HSBC : Annual Results 2022 media release

21 February 2023

HSBC HOLDINGS PLC

2022 RESULTS - HIGHLIGHTS

Noel Quinn, Group Chief Executive, said:

"2022 was another good year for HSBC. We completed the first phase of our transformation and our international connectivity is now underpinned by good, broad-based profit generation around the world. This contributed to a strong overall financial performance. We are on track to deliver higher returns in 2023 and have built a platform for further value creation. With the delivery of higher returns, we will have increased distribution capacity, and we will also consider a special dividend once the sale of HSBC Canada is completed."

2022 financial performance (vs 2021)

• Reported profit before tax fell by $1.4bn to $17.5bn, including an impairment on the planned sale of our retail banking operations in France of $2.4bn. Adjusted profit before tax increased by $3.4bn to $24.0bn. Reported profit after tax increased by $2.0bn to $16.7bn, including a $2.2bn credit arising from the recognition of a deferred tax asset.
• Reported revenue increased by 4% to $51.7bn, driven by strong growth in net interest income, with increases in all of our global businesses, and higher revenue from Global Foreign Exchange in Global Banking and Markets ('GBM'). This was in part offset by a $3.1bn adverse impact of foreign currency translation differences, the impairment on the planned sale of our retail banking operations in France and adverse movements in market impacts in insurance manufacturing in Wealth and Personal Banking ('WPB'). In addition, fee income fell in both WPB and GBM. Adjusted revenue increased by 18% to $55.3bn.
• Net interest margin ('NIM') of 1.48% increased by 28 basis points ('bps'), reflecting interest rate rises.
• Reported expected credit losses and other credit impairment charges ('ECL') were $3.6bn, including allowances to reflect increased economic uncertainty, inflation, rising interest rates and supply chain risks, as well as the ongoing developments in mainland China's commercial real estate sector. These factors were in part offset by the release of most of our remaining Covid-19-relatedreserves. This compared with releases of $0.9bn in 2021. ECL charges were 36bps of average gross loans and advances to customers.
• Reported operating expenses decreased by $1.3bn or 4% to $33.3bn, reflecting the favourable impact of foreign currency translation differences of $2.2bn and ongoing cost discipline, which were in part offset by higher restructuring and other related costs, increased investment in technology and inflation. Adjusted operating expenses increased by $0.4bn or 1.2% to $30.5bn, including a $0.2bn adverse impact from retranslating the 2022 results of hyperinflationary economies at constant currency.
• Customer lending balances fell by $121bn on a reported basis. On an adjusted basis, lending balances fell by $66bn, reflecting an $81bn reclassification of loans, primarily relating to the planned sale of our retail banking operations in France and the planned sale of our banking business in Canada, to assets held for sale. Growth in mortgage balances in the UK and Hong Kong mitigated a reduction in term lending in Commercial Banking ('CMB') in Hong Kong.
• Common equity tier 1 ('CET1') capital ratio of 14.2% reduced by 1.6 percentage points, primarily driven by a decrease of a 0.8 percentage point from new regulatory requirements, a reduction of a 0.7 percentage point from the fall in the fair value through other comprehensive income ('FVOCI') and a 0.3 percentage point fall from the impairment following the reclassification of our retail banking operations in France to held for sale. Capital generation was mostly offset by an increase in risk-weightedassets ('RWAs') net of foreign exchange translation movements.
• The Board has approved a second interim dividend of $0.23 per share, making a total for 2022 of $0.32 per share.

4Q22 financial performance (vs 4Q21)

• Reported profit before tax up $2.5bn to $5.2bn, reflecting strong reported revenue growth and lower reported operating expenses, while reported ECL increased. Adjusted profit before tax up 92% to $6.8bn. Reported profit after tax up $2.9bn to $4.9bn.
• Reported revenue up 24% to $14.9bn, due to strong growth in net interest income and an increase in revenue from Markets and Securities Services ('MSS'), partly offset by the adverse impact of foreign currency translation differences. Adjusted revenue up 38% to $15.4bn.
• Reported ECL were $1.4bn in 4Q22 and included stage 3 charges relating to exposures in the mainland China commercial real estate sector, as well as corporate exposures in the UK. This compared with charges of $0.5bn in 4Q21.
• Reported operating expenses down 6% to $8.9bn due to the favourable impact of foreign currency translation differences and ongoing cost discipline, which more than offset increases in technology investment and performance-related pay. Adjusted operating expenses up 2% to $7.8bn.

Outlook

• The impact of our growth and transformation programmes, as well as higher global interest rates, give us confidence in achieving our return on average tangible equity ('RoTE') target of at least 12% for 2023 onwards.
• Our revenue outlook remains positive. Based on the current market consensus for global central bank rates, we expect net interest income of at least $36bn in 2023 (on an IFRS 4 basis and retranslated for foreign exchange movements). We intend to update our net interest income guidance at or before our first quarter results to incorporate the expected impact of IFRS 17 'Insurance Contracts'.
• While we continue to use a range of 30bps to 40bps of average loans for planning our ECL charge over the medium to long term, given current macroeconomic headwinds, we expect ECL charges to be around 40bps in 2023 (including lending balances transferred to held for sale). We note recent favourable policy developments in mainland China's commercial real estate sector and continue to monitor events closely.
• We retain our focus on cost discipline and will target 2023 adjusted cost growth of approximately 3% on an IFRS 4 basis. This includes up to $300m of severance costs in 2023, which we expect to generate further efficiencies into 2024. There may also be an incremental adverse impact from retranslating the 2022 results of hyperinflationary economies at constant currency.

HSBC Holdings plc 2022 Results

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• We expect to manage the CET1 ratio within our medium-term target range of 14% to 14.5%. We intend to continue to manage capital efficiently, returning excess capital to shareholders where appropriate.
• Given our current returns trajectory, we are establishing a dividend payout ratio of 50% for 2023 and 2024, excluding material significant items, with consideration of buy-backsbrought forward to our first quarter results in May 2023, subject to appropriate capital levels. We also intend to revert to paying quarterly dividends from the first quarter of 2023.
• Subject to the completion of the sale of our banking business in Canada, the Board's intention is to consider the payment of a special dividend of $0.21 per share as a priority use of the proceeds generated by completion of the transaction. A decision in relation to any potential dividend would be made following the completion of the transaction, currently expected in late 2023, with payment following in early 2024. Further details in relation to record date and other relevant information will be published at that time. Any remaining additional surplus capital is expected to be allocated towards opportunities for organic growth and investment alongside potential share buy-backs, which would be in addition to any existing share buy-back programme.

• HSBC Holdings plc 2022 Results

Key financial metrics

For the year ended

Reported results	2022	2021	2020
Reported profit before tax ($m)	17,528	18,906	8,777
Reported profit after tax ($m)	16,670	14,693	6,099
Cost efficiency ratio (%)	64.4	69.9	68.3
Net interest margin (%)	1.48	1.20	1.32
Basic earnings per share ($)	0.75	0.62	0.19
Diluted earnings per share ($)	0.74	0.62	0.19
Dividend per ordinary share (in respect of the period) ($)	0.32	0.25	0.15
Dividend payout ratio (%)1	44	40	79
Alternative performance measures
Adjusted profit before tax ($m)	24,010	20,603	11,695
Adjusted cost efficiency ratio (%)	55.0	64.0	62.3
Expected credit losses and other credit impairment charges ('ECL') as % of average gross loans and advances to	0.36	(0.08)	0.87
customers (%)
Expected credit losses and other credit impairment charges ('ECL') as % of average gross loans and advances to	0.35	(0.08)	0.87
customers, including held for sale (%)2
Return on average ordinary shareholders' equity (%)	8.7	7.1	2.3
Return on average tangible equity (%)	9.9	8.3	3.1
	At 31 December
Balance sheet	2022	2021	2020
Total assets ($m)	2,966,530	2,957,939	2,984,164
Net loans and advances to customers ($m)	924,854	1,045,814	1,037,987
Customer accounts ($m)	1,570,303	1,710,574	1,642,780
Average interest-earning assets ($m)	2,203,639	2,209,513	2,092,900
Loans and advances to customers as % of customer accounts (%)	58.9	61.1	63.2
Total shareholders' equity ($m)	187,484	198,250	196,443
Tangible ordinary shareholders' equity ($m)	149,355	158,193	156,423
Net asset value per ordinary share at period end ($)	8.50	8.76	8.62
Tangible net asset value per ordinary share at period end ($)	7.57	7.88	7.75
Capital, leverage and liquidity
Common equity tier 1 capital ratio (%)3	14.2	15.8	15.9
Risk-weighted assets ($m)3,4	839,720	838,263	857,520
Total capital ratio (%)3,4	19.3	21.2	21.5
Leverage ratio (%)3,4	5.8	5.2	5.5
High-quality liquid assets (liquidity value) ($bn)4,5	647	688	678
Liquidity coverage ratio (%)4,5	132	139	139
Net stable funding ratio (%)4,5	136	N/A	N/A
Share count
Period end basic number of $0.50 ordinary shares outstanding (millions)	19,739	20,073	20,184
Period end basic number of $0.50 ordinary shares outstanding and dilutive potential ordinary shares (millions)	19,876	20,189	20,272
Average basic number of $0.50 ordinary shares outstanding (millions)	19,849	20,197	20,169

For reconciliations of our reported results to an adjusted basis, including lists of significant items, see page 109 of the Annual Report and Accounts 2022. Definitions and calculations of other alternative performance measures are included in our 'Reconciliation of alternative performance measures' on page 128 of the Annual Report and Accounts 2022.

• Dividend per share, in respect of the period, as a percentage of earnings per share adjusted for certain items (recognition of certain deferred tax assets: $0.11 reduction in EPS; planned sales of the retail banking operations in France and banking business in Canada: $0.09 increase in EPS). No items were adjusted in 2021 or 2020.

2 Includes average gross loans and advances to customers reported within 'assets held for sale'.

• Unless otherwise stated, regulatory capital ratios and requirements are based on the transitional arrangements of the Capital Requirements Regulation in force at the time. These include the regulatory transitional arrangements for IFRS 9 'Financial Instruments', which are explained further on page 208 of the Annual Report and Accounts 2022. Leverage ratios are reported based on the disclosure rules in force at that time, and include claims on central banks. Current period leverage metrics exclude central bank claims in accordance with the UK leverage rules that were implemented on 1 January 2022. References to EU regulations and directives (including technical standards) should, as applicable, be read as references to the UK's version of such regulation or directive, as onshored into UK law under the European Union (Withdrawal) Act 2018, and as may be subsequently amended under UK law.

• Regulatory numbers and ratios are as presented at the date of reporting. Small changes may exist between these numbers and ratios and those subsequently submitted in regulatory filings. Where differences are significant, we will restate in subsequent periods.

• The liquidity coverage ratio is based on the average value of the preceding 12 months. The net stable funding ratio is based on the average value of four preceding quarters. December 2021 LCR has been restated for consistency. We have not restated the prior periods for NSFR as no comparatives are available.

HSBC Holdings plc 2022 Results

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Highlights

	Year ended 31 Dec
	2022	2021
	$m	$m
Reported
Revenue1	51,727	49,552
ECL	(3,592)	928
Operating expenses	(33,330)	(34,620)
Share of profit in associates and joint ventures	2,723	3,046
Profit before tax	17,528	18,906
Adjusted2
Revenue1,3	55,345	47,020
ECL	(3,592)	754
Operating expenses	(30,466)	(30,104)
Share of profit in associates and joint ventures	2,723	2,933
Profit before tax	24,010	20,603
Significant items affecting adjusted performance
Revenue
Customer redress programmes	8	11
Disposals, acquisitions and investment in new businesses3	(2,799)	-
Fair value movements on financial instruments4	(579)	(242)
Restructuring and other related costs5	(248)	(307)
Operating expenses
Customer redress programmes	31	(49)
Disposals, acquisitions and investment in new businesses	(18)	-
Impairment of goodwill and other intangibles	4	(587)
Restructuring and other related costs	(2,881)	(1,836)

1 Net operating income before change in expected credit losses and other credit impairment charges, also referred to as revenue.

• Adjusted performance is computed by adjusting reported results for the year-on-year effects of foreign currency translation differences and significant items which distort year-on-year comparisons.

• Includes losses from classifying businesses as held for sale as part of a broader restructuring of our European business, of which $2.4bn relates to the planned sale of the retail banking operations in France.

4 Includes fair value movements on non-qualifying hedges and debit valuation adjustments on derivatives.

5 Comprises gains and losses relating to the business update in February 2020, including losses associated with the RWA reduction programme.

• HSBC Holdings plc 2022 Results

Statement by Mark E Tucker, Group Chairman

At the start of 2022, the ongoing impact of Covid-19 was the most dominant factor within the external environment. While further outbreaks in Hong Kong and mainland China significantly impacted economic growth, the Russia-Ukraine war and rising inflation and interest rates had an even greater impact on the global economy in 2022. They are also likely to continue to have a greater economic impact than the pandemic in 2023, as we are already seeing with a cost of living crisis affecting many of our customers and colleagues.

Strong financial performance and higher capital distributions

We supported our customers through the challenges that they faced at the same time as executing our strategic plan. The first phase of our transformation is now complete. The work that we have done has enabled us to emerge from the pandemic a stronger bank, better aligned to the international needs of our customers.

The reshaping of our portfolio continued with the announcement of the planned sale of our banking business in Canada. We continued to develop our Wealth capabilities, especially in Asia, and this strategy gained traction in 2022. Our increased investment in technology has improved the customer experience and made our processes more efficient. Meanwhile, we continued to support our clients to transition to net zero, and also took further important steps towards our ambition of aligning our financed emissions to net zero by 2050. Given the urgency of today's global energy crisis, it is now even more important that we continue to actively engage our clients on how they intend to prepare their businesses for a low-carbon future.

In 2022, reported profit before tax was $17.5bn, a decrease of $1.4bn compared with 2021 due to the $2.4bn impairment on the planned sale of our French retail banking operations. Adjusted profit before tax was $24.0bn, an increase of $3.4bn on last year. All of our businesses grew profits in 2022, and we maintained our strong capital, funding and liquidity positions.

As we signalled at our interim results, we are committed to ensuring our shareholders share the benefits of our improved performance. The Board approved a second interim dividend for 2022 of $0.23 per share, bringing the full year dividend for 2022 to $0.32 per share. We are establishing a dividend payout ratio of 50% of reported earnings per share for 2023 and 2024, excluding material significant items, and we aim to restore the dividend to pre-Covid-19 levels as soon as possible. We also intend to return to paying quarterly dividends from the start of 2023.

Subject to completion of the planned sale of our banking business in Canada, the Board's intention is to consider the payment of a special dividend of $0.21 per share as a priority use of the proceeds generated. A decision in relation to any potential dividend would be made following the completion of the transaction, currently expected in late 2023, with payment following in early 2024. Any remaining additional surplus capital is expected to be allocated towards opportunities for organic growth and investment alongside share buy-backs, which would be in addition to any existing share buy-back programme.

Board operations

In 2022, the Board met in person in London, Hong Kong, New York and Riyadh - on each occasion also undertaking a wide range of engagements with clients, colleagues, government officials and regulators. The importance of engaging with our teams was also underlined by the appointment of José (Pepe) Meade as Board member with specific responsibility for employee liaison. At the same time as holding some in- person meetings, the continued use of virtual meetings enabled us to retain the benefits of greater efficiency and reduced costs.

At the 2022 Annual General Meeting, Irene Lee and Pauline van der Meer Mohr stepped down from the Board. I am enormously grateful to them for their important and valuable contributions to the Board, the committees and the subsidiary entities on which they have served. Irene remains an independent non-executive Director of The Hongkong and Shanghai Banking Corporation Limited and independent non-executive chair of Hang Seng Bank Limited. Geraldine Buckingham joined the Board as an independent non-executive Director on 1 May.

Following Ewen Stevenson's departure, Georges Elhedery became Group Chief Financial Officer and joined the Board on 1 January 2023. On behalf of the Board, I would like to again thank Ewen for all that he has done for the bank. His leadership, financial expertise and operational rigour have been invaluable to HSBC, and he leaves with our very best wishes.

We also recently announced some changes to the Board. Kalpana Morparia will join the Board as an independent non-executive Director on 1 March. Jack Tai will retire from the Board at the conclusion of the 2023 AGM, and will be succeeded as Chair of the Group Risk Committee by Jamie Forese. Jack has made a significant and important contribution during his time on the Board, particularly in the strengthening of risk and conduct governance and oversight through a period of major change. We wish him very well in his future endeavours.

Noel and I were delighted to meet face-to-face with our loyal Hong Kong shareholders at our Informal Shareholders Meeting in August. We have always greatly valued their feedback and engagement, and this meeting was as well attended as ever. We were pleased to discuss how our business has performed, our continued support of Hong Kong, and our commitment to growing shareholder value. We look forward to continuing these discussions in person in 2023.

Our strategy is working

There were reports over the course of last year about ideas for alternative structures for HSBC. The Board has been fully engaged in examining these alternatives in depth, with the benefit of independent third-party financial and legal advice. It has been, and remains, our judgement that alternative structural options would not deliver increased value for shareholders. Rather, they would have a material negative impact on value.

For 157 years, we have followed trade and investment flows to support our customers as they fulfil their financial ambitions. We have used our experience, expertise and relationships to help our customers to navigate the world.

Today, we remain steadfastly focused on our core purpose of 'opening up a world of opportunity'. Our model is particularly relevant to individuals and companies of all sizes whose financial ambitions span multiple countries and regions. Very few, if any, other banks can rival our ability to connect capital, ideas and people through a global network that facilitates the international access and collaboration required to succeed in today's world.

Our performance in 2022 demonstrates that our current strategy is working and improving returns. We are also confident that it will deliver good returns for our shareholders over the coming years. The Board and management team are fully focused on delivering it.

An uneven macroeconomic outlook

We will need to maintain this focus against an uneven macroeconomic outlook. The pandemic, high inflation and interest rates, and the Russia- Ukraine war all have implications for the global economy, including volatility in markets, supply chain disruption, pressure on small and medium- sized business and squeezes on the cost of living. Different economies also now face different challenges and have different opportunities in 2023.

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