HSBC undergoes yet another overhaul. It still may not be enough
Feb 18th 2020LAST AUTUMN the board of HSBC asked Egon Zehnder, an executive-search firm, to find it a new chief executive. The bank had fired John Flint in August, after just 18 months in the job, for being too shy about pursuing profits. The bank then dodged the decision, appointing Noel Quinn, an experienced, no-nonsense insider, only on an interim basis. Mr Quinn had made it clear he wanted the job permanently. And he behaved as if he had it, hiring and firing senior staff and announcing strategic shake-ups.Yet six months on his appointment is less certain. On February 18th HSBC, Europe’s largest bank by assets, unveiled results that fell short of already pale expectations. Hobbled by write-downs of $7.3bn (mainly, at its global investment bank and European commercial bank), its profit slumped by a third in 2019, to $13.3bn. Its return on tangible equity (RoTE), a standard measure of profitability, slipped to 8.4%, down from 8.6% in 2018. Investors reckon that 10% or so is par. And the chairman, Mark Tucker, said nothing about the top job. HSBC still expects to fill it permanently within six to 12 months.Undaunted, Mr Quinn announced “one of the deepest restructuring and simplification programmes in our history”. The 155-year-old bank is to shed 35,000 of its 235,000 staff (analysts had expected 10,000). It intends to cull risk-weighted assets by over $100bn, out of a total of $843bn, by 2022, reinvesting more profitably elsewhere. It plans $4.5bn in annual cost cuts. Its investment bank, its European arm (where assets will shrink by 35%) and its American business (where it will reduce its branch network by 30%) will bear the brunt. The bank will thus become even more focused on Asia, where it already makes 90% of its profits.Investors were unimpressed: the share price lost nearly 6% on the day. Partly, this is because they have seen it all before: the overhaul is HSBC’s third since the global financial crisis of 2007-09. They had hoped that the bank would at last be able both to aim for higher returns and to hand out some of the bounty to its owners. Yet HSBC set its RoTE target for 2022 at 10-12%—in effect, no different from its previous objective of 11%. Worse, it said it would suspend share buybacks for 2021 and 2022. Investors feel HSBC is “running to stand still”, says Tom Rayner of Numis Securities, a broker.But even standing still may be difficult. Investors tend to see HSBC as a defensive stock that earns a predictable yield. Yet its outlook is clouded by uncertainty. Asia is feeling the chill of a global economic slowdown, and disruption caused by the coronavirus infection is likely to harm growth further. The bank estimates that the epidemic will cost it $200m-500m in the first quarter of 2020; the bill could easily mount. Analysts expect more loans to sour in Hong Kong and mainland China. Elsewhere, commercial property is also starting to look iffy in post-Brexit Britain; negative interest rates are eating banks’ margins in continental Europe.A bigger worry among investors lies with the bank’s ability to do as it promises. Start with the costs. Joseph Dickerson of Jefferies, an investment bank, says the overhaul marks HSBC’s first real stab at trimming its bloated middle office. But controlling costs is becoming more difficult. For its previous round of scalpel-wielding, in 2015, which was aiming to generate about $5bn in cost cuts, HSBC booked $4.5bn in restructuring charges. The latest plan looks to generate similar savings, yet the bank this time expects to incur costs totalling $7.2bn ($6bn in restructuring charges and asset-disposal costs of $1.2bn). The low-hanging fruit has gone.Increasing revenue looks even harder. Boosting sales while cutting expenses is not easy to pull off. Demoralised line managers, credit officers and other staff are hesitant to launch new products. Scale matters in banking, and losing it will make it harder to gain an edge. The asset sales may compound the problem. In the short term, shedding $100bn-worth of loans and parking the cash in low-yielding, liquid alternatives, like money-market funds or interbank facilities, will reduce income, notes Daniel Tabbush of Tabbush Report, an Asia-based research firm. And in the longer run, redeploying the capital in more productive, longer-dated assets is tricky. HSBC wants to strengthen its retail and wealth-management arms, but others are ahead of it—most investment banks, penalised by regulators through heftier capital requirements, are doing the same.All this suggests that the bank’s woes run much deeper than investors may have thought, says Fahed Kunwar of Redburn, a research firm. HSBC’s business is chiefly built on serving corporate clients that prize global connectedness; such a model is inherently vulnerable when the world slows down. That explains why HSBC is being more conservative with its balance-sheet than investors would like. It intends to keep its core tier-one capital ratio (a measure of its ability to withstand catastrophe) near the top of its target range of 14-15%. Some other European banks are bolder, announcing share buybacks or even deploying capital on acquisitions: on February 18th Intesa Sanpaolo, an Italian lender, made a €4.9bn ($5.3bn) bid for UBI Banca, a rival.The uncertain outlook makes HSBC’s dithering over its new chief executive all the more surprising. “Even if you did not have the other issues,” says Mr Rayner, “you’re still asking yourself whether the guy who’s supposedly been the driving force behind it is going to be in charge.” Mr Tucker has not yet entrusted Mr Quinn with the authority a boss needs to enforce a painful overhaul; yet recruiting an external candidate, after such a thorough restructuring has been announced, will be hard. Mr Tucker should make his choice, sharpish.Reuse this contentThe Trust Project