London: HSBC will next week unveil a dramatic revamp to slash costs, pull back from some of its 87 countries and possibly shrink its US business as new bosses stamp their mark on Europe’s biggest bank.
Stuart Gulliver, chief executive since the start of the year, may opt to sell the US credit card business and cut branches there as well as take a knife to other operations dragging on profitability, analysts said.
Costs were expected to be cut by at least $2 billion annually after jumping to an “unacceptable” level last year, potentially seeing jobs go and investment reined in.
A top 25 investor in the bank, who asked not to be named, said Gulliver was being tough internally and had told divisional chiefs to deliver aggressive cost saving plans.
Gulliver needs to take action to get return on equity (RoE) into his 12-15% target range. He has scaled back that target from 15-19% due to the costly impact of tougher regulations, but RoE was only 9.5% last year and around 5% in 2009 and 2008.
“He’s set new targets for return on equity and we’ll see the roadmap and what needs to be done to get there,” said Chris Wheeler, analyst at Mediobanca in London. “I think he’ll talk about cutting businesses, being more streamlined and what markets they can walk away from.”
Pulling up flags?
Gulliver has said he will be more rigorous and disciplined on where to allocate capital and “re-engineer the business”.
Like many of the bank’s top management, Gulliver is an HSBC lifer, joining as a trainee, getting wrapped in its traditions and travelling the world with the bank.
The keen sailor, 51, was named CEO in September after a damaging boardroom power struggle that ended with Douglas Flint being elevated to chairman from finance director and Gulliver moving up from head of investment banking.
Gulliver, who won respect for refocusing HSBC’s investment bank on its financing and emerging markets strength, is expected to put most immediate attention on the bank’s retail arm, especially in the United States.
HSBC admits its $15 billion acquisition of consumer finance firm Household eight years ago was a bad deal and is running down its loan book.
It could release $25 billion in capital from selling its US credit card business, according to analysts at Barclays Capital.
Some also expect it to slim its 475 US branches. HSBC USA has not generated RoE over 10% since 2004 and uses over $16 billion of capital, Investec analyst Gareth Hunt estimated.
Gulliver has plenty of other areas delivering low returns he can target too.
“They are looking at all the countries they are in and just deciding whether they want to be there or not. They have been a flag-planter and Gulliver is trying to shake that up,” the top 25 investor said.
He and other investors and analysts warned not to expect too much too fast, however, given the size and scope of the bank and its conservative traditions.
Short-term measures are likely to be more reliant on squeezing expense, notably in European retail banking. Gulliver wants to cut costs to 48-52% of revenues after they jumped to 55% last year, which would see savings of $2 billion to $5 billion.
Big surprises are not in the HSBC culture that dates back 146 years, but even after shifting focus back to its Asian roots in recent years, that region may not be immune to change.
BarCap analysts said HSBC’s 16% stake in Chinese insurer Ping An offers little operational overlap and selling it could deliver a $5 billion gain.
Ahead of the strategy day, HSBC will issue a first-quarter trading update on Monday. It will include more financial details than past quarterly updates, and is expected to show bad debts continue to fall.
The bank’s 2011 pretax profit should rise about by a fifth on the year to $23 billion, according to the average of 13 analysts polled by Thomson Reuters.