Reforms at HSBC are not radical enough

Banking giant HSBC plans to go back to its roots to boost shareholders’ returns. But investors are not impressed.

HSBC chairman Mark Tucker is struggling to explain the bank’s poor returns

FTSE 100 banking giant HSBC has outlined a “radical restructuring”, reports Richard Fletcher in The Times, after 2019 saw profits before tax fall to $13.35bn, well below the $20bn forecast by City analysts. As part of the move, the group will “shed $100bn in assets and slash the size of its investment bank”, shedding 35,000 jobs in the process. HSBC will also combine its retail banking and wealth-management business unit with its global private-banking operations while reducing its sales and research coverage in European equities and closing a third of its 224 branches in America.

These changes will mean a big fall in the number of HSBC bankers in Canary Wharf, says Jim Armitage in the Evening Standard. But the reality is that they are overdue. HSBC has been “trying to do too much for too little return”. Its global investment bank and “struggling” retail operations in France and the US “will never have the scale to take on the likes of JP Morgan or big domestic rivals”. So it makes sense to cut them and focus on HSBC’s support for corporate clients, as well as moving its assets to places “that will provide it with better returns”, such as Asia.

An even sharper axe might be necessary

Cutting back is the “right idea”, says Liam Proud on Breakingviews. But investors have every right to be unimpressed by the scale of the cuts, which are equivalent to only 14% of HSBC’s total expenses in 2019. The problem is made worse by the fact that HSBC’s cost base is “unusually bloated”, with only $240,000 in revenue generated per staff member last year, compared with Citigroup’s $370,000. Indeed, the targets for cost-cutting and return on equity are so modest that they promise little upside for shareholders. Even if HSBC manages to achieve them, it’s hard to see how the shares could be worth any more than they are now.

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And while HSBC is making all the right noises about “returning the bank” to its roots with the “sharpened focus” on Asia, there’s not much detail on how exactly it plans to grow there, say Harry Wilson and Stefania Spezzati on Bloomberg. Indeed, three years after he was appointed in 2017, chairman Mark Tucker is “still struggling” to explain “why a bank with such a strong hold in some of the world’s fastest-growing economies has been unable to produce a better return”.

The update also failed to address whether interim chief executive Noel Quinn will be made permanent, notes Lex in the Financial Times. Tucker ousted Quinn’s predecessor for not cutting fast enough; Quinn may well worry that the opposite could happen to him – with Tucker refusing to make him CEO because a “necessary” shake-up has made him unpopular with both staff and shareholders, who face a two-year moratorium on buybacks. Yet given that Quinn will be doing the “heavy lifting”, Tucker’s prevarication is “destabilising”. It’s “no wonder the share price dropped 6%”.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri