HSBC plotline points back to Gulliver

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With the bank’s HQ distraction now over, disappointing results have switched attention to the CEO.

In many of his most famous movies, the director Alfred Hitchcock deployed a plot device known as a MacGuffin. This was a part of the story arc that at first glance appeared to be of primary importance but as the picture progressed, would normally be revealed as tangential at best. It helped distract even the most keen-eyed movie-goer from understanding the more relevant clues in the plot.

HSBC’s internal discussions about whether to redomicile away from the UK, most likely to Hong Kong, were much more than a MacGuffin. Plenty of senior HSBC bankers and board members were keen on a relocation of the bank’s headquarters to the centre of its business empire in Asia, where the majority of its profits are generated.

Frustration with the UK regulatory regime ran deep. These concerns weren’t just about the headline items such as the bank levy or balance sheet tax. Insiders complained bitterly about micro-interference into the business as a whole, such as demands for granular detail on the bank’s $30 million mortgage book in the Philippines – hardly a relevant factor in the safety of HSBC’s $2.4 trillion global balance sheet.

The threat to relocate clearly paid dividends to HSBC in terms of the UK’s decision not just to limit the bank levy to UK balance sheets, but also in changing the terms of conversation and therefore engagement with global financial institutions based in the country, of which HSBC is the clear leader.

Stuart Gulliver-160x186
Gulliver, HSBC
But, for the 10 months the review lasted, it also served as a useful distraction away from the underwhelming financial performance of HSBC in recent years under its CEO, Stuart Gulliver.

The focus was already starting to shift before HSBC revealed another disappointing set of results in February, both for the full year 2015 and in particular for the fourth quarter of last year.

Many global banks have delivered poor Q4 results in recent weeks. HSBC’s were far removed from the write-down driven disasters revealed by the likes of Deutsche Bank and Credit Suisse.

The surprise in HSBC’s results was that it was so far removed from analysts’ consensus expectations of a profit of close to $2 billion. In fact, HSBC delivered a Q4 loss of more than $800 million.

For all that Gulliver and chairman Douglas Flint spoke encouragingly of "sound progress on our strategic initiatives", the direction of travel on the two key metrics – revenue and costs – was wrong, with the former down 18% on Q4 2014, and the latter up 3%. Higher loan impairment charges, as well as the impact of the UK bank levy, were highlighted as the principal culprits.

For the full year 2015, HSBC managed to pull a 1% increase in pre-tax profit out of the hat, at $18.9 billion. And there were some bright spots in the bank’s core businesses. Risk-weighted assets are falling in line with the plan Gulliver announced last year, down 10% to $1.1 trillion at group level.

Profits in HSBC’s Global Banking & Markets division were up $1 billion to $8.7 billion on increased revenues of 7%. That’s impressive given it is the main area of RWA reduction. GBM accounted for 42% of group profits for the full year, compared to 31% in 2014, and almost overtook commercial banking as the biggest business line in the group. Transaction banking revenues rose 4%.

But two key numbers continued to fall. The first, return on equity, dropped 0.1 percentage points to 7.2%, still far short of the 10% level targeted by Gulliver. The second, HSBC’s advances-to-deposit ratio, also fell from 72.2% to 71.7%. Most banks aim to run a loan-to-deposit ratio of around 100%, and competitors have identified HSBC’s inability to put more of its deposits to work as one of the reason for its failure to move the needle on ROE.

Gulliver has been chief executive of HSBC for five years. The fact that most people, both externally and internally, consider him still to be the right man for the job shows both the high esteem in which he is held, and the scale of the challenge at HSBC.

But, for the first time the tone of the conversation has changed. When he took the CEO role in 2011, most insiders expected Gulliver to be at the helm for at least a decade. Now, even Gulliver has spoken of his term coming to an end in 2017.

That could lead to a new distraction about succession. Flint is expected to step down as chairman this year. Of more concern is that, given Gulliver’s dominance within the group, the roster of internal candidates to replace him is seen as limited.