HSBC : 3Q20 Earnings Release - Announcement made to the HK stock exchange - English

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27 October 2020

(Hong Kong Stock Code: 5)

HSBC Holdings plc

3Q20 EARNINGS RELEASE

The attached announcement is being released to all the stock exchanges on which HSBC Holdings plc is listed.

For and on behalf of

HSBC Holdings plc

Aileen Taylor

Group Company Secretary and Chief Governance Officer

The Board of Directors of HSBC Holdings plc as at the date of this announcement comprises: Mark Tucker*, Noel Quinn, Laura Cha† , Henri de Castries† , James Anthony Forese† , Steven Guggenheimer† , Irene Lee† , José Antonio Meade Kuribreña† , Heidi Miller† , Eileen K Murray† , David Nish† , Ewen Stevenson, Jackson Tai† and Pauline van der Meer Mohr† .

* Non-executive Group Chairman

• Independent non-executive Director

HSBC Holdings plc

Registered Office and Group Head Office:

8 Canada Square, London E14 5HQ, United Kingdom Web: www.hsbc.com

Incorporated in England with limited liability. Registered in England: number 617987

27 OCTOBER 2020

HSBC HOLDINGS PLC

3Q20 EARNINGS RELEASE

Noel Quinn, Group Chief Executive, said:

"These were promising results against a backdrop of the continuing impacts of Covid-19 on the global economy. I'm pleased with the significantly lower credit losses in the quarter, and we are moving at pace to adapt our business model to a protracted low interest rate environment. We are accelerating the transformation of the Group, moving our focus from interest-rate sensitive business lines towards fee-generating businesses, and further reducing our operating costs. We also intend to increase our rate of investment in Asia, particularly in wealth, the Greater Bay Area, south Asia, trade finance and sustainable finance.

The Group's capital and liquidity ratios strengthened further in the quarter despite the challenging economic conditions. A decision on whether to pay a dividend for the 2020 financial year will depend on economic conditions in early 2021, and be subject to regulatory consultation. We will seek to pay a conservative dividend if circumstances allow."

Financial performance (vs. 3Q19)

• Reported profit after tax down 46% to $2.0bn and reported profit before tax down 36% to $3.1bn, mainly from lower revenue. Results in 3Q20 included our share of an impairment of goodwill by our associate, The Saudi British Bank ('SABB'), of $0.5bn.
  Adjusted profit before tax down 21% to $4.3bn.
• Our operations in Asia continued to perform resiliently with reported profit before tax in 3Q20 of $3.2bn, despite interest rate headwinds.
• Reported revenue down 11% to $11.9bn, reflecting the impact of interest rate reductions on our deposit franchises across all global businesses, partly offset by favourable market impacts in life insurance manufacturing. Reported revenue was also partly offset by a favourable movement in credit and funding valuation adjustments and higher revenue in Global Markets.
• Net interest margin ('NIM') of 1.20%, down 36 basis points ('bps') from 3Q19. NIM was down 13bps from 2Q20, reflecting the continuing impact of interest rate reductions due to the Covid-19outbreak.
• Reported expected credit losses and other credit impairment charges ('ECL') down $0.1bn to $0.8bn. The 3Q20 charge reflected a stabilisation of the forward economic outlook from 2Q20, while wholesale stage 3 charges were in part offset by increased releases related to historical default cases.
• Reported operating expenses down 1% and adjusted operating expenses down 3%, despite continued investment, due to the impact of our cost-savinginitiatives, reduced discretionary expenditure and a lower performance-relatedpay accrual.
• Common equity tier 1 capital ('CET1') ratio of 15.6%, up 0.6% from 15.0% at 2Q20, reflecting a decrease in RWAs (on a constant currency basis), capital generation through profits and foreign currency translation differences.

Financial performance (vs. 9M19)

• Reported profit after tax down 62% to $5.2bn and reported profit before tax down 57% to $7.4bn from higher ECL and lower revenue, partly offset by a fall in operating expenses. Reported results included a $1.3bn impairment of software intangibles and the non-recurrenceof an $828m dilution gain in 9M19. Adjusted profit before tax down 44% to $9.9bn.
• Reported revenue down 9% to $38.7bn, primarily due to the progressive impact of interest rate reductions across our global businesses, in part offset by higher revenue in Global Markets. Adjusted revenue down 6% to $38.5bn.
• Reported ECL up $5.6bn to $7.6bn, mainly due to the impact of the Covid-19 outbreak and the forward economic outlook. Allowance for ECL on loans and advances to customers up from $8.7bn at 31 December 2019 to $13.7bn at 30 September 2020.
• Reported operating expenses down 3% and adjusted operating expenses down 4%, as a reduction in the performance- related pay accrual and lower discretionary expenditure more than offset the impact of continued investment.

Outlook

• Geopolitical risk, particularly relating to trade and other tensions between the US and China, remains heightened. There also remains uncertainty regarding the UK's withdrawal from the European Union ('EU'). Trade talks between the UK and the EU are ongoing and there remains a possibility that there may not be a trade deal agreed by the end of 2020.
• We expect lower global interest rates to continue to put pressure on net interest income. Based on current interest rates, we expect further net interest income headwinds in 4Q20, with some stabilisation as we move into 2021.
• Our ECL charge for 2020 is currently trending towards the lower end of the $8bn to $13bn range. This latest guidance, which continues to be subject to a high degree of uncertainty due to Covid-19and geopolitical tensions, assumes that the likelihood of further significant deterioration in the current economic outlook is low, and that stage 3 impairments from now until the end of 2020 are broadly in line with the average quarterly charge for the year to date.
• We expect to reduce the Group's 2022 annual cost base beyond our original $31bn target, through exceeding our $4.5bn gross cost savings target. We expect to incur more than $6bn in 'cost to achieve' expenditure to generate these saves.
• We expect to exceed our $100bn gross risk-weighted asset ('RWA') reduction target by the end of 2022. This is expected to allow more resources to be allocated to areas of competitive advantage, higher returns and growth.
• We intend to provide a more detailed and updated transformation plan at our 2020 full-year results, as we finalise our work on costs, capital and RWA deployment. We also intend to provide an update on our medium-termfinancial targets.
• Based on our results for 2020 and our forecasts for 2021, the Board will consider whether to pay a conservative dividend for 2020. Any such dividend would be dependent on the economic outlook in early 2021, and be subject to regulatory consultation. A final determination is expected to be made and communicated in February 2021 with our 2020 full-yearresults. We also expect to communicate our revised policy for dividends for 2021 and beyond at the same time.

Earnings Release - 3Q20

Key financial metrics

		Nine months ended		Quarter ended
		30 Sep	30 Sep	30 Sep	30 Jun	30 Sep
	Footnotes	2020	2019	2020	2020	2019
Reported results
Reported revenue ($m)		38,672	42,727	11,927	13,059	13,355
Reported profit before tax ($m)		7,392	17,244	3,074	1,089	4,837
Reported profit after tax ($m)		5,164	13,732	2,039	617	3,795
Profit attributable to the ordinary shareholders of the parent company ($m)		3,336	11,478	1,359	192	2,971
Cost efficiency ratio (%)		63.5	59.2	67.4	66.4	61.0
Basic earnings per share ($)		0.17	0.57	0.07	0.01	0.15
Diluted earnings per share ($)		0.16	0.57	0.07	0.01	0.15
Net interest margin (%)		1.35	1.59	1.20	1.33	1.56
Alternative performance measures
Adjusted revenue ($m)		38,542	41,162	12,065	13,433	13,347
Adjusted profit before tax ($m)		9,939	17,693	4,304	2,596	5,418
Adjusted cost efficiency ratio (%)		58.0	56.7	61.4	55.4	57.0
Expected credit losses and other credit impairment charges ('ECL')		0.96		0.30
(annualised) as % of average gross loans and advances to customers (%)		0.25	1.49	0.32
Return on average ordinary shareholders' equity (annualised) (%)		2.7	9.2	3.2	0.5	7.0
Return on average tangible equity (annualised) (%)	1	3.5	9.5	2.9	3.5	6.4
					At
				30 Sep	30 Jun	31 Dec
			Footnotes	2020	2020	2019
Balance sheet
Total assets ($m)				2,955,935	2,922,798	2,715,152
Net loans and advances to customers ($m)				1,041,340	1,018,681	1,036,743
Customer accounts ($m)				1,568,714	1,532,380	1,439,115
Average interest-earning assets, year to date ($m)				2,070,703	2,034,939	1,922,822
Loans and advances to customers as % of customer accounts (%)				66.4	66.5	72.0
Total shareholders' equity ($m)				191,904	187,036	183,955
Tangible ordinary shareholders' equity ($m)				152,260	147,879	144,144
Net asset value per ordinary share at period end ($)			2,3	8.41	8.17	8.00
Tangible net asset value per ordinary share at period end ($)			3	7.55	7.34	7.13
Capital, leverage and liquidity
Common equity tier 1 capital ratio (%)			4	15.6	15.0	14.7
Risk-weighted assets ($m)			4	857,024	854,552	843,395
Total capital ratio (%)			4	21.2	20.7	20.4
Leverage ratio (%)			4	5.4	5.3	5.3
High-quality liquid assets (liquidity value) ($bn)				654	654	601
Liquidity coverage ratio (%)				147	148	150
Share count
Period end basic number of $0.50 ordinary shares outstanding (millions)				20,173	20,162	20,206
Period end basic number of $0.50 ordinary shares outstanding and dilutive potential ordinary shares		20,227
(millions)				20,198	20,280
Average basic number of $0.50 ordinary shares outstanding (millions)			5	20,164	20,162	20,158
Dividend per ordinary share (in respect of the period) ($)			5	-	-	0.30

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

• The definition of net asset value per ordinary share is total shareholders' equity less non-cumulative preference shares and capital securities, divided by the number of ordinary shares in issue excluding shares the company has purchased and are held in treasury.

• Excludes impact of $0.10 per share dividend in 1Q19, following a June 2019 change in accounting practice on the recognition of interim dividends, from the date of declaration to the date of payment.

• Unless otherwise stated, regulatory capital ratios and requirements are calculated in accordance with the transitional arrangements of the Capital Requirements Regulation in force in the EU at the time, including the regulatory transitional arrangements for IFRS 9 'Financial Instruments' in article 473a. The capital ratios and requirements are reported in accordance with the revised Capital Requirements Regulation and Directive ('CRR II'), as implemented. Leverage ratios are calculated using the end point definition of capital and the IFRS 9 regulatory transitional arrangements.

5 For these metrics, 31 December 2019 is calculated on a full-year basis.

• HSBC Holdings plc Earnings Release 3Q20

Contents

	Page
Highlights	1
Key financial metrics	2
Business highlights	3
Approach to risk management	3
Geopolitical and macroeconomic risks	3
Adjusted performance	5
Financial performance	7
Cautionary statement regarding forward-looking statements	15
Summary consolidated income statement	17

	Page
Summary consolidated balance sheet	18
Credit risk	18
Capital adequacy	28
Leverage	29
Risk-weighted assets	29
Summary information - global businesses	30
Summary information - geographical regions	35
Dividend on preference shares	40
Terms and abbreviations	41

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 GMT. Details of how to participate in the call and the live audio webcast can be found at www.hsbc.com/investors.

Note to editors

HSBC Holdings plc

HSBC Holdings plc, the parent company of HSBC, is headquartered in London. HSBC serves customers worldwide from offices in

64 countries and territories in its geographical regions: Europe, Asia, North America, Latin America, and Middle East and North Africa. With assets of $2,956bn at 30 September 2020, HSBC is one of the world's largest banking and financial services organisations.

Business highlights

On 18 February, the Group announced a substantial transformation programme designed to ensure HBSC is fit for the future, with plans to reshape underperforming businesses, simplify the organisation and reduce costs. During the third quarter, we continued to make progress with this programme, including further reducing RWAs in our Global Banking and Markets ('GBM') business. In addition, we continued to increase investments in technology to improve the customer experience and efficiency, including a new digital multi- currency wallet, launched in Singapore for our Global Liquidity and Cash Management customers. Also, we launched VisionGo in Hong Kong, a digital community platform for small businesses and entrepreneurs, which has already attracted over 8,000 members.

However, given the significant changes in the operating environment, we intend to accelerate the transformation of the Group. We expect to reduce the Group's 2022 annual cost base beyond our original $31bn target, while sustaining investment in our focus areas. We also expect to exceed our target to reduce RWAs by $100bn in low-returning areas. This is expected to allow more resources to be allocated to areas of competitive advantage, higher returns and growth. We are finalising our work on costs, capital and RWA deployment and intend to provide a more detailed and updated transformation plan with our full-year results in February 2021.

We are continuing with the strategic review of our retail banking operations in France and we will provide an update on our plans at or before our 2020 full-year results.

In the US, the management team is making good progress in executing the current business plan at pace. RWAs in our US business at 3Q20 were 8% lower than at 3Q19. In addition, full-time equivalent staff ('FTE') were 9% lower than at 31 December 2019 and 80 US retail branches have been successfully closed and consolidated. However, given the current economic climate, we are pursuing options to accelerate the transformation of this business and intend to provide an update at our 2020 full-year results.

Approach to risk management

We have in place a comprehensive risk management framework. We operate our own wide-ranging stress testing programme, as well as regulatory driven stress tests, to assess risk impacts of severe, adverse, but plausible events at legal entity, regional and overall Group levels. This stress testing programme is a key part of our capital and liquidity risk management and planning. Stress testing provides management with key insights into the potential impacts of, and mitigants to, severely adverse events on the Group, and provides information to regulators on the Group's financial stability. Given the nature of the Covid-19 crisis, additional mitigating actions may be required.

At 30 September 2020, our CET1 ratio was 15.6%, compared with 14.7% at 31 December 2019, and our liquidity coverage ratio ('LCR') was 147%. Our capital, funding and liquidity positions are expected to help us to continue supporting our customers throughout the current geopolitical and macroeconomic uncertainty.

Geopolitical and macroeconomic risks

The Group's results and outlook continue to be impacted by developments in the external risk environment, including the items referred to below, which detail the key developments in the third quarter of 2020. For further information on the risks that the Group faces, see pages 76 to 83 of the Annual Report and Accounts 2019 and pages 50 to 54 of the Interim Report 2020.

Geopolitical risk to our operations and portfolios

US-China tensions remain heightened. In June 2020, the National People's Congress of China enacted the Hong Kong national security law. In response, among other steps, the US President signed into law the Hong Kong Autonomy Act, and issued Executive Order 13936, providing authority to impose sanctions against entities and individuals determined to have undermined Hong Kong's autonomy.

The Hong Kong Autonomy Act also provides authority to impose secondary sanctions against non-US financial institutions determined to have knowingly conducted a significant transaction for any individual or entity subject to primary sanctions under the act.

HSBC Holdings plc Earnings Release 3Q20

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