Something bad is coming at HSBC. No one knows exactly what it is yet (not even the interim CEO and the CFO it seems), but it's going to be big and will be revealed in all its enormity when HSBC announces its full year results for 2019 early next year. Seems HSBC people are going to have a great Christmas.
Speaking today, Noel Quinn, the HSBC interim CEO who is auditioning for the full time position on the basis of strenuous cost-cutting, said the bank had suffered returns that were "not acceptable" in the third quarter, that previous cost-cutting plans were insufficient and that "material" cuts and "decisive action" will be taken very soon.
What kind of decisive action? The well-trodden path of taking risk weighted assets from underperforming businesses and reallocating them to better performing ones, said Quinn. The underperforming businesses in question were cited as being global banking and markets (the investment bank) and businesses in the U.S. and Continental Europe. Asia is still in clover - it will likely be a beneficiary of the 'reallocations.'
Speaking alongside Quinn, HSBC's CFO Ewen Stevenson said things are being kept "deliberately vague" for the moment, but that the word "material" was not being used lightly. Today was all about giving a "steer," said Quinn, adding that the changes would likely take several years.
Cost-cutting and job reductions will be an inevitable result. "It’s fair to say that taking capital out of the region will take revenue out and if we take revenue out we will need to take out the cost base that supported that revenue," Quinn added. The bank is already planning to cut bonuses by $300m in 2019, although this seems a comparatively modest reduction on the $3.5bn it spent on them in 2018.
If you work for HSBC, you have already been primed for bad news. - The Financial Times previously reported that Quinn was itching to cut highly paid people from the global banking and markets division in Europe. Bloomberg subsequently disclosed that the bank was thinking of pulling back from its equities business in London, New York and Germany.
The latest proposed cost cutting comes on the back of previous rounds of the same, but Quinn said it's needed nonetheless: "The economic environment we are facing today is very different to the environment when we put together the strategic plan 18 months ago." HSBC won't meet its RoTE target of 11% for 2020. The shame.
HSBC's investment bank is doing no worse than the rest
Before anyone rushes to the conclusion that HSBC's global banking and markets (GB&M) division needs urgent remedial action because of its especially terrible performance, however, it's worth looking at the chart below. In the first nine months of this year, HSBC's GB&M division far outperformed rival banks both in terms of revenue and profit growth. If HSBC is cutting costs "decisively" and "materially", shouldn't UBS, for example, be doing more than tinkering around the edges?
Quinn and Stevenson would undoubtedly point to returns, which they emphasize are painfully low in some areas (eg. 1.8% on an annualized basis across the U.S. business as a whole). Even here, however, GB&M doesn't do badly compared to others. - The return on tangible equity across GB&M was a healthy(ish) 9.6% in the third quarter of 2019, even if this was down from 12.6% a year earlier.
HSBC's real issue, then, is the discrepancy in performance between its businesses regionally. The chart below shows revenues and profits by region in the GB&M business in the third quarter. It doesn't take much to see that Europe as a whole is Quinn's problem in the investment bank. By comparison, Asia is the kind of business most bank CEOs can only dream of: Hong Kong alone has a crazy margin of 54%.
As we've noted before, it might be that HSBC's Asian business is madly profitable, or it might be that Europe is unfairly carrying a disproportionate amount of cost. Either way, Europe and the U.S. (although maybe not necessarily GB&M in the U.S.) are where the "material cuts" are coming. And if HSBC feels the need to do this in 2020, who is next?
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