Interim Report 2023

Contents

2 Highlights

61 Risk

61 - Key developments in the first half

of 2023

1. - Areas of special interest

1. - Credit risk

1. - Treasury risk

1. - Market risk
2. - Insurance manufacturing operations risk

1. Directors' responsibility statement

Our global businesses

We serve customers through three global businesses. On pages 17 to 24 we provide an overview of our performance in the first half of 2023 for each of the global businesses, as well as our Corporate Centre.

Wealth and Personal Banking ('WPB')

We help millions of our customers look after their day- to-day finances and manage, protect and grow their wealth.

Commercial Banking ('CMB') Our global reach and expertise help domestic and international businesses around the world unlock their potential.

Global Banking and Markets ('GBM')

We provide a comprehensive range of financial services and products to corporates, governments and institutions.

A reminder

The currency we report in is US dollars.

Constant currency performance We supplement our IFRSs figures withnon-IFRSsmeasures used by management internally that constitute alternative performance measures under European Securities and Markets Authority guidance andnon-GAAPfinancial measures defined in and presented in accordance with US Securities and Exchange Commission rules and regulations. These measures are highlighted with the following symbol:

Further explanation may be found on page 13.

Performance in 1H23

HSBC is one of the world's leading international banks.

We have a clear strategy to deliver revenue and profit growth, enhance customer service and improve returns to shareholders.

Overview

Delivery against our financial targets

In assessing the Group's financial performance, we use a range of financial measures that focus on the delivery of sustainable returns for our shareholders and maintaining our financial strength.

For our financial targets, we define medium term as three to four years and long term as five to six years, commencing 1 January 2020.

Further explanation of performance against Group financial targets can be found on page 11.

Retuon average tangible equity (annualised)

22.4%

Revised target: Mid-teens for 2023 and 2024, excluding the impact of material acquisitions and disposals.

(Updated from ≥12% from 2023 onwards.) (1H22: 10.6%)

Target basis operating expenses growth compared with 1H22

4.3%

Target: Growth of approximately 3% compared with 2022. This measure excludes from constant currency operating expenses: notable items, the impact of retranslating the results of hyperinflationary economies at constant currency and the impact of

our acquisition of SVB UK and the related investments internationally.

Common equity tier 1 capital ratio

14.7%

Target: >14%, managing in the range of 14% to 14.5% in the medium term; and manage the range down further long term.

(31 December 2022: 14.2%)

Second interim dividend per ordinary share for10H23

$0.

Target: Dividend payout ratio of 50% for 2023 and 2024, excluding material notable items.

Strategic performance indicators

Our strategy supports our ambition of being the preferred international financial partner for our clients.

We are committed to building a business for the long term, developing relationships that last.

Read more on our strategic progress on page 7.

Read more on our approach to environmental,

social and governance matters on page 10.

• Profit before tax rose by $12.9bn to $21.7bn.This included a $2.1bn reversal of an impairment relating to the planned sale of our retail banking operations in France and a provisional gain of $1.5bn on the acquisition of Silicon Valley Bank UK Limited ('SVB UK').
  On a constant currency basis, profit before tax increased by $13.3bn to $21.7bn. Reported profit after tax increased by $9.1bn to $18.1bn.
• Revenue increased by $12.3bn to $36.9bn.The increase was driven by higher net interest income in all of our global businesses due to interest rate rises. It also included the impacts related to the planned sale in France and the acquisition in the UK.
  On a constant currency basis, revenue rose by $13.2bn to $36.9bn.
• Net interest margin ('NIM') of 1.70%increased by 46 basis points ('bps').
• Expected credit losses and other credit impairment charges ('ECL') of $1.3bnreflected a more stable outlook in most markets, although inflationary pressures remain. The 1H23 charge included $0.3bn relating to the commercial real estate sector in mainland China and charges in Commercial Banking ('CMB') in the UK. The 1H22 charge of $1.1bn reflected heightened economic uncertainty, mainly due to theRussia-Ukrainewar and inflationary pressures, and also included $0.3bn relating to the commercial real estate sector in mainland China, partly offset by releases ofCovid-19-relatedallowances.

• Operating expenses of $15.5bn were $0.7bn or 4% lower than in 1H22,primarily due to lower restructuring and other related costs following the completion of ourcost-savingprogramme at the end of 2022 and from a $0.2bn impact from a reversal of historical asset impairments. This was partly offset by higher technology costs, an increase inperformance-relatedpay, severance of $0.2bn in 1H23 and the effects of rising inflation. Target basis operating expenses rose by 4.3%.
• Customer lending balances increased by $36bn since 31 December 2022. On a constant currency basis, lending balances grew by $23bn,mainly due to the reclassification of balances associated with our retail banking operations in France from held for sale during the period, and $7bn of additional balances following our acquisition of SVB UK during 1Q23. These were partly offset by the reclassification of our business in Oman as held for sale, which resulted in a $3bn reduction. Excluding these factors, customer lending fell, reflecting weaker customer demand for wholesale lending, notably in Hong Kong and Europe.
• Customer accounts increased by $25bn since 31 December 2022. On a constant currency basis, customer accounts increased by $3bn,mainly due to the reclassification of balances associated with our retail banking operations in France from held for sale during the period. In addition, our acquisition of SVB UK resulted in growth of $7bn, and in 1H23, we reclassified our

business in Oman as held for sale, resulting in a $5bn reduction. Excluding these factors, deposits fell, reflecting reductions in Wealth and Personal Banking ('WPB') and CMB in HSBC UK, as well as in Global Banking and Markets ('GBM').

• Annualised retuon average tangible equity ('RoTE') of 22.4%compared with 10.6% in 1H22. Excluding the annualised impacts related to the planned sale in France and the acquisition in the UK, annualised RoTE was 18.5%.
• Common equity tier 1 ('CET1') capital ratio of 14.7% increased by 0.5 percentage points compared with 4Q22,which was driven by capital generation net of the dividend accrual, and included an approximately 0.3 percentage point impact from the reversal of an impairment on the planned sale of our retail banking operations in France and the provisional gain on the acquisition of SVB UK. This was partly offset by increasedrisk-weightedassets ('RWAs') and the impact of the sharebuy-backannounced with our 1Q23 results in May 2023.
• The Board has approved asecond interim dividend of $0.10 per share. We also intend to initiate a further sharebuy-backof up to $2bn, which we expect to commence shortly and complete within three months.
• From 1 January 2023, we adopted IFRS 17 'Insurance Contracts',which replaced IFRS 4 'Insurance Contracts'. Comparative data have been restated. For further details of our adoption of IFRS 17, see page 28.

• Reported profit before tax increased by $4.1bn to $8.8bn.
• Revenue rose by $4.5bn to $16.7bn,with growth across all of our global businesses, primarily reflecting interest rate rises. There were good performances in insurance in WPB and in Debt Capital Markets in GBM, which offset reductions in Global Foreign Exchange and Equities.
• NIM of 1.72% increased by 3bps, compared with 1Q23.
• ECL of $0.9bn increased by $0.5bn.ECL in 2Q23 included $0.3bn of charges in the commercial real estate sector in mainland China, and $0.3bn in the UK, mainly in CMB.

• Operating expenses of $7.9bn fell by $0.1bn.This was driven by lower restructuring and other related costs following the completion of ourcost-savingprogramme at the end of 2022 and the reversal of historical asset impairments. This reduction was partly offset by $0.2bn of severance costs incurred in 2Q23, as well as higher technology spend, an increase in ourperformance-relatedpay accrual and the effects of rising inflation.
• Customer lending decreased by $9bn compared with 31 March 2023,which included a reduction of $3bn related to a reclassification of our business in Oman to held for sale. The remaining reduction was

mainly in GBM in HSBC Bank plc, reflecting client deleveraging and weaker demand as interest rates rose.

• Customer accounts decreased by $18bn compared with 31 March 2023,which included a reduction of $5bn related to the reclassification of our business in Oman to held for sale. The remaining reduction was in GBM in Europe, as corporate customers used deposits to pay down their loans, and in HSBC UK, reflecting higher cost of living and competitive pressures.

Outlook

• Our strategy has enabled us to further strengthen our balance sheet, providing us with a good platform for growth in the current interest rate cycle, while maintaining cost discipline. This has given us the confidence to revise our returns guidance for 2023 and 2024. Based on the current path implied by the market for global policy rates,we are now targeting a RoTE in themid-teensfor 2023 and 2024, which excludes the impact of material acquisitions and disposals.
• Given the current market consensus for global central bank rates, we have raised our 2023 full-year guidance for net interest income to above $35bn. While the interest rate outlook remains positive, we expect continued migration to term deposits asshort-terminterest rates rise.

• We continue to expect ECL charges of around 40bps of average gross loans in 2023(including lending balances transferred to held for sale). There remains a degree
  of uncertainty in the forward economic outlook, particularly in the UK, and we are monitoring risks related to our exposures in mainland China's commercial real estate sector. Over the medium to long term, we continue to use a range of 30bps to 40bps of average loans for planning our ECL charges.
• We remain highly focused on maintaining cost discipline. We continue to target operating expense growth of approximately 3% for 2023, excluding the impact of foreign currency translation differences, notable items and the impact of retranslating the 2022 results of hyperinflationary economies at constant currency. Our target also excludes the

Overview

impact of our acquisition of SVB UK, and the related investments internationally, which are expected to add approximately 1% to the Group's operating expenses. In 2Q23, we incurred severance costs of $0.2bn, with the benefits expected to be realised towards the end of 2023 and into 2024.

• We intend to manage the CET1 ratio within our medium term target range of 14% to 14.5%, and we aim to manage this range down in the long term. In addition, our dividend payout ratio is 50% for 2023 and 2024, excluding material notable items. We have announced a second interim dividend of $0.10 per share and intend to initiate a further sharebuy-backof up to $2bn, which we expect to commence shortly and complete within three months. Furtherbuy-backsfor 2023 and beyond will be subject to appropriate capital levels.

Strategic progress

• In March 2023, we acquired SVB UK.This acquisition strengthens our CMB franchise and enhances our ability to serve innovative andfast-growingfirms in the technology and life science sectors in the UK, and internationally. In June 2023, we launched HSBC Innovation Banking, which includes SVB UK together with newly formed teams in the US, Hong Kong and Israel. This newly formed proposition will deliver a globally connected, specialised banking proposition to support innovation businesses and their investors.
• During 1Q23, the significant interest rate rises in France resulted in the completion of the planned sale of our retail operations in France becoming less certain,as the capital required to
  be held by the buyer at completion of the transaction will increase significantly. As

a result we were required to change the accounting classification of our retail banking operations in France to no longer be classified as held for sale. In June, we agreed new terms for the sale of these operations that will involve HSBC retaining a portfolio of home and other loans. The transaction remains subject to information and consultation processes with respective works councils and regulatory approvals, and the parties aim to complete on 1 January 2024. An estimated pre-tax loss of up to $2.2bn is expected to be recognised in the second half of 2023 upon reclassification to held for sale.

• The plan to sell our banking business in Canada remains a key priority,as we reshape the organisation to focus on our international customer base. The transaction is now expected to complete in the first quarter of 2024, subject to regulatory and

governmental approval, and we continue to classify these operations as held for sale.

• We remain committed to consider the payment of a special dividend of $0.21 per share as a priority use of the proceeds from the sale of our banking business in Canada in the first half of 2024.The remaining proceeds will accrue into CET1 capital in consideration for organic growth and investment, and we intend to use any excess capital to supplement sharebuy-backs.
• We remain focused on investing and growing in our areas of strength, and we have continued to make progress in executing our Wealth strategy, notably in Asia.We attracted net new invested assets of $34bn in the first half of 2023, of which $27bn was from Asia.

ESG highlights

Transition to net zero

• Our net zero transition plan, which we expect to publish later this year, will bring together our strategic approach to net zero, our science- based targets for financed emissions and our operations, and details on how we
  plan to embed climate considerations into our business processes, policies, risk management and governance. We intend to report annually on our implementation progress in our Annual Report and Accounts.
• In the second half of 2023, we expect to complete assessments of transition plans for remaining customers in scope of our thermal coal phase-out policy. We also expect to complete assessments for major oil and gas, and power and utilities customers

globally, as well as other customers in EU and OECD markets in scope of our updated energy policy.

• As part of our ambition to support our customers in their transition to net zero and a sustainable future, we aim to provide and facilitate $750bn to $1tn of sustainable finance and investments by 2030. In 1H23, we provided and facilitated $45bn of sustainable finance and investments, bringing our cumulative amount since
  1 January 2020 to $255.7bn.

Build inclusion and resilience

• We have continued to focus on building a workplace for our colleagues that is fit for the future and provides teams with the flexibility

and resources to deliver for our customers. More of our colleagues are working in a hybrid way than in 1H22, and in the 2022 Snapshot survey, 71% of colleagues said they have everything they needed to feel equipped for success at work. Flexible working practices are also helping us to attract and retain talented employees, with one-third of new joiners saying it influenced their decision to join HSBC.

• Developing the skills of colleagues plays a pivotal role in achieving our strategic goals and growth ambitions. We have continued to focus on programmes critical to our strategy such as those in wealth, sustainability, and leadership development.