Earnings Call Transcript - HSBC Q1 2026

Operator, Operator

Welcome to the analyst and investor presentation for HSBC Holdings plc First Quarter 2026 Earnings. This webinar is being recorded. I will now hand over to Manveen Kaur, Group Chief Financial Officer.

Manveen Kaur, Group Chief Financial Officer

Welcome, everyone. Thank you for joining. We have had another quarter of positive performance, which reflects further progress towards creating a simpler, more agile, growing HSBC. Annualized return on tangible equity, excluding notable items, was 18.7%. We are confident in achieving the targets we set out to you at the full year. We are updating two pieces of guidance today: banking NII to around $46 billion and our expected ECL charge to around 45 basis points. I'll talk to the drivers of both shortly. In the quarter, we continued to make disciplined progress in simplifying the group to unlock HSBC's growth potential. We actioned a further $0.2 billion of simplification saves and remain well on course to deliver the $1.5 billion target. We completed the privatization of Hang Seng Bank, the sale of U.K. Life Insurance, Sri Lanka Retail Banking and South Africa. And as you will have seen, we have agreed the sale of our retail banking business in Indonesia. We expect to realize an up to $0.4 billion gain on completion anticipated in the first half of 2027. Our CIB business in Indonesia is unaffected. On outlook, the economic landscape remains complex and uncertainty will persist. Our thoughts are with all those affected by current events in the Middle East. We are fully engaged in supporting our colleagues, customers and partners across the region. We are well positioned to work with our customers and manage the uncertainties in the global environment from a position of financial strength. Let's turn first to the income statement, where I will focus on year-on-year comparisons unless I indicate otherwise. Profit before tax, excluding notable items, was $10.1 billion. Notable items this quarter include a loss of $0.3 billion on moving Malta to held for sale, a loss of $0.2 billion on the sale of U.K. Life Insurance and $0.1 billion of restructuring costs related to our simplification program. Revenue, excluding notable items, grew 4% year-on-year to $19.1 billion. This was driven by banking NII and strong growth in wealth fee and other income. Annualized RoTE was 18.7%, 0.3% higher than last year. It benefited from the removal of Hang Seng Bank minorities. Looking at capital and distributions: our CET1 capital ratio is 14%, down 90 basis points on the quarter as expected following the privatization of Hang Seng Bank. Reflecting our strong organic capital generation, we are already back to our operating range of 14% to 14.5%. The dividend for the quarter is $0.10. We continue to target a dividend payout ratio for 2026 of 50% of earnings per ordinary share, excluding material notable items and related impacts. Let's now turn to our business segment performance. Each of our four businesses grew revenues and each also delivered annualized RoTE in excess of 17%, excluding notable items. This broad-based performance shows our strategy is working. I would just mention the $0.2 billion gain from a one-off property asset disposal in the Corporate Center, which is not a notable item. Moving now to banking NII. Banking NII increased $0.3 billion year-on-year to $11.3 billion. It fell by $0.5 billion quarter-on-quarter. $0.3 billion of this quarterly decline is day count. We also noted in the fourth quarter $0.1 billion in gains that we did not expect to repeat. In addition, this quarter HIBOR was lower in March, and we also recognized a $0.1 billion adverse one-off. We are now upgrading our full year banking NII guidance to around $46 billion. This reflects an improved interest rate outlook. I would highlight that interest rate curves have been volatile and can, of course, change further in either direction. Turning now to wholesale transaction banking. Recent economic, market and tariff situations have validated the strength of our franchise, both over the last 12 months and in this quarter. We grew fee and other income 2% year-on-year. Customers continue to turn to us to help them navigate volatility and uncertainty. Our balance sheet and franchise strength are particularly valuable in times like this. In the quarter, Securities Services grew fee and other income 11%, reflecting new mandates and higher transaction volumes. Trade grew 8%, driven by continued growth in volumes. Payments grew 3%, driven by growth in volumes across most regions. Foreign exchange fell by 1% compared to a strong first quarter last year. We continue to see growth in volumes and strong client engagement. Turning now to wealth. We grew fee and other income by 15% to $2.7 billion. I remind you that the first quarter of last year was a high base. Growth was driven by all four income lines, and we added 287,000 new-to-bank customers in Hong Kong. It is worth remembering there is typically favorable seasonality to the first quarter when compared with the fourth quarter. Having said that, we are pleased that the investments we are making in our wealth products, distribution channels and customer experience are translating into real results. Private Banking grew 8% and Asset Management, 3%. Investment distribution performed very well, up 21%, reflecting particular strength in our customer franchise in Hong Kong. Insurance growth of 19% from a strong base was also pleasing, again with Hong Kong the standout. Our insurance CSM balance was $15.2 billion, up 19% versus the prior year. First quarter wealth balances were $1.6 trillion, up 12% or $170 billion year-on-year. Net new money in the first quarter was a strong $39 billion, of which $34 billion came from Asia. This is a broad-based and robust franchise. Our investments and focus are paying off. I will note that we saw a slowdown in flows in the early days of the conflict, but activity recovered in April across our wealth franchise in Asia. Turning now to credit. Our first quarter ECL charge was $1.3 billion, equivalent to an annualized charge of 52 basis points as a percentage of loans and advances. Given the ongoing uncertainty in the outlook, we are updating our full year 2026 credit guidance to around 45 basis points. This quarter includes a $0.3 billion charge related to the Middle East conflict. This is precautionary and related to the impact of the conflict everywhere, not just in the Middle East. We also include $0.4 billion for fraud-related secondary securitization exposure with a financial sponsor in the U.K. I will emphasize that we regard the Stage 3 charge this quarter as idiosyncratic and not representative of the risks in the wider portfolio. We have completed a full review of the highest risk areas in our portfolio and have not identified any comparable fraud concerns. We have updated our risk appetite and are incorporating lessons in our due diligence processes. This remains an area in which we are comfortable, but it is not a significant growth driver in our plan. In Hong Kong commercial real estate, we had some small recoveries in the quarter. Overall, it remains broadly stable. You will see our usual detailed breakdown on Slide 21. On Slides 15 and 16, we have also set out our private market exposure. We have made these expansive definitions to give you a full picture of our full-service business in private markets. Let's now turn to costs. We continue to take a disciplined approach to cost management. We are on track to achieve our target of 1% cost growth in 2026 compared to 2025 on a target basis. Cost growth this quarter is 3% year-on-year. This included 1% driven by higher variable pay accrual based on business performance. If you exclude the variable pay accrual, target basis cost growth was around 2% year-on-year. We manage costs on a full year basis. So looking at a quarter in isolation is not meaningful. We remind you that our simplification actions provide a cumulative year-on-year benefit through 2026. For the avoidance of doubt, our 2025 target cost baseline is $34 billion when updated for FX. Now let's turn to customer deposits and loans. Our deposit momentum continues with $99 billion of deposit growth, including held-for-sale balances over the last 12 months. CIB deposits increased $10 billion quarter-on-quarter in what is usually a soft quarter. Hong Kong was a particular driver. This corporate inflow offset a slower retail flow in our Hong Kong pillar. You will see deposit seasonality on Slide 20. Excluding the movement of Malta to held for sale, IWPB deposit growth was $4 billion. You will see on Slides 18 and 19 that we have set out additional deposit disclosure. This shows you the deposit base split between fixed term and instant access accounts. The 70% instant access proportion should help you see the strength and breadth of our deposit base across our businesses. Turning to loans. Growth picked up in the quarter. CIB mainly reflects continued momentum in GTS, higher term lending in Hong Kong and drawdowns on committed lines by high-quality borrowers in the Middle East. We are pleased to be there for our customers when they need us most. Hong Kong returned to volume growth this quarter after a period of decline. We are pleased to see borrowing appetite return as the economy grows and as residential property prices recover. Our $13.7 billion investment in Hang Seng Bank is a signal of our confidence in the opportunity in Hong Kong. We are investing across both iconic banks, and we see significant growth runway for both ahead. In the U.K., we delivered another quarter of good growth. This was both mortgages and our commercial lending book. We see good momentum in our domestic portfolio. Low levels of household and corporate debt in the U.K. provide a platform for the continued growth of our franchise. Now turning to capital. Our CET1 capital ratio was 14%, down 90 basis points in the quarter. This follows the 110 basis point impact of the Hang Seng Bank privatization and Malta disposal loss. We also saw a 12 basis points impact from the fair value through other comprehensive income bond portfolio, as government yields rose following events in the Middle East. These were offset by ongoing strong organic capital generation. We are pleased to have remained within our CET1 operating range since the announcement of the Hang Seng Bank privatization. A decision on future share buybacks will be taken quarterly, subject to our normal buyback considerations. Let's turn to targets and guidance. First, targets. We reiterate the targets we set out to you at the full year. Revenue rising to 5% year-on-year growth by 2028, excluding notable items. Return on tangible equity of 17% or better, excluding notable items each year. Dividends, 50% of earnings per share, excluding material notable items and related impacts. Finally, to guidance. Today, we are updating our banking NII to around $46 billion, given the higher rate outlook, and our ECL charge to 45 basis points given macroeconomic and market uncertainty. In addition, to inform management planning, we have assessed a range of top-down stress scenarios. We have set these out for you on Slide 17. I'm happy to discuss these further in Q&A. All other guidance set out on this slide remains unchanged. To conclude, the intent with which we are executing our strategy is reflected in the growth and momentum in our first quarter. It shows discipline, performance and delivery. Discipline in the way we are applying strong cost control and investing to deliver focused sustainable growth. We are on track to achieve our target of around 1% cost growth in 2026 compared to 2025 on a target basis. And we are reallocating costs from non-strategic or low-returning businesses towards growth opportunities, while upgrading our operating model. This includes investing in artificial intelligence to empower our colleagues, simplify how we operate and enhance the customer experience by personalizing service at scale. Performance in our earnings: each of our four businesses grew revenues and each also delivered annualized RoTE in excess of 17%, excluding notable items. Our first quarter results show we are creating a simpler, more agile, growing HSBC built on the strong foundations of a robust balance sheet and hallmark financial strength. This is why during periods of greater uncertainties, our customers turn to us as a source of financial strength, and we remain confident in delivering against our targets. With that, I'm happy to take your questions.

Operator, Operator

(Operator Instructions) Our first question today comes from Guy Stebbings at BNP Paribas.

Guy Stebbings, Analyst, BNP Paribas

The first one was on wealth. Clearly, another very good performance, particularly on investment distribution and insurance. Can you talk about what you're seeing in terms of flows in the competitive landscape in Hong Kong right now? I'm mindful the benchmark comparisons are getting tougher in terms of growth rates, but equally there's no evidence of let up in momentum and I can see another really good performance for new business CSM, which is well above what you're actually booking through the P&L right now. And then the second question was on private markets. Thanks for Slide 15 and 16. Interested in any changes you're making in your approach to this segment. You've called out the $400 million hit in Q1, and you've not identified anything comparable in the book. One of your peers has signaled partially stepping away from some exposures in this segment as they've assessed levels of financial controls. I know you said this wasn't a big growth driver of the plan, but are you changing how you're thinking about this segment in any way?

Manveen Kaur, Group Chief Financial Officer

Thank you, Guy. If I take your questions in turn. On the first question on wealth, we are really pleased with the growing CSM balance as well as on investment distribution. First quarter is always very strong for us, but I'm pleased to say that even after some slowdown in March, we again saw momentum come through in April. We have a very broad range of products that we offer to our customers, so we've seen some shift in the products — customers moving from bonds and mutual funds into structured products and equities — and that contributes positively to our fee income in wealth. We have an iconic brand in Hong Kong. Yes, competition is fierce, but we are also growing new customers despite introducing the fee in January, and these new customers over time also become wealth customers and near term contribute to the insurance business. Those are all positive signs for us. From a private credit perspective, our overall exposure on private credit has stayed the same, as I called out at the year-end, at $6 billion on the chart. This is both drawn and undrawn private credit and related exposure, and it stays within 2% of our balance sheet. That is a comfortable position in terms of concentration. Following the experience we've seen on the fraud matter, I have always said that in this ecosystem no one is immune to second-order exposures, which is where we have seen issues from financial sponsors. Clearly, as a learning, we are working on additional due diligence processes we may carry out even where we are relying on the due diligence of financial sponsors. In terms of concentrations, we are also looking at any specific concentrations on individual counterparties in this space, but remain comfortable overall. As I've said, this has never been a significant driver of private credit for us. We will continue to be diligent where we are relying on financial sponsors for secondary exposures and their due diligence.

Operator, Operator

Our next question today comes from Amit Goel at Mediobanca.

Amit Goel, Analyst, Mediobanca

Two questions from me. One was just on the cost growth. It seemed like cost growth was a bit higher this quarter, even excluding variable pay, than the overall target for the year. Can you explain why you think costs will be more contained and what the drivers are? And second, on the Middle East scenario: I appreciate the extra slide. What would we need to see for that scenario to play through and have further impact on your ECL guidance?

Manveen Kaur, Group Chief Financial Officer

Thank you, Amit. I'll take the cost question first. Our simplification actions will be completed by the middle of the year. Those simplification actions will give us cumulative savings in the second half of the year. If we factor those in and phase them in line with our forecast and financial planning, we are comfortable we will be within our cost guidance of around 1% growth on a target basis. It is a timing issue: last year we guided gross increase of 3% and the timing of when the 2% savings come through results in the net 1% cost growth. On the Middle East scenario: our ECL guidance and when we reaffirm our targets, we look at all plausible downside scenarios and are conservative in approach. We have an integrated top-down stress scenario that is a bookend scenario requiring several severe outcomes to happen together. To give perspective, in that scenario you would expect stock markets to be down 35% — it's a severe scenario. You would also expect a very high oil price, market disruption and significant GDP slowdown across markets globally. That is the context for that scenario. For ECL guidance, we have already factored in the right weight of probability; that is reflected in the 45 basis points guidance. This scenario is driven by impact on revenue and ECL; it assumes wealth performance, which has been strong, would be significantly affected, and that deposits, which typically become inflows in stress, could reduce because customers need liquidity in an extreme economic stress. I'm happy to discuss further in Q&A.

Operator, Operator

The next question today comes from Aman Rakkar at Barclays.

Aman Rakkar, Analyst, Barclays

A quick follow-up on the Middle East scenario. Back of the envelope it looks like a $2 billion to $3 billion hit to PBT in terms of the mid- to high-single-digit percentage on 2026. Could you round out the disclosure on that scenario in terms of the breakdown between revenues and impairments? I'm assuming it's revenues and ECLs; could you quantify that? Second, on banking NII: you're calling out a $100 million negative impact in the quarter. Adding that back, Q1 annualizes a shade above the $46 billion guide. What are the sequential drivers of net interest income from here? Rates don't look like much of a headwind and you've got balance sheet momentum, so what negatives might offset that?

Manveen Kaur, Group Chief Financial Officer

Thank you, Aman. On the first question: yes, the impact is broadly split between revenues and ECLs in the scenario, and your numbers are in the right range. I would emphasize this is an unmitigated impact — prior to management actions. We are comfortable that even in stress we have management actions we would take, which is why we remain confident in our RoTE targets for 2026–2028. On banking NII guidance: we tend to be conservative and consider all plausible downside scenarios. Mathematically, if you exclude the one-offs and adjust for day count, the run rate may sit above $46 billion; however, our guidance is 'around $46 billion.' Possible headwinds include interest rate uncertainty, the experience of a lower HIBOR in March (which has since rebounded to around 2.5%), and we have the continuing tailwind from our structural hedge reinvestment. Deposit flow remains strong. In summary, around $46 billion with our usual conservatism.

Operator, Operator

Our next question today comes from Andrew Coombs at Citi.

Andrew Coombs, Analyst, Citi

A couple of follow-ups. On private credit exposures on Slide 16: the exposure on which you booked the charge falls within the $3 billion securitization financing bucket. How much of the exposure you took a charge on today accounts for of that $3 billion total? Second, on wealth: 15% year-on-year growth is strong but looks slightly weaker than some peers. Can you explain differences? Is it business mix or lower transaction income year-on-year?

Manveen Kaur, Group Chief Financial Officer

Thank you. On the exposure, we have substantially provided for that exposure. It is a material part of the $3 billion securitization financing bucket you referenced. On revenue: the CSM balances have been growing, but the way they hit the P&L is over time — typically 9 to 10 years — so you capture only a portion of the benefit in the near term. If you adjust for that timing, we are very much in line with or ahead of peers in certain pockets. The growth in CSM and the pipeline of deposits and invested assets gives us confidence in future fee income growth.

Operator, Operator

Our next question today comes from Katherine Lei at JPMorgan.

Katherine Lei, Analyst, JPMorgan

Pam, I'd like more color on the fraud cases. What is the total exposure? The key concern is whether the $0.4 billion is a one-off or whether we will see a step-up in impairment charges because of this case. That's my number one question. Number two: I look at the risk weighting. It seems the downside scenario, the 45 basis points versus before the war, say 4Q 2025, is roughly about 15 basis points higher. Can you give color on in what situations you would see a continued rise above the 45 basis point guidance?

Manveen Kaur, Group Chief Financial Officer

Thank you, Katherine. Firstly, this fraud is idiosyncratic. We have reviewed our highest risk exposures across the portfolio and specifically looked at private credit exposures on the slide and have not identified comparable fraud risks. We have tightened our risk appetite and due diligence, and we feel comfortable this is a one-off fraud that came to us through a secondary exposure via a financial sponsor where there was reliance on their due diligence. On the downside scenarios: the 45 basis points guidance is built after considering multiple scenarios, including a 30% Middle East-related specific scenario that we created as one of the scenarios. We do not expect the 45 basis points guidance to shift materially; it reflects conservative forward-looking adjustments under IFRS 9 and the probabilities assigned to scenarios. The stress scenario on Slide 17 is a holistic planning exercise and represents a more severe 'bookend' scenario with multiple severe impacts. There is a distinction between the IFRS 9 forward-looking scenarios used for provisioning and the broader planning stress scenarios we present for management planning.

Operator, Operator

Our next question today comes from Chris Hallam at Goldman Sachs.

Chris Hallam, Analyst, Goldman Sachs

Two for me. First, on wealth: $5 billion of the $39 billion net new money was deposits, so it looks like 90% of the flows were invested while the stock of your wealth balances is closer to 60% invested. Is that structural? Are clients becoming more invested and what does that mean for fee margins and returns? Also, within the $39 billion, without the conflict in Iran, would that number have been higher or lower? Second, on capital: you managed through the Hang Seng privatization well. Given the underlying business performance, when do you expect to restart share buybacks?

Manveen Kaur, Group Chief Financial Officer

Thank you, Chris. On invested assets: we are pleased with growth in invested assets, but recall Q1 is typically strong for investments, so some seasonality is at work with flows moving from deposits to investments. We've been strong in securing new mandates from private banking, and wealth performance is broad-based, not dependent on a single lever. Regarding the conflict: there was some risk-off in late March but activity recovered in April and transactional volumes remain high. Our broad product range and distribution capability help customers reposition portfolios. On capital and buybacks: despite the large investment in Hang Seng Bank, we have remained within our CET1 operating range which reflects strong organic capital generation across the business. Q2 looks capital generative as well, but share buyback decisions are made quarterly. Our starting point remains capital generation, then loan growth, our 50% dividend payout target, and the residual for buybacks and other distributions, subject to our high hurdle rate for any inorganic opportunities. We will reassess starting in Q2.

Operator, Operator

The next question today comes from Kunpeng Ma at China Securities.

Kunpeng Ma, Analyst, China Securities

Two questions. First, about Hang Seng: I’m glad to hear the momentum in deposits and wealth in Q1 and the pickup in April. What proportion of that momentum could be attributed to synergies from the Hang Seng deal? Any color on future synergies would be helpful. Second, on HSBC's global footprint: regarding the proposed disposal of the Indonesian retail business, Indonesia is important. Which markets are important to you and which are less important?

Manveen Kaur, Group Chief Financial Officer

Thank you, Kunpeng. On Hang Seng: we have made a good start on the privatization, but synergies have been minimal so far because it is early in the integration process. We have started investing in Hong Kong in both brands — technology, simplifying customer journeys, and colleague training — so we expect synergies to come through progressively from the second half of this year and mainly through 2027 and 2028. So we see a strong tailwind to support our targets as we progress and everything is on plan. On the global footprint and Indonesia: Indonesia is a critical market for us from a CIB perspective. It is an important network market and a significant economy in Asia. However, the retail business as it was did not meet the strategic criteria for our wealth franchise and did not meet our hurdle rates for continued investment. It remains a valuable business and the transaction terms reflect that, but from a wealth perspective we have other markets where we are investing in a more focused manner.

Operator, Operator

Our next question today comes from Alastair Warr at Autonomous.

Alastair Warr, Analyst, Autonomous

A couple of follow-ups on credit costs and insurance. If you booked 52 basis points in Q1, to get to 45 basis points for the full year implies a little above 40 basis points for the remaining quarters. You were at 40 before. Is that implicitly building in more drag from the Middle East or anything else we should think about? Second, you mentioned CSM release rate is about 10 years — can I confirm that and whether the shorter payment period products you distribute affect the release rate?

Manveen Kaur, Group Chief Financial Officer

Thank you, Alastair. On credit costs: the 52 basis points in Q1 includes two significant items — the idiosyncratic fraud-related charge and the $300 million Middle East reserve build. If you take those off, the underlying credit cost would be lower and in line with Q1 2025 levels. Q1 has been benign on Hong Kong commercial real estate; we are seeing signs of stabilization but not declaring the end of the cycle, so we maintain buffers for the rest of the year. On CSM: there is no change in accounting policy — it's IFRS 17-based — and the release to P&L is typically over a 9-to-10-year period. The shorter payment period products do not materially alter that long-term release pattern. As long as new customer onboarding and CSM growth exceed the P&L release, the trajectory for fee income is positive.

Operator, Operator

Thank you, Pam. We will take our last question today from Joseph Dickerson at Jefferies.

Joseph Dickerson, Analyst, Jefferies

On the banking NII guidance: is that taking into account the current yield curve in the U.K.? I note some footnotes around using rates as of mid-April. Does that take account of the U.K. yield curve? Also, how might maturities at higher rates influence outer year revenue growth assumptions?

Manveen Kaur, Group Chief Financial Officer

Thank you, Joe. Yes, for banking NII we looked at yield curves as of mid-April across currencies, including the U.K. In terms of outer year revenue growth projections, those were based on the yield curves when we set our targets. If yield curves remain higher or rise further, everything else equal, that will be a tailwind for revenue in future years. Our banking NII guidance covers the current year only.

Operator, Operator

Thank you very much. That ends today's Q&A. I'll now hand back to Manveen for closing remarks.

Manveen Kaur, Group Chief Financial Officer

Thank you all for your questions. As you've seen from our results, we are very pleased with our return on tangible equity of 18.7%. We have not printed a number of this size for nearly 20 years, and that gives us a very good start in terms of where our targets are and how firmly we stand behind them for the next three years. Of course, there are macro uncertainties in the current environment, and we have provided fulsome disclosures both on private credit and on extreme downside stress scenarios. I hope in that context I have answered your questions. If you have further detailed questions, please reach out to the IR team. Thank you very much again for your participation.

Operator, Operator

Thank you, everyone, for joining today. You may now disconnect.