Europe, US key to next stage of HSBC turnaround

May 14, 2012

LONDON, May 14 — HSBC boss Stuart Gulliver needs to map out his route to recovery for the bank’s European and US businesses at a strategy update this week to bolster confidence in a turnaround plan that has shown progress on cost cutting and asset sales.

First-quarter results from Europe’s biggest bank last week showed Gulliver, a 32-year HSBC veteran who made his name building up its investment bank, has achieved much in the first of his three-year revival plan.

That is likely to win him breathing space with investors.

“He is delivering on his promises in keeping costs down and revisiting areas of exposure and that’s what the market wants,” said Guy de Blonay, who runs Jupiter’s Financial Opportunities Fund. “The market has accepted the fact it’s an organisation that you cannot change in an afternoon and it will take time.”

However, shareholders will be keen for Gulliver to flesh out plans for underperforming European and US businesses.

In an echo of his time at HSBC’s investment bank, when he reversed an ill-fated attempt to take on Wall Street’s biggest banks and refocused on its strengths in debt financing and emerging markets, Gulliver is steering the bank back to its roots as a financier of global trade.

Taking companies overseas, hedging their currency exposure, selling their bonds, providing more sophisticated investment bank products and bridging east and west are seen as its best chances to turn around the European and US regions.

Benefits coming through

Gulliver, a keen sailor who grew up in Plymouth on England’s south coast and has held key roles as far afield as Tokyo, London and Stuart Gulliver: Experience as far-flung as Tokyo, London and Kuala Lumpur. — Picture courtesy of trends.levif.beStuart Gulliver: Experience as far-flung as Tokyo, London and Kuala Lumpur. — Picture courtesy of Lumpur, is in charge of a bank with 89 million customers across 85 countries, the biggest bank outside China.

A year ago, he set two key goals: to get return on equity (RoE), a key measure of profitability, above 12 per cent and to cut costs by US$3.5 billion (RM10.7 billion) a year to get them below 52 per cent of revenue.

Last week, he said the bank was getting “serious traction” on the measures under its control. First-quarter results showed annualised cost savings reaching US$2 billion after 14,000 job cuts, shaving the underlying cost/income ratio to 55 per cent from 61 per cent in 2011.

RoE is also on the rise, helped by a string of almost 30 deals in the last year to move out of businesses that lack scale, are unprofitable, or do not connect with other areas.

There have been big US sales, and smaller moves in Europe, including closures in Poland, Georgia and Slovakia, and in Latin America, where the bank has sold or plans to sell businesses in a string of countries. Asia has not been immune, with deals in Thailand, Korea, Japan and elsewhere.

“We’re yet to really see the benefits come through in the numbers, so we’ll be looking for more colour on the financial implications of what they’ve done so far, and what they’ve got to do going forward,” said Shore Capital analyst Gary Greenwood.

“We’re only part way through a three year turnaround programme so there will clearly be more countries they will look to exit,” he said.

But RoE, which topped 15 per cent each year from 2004 to 2007 before plunging to 4-5 per cent in the financial market crisis, will come back under pressure as Basel III regulations come in.

All banks face the same pressure, and it could cut up to 2 percentage points from an HSBC RoE which reached 11 per cent last year and held at that level in the first quarter.

Huge variations

Gulliver said a year ago that about 42 per cent of operations were delivering a return below the bank’s 11 per cent cost of capital. That is the level where investors would be better off putting their money elsewhere.

Analysis of HSBC’s operations shows huge variance across its geographies and business lines, and the United States and Europe need particular work.

To get RoE to between 12 per cent and 15 per cent, HSBC reckons it needs to deliver a return on its assets, weighted for how risky they are, of between 1.8 per cent and 2.6 per cent.

Return on risk-weighted assets (RoRWA) was 1.4 per cent in the first quarter. In Hong Kong it was a stunning 7.3 per cent, coupled with a cost/income ratio of 39 per cent, and it came in at 2.8 per cent in the rest of Asia-Pacific.

Although there are fears Asian growth is slowing, HSBC is expected to pick up business there as European rivals retrench, under pressure to shrink and focus lending at home. HSBC’s share of Asia trade finance jumped to 14 per cent in the first quarter from 3 per cent in 2010, Morgan Stanley analysts estimated.

But in Europe RoRWA has been 1.2-1.5 per cent in the last three years and was no better in the first quarter. Costs are also a problem in Europe and have jumped above 70 per cent of underlying revenue.

HSBC’s problems in the United States have been tackled since the US subprime crisis showed up its disastrous 2003 purchase of Household Finance, and it has been running down the consumer finance book for the past five years.

Gulliver has accelerated change in the United States, selling half its branches and its credit card business.

But there is more work to do, and analysts think some degree of restructuring is also still needed at its stronger businesses in the Middle East and Latin America. — Reuters

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