(Alliance News) - HSBC Holdings PLC on Tuesday delivered a "noisy" set of first quarter results, with strong fee performance overshadowed by higher than expected costs, a surprise fraud-related charge and increased provisions around the Middle East outlook.

Shares in the London-based Asia-focused bank fell 5.9% to 1,279.00 pence each in London on Tuesday, the worst performing stock on the FTSE 100 which is down 1.3%.

"Underlying top-line strength got eaten up before it reached the bottom line," noted Matt Britzman, senior equity analyst, Hargreaves Lansdown.

HSBC said pretax profit fell 1.1% to USD9.38 billion in the quarter ended March from USD9.48 billion a year earlier and below USD9.59 billion company compiled consensus.

"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, 9% 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 UK charge was "not expected," while the increase for the Middle East conflict was "broadly as anticipated."

AJ Bell head of markets Dan Coatsworth said the "sizeable" fraud-related charge is "a reminder that risks don’t only exist in more far-flung parts of the world."

"It may also raise some questions about the robustness of controls within the business," he suggested.

Elsewhere, Jefferies analyst Joseph Dickerson noted the results contained a "fair amount of noise across revenue and cost lines, but the underlying picture is one of a mildly stronger banking [net interest income] print and ongoing strength in Wealth."

Total revenue rose to USD18.62 billion from USD17.65 billion, ahead of USD18.49 billion consensus.

Banking net interest income rose to USD11.25 billion from USD10.60 billion, just shy of USD11.28 billion consensus. Fees and other income increased to USD7.87 billion from USD7.14 billion.

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.

No share buyback was declared, as expected, with HSBC stating: "A decision to recommence buy-backs will be subject to our normal buy-back considerations and process on a quarterly basis."

Buybacks were suspended after HSBC announced last October it was taking full ownership of Hang Seng Bank Ltd.

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.

"We remain confident in achieving the targets we set out in February 2026," he added.

Operating expenses grew 8% to USD8.72 billion from USD8.10 billion, outstripping USD8.43 billion consensus.

JPMorgan called it a "mixed" set of results with underlying pretax profit in line, driven by a strong fee performance (6% ahead) led by Transaction Banking (6% ahead), Wealth (4% ahead) offset by higher costs (4% higher) and higher impairments (9% higher).

"Overall, we expect limited changes to consensus with stronger revenue trends likely to be offset by higher costs and a weaker impairment outlook, with any prolonged challenges in the Middle East likely to further weigh on pretax profit," JPM added.

Citi's Coombs called it a "solid" print, albeit "we expect the market may have hoped for more after the results of its close peer, Standard Chartered".

Bank of America called it an "ok" set of numbers and while provisions were "noisy", it is "not concerned" about the fundamental credit quality of HSBC's loan book.

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%.

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, and compared to USD45.83 billion Visible Alpha consensus.

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.

HL's Britzman said for investors, this was a typically "messy" quarter: the "core franchise looks healthy, but HSBC still needs to prove it can keep a lid on costs and impairments if the market is going to give full credit for that stronger revenue base."

By Jeremy Cutler, Alliance News reporter

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