HSBC Holdings plc (HSBC) Q1 2026 Earnings Call Transcript
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Overview
The earnings call summary presents a mixed picture. Financial performance and strategic progress are strong, but cost growth and exposure to private credit pose concerns. Management’s optimistic guidance and strategic focus on high-growth markets are positive, yet uncertainties in the Middle East and unclear responses regarding securitization charges and share buybacks create caution. The Q&A reveals management's confidence in meeting targets despite challenges. Overall, the sentiment is balanced, leading to a neutral stock price prediction.
Key Financial Performance
Annualized return on tangible equity (RoTE) 18.7%, up 0.3% year-over-year. The increase benefited from the removal of Hang Seng Bank minorities.
Profit before tax (excluding notable items) $10.1 billion. Notable items included a $0.3 billion loss on moving Malta to held for sale, a $0.2 billion loss on the sale of U.K. Life Insurance, and $0.1 billion in restructuring costs related to the simplification program.
Revenue (excluding notable items) $19.1 billion, up 4% year-over-year. Growth was driven by banking NII and strong growth in wealth fee and other income.
Banking Net Interest Income (NII) $11.3 billion, up $0.3 billion year-over-year but down $0.5 billion quarter-on-quarter. The quarterly decline was due to day count, non-repeating gains from the previous quarter, lower HIBOR in March, and a $0.1 billion adverse one-off.
Fee and other income (Wealth) $2.7 billion, up 15% year-over-year. Growth was driven by all four income lines, with strong performance in investment distribution (up 21%) and insurance (up 19%).
Insurance Contractual Service Margin (CSM) balance $15.2 billion, up 19% year-over-year.
Wealth balances $1.6 trillion, up 12% or $170 billion year-over-year. Net new money in the first quarter was $39 billion, with $34 billion from Asia.
Expected Credit Loss (ECL) charge $1.3 billion, equivalent to an annualized charge of 52 basis points. This included a $0.3 billion charge related to the Middle East conflict and $0.4 billion for fraud-related secondary securitization exposure in the U.K.
Cost growth 3% year-over-year. Excluding variable pay accrual, target basis cost growth was around 2% year-over-year.
Customer deposits $99 billion growth over the last 12 months, including held-for-sale balances. CIB deposits increased $10 billion quarter-on-quarter, driven by corporate inflows in Hong Kong.
Loans Growth driven by higher term lending in Hong Kong, drawdowns on committed lines in the Middle East, and good growth in the U.K. mortgage and commercial lending book.
CET1 capital ratio 14%, down 90 basis points in the quarter. The decline was due to the Hang Seng Bank privatization and Malta disposal loss, offset by strong organic capital generation.
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Operating Highlights
Wealth Products: Investments in wealth products, distribution channels, and customer experience are yielding results. Private Banking grew 8%, Asset Management grew 3%, and Investment Distribution grew 21%. Insurance growth was 19%, with Hong Kong being a standout.
Market Expansion in Hong Kong: 287,000 new-to-bank customers were added in Hong Kong. Wealth balances increased by $170 billion year-on-year, with $34 billion net new money from Asia.
Market Expansion in the UK: Good growth in mortgages and commercial lending book. Low levels of household and corporate debt provide a platform for continued growth.
Simplification Program: Achieved $0.2 billion in simplification saves this quarter, on track to deliver $1.5 billion target. Completed privatization of Hang Seng Bank and sale of U.K. Life Insurance, Sri Lanka Retail Banking, and South Africa businesses.
Cost Management: Disciplined cost management with a target of 1% cost growth in 2026 compared to 2025. Cost growth this quarter was 3% year-on-year, with simplification actions providing cumulative benefits.
Strategic Shifts in Banking: Sale of retail banking business in Indonesia, expected to realize up to $0.4 billion gain by the first half of 2027. Focus on reallocating costs from nonstrategic businesses to growth opportunities.
AI Investments: Investing in artificial intelligence to empower colleagues, simplify operations, and enhance customer experience by personalizing services at scale.
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Risk or Challenges
Economic Uncertainty: The economic landscape remains complex and uncertain, with potential impacts on global operations and financial performance.
Middle East Conflict: A $0.3 billion precautionary ECL charge was taken due to the Middle East conflict, reflecting potential impacts on operations and financials globally.
Fraud-Related Exposure: A $0.4 billion charge related to fraud in the UK highlights risks in due diligence and secondary securitization exposure.
Interest Rate Volatility: Interest rate curves have been volatile, which could impact banking NII and financial projections.
Capital Ratio Impact: The CET1 capital ratio decreased by 90 basis points due to the Hang Seng Bank privatization and Malta disposal loss, affecting capital strength.
Hong Kong Commercial Real Estate: While broadly stable, this sector remains a potential risk area, though small recoveries were noted.
Market and Tariff Volatility: Economic and market volatility, along with tariff situations, pose challenges to transaction banking and customer operations.
Fraud Risk Management: The fraud-related charge has led to updates in risk appetite and due diligence processes, indicating operational vulnerabilities.
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Guidance & Outlook
Banking Net Interest Income (NII): Upgraded full-year guidance to around $46 billion, reflecting an improved interest rate outlook. However, interest rate curves remain volatile and subject to change.
Expected Credit Loss (ECL) Charge: Updated full-year 2026 guidance to around 45 basis points due to macroeconomic and market uncertainty, including a $0.3 billion charge related to the Middle East conflict and $0.4 billion for fraud-related exposure in the U.K.
Cost Growth: On track to achieve a target of around 1% cost growth in 2026 compared to 2025, with disciplined cost management and reallocation of costs towards growth opportunities.
Revenue Growth: Targeting 5% year-on-year revenue growth by 2028, excluding notable items.
Return on Tangible Equity (RoTE): Reiterated target of 17% or better, excluding notable items, each year.
Dividends: Targeting a dividend payout ratio of 50% of earnings per share, excluding material notable items and related impacts.
Capital Management: CET1 capital ratio at 14%, within the operating range of 14%-14.5%. Future share buybacks will be considered quarterly based on normal considerations.
Hong Kong Growth: Investing in Hong Kong with a $13.7 billion investment in Hang Seng Bank, signaling confidence in growth opportunities as the economy grows and residential property prices recover.
Artificial Intelligence Investments: Investing in AI to empower employees, simplify operations, and enhance customer experience through personalized services at scale.
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Shareholder Return Plan
Quarterly Dividend: The dividend for the quarter is $0.10.
Dividend Payout Ratio Target: Targeting a dividend payout ratio for 2026 of 50% of earnings per ordinary share, excluding material notable items and related impacts.
Share Buyback Decision: A decision on future share buybacks will be taken quarterly, subject to normal buyback considerations.
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Key Q&A
Q:What is the current competitive landscape in Hong Kong's wealth sector, and how is the company performing?
A:The company is pleased with its growing CSM balance and investment distribution. Despite a slowdown in March, momentum resumed in April. Customers are shifting from bonds and mutual funds to structured products and equities, boosting fee income. The company is growing new customers despite competition and fee increases.
Q:Are there any changes in the company's approach to private markets?
A:The company's overall exposure to private credit remains at $6 billion, within 2% of the balance sheet. Following a fraud incident, the company is enhancing due diligence processes and monitoring concentrations on individual counterparties. Private credit is not a significant growth driver, and the company remains diligent in managing exposures.
Q:Why was cost growth higher this quarter, and how will it be contained?
A:Cost growth was higher due to timing differences in gross increases and savings. Simplification actions will be completed by mid-year, leading to more savings in the second half. The company is confident in achieving its 1% cost growth target for the year.
Q:What are the stress scenarios for the Middle East, and how do they impact ECL guidance?
A:The stress scenario assumes severe conditions, including a 35% stock market drop, $145 oil prices, and significant GDP slowdown. These scenarios are factored into the 45 basis points ECL guidance, which also considers revenue impacts and deposit outflows in extreme conditions.
Q:Can you provide a breakdown of the Middle East stress scenario's impact on revenues and impairments?
A:The impact is equally split between revenues and ECLs. The scenario assumes unmitigated impacts, but management actions would mitigate these effects. The company remains confident in its RoTE targets for 2026-2028.
Q:What are the sequential drivers of net interest income (NII), and how does it align with the $46 billion guidance?
A:The $46 billion NII guidance is conservative and considers potential downside scenarios. Factors include interest rate uncertainties, HIBOR fluctuations, and structural hedge reinvestment. Deposit flows remain strong, supporting the guidance.
Q:What is the exposure related to the $3 billion securitization financing bucket, and how does it relate to the charge taken?
A:The exposure on which the charge was booked is a significant part of the $3 billion securitization financing bucket. The company has substantially provided for this exposure.
Q:Why does the company's wealth revenue growth appear slightly weaker than peers?
A:The company's CSM balances are growing, but P&L recognition occurs over time, with only 1/10 captured annually. Adjusted for this, the company is in line or ahead of peers in certain areas.
Q:Can you provide more details about the fraud cases and their impact on impairments?
A:The fraud is a one-off, idiosyncratic case involving secondary exposure through a financial sponsor. The company has reviewed its portfolio and tightened due diligence, finding no comparable risks. The fraud-related impairment is not expected to recur.
Q:What is the company's view on its global footprint and the disposal of the Indonesian retail business?
A:Indonesia remains critical for CIB, but the retail business did not align with the company's wealth strategy. The disposal reflects a focus on markets with higher growth potential and strategic alignment.
Q:What proportion of the wealth momentum is attributed to the Hang Seng deal, and what are the future synergies?
A:Current synergies from the Hang Seng deal are minimal as the process has just started. Future synergies are expected to materialize from the second half of the year through 2027-2028, driven by investments in technology, customer journeys, and training.
Q:When does the company expect to restart share buybacks?
A:Share buybacks are reviewed quarterly, considering capital generation, loan growth, dividend payout ratio, and residual capital. The company expects strong capital generation in Q2 and will reassess buybacks then.
Q:How does the company view its credit costs and the impact of the Middle East reserve build?
A:Q1 credit costs were 52 basis points, including one-off fraud and Middle East reserve impacts. Excluding these, credit costs are lower than Q1 2025. The company remains conservative, considering potential Stage 3 increases and Hong Kong commercial real estate stabilization.
Q:What is the company's approach to CSM balances and their impact on P&L?
A:CSM balances grow over a 9-10 year period under IFRS 17 principles. The growth in CSM balances exceeds P&L flow, indicating a positive trajectory for the business.
Q:Does the banking NII guidance consider the current yield curve, and how does it affect future revenue growth?
A:The $46 billion NII guidance is based on mid-April yield curves. Future revenue growth projections are based on earlier yield curves, so higher yield curves could provide a tailwind for future revenues.
Q:Review of Unclear Management Responses
A:Management avoided providing a direct answer to the question about the exact breakdown of the $3 billion securitization financing bucket related to the charge taken. They acknowledged the exposure but did not specify the exact amount or details.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Chief Financial
Financial Officer
Group Chief
Kaur Group
Pam Kaur
analyst investor
investor presentation
plc webinar
presentation HSBC
webinar Pam
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The earnings call summary presents a mixed picture. Financial performance and strategic progress are strong, but cost growth and exposure to private credit pose concerns. Management’s optimistic guidance and strategic focus on high-growth markets are positive, yet uncertainties in the Middle East and unclear responses regarding securitization charges and share buybacks create caution. The Q&A reveals management's confidence in meeting targets despite challenges. Overall, the sentiment is balanced, leading to a neutral stock price prediction.
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Frequently Asked Questions
Where does this earnings call transcript come from?
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Who creates the AI Summary and Key Q&A highlights shown above the transcript?
They are generated by a specialized financial-language model trained exclusively on 15+ years of earnings transcripts. The model extracts financial figures, guidance, and tone with 97%+ accuracy and is regularly validated against human analysts. The full raw transcript always remains available for verification.
