A radical break-up of HSBC may be the only way to save the sprawling banking conglomerate.
When HSBC announced its third-quarter results on Monday, they were worse than anyone expected. Pre-tax profits were down by 24%. Revenues fell by 3% to slightly over $13bn, well below what the market expected. Targets for return on equity were missed. The shares fell by close on 5% on the day, the biggest one-day fall in more than two years. They have fallen by 11% in the last six months. Given that growth in the UK is respectable and that HSBC is meant to be brilliantly positioned in the rapidly expanding Chinese and Asian markets, it was a deeply disappointing set of numbers. HSBC is meant to be growing along with its customer base. If it is shrinking, something is going wrong.
So far Noel Quinn who took over as an interim successor when John Flint was ousted as the CEO back in August has not said a great deal about how he intends to fix that. It is not even clear if he is really in charge. He is the only internal candidate for the job, but the board may still decide to bring in an outsider. It will let us know over the next six months. That is hardly the most ringing vote of confidence.
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One big round of redundancies has been announced by Quinn, with up to 10,000 jobs likely to be lost and more staff cuts may well be on the way. There have been noises about focusing more on Asia and deploying more of its capital in the faster growing markets: 96% of its profits in the latest quarter came from Asia, but Europe, which contributed almost nothing to the bottom line, still accounts for half its assets. But that is essentially the strategy HSBC has been pushing for the last five years and so far it has very little to show for it.
It is time to be bolder to break up a financial conglomerate that looks past its sell-by date. HSBC has its roots in Victorian Hong Kong, grew along with the territory and used its base there to expand into Europe and the US, acquiring Midland in this country and re-basing itself here in the 1990s. The combination of East and West worked fantastically well for a long time. But it may not be right for the next 50 years.
First, the bank is simply too big. It has more than 200,000 staff. It operates in more than 60 countries and territories. It has more than 40 million customers. That makes it just about unique. But as well as being too big to fail it also looks too big to manage. If there were ever any synergies between all its different units, they have long since got lost in all its sprawling complexity. Splitting the bank into smaller units would make it easier to manage.
Four-way splits
Next, the East/West combination looks unstable. President Trump may settle his trade war with China in the next few months, or he may not. Either way, it is unlikely to bring an end to the tensions. China looks to be embarking on an increasingly bitter economic war with the US and Europe. Tariffs are being imposed by the US and the EU is planning restrictions on Chinese investment on the continent. When China was an emerging economy, HSBC's position as a bridge between East and West looked like a strong one. Now it looks like a fatal flaw and it may end up getting caught between hostile forces. A split may be the way to fix that.
Finally, banking itself is being taken apart by the internet. The technology giants are moving into the market Uber is just the latest while hundreds of fintech start-ups are chipping away at different parts of the industry. The days of the huge, universal bank look numbered. It does everything, everywhere, but doesn't do any particular thing that well. Over time, that is a recipe for losing market share. HSBC should look at splitting retail and commercial banking.
A radical break-up of HSBC would involve a four-way split. East and West and retail and commercial. The result? Four new banks, each with a lot more focus, a clear place in the market and a renewed sense of purpose. Whether Quinn, or an outsider, will be bold enough to attempt that remains to be seen. But it is the only alternative to steady, unending decline and HSBC's shareholders deserve better than that.
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Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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