CHANGE IS IN the air at HSBC’s shiny new group head office in Canary Wharf. The Norman Foster designed building is itself a departure from the norm. It might be a conservative HSBC-grey colour inside and out, but it is sufficiently capacious to allow staff from the bank’s many different divisions in London to be centralized in one location for the first time. It’s also where HSBC is orchestrating a new push into global investment banking.
It’s not the first time that this venerable global corporate and retail banking group has tried to address its long-standing weakness in this area but this latest effort seems more determined and better planned. Stephen Green, the ex-investment banking head, is now chief executive of the group, a strategic plan is in place to integrate the corporate and investment bank and Stuart Gulliver and John Studzinski, the two co-heads Green has appointed to take over from him, have the ability to make things happen – and fast.
It is a significant departure from HSBC’s two-centuries-old organizational principles of regionalism and cautious conservatism, frugality and steady organic growth. But whether it can be radical enough to create a successful investment bank while still adhering to these wider group principles is yet to be tested.
HSBC’s strength as a global corporate bank has never been successfully translated into investment banking deal flow. It is strongest in fixed income, particularly in corporate origination in Asia, France and in sterling overall, where it ranks as number three, according to Dealogic bookrunner data for the year to September. But in euros overall, the bank is only ranked eleventh by Dealogic over the same period and its showing in dollars is even more paltry at thirteenth. In M&A, it is placed fourteenth year to date in Dealogic’s global adviser table for completed deals. In equities, HSBC is at twenty-third in Dealogic’s rankings of all equity issues, year to date.
“When you talk to HSBC’s competitors in investment banking about who they fear in their markets, I don’t think they would put it in there,” says one analyst.
A big new effort In the US, HSBC has made very little impact, even compared with competitors such as Barclays Capital, although profits were up strongly in the first half of the year. Only in Asia, most notably Hong Kong, has it traditionally won plaudits for its strength in treasury, foreign exchange and risk management. And in M&A and equities even here it punches well below its weight.
The self-proclaimed world’s local bank certainly has considerable expertise in deal-making in Asia and a strong corporate banking presence worldwide but it wasn’t going to be able to build global strength in investment banking without a big new effort. So in May 2002, HSBC chairman Sir John Bond signed up to the strategic plan fully to integrate HSBC’s investment banking and corporate banking operations.
Planning is one thing, execution another. So it was only when Stuart Gulliver, HSBC’s head of treasury and capital markets for Asia-Pacific, was posted back to London in March for the first time since 1987, five months into his new role as head of Global Markets, that observers sat up and began to take notice. Here was the man who had turned around HSBC’s fixed-income and forex business in Asia over the previous nine years, along with eight or nine other key individuals. When Gulliver brought some of them back to London, such as Mark Bucknall, now head of debt finance and advisory, and Michael Powell, now head of European global markets, it seemed clear he would be shaking things up in London in an effort to achieve the same advances for the bank’s fixed-income and forex businesses on a global scale.
Making a single manager responsible for HSBC’s Markets business globally, including trading and sales of forex, fixed income, derivatives, syndicated loans, structured credit, precious metals, futures broking and balance sheet management, was revolutionary. Until recently these businesses were run independently in Asia, Europe and the US and there was no global platform, not even a single derivatives book. “We often felt that we were competing with each other, rather than with the marketplace,” says Gulliver. “There’s a distinct client group, particularly reserve managers and hedge funds, that require to be serviced 24 hours a day and if the three different areas have different goals and targets, that becomes difficult to achieve.”
To break through to the next level of the debt capital markets business, the bank also needed a better league table showing both in euros and dollars, which would be a big financial burden to some of the regional businesses. “Some of the big volume players build league table presence at very generous rates for the issuers so there was a question of who would pay the price of it. The cost of doing tons of US agency business, for example, would fall on the US operation,” says Gulliver.
The result was the creation last November of a Global Markets business with a global P&L. “If you have a global markets structure you also have in mind your vision of how good you have to be and you can raise the bar to the level of the best,” says Gulliver. “The best at the moment is still our Asian operation. That’s why I’ve brought a lot of individuals from our Asian operations to lift the European one.”
Tradition and innovation Giving Gulliver this job fits with HSBC’s reputation for promoting from within. Not only is he an amiable man and a driven manager who gets results, he has worked for HSBC ever since graduating in law from Worcester College, Oxford, and has clocked up 23 years’ continuous service in various senior roles. He jokes that he hasn’t put much in his desk drawers just in case the job doesn’t pan out, but in reality he has the confidence of someone who is well established in his role and who has long commanded the respect of his colleagues.
It was John Studzinski’s arrival at HSBC that really took the market by surprise. Bond has never sanctioned big egos or big pay packages in HSBC’s investment banking business or indeed anywhere else in the group. The bank famously enforced a no-bonus policy in 2002, triggering the defection of several corporate finance staff and equity analysts. It repeated the strategy, in part, this year. Yet here was a star Wall Street salesman, who had just left his job as deputy chairman of Morgan Stanley International, swanning into one of the top two investment banking jobs at HSBC.
It was a signal that HSBC was prepared to look beyond its own ranks and pay big in investment banking for someone with calibre and a fat contacts book. Studzinski, who is famed for his work in building up Morgan Stanley’s European investment banking franchise, filled the bill.
When he and Gulliver were appointed co-heads of global corporate, investment banking and markets (CIBM) in June, after Green took Keith Whitson’s job as chief executive, they presented a powerful combination. Gulliver would add equity trading and sales to his existing markets responsibilities; Studzinski became responsible for global relationship management, corporate banking, corporate finance and advisory and origination in debt capital markets, equity capital markets, structured, project and export finance.
The two men’s experience is complementary. Gulliver is the long-term HSBC man who has spent most of his career in Asia in fixed income and trading, Studzinski had the background in corporate finance and sales, was new to the firm and had spent most of his time in Europe. “Studs and I work well together because we don’t overlap day to day. There’s a very clear demarcation,” says Gulliver. “If we were both traders, for example, there would be an issue of who was the better one.”
Their differing areas of experience meant that they hadn’t come across each other before. Gulliver says the partnership was an “arranged marriage” by Bond. Is it a good match? “I think it’s working well,” says Gulliver. “We’re both impatient for change, demanding of ourselves and the people who work for us.” Studzinski, for his part, says that the two get on “like a house on fire” and agrees that they are both “very much get-on-with-it sort of people”.
Certainly they are making waves in the CIBM group. The global markets reorganization begun by Gulliver last November is well under way. He has been addressing the previous poor coordination between head office and its investment banks in France and Germany, Crédit Commercial de France and Trinkaus & Burkhardt, by running the three as one operation. For example, he has put HSBC’s euro liquid platform and euro derivatives platform in Paris and transferred key personnel. “I’ve mixed some of the people up to break down any barriers that might exist. Part of this initiative is to pull these together and there is clear evidence of that happening.”
The product offering has been broadened in areas such as structured finance and derivatives and Gulliver has plans to build out further the financial institutions business, securitization and structured credit, as well as corporate bonds, credit derivatives and mortgage-backed securities in the US. The north American business is crucial. “Our aim for the north American part of the business is to contribute a much bigger share of profits than it does now,” says Gulliver. “I think it’s impossible to have a credible markets business without a strong US presence. It is the biggest source of investable funds in the world, the biggest economy and the biggest military and political power.”
The reorganization has already reaped dividends. According to Dealogic’s bookrunner ranking for the year to September, it has increased its showing in dollars from sixteenth to thirteenth place and in euros from seventeenth to eleventh place over the same period in 2002.
Although most debt capital markets players had a strong first half in 2003 as a result of falling interest rates, HSBC also built its market share and revenue through offering a wider range of products, particularly in such areas as derivatives trading. Although it is strong in currency trading, HSBC has always had a cautious approach to proprietary trading in other areas, but this is something that’s increasing.
Since June, Studzinski has also started to shake up HSBC’s product offering. Two-thirds of his time in his new job is spent with existing clients, which Studzinski says are already in place as a result of the bank’s lending business, its presence in so many countries, its reputation for client service, and the size and strength of the organization. “In fact our clients actively want to do more business with HSBC and what I’m finding is that what we really need is a broader platform of products and services for our existing client base. And that’s across the board, in fixed income and equities as well as M&A.” He and Gulliver recently reviewed the equity-linked business and how they can build a presence in that market. As a result, they have integrated it into the markets group.
Given Studzinski’s advisory background, the progress of HSBC’s M&A business is one thing that observers will be following closely. In the same way that fixed income was organized as a collection of local businesses around the world, HSBC’s advisory business is organized as a series of boutiques from Paris to Bombay to Beijing. “The idea of global management is still very new with what Stuart has done with global markets as the template. I’m trying to take it to the next stage,” says Studzinski.
The first step to building a global advisory business is to get the M&A teams to share their expertise. “We have strong regional expertise but we don’t use that as a cross-marketing tool – for example, taking our Bombay team and having them spend a week in Paris, or getting our Chinese investment bankers over to London,” he says.
HSBC’s fees from higher-margin advisory business are growing, though from a small base. It has won important mandates this year, including advice to retailer Safeway, construction company Taylor Woodrow and advertising agency WPP. “It’s interesting, HSBC announces that it’s an adviser or co-adviser in two or three deals every week, even though they may not be the blockbuster deals that will get the lead story in the Wall Street Journal,” says Studzinski.
Studzinski cites the example of Taylor Woodrow, where the bank is acting at corporate broker, co-M&A adviser and is also providing the financing. “That’s three income streams there. Clearly our aspiration today is not to compete for home runs in this business with Goldman Sachs and Morgan Stanley. But we have a global network, we understand local buyers and global buyers, we’re very good at process, we have good-sized teams around the world, so clearly we will be able to focus on things like divestitures, debt restructuring and debt advisory and be very good at it.” He cites the example of UK production technology group Invensys, which HSBC recently advised in all three capacities.
Equities under review
The latest announcement by Studzinski and Gulliver, last month, was that they had commissioned a review of the bank’s cash equities business, to be conducted by Mark Ramsey, former head of the convertibles and exchangeables business and new acting global head of equities. The previous head of equities, Krishna Patel, will now head investment banking in non-EU Europe.
The chances are that equities will go the same way as the equity-linked business. “It will probably take two or three months,” says Gulliver, “and we expect to move towards a complete integration of the equities business within Global Markets and move the business away from being based solely on agency broking commissions, as the old James Capel was, to also having a sales and trading component.”
The shake-up is quite radical, as HSBC’s equities business has to date been something of a non-event. It has little distribution capacity. Its research offering has been plagued by defections and it has never been highly acclaimed. This review, at least, should partly address criticism that HSBC has never exploited the few investment banking acquisitions it has made, including London stockbroker James Capel.
Gulliver concedes that the James Capel business model has been a “very skinny living, particularly when it’s supporting the full research costs”. The plan is to generate equities revenue in all the areas in which the bank has been absent to date. “HSBC’s strength is that it has a massive balance sheet and that the markets business has a significant appetite for market risk. Therefore we will be a market maker in stock, trade convertibles, exchangeables and equity derivatives and build our stock lending and borrowing business up.”
The move follows similar initiatives at Morgan Stanley and Dresdner Kleinwort Wasserstein to integrate their equity and fixed-income platforms, although Gulliver says the integration will have its limits. Equities are likely to come under the management of Gulliver and the markets group, with Ramsey eventually ceding his new position. “It won’t mean that fixed-income sales people will start selling to equity investors, but it will mean that cash equities or convertibles are another asset class that we trade and sell on the markets floor as we do with mortgage bonds and interest-rate derivatives, for example.”
On Studzinski’s side, equities research coverage will probably stop being company-specific and start being sector-based, part of a wider drive in equities and M&A that will look at organising the bank’s offering around six to eight key sectors. “To be good at equities you need good trade execution, which we have, good relationship management, which we have, and good research. Are we going to be a top-three research house? I would say no. Will we continue to produce good research? Yes.”
Studzinski is realistic about what can be achieved in equities origination, although his plans to improve the showing in equity-linked are already reaping dividends, with HSBC bookrunning EMI’s $243 million convertible in September, its first European bookrunner mandate for 18 months. “Are we going to have the most robust global IPO pipeline in the short to medium term? Probably not. But we’ve been very active as co-leads and co-managers and I think over time this will improve.”
The reorganization of CIBM has resulted in some significant staffing changes, which will continue. According to Gulliver, incremental hiring could be about 50. However, staff turnover is a lot higher than the net numbers reveal as the bank upgrades existing staff. A lot have been let go. The most dramatic of Gulliver’s changes has been in the New York global markets business. “We have rebuilt our government and corporate bond trading and FX business,” he says. “It basically meant parting company with about 60 people and hiring 45.”
Bucknall has also been hiring in the markets group in London and since Studzinski’s arrival there is also thought to have been a rejigging of investment banking, which has led to redundancies. HSBC would not comment on that.
The plan is to do the same with the 1,450 employed globally in the institutional equities business as a result of the equity review. “I think that the total headcount in the business will decline. We’re not going to cut another huge amount because headcount is already down about 1,000 from the peak of 2001 and 2002,” says Gulliver. “But we will require different types of people – with more specialist sales rather than generalists, and an upgrading of sales traders in certain instances, with a much greater emphasis on hedge funds – so the actual turnover could be greater.”
Gulliver says a lot of the hires in New York are from Morgan Stanley, Merrill Lynch and Goldman Sachs. “One of the beauties of what we’re doing is that a lot of firms are top heavy on very talented people,” he says. “People are getting fed up being co-head or tri-head and are looking for the opportunity to move.”
Recruiters believe the hiring of Studzinski is an indication of a shift away from the HSBC traditions of promoting internally and offering small pay packages. More and more senior people such as Bucknall and Rupert Faure Walker, managing director of the corporate finance and advisory group, are recruiting high-calibre people from outside the bank to inject new life into the business. “These people are convincing the bank that there’s another life for HSBC outside the Scottish mafia and convincing candidates that they are prepared to pay,” says a recruiter.
Indeed bonus payments were up in the first half for certain parts of the markets group, though some recruiters say the perception that HSBC is a measly payer is hard to erase, and could be an obstacle to attracting more external talent.
Aside from Studzinski, there have been some impressive external hires. For example, Matt Desselberger joined as global head of currency options in London from Deutsche Bank and Ben Welsh joined as head of FX trading and sales in New York from Goldman Sachs.
However, following Gulliver’s promotion last November, it’s also true that a lot of senior positions have been filled by insiders. Tony Rademeyer, head of treasury and capital markets in Europe, moved to Hong Kong to become head of CIBM for Asia-Pacific. Brian Robertson became head of CIBM for North America, moving from Hong Kong, where he headed corporate and institutional banking for Asia.
Gulliver says that the programme of grooming young talent within the firm through the international manager programme is still crucial, although he suggests that these days IMs should stay in the CIBM business to allow them to develop expertise. A product of this system himself, he says the CIBM business needs an international management cadre that can be groomed for leadership, but that “this is not exclusive”.
HSBC is changing, but is not going to abandon traditional values. And the key proponents of change realize that it has to be taken steadily. “John Bond and Stephen Green have not put a gun to my head and Stuart’s and said you must transform the investment banking and securities business within 24 months,” says Studzinski. “John’s vision is to create a relationship-oriented investment bank that serves global clients, but not one that is all things to all people. We want to provide high content to our clients around the world, but not in a way that compromises the HSBC character. We don’t want to become overtly transactional like some of our competitors. I’m working on maintaining that fine balance.”
The changes that have been implemented so far are making a difference. One analyst says: “Coordination among managers is substantially improving, after a situation a few months ago when no-one seemed to be talking to anyone. In all honesty, they seem to feel they are getting somewhere.” And Gulliver insists that with Green as new chief executive of the group, committed to the CIBM business, and Green, Studzinski and himself all members of the group executive committee, the business really does have a seat at the table.
Limitations of organic growth
But establishing momentum through steady, organic growth alone will be tricky, particularly when the bank is not planning significant net hires. There are no obvious targets either. Pre-tax profits for CIBM in the first half of 2003 were up to $2.23 billion from $2.07 billion over the same period the previous year, although the percentage CIBM contributed to the group was down at 32.5% from 37.9%. The powers that be are keeping CIBM’s target contribution close to their chests.
Right now HSBC has the opportunity to make a big push and commit cash to its project, armed as it is with a low cost base and strong balance sheet while other investment banks have been retrenching. Competing for staff and equity and M&A deal flow with Goldman Sachs and Morgan Stanley could be more difficult if the upturn persists. “An organic growth strategy is especially difficult if they want to have global presence,” says an analyst. “If they really wanted to be a big player, you would think they would have acquired something. After all, they are capable of making big, successful acquisitions in other areas – Household has shown that.”
But acquiring an investment banking business of any scale is something that the management has repeatedly said it does not want to do. Rumours in the mid-1990s that HSBC might buy PaineWebber or DLJ proved unfounded. Speculation that there might be a merger with Merrill Lynch following the two banks’ 2002 online banking and broking joint venture also came to nothing.
The $13.6 billion acquisition of US consumer finance company Household International aside, risk-taking and flashy gestures are not the HSBC way. To succeed in investment banking it might have to abandon more of its traditional values than it can accept. “You only have to compare HSBC with Citibank to see that it could run a successful investment bank. But HSBC’s situation is similar to what happened at ING – there was a culture clash between the conservative instinct of senior management and the desire to achieve in investment banking, so they never really made it,” says one analyst. “A conservative stance to remuneration, for example, is sensible from the overall group’s point of view. The trouble is, if you’re going to be big in investment banking you have to stomach some things that come with it.”
If the bank cannot stomach a big investment, would it not be more sensible to focus on expanding in global fixed-income, as Barclays Capital has so successfully done, and leaving the equities and advisory side? After all, these parts of the business combined account for just 6% of CIBM profits in 2002. It would take a lot of organic growth for them to establish any significance. The same applies to its very small US business. There it has even less equities presence, apart from European and Asian equity sales and its equity-linked business, and no plans to develop one.
Gulliver warns outsiders not to mistake the models the group intends to follow. “A lot of people assume we want to model our European business on Deutsche Bank or Barclays, but we don’t want to be another Barclays. What I want to do is implement HSBC’s Asian model in Europe.”
HSBC wants change but it also wants to hang on to its old self. As one outsider notes, it doesn’t have the feel or buzz of an investment bank. “When you walk into the London reception, it still feels a lot like Midland Bank.” It’s too early to judge the integration initiative. The strategic plan was only adopted in May 2002, the global markets business is less than a year old and Gulliver and Studzinski have only been co-heads for a few months. The ingrained HSBC culture, however, is unlikely to change in a hurry. If its investment banking efforts are to succeed, it will have to be against a backdrop of institutional grey.
