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09 May 2011

Interim Management Statement Q1 2011

HSBC Holdings plc ('HSBC') will be conducting a trading update conference call with analysts and investors today to coincide with the release of its Interim Management Statement. The trading update call will take place at 12.00 GMT (in London).

Group Chief Executive, Stuart Gulliver, commented:

"Underlying profits1 held up well against a strong Q1 2010, we were profitable in all regions and customer groups, profits increased in each of our faster-growing regions and credit quality improved. There was double-digit revenue growth in many of our businesses in the faster-growing regions. We continued to increase customer lending in all regions, except North America, with strong growth in Asia and Latin America. Higher lending balances, along with strong trade volumes, contributed to the rise in revenues in those regions. Set against this, as expected, we faced revenue headwinds in Global Banking and Markets, notably in Balance Sheet Management, and in the US, where we continued to run off the Consumer Finance portfolios and Card balances reduced. Loan impairment charges once again fell significantly as economic conditions stabilised and we reduced portfolio risk and improved collections.

We have increased our emphasis on cost management across the Group, launching a number of cost reduction programmes during the period which will be covered in more detail at the Strategy Day. The rise in operating expenses compared with Q1 2010 largely reflected continued investment in our businesses in the faster-growing markets and in Global Banking and Markets. This is reflected principally in higher staff costs. The increase was also driven by a number of items which affected the comparisons with Q1 2010 and Q4 2010, in particular a provision of US$440m relating to payment protection insurance in the UK. These items were significant contributors to the rise in the cost efficiency ratio to 60.9%. Excluding them, and movements in the fair value of own debt related to credit spreads, this ratio was 55.1% in Q1 2011 with costs broadly stable compared with Q4 2010.

The world economy continued to expand during the quarter, and although emerging market output growth eased slightly, we believe that these markets will once again outpace mature markets this year. However, there remain a number of risks to the global recovery cycle in the short-term. In the developed world, higher oil and food prices may slow the pace of recovery while, in emerging markets, higher inflation is dampening consumer sentiment. Despite this, we expect economic growth to continue, albeit more slowly than in 2010.

I am pleased to say that April's performance was satisfactory and in line with expectations. I believe HSBC is well placed to capitalise on global business opportunities. Together with my management team, I look forward to presenting our strategy and key priorities on 11 May."

Group performance summary

Earnings were well balanced and all geographical regions and customer groups were profitable. Commercial Banking performed strongly, with profit and revenue growth driven by increasing customer loan balances and higher trade volumes, partly offset by increasing costs as we continued to invest for growth. Profits in Retail Banking and Wealth Management also continued to improve, mainly as a result of lower loan impairment charges, offset in part by higher costs in the faster-growing markets and the payment protection insurance ('PPI') provision. In Global Banking and Markets, profits were lower but remained strong by historical standards. Private Banking profits were in line with 2010 performance.

Group performance commentary

  • Revenues benefited from a number of positive trends. Higher trade-related volumes and increased insurance and investment income were recorded, most notably in Asia. We continued to grow customer loan balances, which increased by 4% during the quarter. In line with recent strong loan growth, net interest income in Asia and Latin America increased overall, while in Europe net interest income rose in Retail Banking and Wealth Management and in Commercial Banking. This was partly offset by asset spread compression as the portfolio mix migrated to better quality secured lending.
  • Revenues were 5% lower than in Q1 2010, principally as a result of headwinds highlighted in respect of full year 2010 performance. These were the ongoing run-off in the US of the Consumer Finance portfolios and lower balances in Cards, and reduced revenues in Global Banking and Markets, including lower Balance Sheet Management revenues, as expected.
  • Compared with Q4 2010, Group revenues were broadly unchanged, reflecting an improvement in Global Banking and Markets, offset by movements in the fair value of non-qualifying hedges, with an unfavourable fair value movement of US$59m in Q1 2011 which contrasted with a favourable movement of US$736m in Q4 2010.
  • In Global Banking and Markets, revenues were lower compared with a strong Q1 2010. However, following strategic investment in the business, equities revenues reached their highest quarterly level in two years as global equity markets rallied. Compared with Q4 2010, revenues recovered strongly across most business lines and regions, as market conditions improved and client activity increased.
  • Loan impairment charges and other credit risk provisions continued to improve as a result of stabilising economic conditions combined with earlier management initiatives to reduce portfolio risk and improve collection processes. Overall, they fell by 37% to US$2.4bn, the lowest quarterly level since Q2 2006. All customer groups and all regions experienced an improvement, with the US accounting for a significant proportion of the total due to lower balances in the Consumer Finance run-off portfolio and the Cards business. Within the Consumer Finance run-off portfolio, the decline in loan impairment charges was moderated by US$0.4bn of additional charges as a result of changes in economic assumptions about the pace of recovery in home prices and delays in the timing of expected cash flows, notably as a result of the foreclosure moratorium that began in late 2010.
  • In Global Banking and Markets, a small net release in loan impairment charges and other credit risk provisions contrasted with a charge in Q1 2010 in line with improved market conditions. Projected impairment charges and expected cash losses remain in line with earlier guidance and the available-for-sale reserve reduced from US$6.4bn at 31 December 2010 to US$5.8bn at 31 March 2011.
  • Costs in Q1 2011 included a US$440m provision in respect of the adverse judgement in the Judicial Review relating to sales of PPI in the UK (for details see below); restructuring costs of US$67m in Latin America; impairments on certain software projects now deferred or cancelled of US$78m in the US; and an acceleration in the expense recognition for deferred bonus awards of US$70m2. Excluding these items and movements in the fair value of own debt related to credit spreads, the cost efficiency ratio was 55.1%, compared with a reported cost efficiency ratio of 60.9% for Q1 2011. On the same basis, and excluding the pension curtailment gain of US$148m recorded in Q1 2010, expenses rose by 7%. The principal drivers of this increase were higher employee expenses and technology-related costs supporting strategic investment in the business.
  • On a reported basis, costs were 2% higher compared with Q4 2010. However, both quarters included a number of notable items, including litigation and other regulatory provisions and, after excluding these, costs were broadly stable. In the UK, legislation in respect of the bank levy has yet to be substantively enacted and therefore no charge has been recognised in Q1 2011. However, we estimate that the cost of the UK bank levy for HSBC will be approximately US$600m for the full year 2011.
  • At US$5.5bn, underlying pre-tax profits were 10% lower than in Q1 2010. On a reported basis, pre-tax profits fell by 14% to US$4.9bn. Unfavourable movements in the fair value of own debt relating to credit spreads mainly accounted for the difference between the reported and underlying figures in Q1 2011.
  • Profit after tax rose by 52% to US$4.4bn. The effective tax rate for the Group was significantly lower at 10.0%, principally due to the recognition of previously unrecognised deferred tax assets in the US on foreign tax credits. The high effective tax rate in Q1 2010 of 49.2% was largely caused by a tax charge on the sale of HSBC Bank Canada by HSBC North America Holdings Inc. to its UK parent company, as previously reported.
  • Profit attributable to shareholders increased by 58% to US$4.2bn, resulting in basic earnings per ordinary share of US$0.23, up 53%.
  • Annualised return on average ordinary shareholders' equity was 11.4%, up from 8.3% in Q1 2010, in part reflecting the low effective tax rate in Q1 2011, as noted above.
  • Customer account balances increased by 4% or US$47bn to US$1.3 trillion during the quarter, mainly in Europe and Asia.
  • We continued to increase customer lending during the quarter. Loans and advances to customers rose by 4% or US$39bn to US$997bn, despite the effect of the run-off of portfolios in the US. Europe, Asia and Latin America all recorded higher balances, with Commercial Banking and mortgage lending driving the growth, as we focus on faster-growing and lower-risk markets and sectors.
  • The advances-to-deposits ratio for the Group remained conservative at 78.2%. This is well within our maximum benchmark ratio of 90% and highlights further room for lending growth.
  • We continued to generate capital and the core tier 1 ratio improved to 10.7%. Risk-weighted assets marginally increased, reflecting strong growth in the key markets where we are expanding our customer relationships, partly offset by run-off in legacy portfolios.
  • On 3 May 2011, the Board announced a first interim dividend payment for 2011 of US$0.09 per ordinary share, an increase of 12.5% compared with the first interim dividend in 2010, as we signalled in February.

Read the full Interim Management Statement announcement (18 page pdf 123k)

1All references to profits are profits before tax, unless otherwise stated. Details of the basis for comparisons are covered in the Notes to this Statement.

2 Recent regulatory pronouncements and best practice guidance have clarified the required structure and terms of deferred bonus arrangements. Accordingly, HSBC started to recognise from 1 January 2011 the costs of deferred awards to be granted in March 2012.

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