The 1.1 percent on-year drop meant the lender came up short of the US$9.6 billion it had forecast for the first three months of the year.

"The decrease reflected higher expected credit losses and other credit impairment charges in 1Q 26, an adverse impact from notable items and a rise in operating expenses," HSBC said in a Tuesday statement.

The bank's expected credit losses surged to US$1.3 billion, primarily reflected in a $400 million "fraud-related, secondary, securitisation exposure with a financial sponsor in the UK", it said.

It added that a US$300 million increase in allowances reflected "heightened uncertainty and a deterioration in the forward economic outlook" caused by the Iran war.

The company's Hong Kong-listed shares fell more than four percent in afternoon trade.

The bank forecast "a mid-to-high single-digit percentage adverse impact on profit before tax" from a range of issues including higher oil prices, rising inflation, a material slowdown in gross domestic product, rising unemployment and market disruption.

Despite the fall, the bank said "we remain confident in achieving the targets we set out".

"The group is well positioned to manage the changes and uncertainties prevalent within the global environment in which we operate, including in relation to the conflict in the Middle East," it added.