BackHSBC embarks on massive overhaul as profits miss the mark
The lender warned that it will pare back underperforming operations in the face of slowing economic growthHSBC’s pretax profit fell 12% to $5.3 billion for the third quarter
PremiumLONDON, HONG KONG : HSBC Holdings Plc embarked on its biggest overhaul in years after profit missed estimates, warning that it will pare back underperforming operations in the face of slowing economic growth and geopolitical uncertainty.
The bank, which makes almost 90% of its profit in Asia and employs 240,000 people, walked away from a key profitability target and said write-offs are likely for some of its European business and technology spending. For acting Chief Executive Officer Noel Quinn, who took over in August following the ouster of John Flint, the review is his chance to put his stamp on the sprawling lender. Cuts at the investment bank have already begun.
The cutbacks underscore a reversal of the expansion made during Flint’s tenure, when the bank said it would spend about $17 billion updating its technology platforms and expanding its business in mainland China. The writedowns will stem from winding down technology from businesses that will be closed, goodwill charges from parts of its European business and severance costs. The shares slid as much as 4.8% in London; a closing price at that level would result in the biggest drop in more than 2 1/2 years.
“Our previous plans are no longer sufficient to improve performance" in the U.S., continental Europe and British investment banking, given “the softer outlook for revenue growth," Quinn said in a statement Monday. “We are therefore accelerating plans to remodel them, and move capital into higher growth and return opportunities."
HSBC’s pretax profit fell 12% to $5.3 billion for the third quarter. It dumped its target for return on tangible equity, a key measure of profitability, of more than 11% in 2020. Retail banking and wealth management saw a 18% drop to $1.69 billion.
“You are likely to see us needing to revisit a few things," Chief Financial Officer Ewen Stevenson said on a call with Bloomberg. “We are carrying a decent amount of goodwill against parts of the European business in particular." The bank plans to maintain its dividend, Stevenson said on a conference call.
Global banking and markets, which houses HSBC’s investment bank, posted a 30% decline in pretax profit for the quarter to $1.24 billion, and that may be bad news for bonuses. While the bank’s total costs rose year-on-year, HSBC said it had cut performance-related pay by $200 million. It didn’t say what division’s staff was taking the largest hit, but traditionally its investment banking unit represents the largest single chunk of variable pay.
“The good news is that this performance looks set to finally goad the management into taking some of the actions to address under-performing businesses that we have been awaiting," wrote Edward Firth, an analyst at Keefe, Bruyette & Woods.
Quinn’s Retrenchment
Quinn, who’s signaled he wants the top job on a permanent basis, has been developing plans for a series of retrenchments. The bank may partially exit stock trading in some developed Western markets, and will attempt to sell its French retail bank, a move that could remove as many as 8,000 staff from the payroll, people familiar with the matter have said.
“Having a strong presence in both continental Europe and the U.S. is important to our bank, and we will retain a presence in both of those markets -- but we need to reshape that presence," Quinn said in an interview with Bloomberg. He declined to provide details.
“The one bright spot is that the bank intends to sustain the dividend," said Eric Moore, a portfolio manager at Miton Group in London. “But with HSBC still trying to identify its proper footprint, ten long years after the credit crunch, there is little else to savor. Shareholders should brace themselves for further heavy restructuring charges."
HSBC’s third-quarter adjusted profit trailed a company-compiled analyst consensus of $5.7 billion. Here are some other highlights from its results:
- Third-quarter adjusted revenue fell 2% to $13.3 billion
- Annualized tangible return on equity of 6.4% for the quarter
- ‘Positive jaws’ of 2.2% over nine months, meaning revenue outpaced costs
- Third-quarter adjusted expected credit losses jumped to $883 million from $545 million in the previous three months
Hong Kong
HSBC credited its operations in Asia with holding up despite challenges in the region. More than four months of street protests in Hong Kong have unnerved some customers, while a confidence-sapping trade war with the U.S. has dragged on China’s economic growth. Few global companies have tied their fortunes as much to Hong Kong as HSBC, which wants to capitalize on closer economic ties with mainland China.
In Hong Kong, adjusted pretax profit inched up 1% in the quarter to $3 billion. However, the bank also flagged a credit charge of $90 million to reflect a deteriorating outlook in the city, where small- and medium-sized businesses are suffering the most. Quinn also said some ultra-high-net-worth clients are opening accounts outside Hong Kong as a contingency plan, though there hasn’t yet been a significant outflow of funds.
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