Europe’s biggest bank, HSBC, said on Tuesday it would cut up to 35,000 jobs, around 15% of its workforce, over the next three years as it sets out a sweeping plan to boost profits and growth by shrinking some of its businesses in Europe and the United States and switching resources to thriving markets in Asia and the Middle East.
The Asia-focused bank took a $7.3 billion charge against its fourth-quarter earnings, partly to cover restructuring costs. It also said its performance in 2020 may be affected by the coronavirus outbreak which was causing economic disruption in Hong Kong and mainland China, likely leading to higher provisions for bad debts.
The shakeup, which interim chief executive Noel Quinn called “one of the deepest restructuring and simplification programs in our history,” is aimed at remedying years of what the bank sees as unacceptably poor performance in parts of the group, mainly in Europe and the U.S. The new focus is to concentrate more on growth in its profitable Asian markets. But there’s risk there too. The coronavirus outbreak has turned the region from high-growth to highly unstable.
Nevertheless, the bank aims to reduce risk-weighted assets in under-performing businesses by more than $100 billion by the end of 2022 and to reinvest those assets elsewhere. That means HSBC’s businesses in Europe, excluding its U.K. retail bank, and in the United States will shrink.
While the bank had not set a target for reducing staff, Quinn told reporters on a call: “We would expect our headcount to decrease from the current level of 235,000 to be closer to 200,000 in 2022.” He pointed out though that in an average year, the bank lost 25,000 people through natural attrition.
The job cuts are expected to focus on Europe and the United States.
Negative rates, slowing economies
While U.S. banking titans have bounced back strongly from the financial crisis, with JPMorgan Chase last month reporting record 2019 net income of $36.4 billion, European-based banks continue to struggle because of weak economies, low or negative interest rates and in some cases bad loans left over from the financial crisis.
European banks, which once had global ambitions, are pulling back in areas like investment banking, leaving U.S. banks to dominate. Germany’s biggest bank Deutsche Bank said last year it would shed around 18,000 jobs, nearly a quarter of its workforce, as it pulls out of global equities trading.
For HSBC, which is based in London, Brexit, U.S.-China trade tensions, Hong Kong protests and now the coronavirus outbreak in China are the biggest concerns.
Chief Financial Officer Ewen Stevenson said the bank expected to take additional loan loss provisions in the current quarter as a result of the virus outbreak and the weakened outlook for the Hong Kong economy. “It’s really a call on how long does it take to contain the virus,” he said.
The bank took a goodwill impairment of $7.3 billion, reflecting lower long-term economic growth rate assumptions and the planned restructuring of its investment banking arm, pushing the bank to a fourth-quarter pre-tax loss of $3.9 billion.
The bank said it had expected restructuring costs of around $6 billion and asset disposal costs of around $1.2 billion between now and 2022, with the majority of restructuring costs incurred in 2020 and 2021.
Reported pre-tax profit for the full year fell by 33% from a year ago to $13.3 billion, well below the $20.03 billion consensus of analysts’ estimates compiled by the bank.
Excluding the impairment, revenue for the year rose nearly 6% to $55.4 billion and pre-tax profit rose 5% to $22.2 billion, both better than analysts expected.
HSBC shares slumped by as much as 5% as investors digested the torrent of bad news. Nonetheless, analysts at Jefferies, which has a ‘buy’ rating on the stock, said in a note shared with Fortune that HSBC’s plan “looks ambitious and very credible.” While the $6 billion restructuring charge was higher than they expected, they said the plan could put HSBC on track for a 10% upgrade to 2022 earnings.
CEO in limbo, buy-backs on hold
Unusually, the restructuring is being led by a CEO who is only filling the job on an interim basis, and that has raised concerns among some investors over whether Quinn has the authority to push through the changes, the Financial Times reported earlier this month. Quinn took over as the fill-in chief executive last August when predecessor John Flint was ousted after just 18 months in the job. If the board opts for an external candidate rather than confirming Quinn in the post, it could be difficult for the new boss to take over the plan half-way through, market observers note.
Chairman Mark Tucker stressed on the call that the board stood squarely behind the restructuring and said the plan, announced last August, to appoint a new CEO within 6-12 months, remained on track.
HSBC said it would suspend share buybacks for 2020 and 2021, but said it intended to keep its dividend stable and to keep its Tier 1 capital ratio, a key measure of financial strength, in the 14-15% range.
The bank said it planned to reduce risk-weighted assets by around 35% by the end of 2022 in its loss-making European operations. It would do this partly by exiting capital-intensive product lines—including long-term derivative market-making linked to G10 currencies in the U.K.
Reducing risk-weighted assets means a bank has to hold less capital, which can be deployed elsewhere.
The bank said it planned to focus its U.K. investment banking activities on supporting U.K. mid-market clients and international corporate clients through its London hub. It said it would reduce its sales and trading and equity research in Europe and move its structured products capabilities from the U.K. to Asia.
The bank is carrying out a strategic review of its French retail business.
The restructuring involves big changes for HSBC’s U.S. bank.
HSBC aims to reduce its U.S. branch network by around 30% from the current 224 branches and consolidate back-office functions to simplify the business and reduce operating expenses by 10% to 15%.
The U.S. branch cuts will be more heavily weighted towards the East Coast, with a reduction in the network there of around 50%, partly offset by an expansion of HSBC’s branch network on the West Coast “where we see a strong Asian, international community that will value the proposition,” Quinn said.
U.S. fixed-income activities would be consolidated in London and risk-weighted assets associated with its U.S. Global Markets business would be cut by around 45%.
In its investment banking arm, HSBC said it planned to accelerate investments in Asia and the Middle East and shift more resources to those regions, while maintaining a global investment banking hub in London.
The group’s structure will be simplified, with the Retail Banking and Wealth Management and Global Private Banking divisions merged into a single division and a reduction from seven to four in the number of regions reporting at Group Executive level .
HSBC is ranked ninth-biggest bank in the world by trade publication The Banker and has a market capitalization of around $150 billion.
HSBC opened for business in Hong Kong in 1865, helping to finance trade between Europe and Asia. HSBC, short for Hongkong and Shanghai Banking Corporation, moved to London in 1993 when it bought Midland Bank.
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