HSBC Holdings plc (LON:HSBA) has announced its Q1 2023 earnings release.
Noel Quinn, Group Chief Executive, said:
“Our strong first quarter performance provides further evidence that our strategy is working. Our profits were spread across our major geographies, and all three global businesses performed well as we continued to meet our customers’ needs through our internationally connected franchises. Our return on tangible equity was 19.3%, excluding the impact of strategic transactions. As a result, we have announced our first quarterly dividend since 2019 of $0.10 per share, as well as a share buy-back of up to $2bn. With the good momentum we have in our business, we expect to have substantial future distribution capacity for dividends and share buy-backs.
We remain focused on continuing to improve our performance and maintaining tight cost discipline, but we also saw an opportunity to invest in SVB UK to accelerate our growth plans. For 158 years, HSBC has banked the entrepreneurs who have created today’s industrial base. With the SVB UK acquisition, we have access to more of the entrepreneurs in the technology and life sciences sectors who will create the businesses of tomorrow. We believe they’re a natural fit for HSBC, and that we’re uniquely placed to take them global.”
Financial performance (1Q23 vs. 1Q22)
• Profit before tax rose by $8.7bn to $12.9bn. This included a $2.1bn reversal of an impairment relating to the planned sale of our retail banking operations in France, as the completion of the transaction has become less certain, and a provisional gain of $1.5bn on the acquisition of Silicon Valley Bank UK Limited (‘SVB UK’) in March. On a constant currency basis, profit before tax increased by $9.0bn to $12.9bn. Profit after tax increased by $7.6bn to $11.0bn.
• Revenue increased by 64% to $20.2bn. The increase was driven by higher net interest income in all of our global businesses due to interest rate rises. It also included the gains related to the transactions in France and the UK. On a constant currency basis, revenue rose by 74% to $20.2bn.
• Net interest margin (‘NIM’) of 1.69% increased by 50 basis points (‘bps’) compared with 1Q22, and by 1bps compared with 4Q22.
• Expected credit losses and other credit impairment charges (‘ECL’) of $0.4bn were down by $0.2bn. The reduced 1Q23 charge reflected a favourable change in the probability weightings of economic scenarios and a low stage 3 charge of $0.4bn. The 1Q22 charge reflected economic uncertainty mainly due to the Russia-Ukraine war and inflationary pressures.
• Operating expenses of $7.6bn were $0.6bn or 7% lower than in 1Q22. The reduction was primarily due to lower restructuring and other related costs following the completion of our cost-saving programme at the end of 2022, and ongoing cost discipline. Higher technology costs and the impacts of rising inflation continued to affect our operating expenses. On a constant currency basis, and excluding notable items and the impact of retranslating the 1Q22 results of hyperinflationary economies at constant currency, operating expenses rose by 2%.
• Customer lending balances increased by $40bn in the quarter. On a constant currency basis, lending balances grew by $32bn, mainly as $25bn of balances associated with our retail banking operations in France were reclassified from held for sale during the period. In addition, the growth included $7bn of additional balances following our acquisition of SVB UK during the quarter. Excluding these factors, customer lending was stable.
• Customer accounts increased by $34bn in the quarter. On a constant currency basis, customer accounts increased by $21bn, mainly as $23bn of balances associated with our retail banking operations in France were reclassified from held for sale during the period. In addition, our acquisition of SVB UK resulted in growth of $8bn. Excluding these factors, deposits fell by $10bn or 0.6%, reflecting outflows in HSBC UK as customers utilised surplus deposits, as well as in Commercial Banking (‘CMB’) and Global Banking and Markets (‘GBM’) in Hong Kong.
• Common equity tier 1 (‘CET1’) capital ratio of 14.7% increased by 0.5 percentage points compared with 4Q22, which was driven by capital generation net of the dividend accrual and included an approximately 25bps impact from the reversal of an impairment on the planned sale of our retail banking operations in France. The acquisition of SVB UK had a minimal impact on the CET1 ratio.
• The Board has approved a first interim dividend of $0.10 per share. We also intend to initiate a share buy-back of up to $2bn, which we expect to commence following our 2023 Annual General Meeting (‘AGM’). The share buy-back is expected to have an approximately 25bps impact on the CET1 capital ratio.
• From 1 January 2023, we adopted IFRS 17 ‘Insurance Contracts’, which replaced IFRS 4 ‘Insurance Contracts’. Comparative data have been restated. For further details of our adoption of IFRS 17, see page 3.
Outlook
• We remain confident of achieving our return on average tangible equity (‘RoTE’) target of at least 12% for 2023 onwards, which is not dependent on the impact of material acquisitions and disposals. Our 1Q23 annualised RoTE of 27.4% included the annualised impact of our provisional gain on the acquisition of SVB UK and the reversal of an impairment on the planned sale of our retail banking operations in France. After excluding these transactions, annualised RoTE was 19.3%. The annualised RoTE in the first quarter is likely to be higher than in other quarters due to revenue seasonality, and as we do not expect certain favourable tax impacts to recur in subsequent quarters.
• Based on the current market consensus for global central bank rates, our net interest income expectations are unchanged from our full-year guidance. After including an approximately $2bn reduction due to the implementation of IFRS 17 ‘Insurance Contracts’, we expect to achieve net interest income of at least $34bn in 2023. While the interest rate outlook remains positive, we expect continued pressure from increased migration to term deposits as interest rates rise.
• We continue to use a range of 30bps to 40bps of average loans for planning our ECL charges over the medium to long term. While the ECL charge in 1Q23 was relatively benign, given current macroeconomic uncertainty we maintain the guidance provided at our full-year 2022 results of around 40bps of average gross loans in 2023 (including lending balances transferred to held for sale). We continue to monitor risks related to our exposures in mainland China’s commercial real estate sector.
• We remain highly focused on maintaining cost discipline. Our acquisition of SVB UK, and the related investments internationally, are expected to add approximately 1% to the Group’s operating expenses. This is in addition to our 2023 target of keeping cost growth to approximately 3%, excluding the impact of foreign currency translation differences, notable items and the impact of retranslating the 2022 results of hyperinflationary economies at constant currency. We expect the up to $300m severance costs announced at our 2022 full-year results to be concentrated in the second quarter of 2023, with the benefits expected to be realised towards the end of 2023 and into 2024.
• Our current intention is to manage the CET1 ratio within our medium-term target range of 14% to 14.5%, with a dividend payout ratio of 50% for 2023 and 2024, excluding material notable items. Given the strength of our capital position, we have announced a first interim dividend of $0.10 per share and intend to initiate a share buy-back of up to $2bn, which we expect to commence following our 2023 AGM, subject to approval of the relevant resolutions. Our intention is for this to be completed in around three months, although with an expected contractual term of five months. Further buy-backs for 2023 and beyond will be subject to appropriate capital levels. Our capital distributions are independent of both the reversal of the impairment of our retail banking operations in France and our provisional gain on the acquisition of SVB UK.
Business highlights
Our strategy
HSBC’s purpose is ‘Opening up a world of opportunity’. Our strategy, announced in February 2021, aims to deliver against our purpose and our ambition of being the preferred international financial partner for our clients. It has four key pillars:
• focus on our strengths – investing in the areas where we see significant opportunities for growth;
• digitise at scale – increasing our investment in technology to improve how we serve customers and increase efficiency;
• energise for growth – building a strong culture, introducing simpler ways of working, and by equipping staff with the future skills they need; and
• transition to net zero – becoming a net zero bank and helping our customers capture the opportunities presented by the transition to a net zero future.
Our strategy is based on transforming our business and services to customers to create a strengthened platform for enhanced growth and returns on a sustainable basis, across the interest rate cycle. We have taken actions to grow non-interest revenue, increase capital allocation to Asia-Pacific, exit non-core businesses in the West, reduce risk-weighted assets ahead of target, and maintain strict cost discipline despite inflation and significant investment in technology. We are committed to ensuring that shareholders share the benefits of improved performance. We have established a dividend payout ratio of 50% for 2023 and 2024, excluding material significant items, and are confident that we will return the dividend per share to pre-Covid-19 levels.
While interest rates remain elevated in most of our major markets, current market expectations indicate that policy tightening may be close to its peak, and global inflation appears to be levelling out. Notwithstanding these factors, during the first quarter of 2023 the banking industry experienced a period of turbulence, although we continued to demonstrate a strong capital and liquidity position, which resulted in the interim dividend we have announced and the buy-back we expect to commence following our 2023 AGM.
Strategic transactions
During 1Q23, the unexpected interest rate rises in France resulted in the completion of the planned sale of our retail operations in France becoming less certain, as the capital required to be held by the purchaser at completion of the transaction will increase significantly. If the transaction does proceed, it is expected that the closing will be delayed. As a result we are required to change the accounting classification of our retail banking operations in France to no longer be classified as held for sale. We remain committed to pursuing the sale, providing appropriate terms can be agreed, and to supporting our clients and colleagues in France at all times.
In March 2023, we acquired SVB UK. This acquisition strengthens our CMB franchise and enhances our ability to serve innovative and fast-growing firms in the technology and life science sectors in the UK, and internationally.
The plan to sell our banking business in Canada remains a key priority, as we reshape the organisation to focus on our international customer base. The transaction is now expected to complete in the first quarter of 2024 to ensure a smooth transition, and we continue to classify these operations as held for sale. We remain committed to consider the payment of a special dividend of $0.21 per share as a priority use of the proceeds in the first half of 2024. The remaining proceeds will accrue into CET1 capital, we intend to use excess capital to supplement share buy-backs.
For further details of the financial impacts of these transactions, see ‘Strategic transactions’ on page 4.
ESG highlights
We continue to make progress on our net zero ambition, including on our net zero transition plan which we expect to publish in 2023. This plan will provide further details of our strategic approach to net zero, and how we plan to transform our organisation and execute on our commercial ambition.
In December 2022, we published an updated energy policy, which covers our approach for the wider energy sector. We also updated our thermal coal phase-out policy with new financed emissions targets, and extended the policy to exclude finance for the specific purposes of new metallurgical coal mines.
In 2022, we requested and assessed transition plans for EU and OECD managed clients in scope of our thermal coal phase-out policy. We also requested and are assessing transition plans for our major oil and gas clients. In 2023, we expect to complete assessments for remaining clients in scope of our thermal coal phase-out policy and for major oil and gas, and power and utilities clients globally, as well as other clients in EU and OECD markets in scope of our energy policy.
We have set on-balance sheet 2030 financed emissions targets for the following sectors: oil and gas; power and utilities; cement; iron, steel and aluminium; aviation; automotive; and thermal coal. We also plan to extend our analysis to four new sectors – shipping, agriculture, commercial real estate and residential real estate – and set baselines and targets for those in future disclosures.
We have made progress on our disclosures related to thermal coal exposures and facilitated emissions. We expect that our updated thermal coal exposures will be made available for reporting as soon as practicable in 2023, although this remains dependent on the availability and quality of data. We plan to publish our facilitated emissions from our capital markets activities, through our underwriting in debt and equity capital markets and syndicated lending, for the oil and gas, and power and utilities sectors for 2019 and 2020, as soon as practicable in 2023. We also plan to set targets for facilitated emissions once the PCAF standard for capital markets is published, which is expected in 2023.
Basis of preparation
IFRS 17 ‘Insurance Contracts’
On 1 January 2023, HSBC adopted IFRS 17 ‘Insurance Contracts’. As required by the standard, the Group applied the requirements retrospectively with comparative data previously published under IFRS 4 ‘Insurance Contracts’ restated from the 1 January 2022 transition date. Under IFRS 17 there is no present value of in-force business (‘PVIF’) asset recognised up front. Instead the measurement of the insurance contract liability takes into account fulfilment cash flows and a contractual service margin representing the unearned profit. In contrast to the Group’s previous IFRS 4 accounting where profits are recognised up front, under IFRS 17 they are deferred and systematically recognised in revenue as services are provided over the life of the contract. The contractual service margin also includes attributable cost, which had previously been expensed as incurred and which is now incorporated within the insurance liability measurement and recognised over the life of the contract.
The impact of the transition was a reduction of $159m on the Group’s 1Q22 reported revenue and a reduction of $22m to reported profit before tax. Revenue in 1Q22 included adverse market impacts in Wealth and Personal Banking (‘WPB’) of $275m, which are largely absorbed by the contractual service margin under IFRS 17. The Group’s total equity reduced by $10.5bn to $196.3bn on the transition at 1 January 2022 and tangible equity reduced by $2.4bn to $155.8bn. For further details, see our Report on Transition to IFRS 17 ‘Insurance Contracts’ at www.hsbc.com/investors.
Changes to our reporting framework
On 1 January 2023, we updated our financial reporting framework. We no longer report ‘adjusted’ results, which exclude the impact of both foreign currency translation differences and significant items. Instead, we compute constant currency performance by adjusting comparative reported results only for the effects of foreign currency translation differences between the relevant periods. This will enable users to understand the impact of foreign currency translation differences on the Group’s performance. We separately disclose ‘notable items’, which are components of our income statement that management would consider as outside the normal course of business and generally non-recurring in nature. While our primary segmental reporting by global business remains unchanged, effective from 1 January 2023, the Group changed the supplementary presentation of results from geographical regions to main legal entities to better reflect the Group’s structure.
Cost target
At our full-year 2022 results, we set a target for our ‘adjusted’ operating expenses of approximately 3% growth for 2023 compared with 2022. Under our new reporting framework we no longer present ‘adjusted’ results. The exception to this is for operating expenses, where we will adjust reported results for notable items and the period-on-period effects of foreign currency translation differences. We also exclude the impact of re-translating comparative period financial information at the latest rates of foreign exchange in hyperinflationary economies, which is not within our control. We consider that this measure provides useful information to investors by quantifying and excluding the items that management considered when setting and assessing cost-related targets.
Resegmentation
In the first quarter of 2023, following an internal review to assess which global businesses were best suited to serve our customers’ respective needs, a portfolio of our Global Banking customers within our entities in Latin America was transferred from GBM to CMB for reporting purposes. Comparative data have been re-presented accordingly. Similar smaller transfers from GBM to CMB were also undertaken within our entities in Australia and Indonesia, where comparative data have not been re-presented.
Notes
• Income statement comparisons, unless stated otherwise, are between the quarter ended 31 March 2023 and the quarter ended 31 March 2022. Balance sheet comparisons, unless otherwise stated, are between balances at 31 March 2023 and the corresponding balances at 31 December 2022.
• The financial information on which this Earnings Release is based is unaudited. Other than the adoption of IFRS 17 described above, it has been prepared in accordance with our significant accounting policies as described on pages 335 to 348 of our Annual Report and Accounts 2022.
Strategic transactions
France
During 1Q23, the completion of the planned transaction to sell our retail banking operations in France became less certain. This was due to an unexpected rise in interest rates in France, which will increase the amount of capital required by the buyer on completion of the transaction. Given the completion of the sale has become less certain, we are required to change the accounting classification of our retail banking operations in France to be no longer classified as held for sale. This has resulted in a $2.1bn reversal of the previously recognised impairment in respect of the sale of our retail banking operations in France. The previously recognised $0.4bn impairment of goodwill has not been reversed.
Silicon Valley Bank UK Limited
In March 2023, HSBC UK acquired SVB UK. The acquisition will be funded from existing resources and brings the staff, assets and liabilities of SVB UK into the HSBC portfolio.
On acquisition, we performed a preliminary assessment of the fair value of the assets and liabilities purchased. We established an opening balance sheet on 13 March 2023 and applied the result of the fair value assessment, which resulted in a reduction in net assets of $0.2bn. The provisional gain on acquisition of $1,511m represents the difference between the consideration paid of £1 and the net assets acquired. This gain could change as further due diligence is performed. At 31 March 2023, the funding provided to SVB UK by HSBC UK was $2.8bn. After initial deposit outflows following our acquisition of SVB UK, deposits are now stabilising, and client exits have been minimal.
| Gain on acquisition | |
| At 13 Mar 2023 | |
| $m | |
| Assets acquired | 11,490 |
| Liabilities acquired | (9,747) |
| Fair value and other revaluation adjustments on acquisition | (232) |
| Fair value of net assets acquired | 1,511 |
Amounts above have been translated at rates of foreign exchange on 13 March 2023.
Canada
In November 2022, we announced the planned sale of our banking business in Canada. We regularly reassess the progress of our strategic transactions and continue to classify this business as held for sale. However, we now expect the transaction to complete in 1Q24.
Key financial metrics
| Quarter ended 31 Mar 2023 | Quarter ended 31 Dec 2022 | Quarter ended 31 Mar 2022 | |
| Reported results | |||
| Profit before tax ($m) | 12,886 | 5,049 | 4,144 |
| Profit after tax ($m) | 11,026 | 4,661 | 3,432 |
| Cost efficiency ratio (%) | 37.6 | 60.3 | 66.5 |
| Net interest margin (%) | 1.69 | 1.68 | 1.19 |
| Basic earnings per share ($)1 | 0.52 | 0.22 | 0.14 |
| Diluted earnings per share ($)1 | 0.52 | 0.22 | 0.14 |
| Dividend per ordinary share (in respect of the period) ($) | 0.10 | 0.23 | – |
| Alternative performance measures | |||
| Constant currency profit before tax ($m) | 12,886 | 5,146 | 3,838 |
| Constant currency cost efficiency ratio (%) | 37.6 | 60.4 | 66.6 |
| Expected credit losses and other credit impairment charges (annualised) as % of average gross loans and advances to customers (%) | 0.18 | 0.59 | 0.25 |
| Expected credit losses and other credit impairment charges (annualised) as % of average gross loans and advances to customers, including held for sale (%)2 | 0.17 | 0.56 | 0.25 |
| Return on average ordinary shareholders’ equity (annualised) (%) | 25.5 | 11.3 | 6.7 |
| Return on average tangible equity (annualised) (%) | 27.4 | 12.3 | 7.2 |
| Return on average tangible equity excluding strategic transactions (annualised) (%)3 | 19.3 | 12.3 | 7.2 |
| Constant currency operating expenses excluding notable items ($m)4 | (7,525) | (7,798) | (7,351) |
| At 31 Mar 2023 | At 31 Dec 2022 | At 31 Mar 2022 | |
| Balance sheet | |||
| Total assets ($m) | 2,989,696 | 2,949,286 | 3,011,588 |
| Net loans and advances to customers ($m) | 963,394 | 923,561 | 1,054,073 |
| Customer accounts ($m) | 1,604,099 | 1,570,303 | 1,709,685 |
| Average interest-earning assets, year to date ($m)5 | 2,152,893 | 2,143,754 | 2,200,896 |
| Loans and advances to customers as % of customer accounts (%) | 60.1 | 58.8 | 61.7 |
| Total shareholders’ equity ($m) | 190,095 | 177,833 | 187,076 |
| Tangible ordinary shareholders’ equity ($m) | 159,458 | 146,927 | 153,747 |
| Net asset value per ordinary share at period end ($) | 8.65 | 8.01 | 8.25 |
| Tangible net asset value per ordinary share at period end ($) | 8.08 | 7.44 | 7.70 |
| Capital, leverage and liquidity | |||
| Common equity tier 1 capital ratio (%)6 | 14.7 | 14.2 | 14.1 |
| Risk-weighted assets ($m)6,7 | 854,434 | 839,720 | 862,318 |
| Total capital ratio (%)6,7 | 19.8 | 19.3 | 19.2 |
| Leverage ratio (%)6,7 | 5.8 | 5.8 | 5.7 |
| High-quality liquid assets (liquidity value) ($bn)7,8 | 634.9 | 647.0 | 688.3 |
| Liquidity coverage ratio (%)7,8 | 132 | 132 | 137 |
| Share count | |||
| Period end basic number of $0.50 ordinary shares outstanding (millions) | 19,736 | 19,739 | 19,968 |
| Period end basic number of $0.50 ordinary shares outstanding and dilutive potential ordinary shares (millions) | 19,903 | 19,878 | 20,134 |
| Average basic number of $0.50 ordinary shares outstanding (millions) | 19,724 | 19,738 | 20,024 |
For reconciliation and analysis of our reported results on a constant currency basis, including lists of notable items, see page 34. Definitions and calculations of other alternative performance measures are included in ‘Alternative performance measures’ on page 31.
1 At 1Q23, earnings per share included the impact of the provisional gain recognised in respect of the acquisition of SVB UK of $0.08 (4Q22: nil; 1Q22: nil); the reversal of the impairment loss related to the planned sale of the retail banking operations in France of $0.08 (4Q22: nil; 1Q22: nil); and gains in relation to the planned sale of the banking business in Canada of $0.01 (4Q22: $0.01; 1Q22 nil). Additionally, the earnings per share at 4Q22 included the impact of recognition of certain tax assets of $0.01 (1Q23: nil; 1Q22: nil).
2 Includes average gross loans and advances to customers reported within ‘assets held for sale’.
3 Excludes impacts of the reversal of the impairment loss of $1.6bn (net of tax) relating to the planned sale of the retail banking operations in France, recognised in 3Q22, which is no longer classified as held for sale, and the provisional gain of $1.5bn recognised in respect of the acquisition of SVB UK.
4 Excluding the impact of retranslating prior year costs of hyperinflationary economies at constant currency FX.
5 Average interest earning assets for 31 December 2022 are stated on a year-to-date basis, which differs from the quarter-to-date basis of $2,116,018m presented in the ‘net interest margin’ section on page 12.
6 Unless otherwise stated, regulatory capital ratios and requirements are based on the transitional arrangements of the Capital Requirements Regulation in force at the time. Leverage metrics exclude central bank claims in accordance with the Prudential Regulation Authority’s (‘PRA’) UK leverage framework. References to EU regulations and directives (including technical standards) should, as applicable, be read as references to the UK’s version of such regulation or directive, as onshored into UK law under the European Union (Withdrawal) Act 2018, and as may be subsequently amended under UK law.
7 Regulatory numbers and ratios are as presented at the date of reporting. Small changes may exist between these numbers and ratios and those subsequently submitted in regulatory filings. Where differences are significant, we will restate in subsequent periods.
8 The liquidity coverage ratio is based on the average month-end value over the preceding 12 months.
HSBC Holdings plc will be conducting a trading update conference call with analysts and investors today to coincide with the publication of its Earnings Release. The call will take place at 07.30am BST. Details of how to participate in the call and the live audio webcast can be found at www.hsbc.com/investors.
