(Alliance News) - Shares in HSBC Holdings PLC were knocked on Tuesday as it reported higher than expected credit losses in its first quarter, including a surprise USD400 million fraud-related charge in the UK.
The news came as Asia-focused bank HSBC said pretax profit fell in the first quarter of 2026, despite reporting strong net fee and net interest income growth.
HSBC said pretax profit fell 1.1% to USD9.38 billion in the first quarter ended March 31 from USD9.48 billion a year earlier.
"The decrease reflected higher expected credit losses and other credit impairment charges," HSBC said.
Change in expected credit losses and other credit impairment charges surged 49% to USD1.30 billion from USD876 million, worse than USD1.19 billion consensus.
HSBC said this reflected a USD400 million fraud-related, secondary, securitisation exposure with a financial sponsor in the UK as well as a USD300 million increase in allowances to reflect the possible impact of the Middle East conflict.
The Financial Times on Tuesday said the UK fraud charge was tied to collapsed UK mortgage lender Market Financial Solutions, citing people familiar with the matter.
"We have an exposure to a financial sponsor who has an exposure to the company," HSBC's chief financial officer Pam Kaur said on a media call, without naming the group.
A USD400 million loss would place HSBC among the lenders hardest hit by the MFS implosion. Last week, Barclays PLC took a GBP228 million hit from its demise.
Citi analyst Andrew Coombs said the charge was "not expected."
HSBC shares were down 5.1% at 1,290.60 pence each in London on Tuesday.
Diluted earnings per share rose 2.6% to USD0.40 from USD0.39.
The bank maintained its dividend for the first quarter at USD0.10 per share.
"A decision to recommence buy-backs will be subject to our normal buy-back considerations and process on a quarterly basis," HSBC said.
Net interest income rose 7.7% to USD8.95 billion from USD8.30 billion, while net fee income jumped 12% to USD3.72 billion from USD3.32 billion.
Net operating income increased 3.3% to USD17.32 billion from USD16.77 billion.
Chief Executive Officer Georges Elhedery said: "Each of our four businesses contributed to firm-wide revenue growth and each delivered an annualised [return on tangible equity] in excess of 17%, excluding notable items.
"In periods of greater uncertainty, customers turn to us more as their trusted partner to navigate complexity with the financial strength, stability and expertise they know they can rely on. We remain confident in achieving the targets we set out in February 2026."
Total operating expenses excluding amortisation and impairment of intangible assets rose 6.8% to USD8.00 billion from USD7.49 billion.
At 1.60% the net interest margin improved slightly from 1.59% last year.
HSBC's common equity tier one ratio reduced to 14.0% from 14.7%, although the bank said it intends to continue to keep it within the medium term target range of 14.0% to 14.5%.
Total shareholders' equity rose to USD196.82 billion from USD190.81 billion.
"The macroeconomic outlook is facing heightened uncertainty, creating volatility in both economic forecasts and financial markets resulting in both tailwinds and headwinds. The group is well positioned to manage the impacts of these challenges through our high-quality revenue streams, conservative approach to credit risk and strong deposit franchise," HSBC said.
To reflect an improved interest rate outlook, HSBC now expects banking net interest income to reach around USD46 billion in full-year 2026, up from prior guidance of at least USD45 billion.
The bank also said it is on track to deliver USD1.5 billion of annualised cost savings by the end of June, six months earlier than planned.
By Elijah Dale, Alliance News senior reporter Asia-Pacific (updated by Jeremy Cutler, Alliance News reporter)
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