LONDON (Alliance News) - HSBC Holdings PLC Tuesday said it will take action to save billions of dollars in costs by 2017, including cutting about 10% of its workforce, building on the costs Chief Executive Stuart Gulliver has already slashed from the group's annual bill, while the group is also looking to cut its investment banking division as it aims to bolster returns.
The London-based banking group said it wants to save a further USD4.5 billion to USD5.0 billion on an annual basis by 2017, with a one-off cost of between USD4.0 billion and USD4.5 billion to achieve those cuts.
The group confirmed it intends to sell operations in Turkey and Brazil, though it will keep a presence in the South American country to help serve large corporate clients.
It will axe between 22,000 and 25,000 full-time employees between 2014 and 2017, not including Brazil and Turkey, from the 258,000 employed in the whole group at the end of 2014, although reductions will be partly re-invested in growth and compliance.
Speaking to analysts at an investor update on Tuesday, Gulliver defended HSBC's international network as a means by which to gain access to global trade and capital flows, arguing that the benefits outweigh the costs of running a global bank.
"HSBC has an unrivalled global position: access to high growth markets; a diversified universal banking model with strong funding and a low risk profile; and strong internal capital generation with industry leading dividends," Gulliver said in a statement.
The chief executive also wants to accelerate investments in Asia, where it wants to expand its asset management and insurance activities. In particular, HSBC sees opportunities in the Pearl River Delta in Guangdong province, China and in the Association of Southeast Asian Nations region, which counts Indonesia, Singapore and Thailand among its 10 members.
"The world is increasingly connected, with Asia expected to show high growth and become the centre of global trade over the next decade. I am confident that our actions will allow us to capture expected future growth opportunities and deliver further value to shareholders," Gulliver said.
By business, Gulliver wants to reduce the emphasis placed on HSBC's investment banking division - global banking and markets - where he wants to reduce risk-weighted assets to less than one-third of the group total. The investment bank's risk-weighted assets, which are more capital intensive - amounted to USD516.1 billion on a Basel 3 basis at the end of 2014, about 42% of the total. Overall, Gulliver wants to cut risk-weighted assets by USD290 billion.
"HSBC have indicated risk weighted asset reduction of USD290 billion. We see this as better-than-consensus expectations. This is better than the USD240 billion risk weighted asset reduction we were expecting and USD235 billion risk weighted asset reduction expected by buy-side (based on a survey we ran over the last fortnight)," Nomura's Chintan Joshi said in a research note to clients.
Four years have elapsed since Gulliver first addressed investors about his vision for the group. Since the strategy update in May 2011, when Gulliver had been chief executive for just a few months, HSBC has taken considerable action simplify the group, selling or exiting dozens of business and removing complexity. Instead of trying to operate "the world's local bank", Gulliver's focus has been on turning HSBC into a "leading international bank".
Earlier this year, the bank launched a review to decide whether to move its global headquarters from London, with Hong Kong widely seen as a possible destination, due to the costs of the UK's bank levy on global balance sheets and plans to separate retail banking from investment banking with a ring-fence.
According to presentation slides available through the bank's website, HSBC will use at least 11 criteria to decide on the best location for its headquarters, including economic importance and future growth, the tax system, and government policy. The bank wants to make a decision by the end of 2015. The UK bank levy disproportionately hits HSBC because it is implemented on UK banks' global balance sheets, a point of frustration for a bank that makes most of its money and holds most of its risk-weighted assets in Asia.
"A decision on domicile is due by year-end; we think the financial logic for HSBC to escape the clutches of the UK (and Europe) is overwhelming. What possible reason is there to stay?" Ian Gordon, Investec's banking equity analyst, said in a research note on Tuesday.
HSBC's initiatives to deal with the UK's plans for the banking sector also take into account requirements to ring-fence high street operations from investment banking in time for 2019. Speaking at the investor update, Gulliver said the UK retail bank, which is to fall within the ring-fenced entity based in Birmingham, UK, will be re-branded so that customers know which part of the bank is working with them. Yet to decide on how to brand the UK retail bank, HSBC has experience of banking activities in the UK that do not feature the holding company's name, including M&S Bank, run as a joint venture with FTSE 100 retailer Marks & Spencer PLC, and internet bank First Direct.
By sharpening the group's structure and processes, Gulliver achieved sustainable savings of USD6.1 billion on an annualised (run rate) basis as of the end of 2014, far above the initial USD2.5 billion to USD3.5 billion targeted in 2011.
The importance of cutting costs has been highlighted by the pressure on other key profitability and cost efficiency metrics for the group, which has seen heightened costs relating to regulation and compliance. Challenges have come from tougher capital requirements, higher costs of regulation, compliance and fines, the UK's bank levy, and low interest rates set by central banks.
Under the goals set out in 2011, the bank was supposed to attain a 48-52% cost efficiency ratio - a measure of expenses as a percentage of net operating income before loan impairment charges and other credit risk provisions - by 2013, but that figure was 59.6% for 2013 and 67.3% for 2014, driven higher by burdensome legal, regulatory and inflation-related costs.
The targeted cost efficiency ratio was later revised to "the mid-50s", along with a goal of growing revenue faster than operating costs on an adjusted basis.
In 2011, Gulliver had considered a 12-15% return on equity - the ratio of net profit to average ordinary shareholders' equity - a viable target. Four years later, HSBC said it is now targeting an ROE of "greater than 10%" by 2017, revenue growth in excess of cost growth, and progressive dividends to shareholders.
HSBC shares were down 1.0% at 613.40 pence on Tuesday, just after midday in London.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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