HSBC takes baby steps

John Flint of HSBC © Getty
John Flint: playing it safe

Global banking giant HSBC has unveiled an extremely cautious strategic update. Shareholders wanted a bit more spice, says Alice Gråhns.

Iain Duncan Smith, the “quiet man’” who once led the Tories, “was famously lampooned when he pledged to ‘turn up the volume’ during a tactical reboot”, says Christopher Thompson on Breakingviews. Nobody will be chortling about HSBC’s new CEO John Flint shooting for the moon. In his first strategic update this week, he promised to invest up to $17bn by 2020 on technology and expanding in China – provided the bank’s revenue rises faster than costs.

That “hardly smacks of sweeping change”. In fact, his target for a return on tangible equity (ROTE) – a key gauge of profitability– of more than 11% by the same date is only slightly higher than the 10% analysts had anticipated. With HSBC already delivering an annualised 11.6% ROTE in the first quarter, “there is little need for Flint to do anything dramatic”.

The new strategy “is in many ways what you would expect from someone elevated to chief executive after a 28-year career at the bank: continuity and incremental improvement”, says Martin Arnold in the Financial Times. After all, HSBC is “the supertanker of British banking” with $2.65trn of assets, almost 230,000 employees and 3,900 offices in 67 countries. “So anyone expecting Flint to unveil radical changes was kidding themselves.”

Instead, Flint promised to push forward with the “pivot to Asia” strategy introduced three years ago by former CEO Stuart Gulliver and said he’d also continue to redeploy capital from areas with low return on equity to more promising ones. There is no sign of significant change when it comes to the dividend either.
He wants to keep it at 51 cents a share. Many had hoped for a rise.

A dash of growth would be welcome

That only partly explains why the shares fell marginally after the statement, says Paul Davies in The Wall Street Journal. Investors “crave growth”, and while they wouldn’t want the bank to “take crazy risks”, and appreciate that HSBC is so huge it’s hard to move the needle, they were looking for a bit more excitement on the new business front. They seem unlikely to get it. Davies played down the prospect of new acquisitions, insisting that “plan A is all about organic growth”.

The bank may be “building in a cushion for when tougher global capital rules kick in from 2021 onward”. But it should manage that without being so cautious. By the end of 2020, it could have generated almost $10bn of capital beyond its targeted regulatory needs. This prediction is based on revenue, costs and the balance sheet growing by 5%, 4% and 2% respectively each year –“a reasonably sceptical reading” of its plan. The numbers don’t include the excess capital of $2bn it has in the US.
The upshot? Shareholders “can probably expect much better payouts from HSBC” than it’s letting on. But “unless he has something more up his sleeve, investors may still be disappointed”.


WH Smith: poor service, good returns

“Though recently voted the worst high-street retailer by Which readers, who panned its store standards and customer service, there is plenty of life in WH Smith,” says James Crux in Shares magazine. Last week, the 225-year-old group’s shares bounced by more than 6% after a positive third-quarter update. Total group sales rose 4% in the 13 weeks to 2 June, with like-for-like sales up 1% year-on-year. Although sales at its high-street business fell by 1%, the decline has slowed since late 2017 and early 2018.

How did this happen? “Through a relentless, hard-nosed approach on costs and profits,” says Ben Marlow in The Daily Telegraph. Former boss Kate Swann moved away from CDs and DVDs, and stocked up on higher-margin items, such as birthday cards. Similarly, her successor Stephen Clarke is prioritising pens and paper rather than newspapers and magazines. The greatest transformation, however, has occurred at its travel division. Last year it generated more profit and turnover than the rest of the business for the first time, and it is compensating for the slowdown elsewhere. At stations and airports, captive customers and less competition gives WH Smith greater pricing power.

WH Smith may irritate its customers, but its investors certainly can’t complain. Since 2010 WH Smith’s share price has climbed from around 350p to more than £21. Anyone buying the shares five years ago would have made a 174% gain, eight times as much as the FTSE 100. “In today’s brutal retail environment, that is a pretty phenomenal return.”


City talk

l London-listed satellite-communications firm Inmarsat is “another Brexit bargain”, says Chris Hughes on Bloomberg. It does very little business in the UK and looks good value. It hasn’t performed as well as other “dollar” stocks whose sales have been boosted by the pound’s Brexit-vote-induced swoon: it has been investing heavily in satellite broadband for passenger planes. In dollar terms, the stock had fallen 67% from its 2015 peak before it rose on takeover speculation last week. Inmarsat says it has rebuffed a tentative offer from America’s EchoStar. Put a standard 30% premium on the pre-leak price and this would suggest an offer of 543p a share. The stock was trading at about 538p last Monday. Inmarsat’s “best bet is that a counterbidder forces EchoStar to pay up”.

l “Running BT is like running [the] gauntlet,” says Liam Proud in Breakingviews: placating shareholders on the one side and regulators on the other. Outgoing CEO Gavin Patterson (pictured) “managed neither”. BT’s share price has fallen nearly 40% since his tenure began in 2013. The timing of Patterson’s exit, however, is odd. BT’s key issues – a rocky relationship with regulators and slow sales growth – are not new, and Patterson’s recent strategic revamp makes sense. Chairman Jan du Plessis supports it, but wants someone else to execute it. “That suggests the board wants a steady hand…  the opposite of Patterson”, who rocked the boat.

l “Wannabe Bank of England governors are always keen to please the Treasury,” says Alistair Osborne in The Times. So it’s no wonder Andrew Bailey at the Financial Conduct Authority (FCA) is “bending” the London stock exchange’s listing rules to “lure the $1trn oil giant Saudi Aramco”, even if he denies it. Now London’s governance is being diluted, Egypt and Kazakhstan are reputedly keen to turn up, “no doubt followed by Kim Jong-un’s (de-nuked) ballistic missile company. Should be a blast.”

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