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HSBC sells up in Brazil as compliance costs crimp global ambitions

HSBC Holdings Plc Headquarters And Bank Branches As Tax Scandal Threatens Chairman Douglas FlintHSBC Holdings Plc Headquarters And Bank Branches As Tax Scandal Threatens Chairman Douglas Flint
The headquarters of HSBC Holdings in the Canary Wharf business, financial and shopping district in London.Photograph by Simon Dawson — Bloomberg via Getty Images

HSBC Plc (HSBC) said Monday it’s selling its Brazilian subsidiary in a landmark retreat from its strategy of being ‘the world’s local bank’.

The move is also another vote of no-confidence in one of the world’s biggest emerging economies, a country that was supposed to become an engine of global growth before a downturn in world demand for its biggest commodity exports exposed the scale of the country’s economic mismanagement during the boom years. The move will leave Citigroup Inc. (C) and Spain’s Santander (BSBR) as the only two foreign banks with a retail banking subsidiary in Brazil.

Banco Bradesco, a local financial services group. will buy the unit for $5.19 billion in cash. The deal will make it Brazil’s third-largest bank by total assets and will cement its position as the fourth-largest bank in terms of loans and deposits.

It will also strengthen HSBC’s balance sheet as it grapples with a host of conduct-related charges and heavier capital requirements due to its being one of the world’s largest and most complex financial organizations. HSBC has hired more than 2,200 people for compliance operations alone in the first six months.

As a response to increased regulatory costs, HSBC is trying to become simpler and more transparent, aiming to shrink its risk-adjusted assets by 25%. The bank said earlier this year it will exit its under-performing operations in Turkey and chairman Douglas Flint hinted in a news release Monday that it may also shed more of its smaller operations due to cost issues.

HSBC announced the sale as it posted a modest 2% increase in underlying pretax profits in the first half of the year to $13.0 billion. Operating costs (up 7%) continued to outpace revenue gains (up 2%), largely because of “regulatory problems and compliance costs”. Despite that, the bottom line got a boost from a fall in provisions against bad loans to $1.44 billion from $1.84 billion a year earlier. Reported pretax profit was up 10%, beating expectations.

Retrenchment is exposing how much HSBC now depends on Asia, which has long been the most dynamic region in the world economy but which is now also slowing as China struggles with the problems of restructuring its economy. Over 60% of group profits came from Asia in the first half of the year. The bank said it’s expecting action from the Chinese central bank to stabilize the economy in the second half after a well-documented slowdown, but it made no more specific reference to the ongoing carnage in China’s stock market.