HSBC finds itself in eye of the storm

HSBC, the global banking giant, is the worst hit of the high-street banks in Britain and is facing trouble elsewhere too. Matthew Partridge reports

HSBC’s Noel Quinn © HSBC
HSBC’s Noel Quinn will need to make deeper cuts
(Image credit: © HSBC)

An unexpectedly steep plunge in earnings, with first half pre-tax profits falling by 65% to $4.3bn, has prompted HSBC to announce that it will “accelerate” the axing of 35,000 jobs, says the BBC. The bank says bad loans linked to the coronavirus could reach $13bn (£9.8bn) as more people and businesses are now expected to default on their repayments because of the pandemic. HSBC has granted more than 700,000 payment holidays on loans, credit cards and mortgages. It has also been hit by low interest rates, which squeezes profit margins on the loans it provides.

The job cuts are likely to end up going even further, says Liam Proud on Breakingviews: the investment banking business is the only part of HSBC “that’s really growing”. However, not only is investment banking “hardly a dependable earner”, but its “stellar” performance also can’t offset a “slump” in retail and commercial banking revenue. This leaves cost reductions as “the only lever available” to help HSBC achieve its goal of a 10%-12% tangible return on equity by 2022. CEO Noel Quinn will need “much more” than the 7% year-on-year reduction he’s already achieved.

A bigger headache than Covid-19

HSBC’s size means that it has been in the “eye of the Covid-19 storm” and has been hit particularly hard by government pressure to “support struggling businesses and stretched households”, says Ben Marlow in The Daily Telegraph. Still, in terms of HSBC’s long-term direction, Covid-19 is almost a “sideshow”, since the process of navigating “rising tensions” between Washington and Beijing is providing it with an “even bigger headache”.

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There is “no easy fix” for the geopolitical predicament HSBC finds itself in, says Alistair Osborne in The Times. But the decision of its Asian head Peter Wong to sign a petition backing China’s intervention in Hong Kong has “cranked things right up”, as well as alienating its customers in Hong Kong, which currently account for a large chunk of profits. With the bank looking “too big to manage” a breakup seems increasingly attractive, especially as the “pretence” that HSBC can “breezily” operate in markets that “politically collide” has “slipped”.

Still, at least HSBC’s shareholders can console themselves that they are not alone in their misery, say Harry Wilson and Stefania Spezzati on Bloomberg. Write-offs at the UK’s six biggest banks so far this year “roughly equal Barclays Plc’s current market value”.

For example, Lloyds expects to set aside “between £4.5bn and £5.5bn pounds this year”, while Barclays has taken a £1.6bn impairment charge. More misery may be coming with Deutsche Bank estimating that UK banks “might book as much as £40bn in provisions over two years”. No wonder shares in HSBC, Barclays, Lloyds and NatWest “have all performed worse than their European peers this year”.

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