Interim Management Statement 1Q 2014

HSBC Holdings plc ('HSBC') will be conducting a trading update conference call with analysts and investors today to coincide with the release of this Interim Management Statement. The trading update call will take place at 10.00am BST, and details of how to participate in the call and the live audio webcast can be found below and at Investor Relations on www.hsbc.com.

Conference call details

Date: Wednesday, 7 May 2014

Time: 5.00am EDT

10.00am BST

5.00pm HKT

Audio webcast: Please follow this link for the webcast: http://www.hsbc.com/1/2/investor-relations

Speakers: Stuart Gulliver, Group Chief Executive

Iain Mackay, Group Finance Director

Conference details for investors and analysts: Passcode: HSBC

Replay conference call details (available until 6 June 2014): Passcode: 23525015#

Table of contents

Terms and Abbreviations

Note to editors

HSBC Holdings plc

HSBC Holdings plc, the parent company of the HSBC Group, is headquartered in London. The Group serves customers worldwide from over 6,300 offices in over 75 countries and territories in Europe, Asia, North and Latin America, and the Middle East and North Africa. With assets of US$2,758bn at 31 March 2014, HSBC is one of the world's largest banking and financial services organisations.

· Reported profit before tax ('PBT') down 20% in the first quarter of 2014 ('1Q14') at US$6,785m compared with US$8,434m in the same period in 2013 ('1Q13').

· Underlying PBT was down US$968m or 13% in 1Q14 at US$6,621m, compared with US$7,589m in 1Q13, primarily reflecting the reduced impact of significant items (US$741m net reduction in PBT between 1Q13 and 1Q14, comprising lower revenue items of US$1,076m and lower operating expense items of US$335m).

· Earnings per share and dividends per ordinary share for the first quarter of 2014 were US$0.27 and US$0.10, respectively, compared with US$0.34 and US$0.10 for the equivalent period in 2013.

· Return on average ordinary shareholders' equity (annualised) was 3.2% lower at 11.7%, compared with 14.9% for the equivalent period in 2013.

· Lower 1Q14 revenue - 1Q14 underlying revenue was US$15,709m, down 8% from US$17,135m in the same period in 2013 mainly reflecting the reduced impact from significant items of US$1,076m. Excluding these items, revenue was lower by US$350m or 2%, driven by Retail Banking and Wealth Management and Global Banking and Markets, partly offset by growth in Commercial Banking.

· Further progress made on executing against strategy with market share gains in several product categories in Global Banking and Markets including equity and debt capital markets, advisory and lending. We also achieved positive net new money in targeted areas of growth in Global Private Banking.

· Lower 1Q14 underlying operating expenses - 1Q14 operating expenses were US$8,843m, down 2% from US$9,014m in the same period in 2013. Excluding significant items, operating expenses increased by 2% in part reflecting increased investment in Global Standards, Risk and Compliance, and inflation, partly offset by cost saving initiatives.

· Capital - at 1Q14, the CRD IV transitional basis CET1 capital ratio was 10.7%, down from 10.8% at 31 December 2013, and the end point CET1 capital ratio was 10.8%, down from 10.9%. This largely reflected increased RWAs resulting from regulatory change.

1  All on a reported basis, unless otherwise stated. Underlying basis eliminates effects of foreign currency translation differences, acquisitions, disposals and changes in ownership levels of subsidiaries, associates, joint ventures and businesses, and changes in fair value ('FV') due to movements in credit spread on own long-term debt issued by the Group and designated at fair value. A reconciliation of reported results to underlying results is shown on page 7.

2 For details of the implementation of CRD IV, see page 6.

Reconciliation of reported and underlying PBT

Significant items (on a reported basis)

1 Net operating income before loan impairment charges, also referred to as 'revenue'.

2 The gain of US$553m represents the net impact of the disposal of available-for-sale investments in Ping An offset by adverse changes in fair value of the contingent forward sale contract to the point of delivery of the shares.

3 In 1Q13, the private banking operations of HSBC Private Bank Holdings (Suisse) SA in Monaco were classified as held for sale. At this time a loss on reclassification to held for sale was recognised following a write down in the value of goodwill allocated to the operation. Following a strategic review we decided to retain the operation and the assets and liabilities of the business were reclassified to the relevant balance sheet categories; however, the loss on classification was not reversed.

Group Chief Executive, Stuart Gulliver, commented:

"In the first quarter we maintained control of costs and further demonstrated our capital resilience. Whilst revenue was lower than the previous year's first quarter, which benefited from a number of specific items, we have seen progress in revenue over the trailing quarters. Loan impairment charges fell, reflecting the changes to the portfolio since 2011. Our return on equity was 11.7%.

"Global Banking and Markets had a relatively good performance and we grew our market share in several product categories. Commercial Banking saw revenue growth but, in our Principal Retail Banking and Wealth Management business, revenues were impacted by changes in incentive plans and product pricing."

Geographical regions

Hong Kong and Rest of Asia-Pacific are no longer regarded as separate reportable operating segments, having considered the geographical financial information presented to the GMB. From 1 January 2014, they have been replaced by a new operating segment 'Asia', which better aligns with internal management information used for evaluation when making business decisions and resource allocations. Comparative data have been re-presented to reflect this change.

Implementation of CRD IV

On 1 January 2014, CRD IV came into force and capital and RWAs at 31 March 2014 are calculated and presented on this basis. Prior to this date, capital and RWAs were calculated and presented on a Basel 2.5 basis. In addition, capital and RWAs at 31 December 2013 were also estimated based on the Group's interpretation of final CRD IV legislation and final rules issued by the PRA, details of which can be found in the basis of preparation on page 324 of the Annual Report and Accounts 2013.

Underlying performance

Underlying performance:

· adjusts for the period-on-period effects of foreign currency translation;

· eliminates the fair value movements on our long-term debt attributable to own credit spread where the net result of such movements will be zero upon maturity of the debt. This does not include fair value changes due to own credit risk in respect of trading liabilities or derivative liabilities; and

· adjusts for acquisitions, disposals and changes of ownership levels of subsidiaries, associates, joint ventures and businesses.

For acquisitions, disposals and changes of ownership levels of subsidiaries, associates, joint ventures and businesses, we eliminate the gain or loss on disposal or dilution and any associated gain or loss on reclassification or impairment recognised in the period incurred, and remove the operating profit or loss of the acquired, disposed of or diluted subsidiaries, associates, joint ventures and businesses from all the periods presented so we can view results on a like-for-like basis. Disposal of investments other than those included in the above definition do not lead to underlying adjustments.

Reconciliation of reported and underlying revenue

Reconciliation of reported and underlying LICs

Reconciliation of reported and underlying operating expenses

Reconciliation of reported and underlying profit before tax

1 'Currency translation adjustment' is the effect of translating the results of subsidiaries and associates for the previous period at the average rates of exchange applicable in the current period.

Financial performance commentary

1Q14 compared with 1Q13

· Reported profit before tax of US$6.8bn in 1Q14 was US$1.6bn or 20% lower than in 1Q13, primarily reflecting lower gains (net of losses) from disposals and reclassifications. Notably, our results in 1Q13 included a US$1.1bn accounting gain arising from the reclassification of Industrial Bank as a financial investment following its issue of additional share capital to third parties. This was partly offset in 1Q14 by favourable fair value movements of US$0.1bn on our own debt designated at fair value resulting from changes in credit spreads compared with adverse movements of US$0.2bn in 1Q13.

· On an underlying basis, profit before tax was US$1.0bn or 13% lower than in 1Q13. This was primarily driven by lower revenue, partly offset by lower LICs and operating expenses.

· Reported revenue was US$15.9bn in 1Q14, US$2.5bn lower than in 1Q13, in part reflecting lower gains (net of losses) from disposals and reclassifications. On an underlying basis, revenue of US$15.7bn was US$1.4bn or 8% lower driven by a number of significant items which were recorded in 1Q13, as follows:

- a net gain on completion of the Ping An disposal of US$553m; and

- foreign exchange gains on sterling debt issued by HSBC Holdings of US$442m.

This was partly offset by:

- a loss of US$279m recognised following the write-off of allocated goodwill relating to our GPB business in Monaco;

- a loss of US$199m on early termination of cash flow hedges in the US run-off portfolio in RBWM; and

- a loss on the sale of an HFC Bank UK secured loan portfolio of US$138m.

In addition, 1Q14 revenue included:

- a favourable DVA of US$31m (compared with US$472m in 1Q13) in GB&M on derivative contracts;

- adverse fair value movements on non-qualifying hedges of US$142m compared with favourable movements of US$84m in 1Q13; and

- a loss of US$30m on sales of several tranches of real estate secured accounts in the US run-off portfolio in RBWM.

Excluding these items, revenue was US$0.4bn lower:

- in RBWM, revenue was US$0.3bn lower reflecting reduced net interest income following the sale of the non-real estate portfolio in 2013 and lower average balances in the US run-off portfolio. In our Principal RBWM business, revenue decreased by US$0.1bn, mainly reflecting the run-off of our Canadian consumer finance business, lower mortgage fees in the US and lower overdrafts and investment fees in Europe. These factors were partly offset by higher revenue from savings and deposits, mainly in Europe and Asia;

- in GB&M, total revenue was US$0.2bn or 4% lower, although this included higher revenue in Legacy Credit of US$0.1bn as we actively managed the portfolio. The reduction in revenue was driven by a decrease of US$0.2bn in Balance Sheet Management, as 1Q13 included higher gains from the re-positioning of the portfolio for risk management purposes. Although market conditions were challenging, GB&M increased market share in several product categories including equity and debt capital markets, advisory and lending. However, overall revenue in Capital Financing decreased as volume growth across the business was more than offset by spread and fee compression. Revenue in Rates, Foreign Exchange and Credit also fell as these businesses were affected by subdued activity levels. By contrast, revenue grew in our Equities business as client flows increased; and

- in GPB, revenue was US$0.1bn lower, reflecting a managed reduction in client assets as we continued to reposition the business, which led to a reduction in fee and trading income. We attracted positive net new money in areas that we have targeted for growth, including our home and priority markets and the high net worth client segment.

These factors were partly offset by:

- CMB, where revenue rose by US$0.2bn. This was primarily due to higher net interest income, mainly in Asia from average balance sheet growth and in the UK from a rise in deposit balances and wider lending spreads. In addition, revenue grew from increased collaboration with GB&M, notably in Asia, and from higher term lending fees in the UK.

· LICs of US$0.8bn were US$0.4bn lower than in 1Q13 on a reported basis, and US$0.3bn lower on an underlying basis, primarily from reductions in North America and Europe.

- In North America, the decrease of US$0.3bn reflected reduced balances and lower levels of new impaired loans in the US run-off portfolio, together with improvements in US housing market conditions, although the rate of improvement was lower than in 2013.

- In Europe, the decrease of US$0.1bn was mainly driven by lower specific impairments in CMB in the UK.

· Reported operating expenses in 1Q14 of US$8.9bn were 5% lower than in 1Q13. On an underlying basis, operating expenses fell by US$0.2bn, reflecting the effect of significant items:

- the non-recurrence of regulatory investigation provisions in GPB recorded in 1Q13 of US$119m;

- a customer remediation provision connected to our former CRS business recorded in 1Q13 of US$100m;

- lower UK customer redress programme charges of US$83m compared with US$164m in 1Q13. Charges for the period included estimated redress for possible mis‑selling in previous years in respect of PPI; and

- lower restructuring and other related costs of US$35m.

Excluding these items, operating expenses were 2% higher than in 1Q13 reflecting increased investment in Global Standards, Risk and Compliance and wage inflation, partly offset by cost saving initiatives.

· Our cost efficiency ratio increased by 4.9 percentage points on a reported basis to 55.7% and by 3.7 percentage points to 56.3% on an underlying basis reflecting lower revenue.

· The number of FTEs at the end of the quarter was 255,200, an increase of 1,100 on 31 December 2013, reflecting continued investment in Global Standards, Compliance and business growth initiatives, primarily in RBWM and CMB, partly offset by sustainable savings initiatives and the disposal of our operations in Colombia.

· The effective tax rate of 18.8% was lower than the UK corporation tax rate of 21.5%. This reflected the recurring benefits from tax exempt income from government bonds held in a number of Group entities and the recognition of the Group's share of post-tax profits of associates and joint ventures within the Group's pre-tax income. The lower effective tax rate in 1Q13 of 15.7% was driven by the benefits arising from the non-taxable gain on profits associated with the reclassification of Industrial Bank as a financial investment and the Ping An sale.

· On 7 May 2014, the Board announced a first interim dividend for 2014 of US$0.10 per ordinary share.

1Q14 compared with 4Q13

· Reported profit before tax was US$2.8bn or 71% higher than in 4Q13, despite lower gains (net of losses) from disposals of US$18m compared with US$1.0bn in 4Q13 which primarily arose from the sale of our Panama operations. 1Q14 included favourable fair value movements of US$0.1bn on own credit spread compared with adverse movements of US$0.7bn in 4Q13.

· On an underlying basis, profit before tax was US$3.1bn or 89% higher than in 4Q13, reflecting higher revenue and lower LICs and operating expenses.

· Reported revenue of US$15.9bn in 1Q14 was 5% higher than in 4Q13. On an underlying basis, revenue was US$1.1bn or 7% higher, driven by GB&M. This was notably in Rates, Foreign Exchange and Credit following particularly muted customer activity in 4Q13 compared with 1Q14.

· LICs were US$0.3bn lower than in 4Q13 on both a reported and underlying basis. LICs fell in the majority of our regions, notably by US$0.2bn in Latin America reflecting lower specific impairments in CMB in Mexico relating to homebuilders due to a change in public housing policy in 2013, and in Brazil across a number of corporate exposures. In North America, LICs fell by US$0.1bn, mainly driven by lower collective charges in the US, in part reflecting the CML portfolio run-off.

· Operating expenses for 1Q14 were US$1.7bn lower than in 4Q13 on a reported basis and US$1.6bn lower on an underlying basis. This primarily reflected a number of significant items including the bank levy of US$0.9bn recorded in 4Q13, lower UK customer redress charges of US$0.3bn and a decrease in restructuring and related costs. The remaining operating expenses were US$0.3bn lower, primarily reflecting incremental cost saving initiatives.

Balance sheet commentary

· Reported loans and advances to customers increased by US$17.7bn in the quarter. Excluding FX movements of US$2.2bn, the growth was driven by GB&M and CMB customers in Asia, relating to term lending. In addition, there was growth in Europe in GB&M from Capital Financing and corporate overdraft balances that did not meet the criteria for netting, partly offset by a reduction in credit card balances in RBWM and a fall in CMB lending.

· Reported customer accounts balances were broadly unchanged during 1Q14, with growth in Europe offset by a decrease in North America. The increase in Europe was driven by growth in balances in GB&M that did not meet the criteria for netting and an increase in RBWM. In North America, the fall in balances primarily reflected re-pricing.

· Other significant balance sheet movements in the quarter included a rise in trading assets and liabilities, mainly in Europe and North America. This reflected an increase in customer activity and a resultant increase in settlement account balances.

Capital and risk-weighted assets

On 1 January 2014, CRD IV came into effect, implementing the Basel III framework within the European Union.

At 1Q14, the CRD IV transitional basis CET1 capital ratio reduced to 10.7%, from 10.8% at 31 December 2013. Similarly the end-point CET1 capital ratio reduced to 10.8% from 10.9%. This largely reflected increased RWAs resulting from regulatory change.

Internal capital generation contributed US$4.5bn to CRD IV end point CET 1 capital, being profits attributable to shareholders of the parent company after regulatory adjustment for own credit spread and net of the first interim dividend. The dividend is net of planned scrip, and we have benefited from a higher fourth interim dividend scrip take-up.

On 1 January 2014, the move from the historical regulatory regime to a CRD IV transitional basis increased RWAs by US$122.2bn. This movement mainly consisted of credit valuation adjustment, asset value correlation, amounts in aggregate below the capital threshold risk-weighted at 250% and selected securitisation positions which moved from capital deductions to RWAs.

Selected portfolios with low default history were subject to PRA LGD floors, with an impact of US$17.3bn in RWAs; this is reported under methodology and policy changes. In addition, the PRA required a floor to be applied to the UK corporate LGD model, resulting in an increase in RWAs of US$17.1bn, as reported under model updates.

Business growth in CMB and GB&M in Asia and Europe from higher term lending to corporate customers increased RWAs by US$7.3bn, while additional increases occurred for corporate and sovereign exposures in Asia resulting from adverse movements in customer credit standing with an RWA impact of US$2.3bn.

Internal ratings-based ('IRB') RWA reductions of US$10.1bn from internal updates related to immaterial portfolios moving to the Standardised approach, with a reduction in IRB RWAs of US$4.8bn and methodology changes associated with trade finance products which accounted for a reduction in RWAs of US$4.6bn. Immaterial portfolios moving to the Standardised approach increased Standardised RWAs by US$6.0bn.

US retail run-off portfolio RWAs reduced by US$8.2bn as a result of a combination of factors, including the implementation of new risk models for the mortgage portfolios and favourable shifts in portfolio quality, as lower quality exposures continue to run off.

Net interest margin

Net interest margin was lower than in 1Q13 as a result of lower yields on customer lending, primarily in North America and Latin America. In North America this was driven by the effect of the disposals of the CML non-real estate loan portfolio and select tranches of CML first lien mortgages in the US in 2013. Both North America and Latin America were also affected by a change in the composition of their lending portfolios as they focused on growing secured, lower yielding balances, for both corporate and Premier customers. Yields on customer lending also fell in Europe and Asia, although to a lesser extent. However, yields on our surplus liquidity increased, notably in Asia, in line with market rate rises in mainland China and active management of our portfolios.

Cost of funds on customer accounts fell, albeit to a lesser extent than yields on customer lending, across most regions. In addition, the cost of debt issued by the Group decreased, primarily in Europe and in North America, as higher cost funding matured. The effects of these reductions were partially offset by an increase in the cost of funds in Latin America from rising interest rates in Brazil and from the continued change in the funding base, substituting wholesale deposits for medium-term notes.

In addition, the net interest margin reduced due to the significant increase in reverse repurchase agreements and repurchase agreements arising from the change in 4Q13 in the way that GB&M manage these activities. This had the effect of increasing average interest-earning assets, without a correspondingly large increase in net interest income, as these agreements are typically lower-yielding and have a lower cost of funds than the rest of the portfolio.

The decline in net interest margin from 4Q13 was lower than the reduction experienced from 1Q13 and was driven by North America and Latin America. It similarly reflected the change in the composition of lending portfolios, both as a result of disposals of selected tranches of CML first lien mortgages in the US during 4Q13 and the continued shift towards secured, lower-yielding balances in both regions, as noted above. Additionally, Latin America was affected by a significant rise in its cost of funds, as interest rates rose in Brazil.

Trading conditions since 31 March 2014 and outlook

We continued to experience muted customer activity in April.

Notes

· Income statement comparisons, unless stated otherwise, are between the quarter ended 31 March 2014 and the quarter ended 31 March 2013. Balance sheet comparisons, unless otherwise stated, are between balances at 31 March 2014 and the corresponding balances at 31 December 2013.

· The financial information on which this Interim Management Statement is based, and the data set out in the appendix to this statement, are unaudited and have been prepared in accordance with HSBC's significant accounting policies as described in the Annual Report and Accounts 2013, with the exception of the adoption of the following new or revised standards: On 1 January 2014 HSBC adopted amendments to IAS 32 'Offsetting Financial assets and Financial Liabilities' which clarified the requirements for offsetting financial instruments and addressed inconsistencies in current market practice when applying the offsetting criteria in IAS 32 'Financial Instruments: Presentation'. The amendments have been applied retrospectively and have not had a material effect on HSBC's financial statements.

· The Board has adopted a policy of paying quarterly interim dividends on the ordinary shares. Under this policy, it is intended to have a pattern of three equal interim dividends with a variable fourth interim dividend. Dividends are declared in US dollars and, at the election of the shareholder, paid in cash in one of, or in a combination of, US dollars, sterling and Hong Kong dollars or, subject to the Board's determination that a scrip dividend is to be offered in respect of that dividend, may be satisfied in whole or in part by the issue of new shares in lieu of a cash dividend.

Cautionary statement regarding forward-looking statements

The Interim Management Statement contains certain forward-looking statements with respect to HSBC's financial condition, results of operations, capital position and business.

Statements that are not historical facts, including statements about HSBC's beliefs and expectations, are forward-looking statements. Words such as 'expects', 'anticipates', 'intends', 'plans', 'believes', 'seeks', 'estimates', 'potential' and 'reasonably possible', variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made. HSBC makes no commitment to revise or update any forward-looking statements to reflect events or circumstances occurring or existing after the date of any forward-looking statements.

Written and/or oral forward-looking statements may also be made in the periodic reports to the US Securities and Exchange Commission, summary financial statements to shareholders, proxy statements, offering circulars and prospectuses, press releases and other written materials, and in oral statements made by HSBC's Directors, officers or employees to third parties, including financial analysts.

Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement. These include, but are not limited to:

· changes in general economic conditions in the markets in which we operate, such as continuing or deepening recessions and fluctuations in employment beyond those factored into consensus forecasts; changes in foreign exchange rates and interest rates; volatility in equity markets; lack of liquidity in wholesale funding markets; illiquidity and downward price pressure in national real estate markets; adverse changes in central banks' policies with respect to the provision of liquidity support to financial markets; heightened market concerns over sovereign creditworthiness in over-indebted countries; adverse changes in the funding status of public or private defined benefit pensions; and consumer perception as to the continuing availability of credit and price competition in the market segments we serve;

· changes in government policy and regulation, including the monetary, interest rate and other policies of central banks and other regulatory authorities; initiatives to change the size, scope of activities and interconnectedness of financial institutions in connection with the implementation of stricter regulation of financial institutions in key markets worldwide; revised capital and liquidity benchmarks which could serve to deleverage bank balance sheets and lower returns available from the current business model and portfolio mix; imposition of levies or taxes designed to change business mix and risk appetite; the practices, pricing or responsibilities of financial institutions serving their consumer markets; expropriation, nationalisation, confiscation of assets and changes in legislation relating to foreign ownership; changes in bankruptcy legislation in the principal markets in which we operate and the consequences thereof; general changes in government policy that may significantly influence investor decisions; extraordinary government actions as a result of current market turmoil; other unfavourable political or diplomatic developments producing social instability or legal uncertainty which in turn may affect demand for our products and services; the costs, effects and outcomes of product regulatory reviews, actions or litigation, including any additional compliance requirements; and the effects of competition in the markets where we operate including increased competition from non-bank financial services companies, including securities firms; and

· factors specific to HSBC, including discretionary risk-weighted asset growth and our success in adequately identifying the risks we face, such as the incidence of loan losses or delinquency, and managing those risks (through account management, hedging and other techniques). Effective risk management depends on, among other things, our ability through stress testing and other techniques to prepare for events that cannot be captured by the statistical models it uses; and our success in addressing operational, legal and regulatory, and litigation challenges, notably compliance with the Deferred Prosecution Agreements with US authorities.

Summary consolidated income statement

Summary consolidated balance sheet

Capital

Capital structure

1 Includes externally verified profits for the period ended 31 March 2014.

Reconciliation of regulatory capital from Year 1 transitional basis to an estimated CRD IV end point basis

Capital and RWA movements by major driver - CRD IV end point basis

1 In respect of 2014. This includes dividends declared on ordinary shares, quarterly dividends on preference shares and coupons on capital securities, classified as equity.

2 In respect of 2013.

Risk-weighted assets

RWAs by risk type

RWAs by global businesses

RWAs by geographical regions

1 RWAs are non-additive across geographical regions due to market risk diversification effects within the Group.

Credit risk exposure - RWAs by geographical region