Noel Quinn reveals HSBC considered exit from US retail banking

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By:
Peter Lee
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The interim chief executive unveils a radical three-year restructuring plan that makes abundant strategic sense but carries plenty of execution risk.

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The most surprising moment in HSBC’s announcement today of what interim chief executive Noel Quinn describes as “one of the deepest restructuring and simplification programmes in our history” came at the very start. 

It is usual for any bank’s annual results to be delivered by the chief executive and the chief financial officer. But chairman Mark Tucker took to the stage to outline the board’s first priority, above that of improving returns, which is still to select a new permanent chief executive. 

“The board has embarked on a thorough and rigorous process to identify a new chief executive,” Tucker confirmed. 

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Mark Tucker

This has been underway since August last year when HSBC promised to announce the result within six to 12 months. Tucker says it will stick to that timetable. But it looks like the new person could be appointed towards the end of it.

Meanwhile, the bank is now cutting $100 billion of risk-weighted assets (RWAs) from the US and Europe, seeking to re-invest them mainly in growth in Asia, profoundly reshaping its entire US business, merging the separate middle and back offices of its commercial bank and its global banking and markets business, reorganizing divisions, merging the private bank into retail banking and wealth management, cutting $4.5 billion of annual costs – all while grappling with the unknowable impact of coronavirus on its most important market in Hong Kong.

“It is to Noel’s credit that he has grasped the task with energy and resolve,” says Tucker.

Indeed, it is.

At heart, all bank reorganizations are simple and similar. 

Like everyone else, HSBC wants to take capital from low-return businesses with high cost-to-income ratios that consume lots of the precious stuff and reinvest in higher-return businesses with lower cost-to-income ratios that are less risky and offer better growth potential.

To sustain the dividend that is the chief reason to hold the stock, HSBC needs to deliver a return on tangible common equity of 11%. It set out a plan to achieve this 18 months ago, but the interest rate assumptions underpinning that have proved illusory. Rates are once again falling around the world. 

For 2019, HSBC delivered a return on tangible equity (RoTE) of 8.4%, down from 8.6% in 2018. 

It has been progressing slowly and, unfortunately, in the wrong direction. 

It needs a new plan. 

Renewed focus

The bank will renew its focus on wealth management in Asia, while combining the global private bank it has been trying to grow in recent years with the group’s much bigger retail banking and wealth management business into a new wealth and personal banking division.

HSBC is scaling back its markets business, especially RWA-intensive business lines with low returns, and re-investing in its transaction bank. It will, for example, exit market making in long-term derivatives on G10 rates, cut back cash equity sales and research in Europe and move structured products from London to Asia. 

It will spend to consolidate its position as a top-three investment bank in Asia and the Middle East, but its global ambitions are limited to being a top transaction services bank and a leading financing house.

The restructuring comes at a cost that will be spread over the next three years, and HSBC hopes to achieve its 11% RoTE target by 2022 with further revenue benefits by then baked in that will accrue in the years after.

Promises, promises.

Analysts worry that it may cut RWAs – and lose the associated revenues – faster than it can re-invest them. 

Fine, the bank has suspended share buybacks for the next two years and will maintain the dividend. In the first two years of restructuring, it will likely accrete already strong capital – for now at 14.7% common equity tier-1, perhaps rising closer to 15% – before eventually heading back to 14% in recognition of a less risky business mix. 

Could the dividend be in question? 

Medium-term benefits

Quinn explains that the cost-cutting programme is partly designed to mitigate that exact risk of RWA disposals and associated revenue declines running ahead of re-investment. But the medium-term benefit of cutting RWAs yielding 2% to 3% and reinvesting in RWAs yielding 5% to 6% is obvious.

HSBC will cut 45% of RWAs from the US global banking and markets business. Could the bank have been more radical? The US has long been a drag on group returns. Why not go further?

Quinn says: “We considered a number of actions with respect to the US retail bank, including exiting completely. But it is an important source of dollar liquidity and funding for the group. We think it is important to have a stable balance sheet in the US to support our leadership in international transaction banking.” 

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Noel Quinn

Quinn points out that the global transaction banking business is 70% denominated in US dollars: “We cannot put that business at risk by being sub-scale in the US.”

Previously, HSBC presented itself as a full-service retail bank on the east coast of the US and as a more focused bank serving affluent, international clients on the west coast. 

Quinn says: “You cannot run both strategies.”

HSBC will turn to the west coast model. 

“We think international and affluent customers in the US is a big enough market segment, at 40 million people, to be quite meaningful,” he says. “That’s bigger than most countries.” 

Quinn says that as well as supporting its signature global transaction banking businesses, the US operation can deliver at least acceptable returns on a standalone basis. 


We think it is important to have a stable balance sheet in the US to support our leadership in international transaction banking 
 - Noel Quinn

“This will be a fundamentally different US business. And the big difference with previous US turnaround plans is that all these changes are within our control. We are not dependent on market conditions.”

A bullish Quinn points to the revival of the bank’s Mexican business: “Many people were telling us five years ago we could not turn Mexico around and were advising us to sell it. That business is generating a RoTE today of 15%, with strong potential for further growth.”

Structural issues

While the business exits will attract the headlines, the internal restructuring of HSBC also deserves attention. 

The group’s federal structure – standalone balance sheets of separately capitalized banks reporting to a central holding company – served it well in the years after the crisis, when national regulators wanted the reassurance of segregated capital and funding. But, having set up a ring-fenced bank in one of its biggest markets, the UK, HSBC now wants to re-examine a group structure that embeds complexity.

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Ewen Stevenson

“We have two big structural issues,” says Ewen Stevenson, chief financial officer, who confidently took most of the questions on the analyst call. “No single balance sheet accounts for more than 30% of the group, whereas for most US banks the largest single balance sheet is rarely less than 70% of the group. That brings enormous capital inefficiency. In addition, we still have a significant level of peak-to-trough stress volatility within the group.”

Partly to address that, HSBC will reduce principal investing in the non-ring-fenced bank in Europe, which its own internal stress testing shows can bring a considerable uplift in risk exposure. Reducing that may help it to manage to a lower CET1 ratio over the medium term.

Stevenson had other key points to make. The headline is for 35,000 job losses. He points out that the bank runs at a level of natural attrition of 25,000 people a year, so 75,000 over the three-year restructuring plan. 


We have two big structural issues. No single balance sheet accounts for more than 30% of the group. In addition, we still have a significant level of peak-to-trough stress volatility 
 - Ewen Stevenson

With many jobs to go in the combined middle and back offices of the commercial bank and GBM and the newly merged wealth and personal finance division, HSBC might keep a lid on severance costs.

But a lot of the questions were on coronavirus, which did not hit the 2019 numbers. 

The unknowable question is how long it may take to contain. The first hit to HSBC revenue will come in first-quarter 2020 numbers. 

“The revenue impact will become progressively more acute if it continues to spread beyond the next six weeks,” says Stevenson, “when we would then also see ratings migration and RWA uplifts. The first quarter impact will be in the range of $200 million to $500 million. The most extreme downside if the virus continues in the second half of the year would be $600 million of loan loss provisions.”

It probably makes sense over the medium term for HSBC to double down in Asia, where its brand is so strong and where it already makes most of its profits. But it is redeploying capital into the region hardest hit by coronavirus and where the short-term outlook is most uncertain.

Perhaps more worrying for investors, an interim CEO has launched a big restructuring effort, the latest in a string of these at HSBC, which an outsider may yet be asked to come in and complete.