HSBC embarks on massive overhaul after profit misses estimates

Hong Kong: HSBC Holdings Plc is embarking on its biggest overhaul in years after profit missed estimates, warning that it will take significant write-downs in the coming year as it pares back under-performing areas.

The bank, which makes almost 90 per cent of its profits in Asia, said fresh write-offs are likely to cover its European businesses and technology spending, as HSBC also walked away from a key profitability target. For acting Chief Executive Officer Noel Quinn, who took over in August following the ouster of John Flint, the review is his chance to put his stamp on the approximately 240,000 strong workforce where he has already started to make cuts at HSBC’s investment bank.

“Our previous plans are no longer sufficient to improve performance for these businesses, given the softer outlook for revenue growth,” Quinn said in a statement. “We are therefore accelerating plans to remodel them, and move capital into higher growth and return opportunities.”

Any write-down could wipe out much of the investment made during Flint’s tenure when the bank said it would spend about $17 billion updating its technology platforms and expanding its business in mainland China.

“You are likely to see us needing to revisit a few things,” Chief Financial Officer Ewen Stevenson said on a call with Bloomberg. “Obviously we are carrying a decent amount of goodwill against parts of the European business, in particular,” he said. “There may in one or two areas be some investment spent, for example in IT, that we need to write off.”

HSBC’s pretax profit fell 12 per cent to $5.3 billion for the third quarter. It also dumped a target for return on tangible equity, a key measure of profitability, of more than 11 per cent in 2020, even as it credited operations in Asia with holding up despite challenges in the region. The stock slumped in Hong Kong and dropped as much as 3.1 per cent in London morning trade.

Global banking and markets, which houses its investment banking operations, posted a 30 per cent decline in pretax profit for the quarter to $1.24 billion, while retail banking and wealth management saw a 18 per cent drop to $1.69 billion.

“The good news is that this performance looks set to finally goad the management into taking some of the actions to address under-performing businesses that we have been awaiting for,” wrote Edward Firth, banks analyst at Keefe Bruyette & Woods.

Quinn’s retrenchment

Quinn, who’s signalled he wants the top job on a permanent basis, has been developing plans for a series of retrenchments. The bank may partially exit stock trading in some developed Western markets, and will attempt to sell its French retail bank, a move that could remove as many as 8,000 staff from the payroll, people familiar with the matter have said.

“Having a strong presence in both continental Europe and the US is important to our bank and we will retain a presence in both of those markets — but we need to reshape that presence,” Quinn said in an interview with Bloomberg. He declined to provide details.

HSBC’s third-quarter adjusted profit trailed a company-compiled analyst consensus of $5.7 billion. Here are some other highlights from the earnings report:

Hong Kong fears

HSBC, which is heavily exposed to turbulence in the region, said earnings there have been resilient. More than four months of street protests in Hong Kong have unnerved some customers while a confidence-sapping trade war with the US has dragged on China’s economic growth.

In Hong Kong — a market that’s a key driver of HSBC’s earnings — adjusted pretax profit inched up 1 per cent in the quarter to $3 billion. That may provide some relief for investors who have feared the unrest would eat into business there. However, the bank also flagged a credit charge of $90 million to reflect a deteriorating economic outlook in the city.

Simplify, execute

Comments from Hong Kong officials and economic indicators released in the past weeks paint a picture of a rapidly worsening situation in the Chinese territory. Few global companies have tied their fortunes as much to Hong Kong as HSBC, which wants to capitalise on closer economic ties with mainland China.

The emphasis on cost cuts has been reinforced by Chairman Mark Tucker, who recently told some employees the bank needs to improve its return on capital, according to an internal briefing note seen by Bloomberg. In a recent meeting, he highlighted the need for more cuts, according to the briefing note.