Net profit in the first quarter of 2026 inched up 0.3 percent to US$7.345 billion compared with the January-March period one year earlier, HSBC said in its earnings statement.

Pre-tax profit fell to 1.1 percent to $9.4 billion, missing the bank's expectations.

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

The bank's credit losses surged to $1.3 billion, primarily reflected in a $400 million "fraud-related" charge, reportedly tied to Market Financial Solutions, a collapsed lender of home loans in the UK.

"We feel quite comfortable that this is a one-off fraud and it comes to us through a secondary exposure that we have through a financial sponsor and where there was reliance on the financial sponsors' due diligence," HSBC chief financial officer Pam Kaur said in a call with media.

British bank Barclays last week announced a hit linked to MFS, which has faced allegations of financial irregularities.

HSBC on Tuesday added that group revenue in the first quarter increased by six percent to $18.6 billion, driven by strong performance in wealth management.

- Mideast cost -

The London-headquartered bank said it had set aside $300 million over "heightened uncertainty and a deterioration in the forward economic outlook" caused by the Iran war.

For the full year, the bank said it could expect "a mid-to-high single-digit percentage adverse impact on profit before tax" amid rising inflation, slowing economic growth, rising unemployment and market disruption.

Despite this, "the group is well positioned to manage the changes and uncertainties prevalent within the global environment in which we operate", HSBC added.

While the lender and its peers are set to benefit from higher interest rates caused by soaring oil prices pushing up overall inflation, HSBC stressed that "the outlook remains volatile and uncertain".

At the same time, volatility in markets caused by the Middle East war is boosting banks' fees.

"We continue to see high volume" of transactions, Kaur said.

"Our customers, they continue to readjust their portfolios," she said, adding that "going forward from a fee income perspective, I do believe there is a huge tailwind for us".

Following the update, the HSBC share price was down 5.5 percent in midday deals on London's benchmark FTSE 100 index, which was 1.1-percent lower overall.

"The disappointed reaction to the update... has been exacerbated by wider market weakness given the apparent resumption of some hostilities in the Middle East," noted Richard Hunter, head of markets at Interactive Investor.

"Nonetheless it has done little to derail the overall progress of a share price which had risen by 65 percent over the last year, as compared to a gain of 20 percent for the wider FTSE 100."

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