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LONDON (Alliance News) - HSBC Holdings PLC is to cut thousands of jobs, re-deploy billions of dollars in risk-weighted assets from its investment bank to higher returning operations, and continue deliberating on whether to re-domicile away from London, as Chief Executive Stuart Gulliver seeks to satisfy investors by slashing costs and boosting returns in order to boost dividends.
Almost four years to the day since his first investor update as group chief executive, Gulliver's latest strategic plan reinforced the scale of the challenges and opportunities for the group. HSBC's performance against the financial metrics targeted in 2011 was mixed, largely due to an increasingly tough regulatory regime, higher capital requirements and the impact of fines relating to the bank's past transgressions, but the lender estimates that its strong international network gives it access to about 90% of global trade and capital flows.
On Tuesday, Gulliver said the banking group will target a further USD4.5 billion to USD5.0 billion in savings on an annual basis by 2017, building on the considerable cost cuts already made during his time as CEO, with a one-off cost of between USD4.0 billion and USD4.5 billion to achieve that end.
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, retaining Mexico as an opportunity, contrasting its open economy with those of Turkey and Brazil.
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 across the whole group at the end of 2014, although reductions will be partly re-invested in growth and compliance.
Speaking to analysts at the 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. It has yet to decide what the name will be.
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 0.7% at 615.06 pence on Tuesday, just after midday in London.
By Samuel Agini; samagini@alliancenews.com; @samuelagini
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