HSBC delivered the strongest underlying return on tangible equity (RoTE) it has reported in nearly two decades in the first quarter of 2026, but a $1.3 billion expected credit loss charge sent Hong Kong-listed shares 4.6% lower and UK-listed shares 5.5% lower on the day. Profit before tax of $9.4 billion came in just below the $9.6 billion consensus the bank itself compiled, with the ECL charge the primary driver of the miss. Revenue rose 2% on a reported basis to $18.6 billion, or 4% excluding notable items.

RoTE excluding notable items reached 18.7%, which Pam Kaur, group chief financial officer, described as a level the bank had not reached in nearly 20 years. The figure was supported by an upgraded full-year banking net interest income (NII) guidance of approximately $46 billion, from at least $45 billion previously.

The quarter was also the first reporting period in which HSBC consolidated Hang Seng Bank as a wholly-owned subsidiary, following completion of the privatisation in late January. The Hong Kong segment generated a 44.7% annualised RoTE, anchoring the group result.

Second-order exposure surfaces alongside Middle East reserve build

The $1.3 billion ECL charge breaks into three parts: a $0.4 billion fraud-linked charge, a $0.3 billion Middle East-related reserve build and an underlying charge of approximately $0.6 billion that would have been broadly in line with or below the first quarter of 2025.

The first component is what HSBC described as a fraud-related, secondary securitisation exposure with a financial sponsor in the UK within the Corporate and Institutional Banking (CIB) book. HSBC's disclosure identified the exposure as sitting within the $3 billion securitisation financing bucket of its private credit book — facilities backed by portfolios of receivables including mortgages and consumer loans, structured to implied investment grade ratings with transactions involving equity from financial sponsor clients.

Kaur described the charge as idiosyncratic while acknowledging a structural vulnerability: "In this ecosystem, no one is immune to second-order exposures." She said the bank had conducted a full review of its highest-risk private credit exposures and identified no comparable fraud concerns, and confirmed HSBC is tightening due diligence processes for secondary positions where reliance is placed on a financial sponsor's underwriting. Private credit related exposure on an amortised cost basis stands at $22 billion drawn and committed, within 2% of the loan book, and Kaur stated this segment is not a significant growth driver in the bank's plan.

The second component is a $0.3 billion increase in allowances reflecting deterioration in the forward economic outlook following the onset of the conflict in the Middle East that began in February. Kaur was explicit that this reserve applies globally across portfolios exposed to the conflict's economic spillover, not only to direct regional positions. The annualised first-quarter charge was 52 basis points; HSBC's medium-term planning range remains 30 to 40 basis points.

Hong Kong carries the quarter as wealth flows accelerate

The Hong Kong segment generated $4.0 billion in revenue and the highest RoTE of the four business segments by some distance, driving the group's wealth and deposit growth. Deposit balances in Hong Kong grew $35 billion year-on-year, supported by $34 billion of the group's $39 billion in net new money flowing in from Asia. Wealth fee and other income rose 15% group-wide to $2.7 billion, with investment distribution up 21% and insurance manufacturing up 19%, both with Hong Kong as the primary contributor. The insurance contractual service margin (CSM) balance reached $15.2 billion, up 19% year-on-year, with new business CSM of $1.4 billion in the quarter.

Following completion of the Hang Seng privatisation in January, and the delisting of Hang Seng shares from the Hong Kong Stock Exchange, the 110-basis point CET1 drag from the transaction drove the capital ratio down to 14.0% from 14.9% at year-end. HSBC expects $0.5 billion in pre-tax revenue and cost synergies from the combined Hong Kong franchise by end-2028, with an additional $0.4 billion of potential upside, with meaningful synergy realisation accruing primarily in 2027 and 2028.

The UK segment produced $3.3 billion in revenue at a 21.6% RoTE, CIB delivered $7.8 billion at 17.2% RoTE, and International Wealth and Premier Banking contributed $3.9 billion at 27.4% RoTE.

Structural hedge maturities point to forward NII tailwind

Banking NII, which excludes funding costs associated with the trading book, rose $0.7 billion year-on-year to $11.3 billion, though it fell $0.5 billion sequentially from the fourth quarter on a combination of day-count differences, a one-off adverse item, and a period of lower HIBOR in March. The upgraded NII guidance is supported by a $604 billion structural hedge with an average remaining life of 3.1 years. Approximately $210 billion is set to mature across 2027 and 2028 at yields of 3.4% to 3.6% — above current blended portfolio yield — providing a rate-independent NII tailwind into the outer years of the bank's target period.

Wholesale transaction banking fee and other income rose 2% year-on-year to $3.1 billion. Securities Services grew 11% on new client mandates and higher volumes, Global Trade Solutions rose 8% and Global Payments Solutions 3%. Foreign exchange fell 1% against a strong prior-year comparison.

Costs held flat as buyback decision looms

Operating expenses on a target basis were $8.5 billion, up 3% year-on-year including a higher variable pay accrual; excluding that accrual, target basis growth was approximately 2%. HSBC maintained full-year cost growth guidance of approximately 1% against a restated 2025 baseline of $34.0 billion. Kaur noted that cumulative simplification savings — $0.3 billion realised in the income statement during the quarter — will provide a growing year-on-year cost benefit through the second half, with the $1.5 billion annualised savings target on track to be fully actioned ahead of schedule.

Customer loans grew $20 billion quarter-on-quarter on a constant currency basis to approximately $1 trillion. Deposits grew $9 billion to $1.78 trillion over the same period, and $99 billion year-on-year including held-for-sale balances, with instant access and demand deposits representing 70% of the total.

On share buybacks, Kaur signalled active consideration for a second quarter (Q2) decision: "I expect Q2 to be equally highly capital generative for us. We will look at it again, starting from Q2." The first interim dividend was set at $0.10 per share.

Revenue growth and NII upgrades underpin outlook

HSBC retained its group financial targets in full: RoTE of 17% or better for 2026, 2027 and 2028 excluding notable items; a 50% earnings per share dividend payout ratio excluding material notable items; and revenue growth rising to 5% year-on-year by 2028.

Kaur quantified the unmitigated PBT impact under the disclosed stress scenario at a mid-to-high single-digit percentage — broadly $2 billion to $3 billion, split approximately equally between revenue and ECL. Under that scenario, she acknowledged RoTE excluding notable items could fall below the 17% target in 2026. The scenario assumes stock markets down 35%, oil at $145/barrel, significant GDP deceleration and broad market disruption — it has not materialised, and wealth flows that softened in March had recovered by April. HSBC's Q2 buyback decision will be taken against a capital position Kaur described as already back within the 14% to 14.5% operating range and supported by strong organic generation across all four businesses.