conditions and better than expected levels of credit performance. This compared with the build-up of stage 1 and stage 2 allowances in 3Q20 due to the adverse economic outlook during the earlier phases of the Covid-19 pandemic. In addition, there were lower stage 3 charges in 3Q21.

Reported operating expenses

Reported operating expenses of $8.0bn were broadly unchanged. A decrease of $0.2bn in restructuring and other related costs, driven by a $0.2bn reduction in severance payments, was largely offset by an adverse impact of foreign currency translation differences of $0.2bn.

The impact of continued investment in technology, including investments in our digital capabilities, was broadly offset by reductions from our cost-saving initiatives of $0.6bn during 3Q21.

Reported share of profit from associates and JVs

Reported share of profit from associates and joint ventures of $0.7bn was $0.7bn higher than in 3Q20. This reflected an increase in the share of profit from SABB due to the non-recurrence of our share of a 3Q20 goodwill impairment charge, a higher share of profit from Bank of Communications Co., Limited ('BoCom') and an increase from Business Growth Fund ('BGF') in the UK due to a recovery in asset valuations.

Group

3Q21 compared with 3Q20 - adjusted results

Adjusted profit

Adjusted profit before tax of $6.0bn was $1.6bn or 36% higher than in 3Q20, primarily due to a net release in reported ECL, which reflected continued stability in the economic outlook and better than expected levels of credit performance. This compared with a net charge in 3Q20. Our share of profit from associates and joint ventures also increased.

Adjusted revenue decreased marginally, despite continued good performances in areas of strategic focus, including wealth and trade finance products, while revenue in GLCM stabilised relative to 2Q21.

Adjusted revenue

Adjusted revenue of $12.2bn was $0.2bn or 1% lower than in 3Q20. The reduction was primarily due to net adverse movements in market impacts in life insurance manufacturing in WPB of $167m. In GBM, the reduction in adjusted revenue was notably in Global Debt Markets in MSS and from a net adverse movement in credit and funding valuation adjustments of $84m, although revenue increased in Equities, Securities Services and leveraged and acquisition finance. In CMB, we grew fee income in all products and benefited from a recovery in global trade volumes during 2021.

The reduction in adjusted revenue included a fall in net interest income due to the impact of 2020 global interest rate reductions, mainly affecting our deposit franchises within WPB and in GLCM in CMB and GBM. However, net interest income stabilised compared with 2Q21.

Adjusted ECL

Adjusted ECL were a net release of $0.7bn, compared with a charge of $0.8bn in 3Q20. ECL in 3Q21 reflected continued stability in economic conditions and better than expected levels of credit performance. This compared with the build-up of stage 1 and stage 2 allowances in 3Q20. In addition, there were lower stage 3 charges in 3Q21.

Adjusted operating expenses

Adjusted operating expenses of $7.6bn were broadly unchanged. Our continued investment in technology, including investments in our digital capabilities, was broadly offset by the effects of our cost-saving initiatives.

Adjusted share of profit from associates and JVs

Adjusted share of profit from associates and joint ventures of $0.7bn increased by $0.3bn or 57%. This reflected an increase in the share of profit from BoCom, as well as from BGF in the UK due to a recovery in asset valuations.

Group

9M21 compared with 9M20 - reported results

Reported profit

Reported profit after tax of $12.7bn was $7.5bn higher than in 9M20.

Reported profit before tax of $16.2bn was $8.9bn higher than in 9M20. The increase was primarily due to lower reported ECL, reflecting an improvement in the forward economic outlook, notably in the UK, compared with the significant build-up of stage 1 and stage 2 allowances in 9M20. We also reported an increase in the share of profit from associates and joint ventures. This was partly offset by lower reported revenue and an increase in reported operating expenses.

The reduction in reported revenue primarily reflected the impact of 2020 global interest rate reductions, as well as a decline in revenue in GBM's MSS business compared with a notably strong performance in 9M20. Reported revenue also included the net favourable impact of certain volatile items:

• In WPB, favourable market impacts in life insurance manufacturing of $373m compared with adverse movements in 9M20 of $218m.

• In GBM, MSS included favourable credit and funding valuation adjustments movements, as adverse adjustments of $14m compared with adverse adjustments of $322m in 9M20. In Principal Investments, valuation gains of $325m compared with gains of $40m in 9M20.

This was partly offset by:

• In Corporate Centre, there were adverse fair value movements on our long-term debt and associated swaps of $89m (9M20: $163m favourable).

In 9M21, all of our regions were profitable. Despite the impact of lower global interest rates, our Asia business continued to perform strongly. In addition, there was a material recovery in profitability in all other regions, primarily reflecting a net release in ECL as the economic outlook improved, notably in HSBC UK.

IFRS 17 'Insurance Contracts' sets the requirements that an entity should apply in accounting for insurance contracts it issues and reinsurance contracts it holds. IFRS 17 is effective from 1 January 2023 and could have a significant adverse impact on the profitability of our insurance business. For further details on the impact of IFRS 17 on the results of our insurance operations, see page 10.

Reported revenue

Reported revenue of $37.6bn was $1.1bn or 3% lower than in 9M20. The reduction primarily reflected a fall in net interest income as a result of the impact of lower global interest rates, notably affecting our deposit franchises in WPB and in GLCM in CMB and GBM. In GBM's MSS business, revenue decreased in Global Foreign Exchange and Global Debt Markets, compared with a notably strong 9M20, although activity increased in Equities and there were favourable movements in credit and funding valuation adjustments. In addition, revenue was lower in Corporate Centre.

These reductions were in part mitigated by revenue growth in Wealth in WPB, notably from a net favourable movement in market impacts in life insurance manufacturing, and growth in investment distribution, asset management and new business in insurance. GBM revenue also benefited from favourable valuation gains in Principal Investments and higher revenue in leveraged and acquisition finance. In CMB, revenue increased in Credit and Lending as margins improved, and a recovery in trade volumes resulted in higher fee income in Global Trade and Receivables Finance ('GTRF').

The reduction in reported revenue included adverse fair value movements on financial instruments of $0.6bn, although these were more than offset by the favourable impact of foreign currency translation differences of $1.4bn.

Reported ECL

Reported ECL were a net release of $1.4bn, compared with a charge of $7.6bn in 9M20. The net release in 9M21 reflected an improvement in the economic outlook, notably in the UK. This compared with the significant build-up of stage 1 and stage 2 allowances in 9M20 due to the worsening economic outlook at the onset of the Covid-19 pandemic. The reduction in ECL also reflected low levels of stage 3 charges, as well as the non-recurrence of a significant charge in 9M20 related to a corporate exposure in Singapore.

Given current consensus economics and default experience, ECL charges for 2021 are expected to be a net release for the year, with the potential for a further small net release in 4Q21, dependent on offsetting levels of stage 3 charges. We do not currently expect ECL charges to normalise towards our medium-term range of 30bps to 40bps of average loans until the second half of 2022.

For further details on the calculation of ECL, including the measurement uncertainties and significant judgements applied to such calculations, the impact of alternative/additional scenarios and post-model adjustments, see pages 20 to 23.

Reported operating expenses

Reported operating expenses of $25.1bn were $0.5bn or 2% higher than in 9M20. This primarily reflected an increase in performance-related pay of $0.9bn, which is accrued based on the profile of our expected profit performance. In addition, investment in technology, including investments in our digital capabilities, increased by $0.6bn. Our investment in Asia wealth also rose by $0.1bn. These increases were partly offset by a $1.5bn impact of our cost-saving initiatives.

The increase in reported operating expenses also included the adverse impact of foreign currency translation differences of $1.1bn and an increase in restructuring and other related costs of $0.2bn, within which severance payments fell by $0.1bn. However, these items were broadly offset by the non-recurrence of a $1.3bn impairment of intangible assets, mainly in Europe in 9M20, of which $0.2bn was within restructuring and other related costs.

Reported share of profit from associates and JVs

Reported share of profit in associates and joint ventures of $2.4bn was $1.4bn higher, primarily reflecting a higher share of profit from SABB due to the non-recurrence of our share of its goodwill impairment charge in 9M20 and an increased share of profit from BoCom. Our share of profit also rose from BGF in the UK due to a recovery in asset valuations relative to 9M20.

Tax expense

The effective tax rate for 9M21 of 22.0% was lower than the 30.1% for 9M20. The effective tax rate for 9M21 was increased by the impact of substantively enacted legislation to increase the UK statutory tax rate from 1 April 2023. The 9M20 effective tax rate was high, due mainly to the non-recognition of deferred tax on losses in the UK.

Group

9M21 compared with 9M20 - adjusted results

Adjusted profit

Adjusted profit before tax of $17.9bn was $7.9bn or 79% higher than in 9M20, primarily due to a net release of adjusted ECL due to an improvement in the economic outlook, notably in the UK, compared with the significant build-up of stage 1 and stage 2 allowances in 9M20. Share of profit from associates and joint ventures also increased.

These factors were in part offset by lower adjusted revenue, primarily reflecting a fall in net interest income as a result of the impact of lower global interest rates and a reduction in MSS revenue in GBM, compared with a notably strong performance in 9M20. In addition, adjusted operating expenses were higher, primarily due to a higher performance-related pay accrual.

Adjusted revenue

Adjusted revenue of $38.0bn was $2.0bn or 5% lower than in 9M20. The reduction was primarily in net interest income due to the impact of lower global interest rates, mainly affecting our deposit franchises within WPB and in GLCM in CMB and GBM. In GBM's MSS business, revenue decreased in Global Foreign Exchange and Global Debt Markets, reflecting lower market volatility and client activity compared with a notably strong 9M20, although activity increased in Equities and there were favourable movements in credit and funding valuation adjustments of $327m. In addition, revenue was lower in Corporate Centre.

These reductions were in part mitigated by revenue growth in Wealth in WPB, notably from a net favourable movement in market impacts in life insurance manufacturing of $598m, and growth in investment distribution, asset management and new business in insurance. In GBM, there were higher favourable revaluations in Principal Investments compared with 9M20, and increased revenue in leveraged and acquisition finance. In CMB, revenue grew in Credit and Lending as margins improved, and a recovery in trade volumes resulted in higher fee income in GTRF.

Adjusted ECL

Adjusted ECL, which removes the period-on-period effects of foreign currency translation differences, were a net release of $1.4bn compared with a charge of $8.1bn in 9M20. These reflected releases as a result of an improvement in the economic outlook, notably in the UK. This compared with the significant build-up of stage 1 and stage 2 allowances in 9M20 due to the worsening economic outlook at the onset of the Covid-19 pandemic. The reduction in ECL also reflected low levels of stage 3 charges in 9M21, as well as the non-recurrence of a significant charge in 9M20 related to a corporate exposure in Singapore.

Adjusted operating expenses

Adjusted operating expenses of $23.8bn were $0.5bn or 2% higher than in 9M20. This primarily reflected higher performance-related pay of $0.8bn, which is accrued based on the profile of our expected profit performance. In addition, investment in technology, including investments in our digital capabilities, increased by $0.6bn. Our Asia wealth investment also rose by $0.1bn. These increases were partly offset by a $1.5bn impact of our cost-saving initiatives.

The number of employees expressed in full-time equivalent staff ('FTE') at 30 September 2021 was 223,448, a decrease of 2,611 compared with 31 December 2020. The number of contractors at 30 September 2021 was 6,236, an increase of 544, primarily as a result of our growth and transformation initiatives.

Adjusted share of profit from associates and JVs

Adjusted share of profit from associates and joint ventures of $2.4bn was $0.9bn or 58% higher than in 9M20, including an increase in share of profit from BoCom and SABB. Our share of profit also rose from BGF in the UK due to a recovery in asset valuations relative to 9M20.

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 1.20% was 15 basis points ('bps') lower compared with 9M20, driven by lower market interest rates. The yield on AIEA dropped by 45bps, partly offset by a 35bps fall in the funding cost of average interest-bearing liabilities. The decrease in NIM in 9M21 included the favourable impact of significant items and the adverse effects of foreign currency translation differences. Excluding these, NIM fell by 14bps.

NIM for 3Q21 was 1.19%, down 1bps compared with the previous year as well as the previous quarter, predominantly driven by a change in the balance sheet mix towards low yielding short-term funds and loans to banks, and reducing balances in high yielding term lending.

Results from insurance operations

IFRS 17 'Insurance Contracts' sets the requirements for accounting for insurance contracts issued and reinsurance contracts held and is effective from 1 January 2023. As highlighted in our Annual Report and Accounts 2020, IFRS 17 requires a number of key changes compared with our current accounting policies for insurance.

• Under IFRS 17, there will be no present value of in-force insurance contracts ('PVIF') asset recognised. Instead the estimated future profit will be included in the measurement of the insurance contract liability as the contractual service margin ('CSM') and this will be gradually recognised in revenue as services are provided over the duration of the insurance contract. While the profit over the life of an individual contract will be unchanged, its emergence will be later under IFRS 17.

• IFRS 17 requires the increased use of current market values in the measurement of insurance assets and liabilities. Additionally, the replacement of the PVIF asset with a CSM liability will reduce both tangible and overall equity.

• In accordance with IFRS 17, directly attributable costs will be incorporated in the CSM and, as recognised, will be presented as a deduction to reported revenue. This will result in a reduction in reported operating expenses.

The Group is in the process of implementing IFRS 17, and industry practice and interpretation of the standard are still developing. Additionally, the impact on the forecast future returns of our insurance business is dependent on the growth, duration and composition of our insurance contract portfolio. Therefore, the likely financial impact of its implementation remains uncertain.

We expect to provide an update on the likely impacts on our insurance business' income statement and balance sheet at or around our 1H22 interim results announcement. For the purpose of planning the Group's financial resources, our initial assumption (based on analysis of the expected 2022 position) is that the resultant accounting changes may result in a step-down in the profitability of our insurance business by approximately two thirds on the transition to IFRS 17, albeit with a range of expected outcomes. The return on average ordinary shareholders' equity ('RoE') of the insurance business is not expected to be significantly impacted. A similar impact is expected on the equity of the insurance business, primarily reflecting the elimination of the PVIF asset and creation of the CSM liability (the latter impacting tangible equity). At 1H21, the equity of insurance manufacturing subsidiaries were $16.4bn, including PVIF assets of $9.4bn and an associated deferred tax liability of $1.7bn. These assumptions may change significantly in the period prior to adoption of the standard.

No significant effects are expected on the distribution of dividends from insurance subsidiaries, primarily as insurance entities do not recognise PVIF in their individual financial statements. Similarly, no significant impacts are expected on the Group's regulatory capital, which does not consolidate the results of insurance entities.

1 Net of impairment allowances.

Balance sheet - 30 September 2021 compared with 30 June 2021

At 30 September 2021, our total assets of $3.0tn were $7bn lower on a reported basis and included adverse effects of foreign currency translation differences of $39bn.

The decrease in total assets reflected lower loans and advances to customers. This was in part offset by higher cash balances, which rose by $16bn, from an increased commercial surplus and growth in deposits, as well as an increase in reverse repurchase agreements, driven by higher client demand and short-term funding requirements.

Reported loans and advances to customers as a percentage of customer accounts was 61.6%, which was lower compared with 63.5% at 30 June 2021.

Loans and advances to customers

Reported loans and advances to customers of $1.0tn were $20bn lower, which included adverse effects of foreign currency translation differences of $14bn. On a constant currency basis, customer lending balances were $6bn lower.

Customer lending decreased in WPB by $2bn to $482bn, mainly from the repayment of $9bn of short-term borrowing to fund investments in initial public offerings in Hong Kong. This reduction was largely offset by higher mortgage balances, notably in the UK (up $2bn), Hong Kong (up $2bn) and Canada (up $1bn) as housing market activity continued to increase.

In GBM, lending of $212bn fell by $2bn, and in CMB, customer lending of $345bn was $1bn lower. These reductions were primarily driven by the repayment of short-term borrowing to fund investments in initial public offerings in Hong Kong. In addition, in CMB we grew trade lending by $2bn, reflecting a recovery in global trade volumes, which largely mitigated a reduction in other term lending.

Customer accounts

Customer accounts of $1.7tn increased by $19bn on a reported basis, which included adverse effects of foreign currency translation differences of $22bn. On a constant currency basis, customer accounts were $41bn higher, with growth across all of our global businesses. The increase was primarily in the UK, Hong Kong and Singapore, as customers continued to build up their savings as spending remained below pre-pandemic levels.

Risk-weighted assets - 30 September 2021 compared with 30 June 2021

Risk-weighted assets ('RWAs') decreased by $23.1bn during the quarter. Excluding foreign currency translation differences, RWAs decreased by $14.4bn, reflecting the following movements:

• a $6.4bn fall in RWAs due to changes in asset quality, which related predominantly to favourable portfolio mix changes and credit migration in GBM and CMB corporate lending portfolios;

• a $4.5bn reduction in RWAs due to changes to methodology and policy, mostly risk parameter refinements in GBM and CMB; and

• a $3.5bn asset size decrease. This was mostly due to lower short-term lending in WPB and GBM related to lending to fund initial public offerings in Hong Kong, partly offset by an increase in market risk RWAs.

Wealth and Personal Banking - adjusted results

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

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

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

9M21 compared with 9M20

Adjusted profit before tax of $5.8bn was $2.7bn or 86% higher than in 9M20. This reflected a net release of adjusted ECL as the economic outlook improved, compared with the significant build-up of allowances in 9M20. The impact of lower global interest rates resulted in a decrease in net interest income, which was partly offset by an increase in Wealth revenue due to a net favourable movement of $598m in market impacts in insurance, and growth in investment distribution (up $0.2bn), asset management (up $0.1bn) and new business in insurance (up $0.2bn).

Adjusted revenue of $16.8bn was $0.4bn or 3% lower.

In Personal Banking, revenue of $9.2bn was down $1.1bn or 11%.

• Net interest income was $1.2bn lower due to narrower margins following the fall in global interest rates in 2020 due to the Covid-19 pandemic. This reduction was partly mitigated by deposit balance growth of $35bn or 5% and higher mortgage lending of $23bn or 7% across all regions, particularly in the UK and Hong Kong.

• Non-interest income increased by $0.1bn or 11%, driven by growth of mortgage fees in the UK and higher transaction volumes and spending on cards.

In Wealth, revenue of $7.0bn was up $1.1bn or 19%.

• Life insurance manufacturing revenue was $0.8bn higher, which included a net favourable movement in market impacts of $598m. A favourable movement of $373m compared with an adverse movement of $225m in 9M20, as equity markets continued to improve after the sharp fall in March 2020. The value of new business written of $0.8bn was $0.2bn higher, reflecting market share growth across Asia, notably in Hong Kong, where we significantly broadened engagement with domestic customers, including through the continued expansion of our health platforms.

• Investment distribution revenue was $0.2bn or 8% higher, reflecting strong equity market conditions in Hong Kong, which resulted in higher mutual fund sales and growth in brokerage fees as transaction volumes increased.

• Asset management revenue was $0.1bn or 15% higher, driven by an increase in management fees from higher net new money inflows, and growth in performance fees, reflecting favourable market movements.

• Global Private Banking revenue was $18m or 1% higher due to growth in non-interest income of $69m or 8%. A rise in investment revenue reflected higher fees from advisory and discretionary mandates, as well as market volatility. This was partly offset by net interest income, which fell by $51m or 10% as a result of the impact of lower global interest rates.

Adjusted ECL were a net release of $0.3bn, compared with a charge of $2.7bn in 9M20. ECL reflected a release of allowances as the economic outlook improved. This compared with the significant build-up of allowances in 9M20 as a result of the Covid-19 pandemic.

Adjusted operating expenses of $11.4bn were $0.1bn or 1% lower, as the benefits of our cost-saving initiatives funded our continued investment in Wealth in Asia and also offset a higher performance-related pay accrual.

3Q21 compared with 3Q20

Adjusted profit before tax of $1.9bn was $0.5bn or 32% higher than in 3Q20. This was driven by a $0.6bn reduction in adjusted ECL, reflecting continued stability in economic conditions and better than expected levels of credit performance. Adjusted revenue was $0.2bn or 3% lower, driven by a net adverse movement in market impacts in life insurance manufacturing of $167m and the ongoing impact of lower global interest rates. However, this was in part mitigated by higher revenue, notably fee income, in asset management and Global Private Banking. While wealth balances fell by 2% in the quarter, mainly reflecting an adverse movement in equity markets in Asia, net new money in Global Private Banking and asset management remained positive. Adjusted operating expenses were stable, as our increased investment in Wealth in Asia was funded by the benefits of our cost-saving initiatives.

Commercial Banking - adjusted results

1 Includes CMB's share of revenue from the sale of Markets and Securities Services and Banking products to CMB customers. GBM's share of revenue from the sale of these products to CMB customers is included within the corresponding lines of the GBM management view of adjusted revenue. Also includes allocated revenue from Markets Treasury, HSBC Holdings interest expense and Argentina hyperinflation.

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

9M21 compared with 9M20

Adjusted profit before tax of $5.4bn was $4.0bn higher than in 9M20. This reflected a net release of adjusted ECL of $0.5bn in 9M21 as the economic outlook improved, compared with a charge of $4.1bn in 9M20 due to a significant build-up of allowances and a notable charge related to a corporate exposure in Singapore. This was partly offset by a decline in adjusted revenue, mainly due to the impact of lower global interest rates.

Adjusted revenue of $10.0bn was $0.5bn or 5% lower.

• In GLCM, revenue decreased by $0.7bn or 21%, reflecting the impact of lower global interest rates, mainly in Hong Kong and the UK. This was partly offset by a 16% increase in year-on-year average deposit balances, with growth particularly in the UK, Hong Kong and the US, as well as from an 8% increase in fee income, with growth across all regions.

• In GBM products, Insurance and Investments, and Other, revenue reduced by $21m or 1%, reflecting the impact of lower global interest rates on income earned on capital held in the business. This reduction was partly offset by higher revenue from the cross-sell of GBM products to CMB customers, notably Global Markets and Capital Markets and Advisory.

These decreases were partly offset:

• In Credit and Lending, revenue increased by $0.1bn or 3%, reflecting wider margins and an 8% increase in fee income, notably in the UK, Latin America and North America. During 2021 we grew balances in Asia, although year-on-year average balances decreased, as customers' funding requirements fell due to the Covid-19 restrictions.

• In Global Trade and Receivables Finance ('GTRF'), revenue rose by $0.1bn or 5%, driven by a 7% growth in fee income across all regions, partly reflecting a recovery in global trade volumes during 2021, as well as an increase in average balances, notably in Asia.

Adjusted ECL were a net release of $0.5bn, compared with a charge of $4.1bn in 9M20. ECL in 9M21 reflected a release of stage 1 and stage 2 allowances as the economic outlook improved, notably in the UK. This compared with the significant build-up of allowances in 9M20 as a result of the adverse economic outlook due to the Covid-19 pandemic. The reduction in ECL also included lower stage 3 charges in 9M21, and as 9M20 included a significant charge related to a corporate exposure in Singapore.

Adjusted operating expenses of $5.2bn were $0.1bn or 1% higher, primarily reflecting an increase in the performance-related pay accrual and continued investment in our digital and transactional banking capabilities. These increases were partly offset by continued cost discipline through hiring efficiencies, and the impact of our cost-saving initiatives.

At 30 September 2021, we had delivered $23bn of cumulative gross RWA reductions as part of our transformation programme.

3Q21 compared with 3Q20

Adjusted profit before tax of $2.0bn was $0.8bn or 64% higher than in 3Q20, primarily due to a reduction in adjusted ECL of $0.6bn, reflecting continued stability in economic conditions, better than expected levels of credit performance and lower stage 3 charges. Adjusted revenue for the quarter increased compared with the prior year quarter for the first time since the pandemic, driven by higher fee income across all products and growth in trade lending and deposit balances, although these were partly offset by the impact of lower global interest rates. Adjusted operating expenses were broadly unchanged as increased investment in technology was broadly offset by the impact of our cost-saving initiatives and continued disciplined hiring.

Global Banking and Markets - adjusted results

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

2 From 1 June 2020, revenue from Issuer Services, previously reported in Securities Services, was reported in Banking. This resulted in $80m revenue being recorded in Securities Services in 9M20. Comparative data have not been re-presented.

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

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

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

9M21 compared with 9M20

Adjusted profit before tax of $4.7bn was $0.9bn or 24% higher than in 9M20. This mainly reflected a net release of adjusted ECL, compared with a significant build-up of allowances in 9M20, despite a decrease in adjusted revenue and higher operating expenses.

Adjusted revenue of $11.5bn decreased by $0.8bn compared with 9M20.

In MSS, revenue fell by $0.7bn or 10%, compared with an exceptionally strong comparative period, primarily in Global Debt Markets, Global Foreign Exchange and Securities Financing.

• In Equities, our diversified product and geographical coverage enabled us to capture market opportunities, including the strong client activity, particularly in wealth in Asia and Europe, due to volatility in the Shanghai and Hong Kong stock exchanges, contributing to revenue growth of $0.4bn or 81%.

• In Securities Services, we continued to grow assets under custody, with a 23% year-on-year increase in average balances, rising to $10tn. In addition, transaction volumes increased in Asia and Europe, resulting in higher fees.

In Banking, revenue fell by $0.2bn or 5%.

• In GLCM, revenue fell by $0.2bn or 14%, as lower global interest rates compressed margins, although we grew average balances by 5% and increased fee income, reflecting higher transaction volumes in the US and UK.

• Capital Markets and Advisory benefited from a strong performance in leveraged and acquisition finance, particularly in the US, although revenue was adversely affected by a reduction in debt underwriting volumes compared with elevated activity in 9M20.

• Revenue was adversely affected in Credit and Lending and GTRF due to strategic actions taken to reduce RWAs.

Adjusted ECL were a net release of $0.6bn, compared with a charge of $1.3bn in 9M20. ECL in 9M21 reflected the release of stage 1 and stage 2 allowances as the economic outlook improved, and benefited from a net release of provisions against specific stage 3 customers. This compared with the significant build-up of allowances in 9M20 as a result of the Covid-19 pandemic.

Adjusted operating expenses of $7.3bn were $0.1bn or 2% higher from an increased performance-related pay accrual of approximately $0.3bn and higher technology investment. These increases were partly offset by the impact of our cost-saving initiatives.

At 30 September 2021, we had delivered $70bn of cumulative gross RWA reductions as part of our transformation programme. Since the start of the programme, this mitigated growth in RWAs from asset quality deterioration, increased activity on client facilities and elevated market volatility as a result of the Covid-19 pandemic, as well as from regulatory changes.

3Q21 compared with 3Q20

Adjusted profit before tax of $1.4bn was $0.2bn or 13% higher than in 3Q20, driven by a net release in adjusted ECL in 3Q21.

Adjusted revenue was $0.1bn or 3% lower. Revenue in Global Debt Markets was lower due to our strategic reduction of the capital deployed to G10 long-term rates derivatives market-making, and was in the context of strong client activity in 3Q20. However, there was continued momentum in Equities, notably in derivatives, from higher client activity and volatility in Asia. In Securities Services, 3Q21 was a strong quarter, as higher volumes resulted in fee growth and we grew assets under custody, mainly in Asia. In Credit and Lending, net interest income fell due to our strategic actions to reduce RWAs, resulting in lower balances. Adjusted ECL were $0.3bn lower, reflecting continued stability in economic conditions and better than expected levels of credit performance. Adjusted operating expenses were $23m or 1% lower, as our cost-saving initiatives and lower litigation costs more than offset an increase in investments in technology and a higher performance-related pay accrual.

Corporate Centre - adjusted results

1 Central Treasury includes adverse valuation differences on issued long-term debt and associated swaps of $89m (9M20: gain of $163m; 3Q21: loss of $35m; 2Q21: loss of $27m; 3Q20: loss of $32m).

2 Revenue from Markets Treasury, HSBC Holdings net interest expense and Argentina hyperinflation are allocated out to the global businesses, to align them better with their revenue and expense. The total Markets Treasury revenue component of this allocation for 9M21 was $1,844m (9M20: $2,253m; 3Q21: $524m; 2Q21: $510m; 3Q20: $672m).

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

9M21 compared with 9M20

Adjusted profit before tax of $2.1bn was $0.3bn or 16% higher than in 9M20 due to an increased adjusted share of profit from associates and joint ventures, partly offset by adverse movements in adjusted revenue and adjusted operating expenses.

Adjusted revenue decreased by $0.2bn, mainly in Central Treasury, from a net adverse fair value movement of $252m relating to the economic hedging of interest rate and exchange rate risk on our long-term debt with associated swaps.

Adjusted operating expenses increased by $0.4bn due to a reduction in recoveries from our global businesses, higher expenditure on regulatory projects and a higher performance-related pay accrual.

Adjusted share of profit from associates and joint ventures of $2.4bn increased by $0.8bn. The increases were from BoCom and SABB, as well as from BGF in the UK, reflecting a recovery in asset valuations relative to 9M20.

3Q21 compared with 3Q20

Adjusted profit before tax of $0.7bn was $0.2bn higher than in 3Q20. This was primarily due to an increase in the share of profit from BoCom and from BGF in the UK due to favourable asset valuations compared with 3Q20. This was partly offset by lower revenue, driven by a loss on disposal of legacy portfolios in the US.

• Income statement comparisons, unless stated otherwise, are between the quarter ended 30 September 2021 and the quarter ended 30 September 2020. Balance sheet comparisons, unless otherwise stated, are between balances at 30 September 2021 and the corresponding balances at 30 June 2021.

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

• On 2 August 2021, the Directors approved an interim dividend for the 2021 half-year of $0.07 per ordinary share. The interim dividend was paid on 30 September 2021 in cash in US dollars, or in sterling or Hong Kong dollars at exchange rates determined on 20 September 2021. The Group will not pay quarterly dividends during 2021, but will review whether to revert to paying quarterly dividends at or ahead of its 2021 results announcement in February 2022.

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.

We operate a wide-ranging stress testing programme, which is a key part of our risk management and capital and liquidity planning. Stress testing provides management with key insights into the impacts of severely adverse events on the Group, and provides confidence to regulators on the Group's financial stability.

In response to the risks posed by climate change, we have developed our capabilities to execute climate stress testing and scenario analysis, which are being used to further enhance our understanding of our risk exposures for use in risk management and business decision making. We have also delivered regulatory stress testing exercises to a number of regulators including the Bank of England's climate biennial exploratory scenario. We appointed a Head of Climate Risk in support of our climate change strategy and to oversee the development of our climate risk management capabilities. Our ongoing climate risk programme will shape our approach to climate risk across four key pillars: governance and risk appetite; risk management; stress testing; and disclosures.

At 30 September 2021, our CET1 ratio increased to 15.9%, from 15.6% at 30 June 2021, and our liquidity coverage ratio ('LCR') was 135%. Our capital, funding and liquidity positions continue to help enable us to support our customers throughout the ongoing geopolitical and macroeconomic uncertainty.

The Covid-19 outbreak and its effect on the global economy have continued to impact our organisation and our customers, and the future effects of the pandemic still remain uncertain. The economic impact of the pandemic has affected regions at different times and to varying degrees.

The various government support measures and restrictions put in place in response to the outbreak have created additional challenges, given the rapid pace of change and significant operational demands. The speed at which countries and territories are able to return to pre-Covid-19 levels of economic activity will vary based on the levels of continuing government support offered, the continuing levels of infection, and ability of governments to roll out vaccines across each country. While the approval and roll-out of vaccines during 2021 raised hopes that government restrictions will be lifted across all developed markets by the end of the year, there has been significant divergence in the speed at which vaccines have been deployed. Most developed countries have now vaccinated a large proportion of their populations, although take-up rates vary both within countries and across age groups. Many less developed countries have struggled to secure supplies and are at an earlier stage of their vaccination programmes. There remains uncertainty regarding the efficacy and side effects of the vaccines over various time horizons, particularly as new variants of the virus emerge. A full return to pre-pandemic levels of social interaction across all our key markets is unlikely in the short to medium term, despite the easing of government restrictions in many of these markets.

Our operations have been resilient throughout the Covid-19 pandemic. However, the operational support functions on which the Group relies are based in a number of countries worldwide, some of which, notably India, have been particularly affected by the Covid-19 pandemic and experienced a significant increase in infection rates during 2021. As a result, business continuity responses have been implemented and the majority of service level agreements have been maintained in locations where the Group operates. We continue to monitor the situation closely, in particular in those countries and regions where Covid-19 infections are most prevalent.

Our ECL models continue to be impacted by the pandemic, particularly as a result of the various government measures introduced to support borrowers during the outbreak. This continues to require enhanced monitoring of model outputs and the use of model overlays, including management judgemental adjustments based on the expert judgement of senior credit risk managers and the recalibration of key loss models to take into account the impacts of Covid-19 on critical model inputs. In addition, we have been responding to complex conduct considerations and heightened risk of fraud related to the varying government support measures and restrictions. The continued economic uncertainty from the pandemic could adversely impact our revenue assumptions, notably volume growth.

The trade and regulatory environment is becoming increasingly fragmented. The spread of the Covid-19 delta variant has been a major contributing factor to the disruption of supply chains in several industries globally. Supply chain disruptions are likely to create a headwind to continued recovery for the remainder of 2021. The mismatch between supply and demand has also impacted commodity prices and has created further challenges for monetary authorities. Central bank interest rates remain at historically low levels in developed markets, whereas in several emerging markets central banks have begun to tighten monetary policy to counter rising inflation. The vaccine-led economic recovery contributed to an increase in interest rate yields and a steepening of yield curves in our major markets in the first half of 2021. However, more recently, some segments of the financial markets have priced in a moderation in global GDP growth rates from 2022 as the post-Covid-19 rebound fades, and as Chinese policymakers take calibrated steps to curb domestic financial risks, resulting in some re-flattening of major market yield curves.

Recent market volatility reflects, to a certain extent, concerns about potential repercussions that may affect the wider Chinese and global economy resulting from the recent instability of China's real estate sector. Such repercussions may occur directly through financial exposures to the Chinese real estate sector, or indirectly through the effect of weaker Chinese economic activity on global supply chains and commodities demand and pricing. Using the Chinese government's 'three red lines' framework used to govern the real estate sector, at 30 September 2021 HSBC had no direct credit exposure to developers in the 'red' category, and limited exposure to clients categorised as 'orange'. We continue to monitor the situation closely, particularly potential indirect impacts that may arise, and seek to take mitigating actions as required.

Potential changes to tax legislation and tax rates in the countries in which we operate could increase the Group's effective tax rate in future periods as governments seek revenue sources to pay for the Covid-19 support packages that they have implemented. In October, the finance ministers of 136 countries, including all G7 and G20 countries, reached agreement on the key principles with respect to the introduction of a global minimum tax rate of 15% by 2023. The financial impact on HSBC will depend significantly on the finalisation of several key aspects of the calculations. It is expected that detailed rules will be finalised during the fourth quarter of 2021. Given the uncertainty regarding the detail of the tax rules and the future profitability in each tax jurisdiction, we are not able to reliably estimate the potential impact at this stage.

Geopolitical tensions could also have potential ramifications for the Group and its customers. The relationship between the UK and the EU laid out in the Trade and Cooperation Agreement of December 2020 will take time to settle, and may give rise to intermittent disputes in the interim. Diplomatic tensions including between China and the US, the UK, the EU, India and other countries, and developments in Hong Kong and Taiwan, alongside other potential areas of tension, may affect the Group by creating regulatory, reputational and market risks. The US, the UK, the EU, Canada and other countries have imposed various sanctions and trade restrictions on Chinese persons and companies, and the US continues to advance the development of its framework for strategic competition with China. There is also increasing discussion in the US and Europe on multilateral efforts to address certain areas of disagreement with China, which may create a more complex operating environment for the Group and its customers. In response to foreign sanctions and trade restrictions, China has also announced a number of sanctions, trade restrictions and laws that could impact the Group and its customers. We continue to carefully monitor and seek to manage the potential implications of these developments.

The financial impact to the Group of geopolitical risks in Asia is heightened due to the strategic importance of the region in terms of profitability and prospects for growth. Business sentiment in some sectors in Hong Kong remains dampened, although the financial services sector has remained strong and has benefited from stable liquidity conditions.

During the third quarter 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 from legacy Ibor products - continued to engage with our clients, and finalise IT and operational changes necessary to facilitate an orderly transition from Ibors to RFRs, or alternative benchmarks, such as policy interest rates. Following the announcement by ICE Benchmark Administration Limited in March 2021 to extend the publication of the US dollar London interbank offer rate ('Libor') to June 2023, the Group's transition programme is focusing mainly on client engagement for Ibors demising from the end of 2021.

The Group's exposure to contracts referencing Libor interest rates that are demising from the end of 2021 has continued to reduce as a result of ceasing to provide sterling Libor cash and derivative products, in line with industry milestones and the transition of legacy contracts. With respect to the transition of our legacy contracts linked to Libor interest rates demising from the end of 2021, we have communicated with all impacted clients and plan to transition a significant amount of contracts by 31 December 2021. While client and market factors continue to present challenges in the transition process, the plans and actions being taken demonstrate that this is achievable dependent on the pace of market transition away from the demising benchmarks, and the responsiveness of our clients in agreeing the required changes.

We continue to participate in market-wide initiatives for the transition of derivative contracts and new RFR convention changes. We also continue to meet our clients to discuss loan contracts and we launched a consent solicitation to remediate Ibor references in a number of the Group's English law-governed capital/MREL instruments. The key risks associated with the transition of these legacy contracts, including regulatory compliance risk, resilience risk, financial reporting risk, legal risk and market risk, continue to be actively managed and mitigated with focus on ensuring fair outcomes for clients are achieved. We will continue to carry out contractual legal repapering and rebooking activities, along with the negotiation of fallback provisions where active transition cannot be achieved. However, there may be a limited number of contracts that are difficult to transition (so-called 'tough legacy'), where we may need to rely on jurisdictional legislative solutions, to the extent possible.

Summary of credit risk

At 30 September 2021, gross loans and advances to customers and banks of $1,147bn increased by $13bn, compared with 31 December 2020. This included adverse foreign exchange movements of $16.4bn and a $2.6bn decrease due to domestic mass market retail banking in the US being reclassified to assets held for sale.

Excluding foreign exchange movements, growth was driven by a $17.9bn increase in personal loans and advances to customers and a $15.7bn increase in loans and advances to banks. Wholesale loans and advances to customers decreased by $4.2bn.

The increase in personal loans and advances to customers was driven by mortgage growth of $16.8bn, mainly in the UK (up $7.4bn), Hong Kong (up $5.1bn) and Canada (up $3.1bn). Personal loans and overdrafts increased by $2.6bn, mainly in Hong Kong (up $2.2bn). This was partly offset by a decrease of $1.3bn in credit cards, mainly in the US (down $0.9bn).

During the first nine months of 2021, the Group experienced a release in allowances for ECL, which was driven by improving economic forecasts, better than expected levels of credit performance and lower levels of stage 3 charges. Excluding foreign exchange movements, stage 1 and stage 2 allowances for ECL reduced by $2.6bn and stage 3 by $0.4bn.

Excluding foreign exchange movements, the allowance for ECL in relation to loans and advances to customers decreased by $2.7bn from 31 December 2020. This was attributable to:

• a $1.4bn decrease in wholesale loans and advances to customers, of which $1.1bn was driven by stages 1 and 2; and

• a $1.3bn decrease in personal loans and advances to customers, of which $1.2bn was driven by stages 1 and 2.

At 30 September 2021, the allowance for ECL of $12.4bn decreased by $3.3bn compared with 31 December 2020, including favourable foreign exchange movements of $0.3bn. The $12.4bn allowance comprised $11.9bn in respect of assets held at amortised cost, $0.5bn in respect of loan commitments and financial guarantees, and $0.1bn in respect of debt instruments measured at fair value through other comprehensive income ('FVOCI').

The ECL release for the first nine months of 2021 was $1.4bn, inclusive of recoveries. This comprised: $1.1bn in respect of wholesale lending, of which the stage 3 and purchased or originated credit impaired ('POCI') charge was $0.3bn; $0.4bn in respect of personal lending, of which the stage 3 charge was $0.3bn; and $0.1bn in respect of debt instruments measured at FVOCI, partly offset by a charge of $0.2bn in other financial assets measured at amortised cost. Uncertainty remains as countries emerge from the pandemic at different speeds, government support measures unwind and supply chain interruptions contribute to rising inflation.