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Statutory financial performance summary

1 Comparisons presented on the basis of the current period's transactional currency rate, ensuring like-for-like currency rates between the two periods

2 Change is the basis points (bps) difference between the two periods rather than the percentage change

3 Not meaningful

The first quarter of 2023 was characterised by a period of significant uncertainty for the banking industry. The Group has successfully navigated this period delivering a strong operating performance whilst maintaining its robust liquidity and capital metrics.

The Group's underlying profit before tax of $1.7bn, was an increase of 23 per cent and the largest quarterly profit since the first quarter of 2014. Income grew 13 per cent on a constant currency basis with an 18 per cent increase in net interest income and a 9 per cent increase in other income. The net interest margin increased 5 basis points in the quarter as the Group continues to benefit from rising interest rates. Expenses increased 10 per cent at constant currency and the Group generated 3 per cent positive income-to-cost jaws. Credit impairment charges in the quarter were equivalent to an annualised loan loss rate of 7 basis points.

The Group remains well capitalised and highly liquid with a diverse and stable deposit base. The advances-to-deposits ratio of 56 per cent and a liquidity coverage ratio of 161 per cent both reflect disciplined asset and liability management. Deposit betas in all segments were in line with expectations as was the extent of migration from current and savings accounts (CASA) to time deposits. The CET1 ratio of 13.7 per cent has remained towards the top of the target range for several consecutive quarters allowing the Group to continue returning surplus capital to shareholders.

All commentary that follows is on an underlying basis and comparisons are made to the equivalent period in 2022 on a reported currency basis, unless otherwise stated. 

•       Operating income of $4.4 billion in the first quarter was the highest quarterly income since the first quarter of 2015, up 8 per cent and up 13 per cent on a constant currency basis, as the Group benefited from an expansion in net interest margin and increased trading income within Financial Markets

•       Net interest income increased 13 per cent, or 18 per cent on a constant currency basis. Excluding the increased interest expense of funding the trading book in a higher interest rate environment, adjusted net interest income increased 29 per cent as the net interest margin increased 26 per cent or 34 basis points. This was despite a year-on-year incremental 23 basis points drag from hedges. The Group increased its pricing on assets and its yield on its Treasury portfolio more quickly than it repriced its liability base, reflecting strong pricing discipline and passthrough rate management

•       Other income increased 9 per cent as Financial Markets other income increased 16 per cent on a constant currency basis despite the non-repeat of $94 million of gains on mark-to-market liabilities in the first quarter of 2022

•       Operating expenses increased 5 per cent and grew 10 per cent on a constant currency basis, reflecting the impact of inflation, post-COVID normalisation and additional headcount supporting business initiatives in Financial Markets, Consumer, Private and Business Banking ('CPBB') Relationship Managers and in China. Increased investment spend into transformational digital initiatives includes a double-digit percentage increase in amortisation charges and was offset by cost efficiency actions. The Group generated 3 per cent positive income-to-cost jaws while the cost-to-income ratio decreased 2 percentage points to 61 per cent

•       Credit impairment was a $26 million charge in the quarter, a $172 million reduction on the first quarter of 2022, with the loan loss rate in the quarter annualising to 7 basis points. Impairment charges in the CPBB portfolio were partly offset by net releases relating to the prior sovereign ratings downgrade of Ghana

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•       Profit from associates and joint ventures decreased $52 million to $11 million primary due to lower profits at China Bohai Bank, as reflected by the 2022 impairment.

•       The Group's underlying operating profit before taxation no longer includes movements in the debit valuation adjustment (DVA), the markets and businesses it intends to exit in the Africa & Middle East region and the Aviation Finance business and now reports them within restructuring and other items. Restructuring profits of $48 million primarily reflect the operating profit from the exit markets and Aviation Finance while DVA was a positive $54 million

•       Taxation was $464 million on a statutory basis, with an underlying year-to-date effective tax rate of 26.3 per cent compared to the prior year rate of 21.7 per cent reflecting a change in the geographic mix of profits and the non-repeat of a prior year credit

•       Underlying return on tangible equity increased by 170 basis points to 11.9 per cent due to higher profits and lower tangible equity reflecting shareholder distributions, including share buy-backs, and adverse movements in reserves during the course of 2022 due to movements in interest rates and FX. On a statutory basis, return on tangible equity increased 190 basis points to 13.0 per cent

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Operating income by product

1 Comparisons presented on the basis of the current period's transactional currency rate, ensuring like-for-like currency rates between the two periods

2 Underlying income for relevant periods in 2022 has been restated for the removal of (i) exit markets and businesses in AME (ii) Aviation Finance and (iii) DVA. No change to statutory performance

3 Not meaningful

The operating income by product commentary that follows is on an underlying basis and comparisons are made to the equivalent period in 2022 on a constant currency basis, unless otherwise stated.

Transaction Banking income increased 102 per cent. Cash Management income nearly tripled reflecting strong pricing discipline and passthrough rate management to take advantage of a rising interest rate environment. Trade & Working Capital decreased 2 per cent reflecting lower balance sheet and contingent volumes.

Financial Markets income decreased 5 per cent compared to a record performance in the first quarter of 2022 but was up 1 per cent excluding the non-repeat of $94 million of gains on mark-to-market liabilities in the first quarter of 2022. Macro Trading had another strong quarter, albeit down 7 per cent against a record prior year comparative quarter, with strong double-digit growth in Rates partly offsetting a non-repeat of last year's record performance in FX and Commodities. Credit Markets income was flat with strong growth in Credit Trading income offset by lower Financing Solutions & Issuance income which was impacted by lower capital market issuances in a volatile interest rate environment. Excluding the non-repeat of the mark-to-market gains, Financing & Security Services income more than doubled as Securities Services income benefited from rising interest rates.

Lending and Portfolio Management income increased 1 per cent with an increase in fee income partly offset by lower volumes and increased cost of funding on undrawn commitments.

Wealth Management income recovered from a weak performance in the second half of 2022 to build back up to the strong performance in the first quarter of 2022 as strong double-digit growth in FX, fixed income and structured products was offset by lower managed investment income as transactional volumes were impacted by subdued equity markets across the footprint. Bancassurance income was broadly flat while Wealth Management secured lending income nearly halved on the back of customer deleveraging.

Retail Products income increased 53 per cent. Deposit income more than tripled due to low passthrough rates in a rising interest rate environment partly offset by migration from CASA into time deposits. Mortgages & Auto income decreased 52 per cent as the Best Lending Rate cap in Hong Kong restricted the ability to reprice mortgages despite an increase in funding costs from higher interest rates. Credit Cards & Personal Loans income increased 2 per cent reflecting growth in credit card balances and increased fee income.

Treasury income was a $233 million loss in the quarter primarily due to the $298 million loss from structural and short-term hedges in a rising interest environment which more than offset increased yields on the remainder of the Treasury portfolio and mark to market gains from FX swaps.

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Profit before tax by client segment and geographic region

1 Comparisons presented on the basis of the current period's transactional currency rate, ensuring like-for-like currency rates between the two periods

2 Underlying performance for relevant periods in 2022 has been restated for the removal of (i) exit markets and businesses in AME (ii) Aviation Finance and (iii) DVA. No change to statutory performance

3 Not meaningful

Corporate, Commercial & Institutional Banking (CCIB) profit increased 49 per cent. Income grew 27 per cent on a constant currency basis with Cash Management benefiting from disciplined pricing initiatives in a rising interest rate environment partly offset by a non-repeat of gains on mark-to-market liabilities within Financial Markets in the first quarter of 2022. Expenses were 18 per cent higher on a constant currency basis reflecting further investment in the business partly offset by a net $8 million credit impairment release.

Consumer, Private & Business Banking (CPBB) profit increased 84 per cent, with income up 31 per cent on a constant currency basis as the benefit from higher interest rates on Retail Deposit income was partly offset by lower Mortgage income negatively impacted by the Best Lending Rate cap in Hong Kong. Expenses increased 7 per cent on a constant currency basis while credit impairment was $27 million higher.

Ventures loss increased by over a third to $103 million, reflecting the Group's continued investment in transformational digital initiatives with expenses increasing $30 million while income was $17 million in the quarter, an increase of $16 million on the first quarter of 2022. The impairment charge increased $7 million to $10 million reflecting the build of expected credit loss provisions as the credit portfolios grow.

Central & other items (segment) recorded a loss of $353 million with negative income of $285 million including the $298 million loss from hedges. This was partly offset by lower expenses and a net release in credit impairment relating to sovereign downgrades.

Asia profits increased 63 per cent as income grew 23 per cent on a constant currency basis. Strong growth in Cash Management, Retail Deposits and Financial Markets income was offset by lower Mortgage income and a loss in Treasury Markets. Expenses increased 12 per cent on a constant currency basis with the credit impairment charge reducing by three-quarters. The profit share from China Bohai Bank reduced by $49 million.

Africa & Middle East (AME) profits increased 9 per cent but was up 31 per cent on a constant currency basis as income increased 26 per cent with strong growth in Cash Management and Retail Deposit income. This was partly offset by expenses increasing 14 per cent on a constant currency basis reflecting inflationary pressures in the region. Impairment charges was a net release of $26 million, a $18 million reduction on the prior year.

Europe & Americas recorded a loss of $18 million as income nearly halved, reflecting the increased cost of hedges within Treasury whilst strong growth in Transaction Banking income was partly offset by lower Financial Markets income. Expenses increased 15 per cent and there was a $36 million reduction in the credit impairment release booked in the quarter.

Central & other items (region) recorded a profit of $25 million compared to a $217 million loss in the first quarter of 2022. The return to profitability is mainly due to higher returns paid to Treasury on the equity provided to the regions in a rising interest rate environment.

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Adjusted net interest income and margin

1 Variance is better/(worse) other than assets and liabilities which is increase/(decrease)

2 Adjusted net interest income is statutory net interest income less funding costs for the trading book and financial guarantee fees on interest-earning assets

3 Change is the basis points (bps) difference between the two periods rather than the percentage change

4 Adjusted net interest income divided by average interest-earning assets, annualised

5 Not meaningful

Adjusted net interest income increased 29 per cent due to a 26 per cent increase in the net interest margin which averaged 163 basis points in the quarter, increasing 34 basis points year-on-year and 5 basis points compared to the prior quarter:

•       Average interest-earning assets increased 3 per cent in the quarter with growth primarily from an increase in the Treasury Markets portfolio. Gross yields increased 61 basis points compared with the prior quarter due to the impact of rising interest rates on customer loan pricing and on Treasury portfolio yields partly offset by a 3 basis point quarter-on-quarter additional loss from hedges

•       Average interest-bearing liabilities increased 3 per cent in the quarter due to an increase in customer accounts and debt securities in issue. The increase in customer accounts reflects an increase in time deposits partly offset by a reduction in current and savings accounts (CASA). The rate paid on liabilities increased 61 basis points compared with the average in the prior quarter reflecting the impact of interest rate movements and a slight deterioration in the liability mix

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Credit risk summary

Income Statement

1 Variance is increase/(decrease) comparing current reporting period to prior reporting periods

2 Underlying credit impairment for relevant periods in 2022 has been restated for the removal of (i) exit markets and businesses in AME and (ii) Aviation Finance. No change to statutory credit impairment

Balance sheet

1 Variance is increase/(decrease) comparing current reporting period to prior reporting periods

2 Includes reverse repurchase agreements and other similar secured lending held at amortised cost of $14,398 million at 31 March 2023, $24,498 million at 31 December 2022 and $12,571 million at 31 March 2022

3 Change is the percentage points difference between the two points rather than the percentage change

Asset quality remained resilient in the first quarter, with an improvement in a number of underlying credit metrics. However, the Group continues to remain alert to a volatile and challenging external environment which has led to idiosyncratic stress in a select number of markets and industry sectors.

Credit impairment was a $26 million charge in the quarter, a $172 million reduction year-on-year and down $314 million compared to the prior quarter. There was an ongoing $62 million charge relating to CPBB inclusive of a $12m reduction in the management overlay relating to COVID-19. There was a net release of $23 million relating to sovereign downgrades as a $14 million additional charge relating to Pakistan was more than offset by a net release relating to Ghana sovereign exposures. There was a $2 million net release relating to China commercial real estate sector, with further Stage 3 impairments offset by a $6 million reduction in the management overlay. The remaining China commercial real estate sector management overlay is now $167 million, and the COVID-19 remaining overlay is $9m, wholly in CPBB.

The credit impairment charge represents an annualised loan loss rate of 7 basis points, as the loan loss rate calculation references the $108 million impairment in relation to loans and advances partly offset by $46 million releases on financial guarantees, and loan commitments but excludes the impairment releases on debt securities.

Gross stage 3 loans and advances to customers of $7.4 billion were 5 per cent lower, as repayments, client upgrades, reduction in exposures and write-offs more than offset new inflows. Credit-impaired loans represented 2.4 per cent of gross loans and advances, a decrease of 5 basis points in the quarter.

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The stage 3 cover ratio of 59 per cent increased by 2 percentage points compared to 31 December 2022, while the cover ratio post collateral at 79 per cent increased by 3 percentage points due to the reduction in gross stage 3 balances.

Credit grade 12 balances increased $68 million to $1.6 billion in the quarter. Early Alert accounts of $5.4 billion have increased by 8 per cent from 31 December 2022, reflecting new inflows relating to a select number of clients. The Group is continuing to carefully monitor its exposures in vulnerable sectors and select markets, given the unusual stresses caused by the currently difficult macro-economic environment.

The proportion of investment grade corporate exposures has decreased by 1 percentage point to 75 per cent.

The above balance sheet disclosure relates to loans and advances to customers. The movement in high-risk assets (gross stage 3 loans and advances, credit grade 12 balances and early alert accounts) does not fully reflect the impact of the sovereign ratings downgrade of Ghana, Pakistan and Sri Lanka as it does not capture the impact of these downgrades on the Group's investment and debt securities portfolio. 

Restructuring, goodwill impairment and other items

1 Restructuring, DVA and other items for relevant periods in 2022 has been restated for the removal of (i) exit markets and businesses in AME (ii) Aviation Finance and (iii) DVA from underlying operating performance

The Group's statutory performance is adjusted for profits or losses of a capital nature, amounts consequent to investment transactions driven by strategic intent, other infrequent and/or exceptional transactions that are significant or material in the context of the Group's normal business earnings for the period and items which management and investors would ordinarily identify separately when assessing underlying performance period-by period.

The Group has announced that subject to regulatory approval, it intends to exit onshore operations in seven markets in the AME region and will focus solely on the CCIB segment in two more "exit markets". Additionally, the Group announced that it intends to explore alternatives for the future ownership of its Aviation Finance business. As a result of these announcements, effective 1st January 2023, the Group will no longer include the exit markets and the Aviation Finance business within the Group's underlying operating profit before taxation but will report them within restructuring.

The Group is also reclassifying movements in the debit valuation adjustment (DVA) out of its underlying operating profit before taxation and into other items.

To aid comparisons with prior periods the Group has removed the exit markets, Aviation Finance business and DVA from its underlying operating profit before taxation for 2022.

Restructuring profits of $48 million primarily reflect the profit from the exit markets and Aviation Finance businesses partly offset by losses on the remaining Principal Finance portfolio and redundancy charges.

DVA was a positive $54 million driven by the widening of Group's asset swap spreads on derivative liability exposures. The size of the portfolio subject to DVA did not change materially.

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Balance sheet and liquidity

1 Variance is increase/(decrease)comparing current reporting period to prior reporting periods

2 The Group now excludes $24,173 million held with central banks (31.12.22: $20,798 million, 31.03.22: $11,970 million) that has been confirmed as repayable at the point of stress. Advances exclude repurchase agreement and other similar secured lending and include loans and advances to customers held at fair value through profit or loss. Deposits include customer accounts held at fair value through profit or loss.

The Group's balance sheet remains strong, liquid and well diversified:

•       Loans and advances to customers decreased by $10 billion or 3 per cent from 31 December 2022 to $301 billion. This includes a $6 billion reduction in Treasury and securities backed loans held to collect and a $2 billion reduction from the reclassification of Aviation Finance loans into Held for Sale assets. Excluding these items, there was an underlying $2 billion decrease in customer loans, with growth in corporate lending offset by a decline in retail mortgages reflecting in part tighter mortgage margins in key markets

•       Customer accounts of $462 billion were stable compared to 31 December 2022 with a temporary reduction in Corporate operating account deposits which partly reversed post 31 March 2023 offset by an increase in retail time deposits

•       Other assets increased 3 per cent in the first quarter of 2023 with an increase in cash and balances held at central banks, reverse repurchase agreements designated at fair value through profit or loss and assets classified as held for sale, partly offset by a reduction in derivative assets. Other liabilities increased 1 per cent with an increased in repurchase agreements and debt securities in issue partly offset by a reduction in derivative liabilities

The advances-to-deposits ratio declined to 56.2 per cent from 57.4 per cent at 31 December 2022. The point-in-time liquidity coverage ratio increased 14 percentage points in the quarter to 161 per cent and remains well above the minimum regulatory requirement.

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Risk-weighted assets

1 Variance is increase/(decrease) comparing current reporting period to prior reporting periods

Total risk-weighted assets (RWAs) of $250.9 billion increased $6.2 billion or 3 per cent since 31 December 2022:

•       Credit Risk RWA increased by $3.8 billion in the first quarter to $200.6 billion. There was a $4.3 billion increase from a combination of asset growth and mix, $1.8 billion increase from deterioration in asset quality reflecting the impact of sovereign downgrades and a $0.6 billion increase from a reversal of prior quarter derivative counterparty credit risk movements. This was partly offset by a $1.1 billion reduction from currency translation, a further $0.9 billion reduction in the CCIB low-returning portfolio targeted for optimisation and $0.9 billion from other efficiency actions

•       Operational Risk RWA increased $0.7 billion primarily due to an increase in average income as measured over a rolling three-year time horizon, with higher 2022 income replacing lower 2019 income

•       Market Risk RWA increased $1.7 billion to $22.4 billion reflecting a seasonally higher level of Financial Markets activity

Capital base and ratios

1 Variance is increase/(decrease) comparing current reporting period to prior reporting periods

2 Change is percentage points difference between two points rather than percentage change

The Group's CET1 ratio of 13.7 per cent was 25 basis points lower than as at 31 December 2022 as an increase in RWAs and the reduction in CET1 from shareholder distributions was partly offset by profit accretion. The CET1 ratio remains 3.3 percentage points above the Group's latest regulatory minimum of 10.4 per cent and towards the top of the 13-14 per cent target range.

The Group is part way through the $1 billion share buyback programme which it announced on 16 February 2023, and by 31 March 2023 had spent $501 million purchasing 58 million ordinary shares, reducing the share count by approximately 2 per cent. Even though the share buyback was still ongoing on 31 March 2023, the entire $1 billion is deducted from CET1 in the period, reducing the CET1 ratio by 40 basis points.

The Group is accruing a provisional interim 2023 ordinary share dividend over the first half of 2023, which is calculated formulaically at one third of the ordinary dividend paid in 2022 or 6 cents a share. Half of this amount was accrued in the first quarter and combined with payments due to AT1 and preference shareholders reduced the CET1 ratio by 8 basis points.

The $6.2 billion increase in RWAs in the first quarter accounted for a 37 basis points reduction in the CET1 ratio.

The above CET1 ratio headwinds were partly offset by 54 basis points uplift from profit accretion in the quarter and 13 basis points from an increase in reserves mainly relating to currency movements and a reversal of prior year unrealised losses on debt securities.

The Group's UK leverage ratio of 4.7 per cent is 10 basis points lower than at 31 December 2022. This is primarily driven by reduced Tier 1 capital following a call of $1.0 billion Additional Tier 1 securities, effective 4 April 2023 but impacting the regulatory ratio in March 2023. The Group's leverage ratio remains significantly above its minimum requirement of 3.7 per cent.

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Outlook

The strong first quarter performance together with a favourable trading outlook in our key markets gives us increased confidence we will deliver our financial targets.

Our liquidity profile remains strong, with deposit balances stable and deposit migration and betas performing as expected. We continue to actively manage our credit portfolio and closely monitor sovereign risks in markets that are most vulnerable. Capital levels remain robust.

Taken together our revised guidance is as follows:

•       Income to increase by around 10 per cent, the top end of the 8-10 per cent range at constant currency in 2023 and in the 8-10 per cent range at constant currency in 2024

•       Full year average net interest margin of around 170 basis points in 2023 and around 175 basis points in 2024

•       Asset and RWA growth in the low single digit percentage range

•       Positive income-to-cost jaws of 3 per cent, excluding UK bank levy at constant currency in 2023 and 2024

•       Credit impairment to normalise towards the historic through the cycle loan-loss rate range of 30-35 basis points

•       Operate dynamically within the full 13-14 per cent CET1 target range

•       Plan to return in excess of $5 billion to shareholders by 2024

•       RoTE to be approaching 10 per cent in 2023, and to exceed 11 per cent in 2024, with further growth thereafter

Andy Halford

Group Chief Financial Officer

26 April 2023