Commercial banking: HSBC sells up and goes back to its roots

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By:
Louise Bowman
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Geographic retrenchment to focus business; Commercial banking to drive growth

Stuart Gulliver, with more than a year under his belt as chief executive of HSBC, is a man with something to prove.

"The day after our 9.5-hour strategy presentation last year, there was a lot of comment in the press about how we would not achieve anything because of the treacly inertia of HSBC," he said at this year’s strategy presentation in May. "But they should have confidence that this management team has the ability to make change."

Central to the 2011 strategy was the goal of between $2.5 billion and $3.5 billion sustainable cost savings by 2013. Progress looks good – with $2 billion in total annualized savings announced so far. There have been 28 disposals or closures of businesses, which will bring in $5.9 billion and achieve a $55 billion reduction in risk-weighted assets (RWA).

For a bank that was chalking up 10 acquisitions a year from 2000 to 2010, slimming down is a step in the right direction. But in these markets, it is easier to cut than grow.

Credit card sale

The most substantial sale is that of the US credit card business to Capital One for $3.7 billion that was announced last August, closed on May 1 and released $40 billion RWA. There was no cross-selling potential from the Household Financial portfolio – it was sub-prime borrowers using their credit cards to buy petrol and milk.

There is, however, still an urgent need to deal with its other legacy consumer assets in the US – primarily real estate. The portfolio has shrunk from $101 billion in 2008 to $49 billion today, but still has a destabilizing effect on the whole business.

"We were shocked at how fast the share price fell when the third-quarter losses on this portfolio were released," admits Gulliver. "This has a disproportionate impact on our share price and we will use some of the capital savings to tidy this up."

He advocates exploring the full sale of the real estate portfolio to mitigate its impact but hopes to undertake a modest test-case sale of some assets soon.

The rest of the announced disposals are focused on insurance, pension fund management and private equity activities or retail banking closures in non-strategic markets.

HSBC’s two home markets – the UK and Hong Kong – account for 43% of profit before tax (PBT) and it has identified 20 priority markets that together with these two account for 97% of PBT. This is where the focus will be but there is still a lot of fat to cut.

Stuart Gulliver, with more than a year under his belt as chief executive of HSBC
Stuart Gulliver, chief executive of HSBC 
"We have tried to be all things to all people everywhere," says Gulliver. "Our valuation has been affected by questions over synergy and operational efficiency. There is a sense that banks like this are too big to manage – particularly in light of the unfortunate events at JPMorgan. If you have a cohesive set of businesses and geographies, you can scale. If you have multiple activities in multiple geographies, you can’t."

The knife

The knife is primarily being wielded in retail banking. "We have closed retail banking in countries where we have no right to win," explains Gulliver. This includes Poland, Russia, Thailand, Japan and Chile. "We are only a mass market bank in the UK and Hong Kong. It is hard to be a retail bank with two branches like we have in Thailand. We have been in Japan since 1865 and we aren’t going to win but we have had a good crack at it."

He warns not to misinterpret this as a series of full country exits. "We are exiting unprofitable retail and wealth management businesses," he says. "But you don’t need a retail bank to be successful in global banking and markets." These are, of course, the businesses that Gulliver built his career in before taking the top job at HSBC.

Gulliver still faces a tough job to dismantle many of the structural inefficiencies that are the byproduct of the old "country head is king" approach.

In the first quarter this year, the bank had 300,000 full-time equivalent staff in more than 80 countries and it was run as a separate body in each country. There are, for example, 86 different facilities management companies managing its buildings and 12,000 collections staff in multiple centres, rather than just one in each of the three main time zones.

HSBC has now implemented an eight-by-eight management structure, whereby there will be no more than eight layers between Gulliver and frontline staff. Previously there could be as many as 17, with several cases of people reporting to themselves.

By focusing the bank on four key businesses – commercial banking, global banking and markets (GBM), global private banking, and retail banking and wealth management – Gulliver aims to deliver growth from his more streamlined approach. But achieving growth looks to be more difficult that exiting non-core businesses.

The subset of the bank’s activities defined as "growth HSBC" – GBM, growth network and small markets and home markets (UK and HK) – is now delivering a return on RWA of 2.2%, which Gulliver says is equivalent to 12% to 13% return on equity. The remainder – US run-off and legacy GBM assets together with disposals – is not.

Punchy target

In wealth management, the bank had set itself a target of $4 billion additional revenue by 2015. Given that it added just $300 million in 2011, this target looks punchy. "In 2011, there was a 7% increase in wealth-management revenues in a year that was risk off, so that is not too bad," says Gulliver. But it must be a disappointment.

He is hoping that greater integration between commercial banking and GBM will boost the numbers. It’s a goal other universal banks have pursued with mixed results. HSBC has added $500 million in incremental revenues from this integration in 2011 and is looking for more. "We have added another $1 billion to the opportunity internally because the main source of customers for private banking should be commercial banking," says Gulliver.

There is a sense that HSBC is heading back to its roots. "The big business that drives our competitive advantage is commercial banking," emphasizes Gulliver. "Trade finance to SMEs and MMEs is at the heart of what we do. We have no desire to shift GBM to become 80% of PBT like it is at Barclays Capital or Standard Chartered."

And for a bank that spent $46.3 billion on acquisitions in the 10 years to 2010, it has had a drastic change of heart and stopped buying. "It is much better to grow organically than to go out and buy another business that our track record would suggest we are not quite as good at running as our own," says Gulliver.