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* Investors believe HSBC bosses need to announce bold moves
* No action too big to debate, including break-up, they say
* Shareholders ask if global empire is worth the expense
* They want to hear how CEO will cut investment banking arm
By Sinead Cruise and Steve Slater
LONDON, June 2 (Reuters) - No longer feared as "too big tofail", shareholders are weighing whether HSBC is now "too big tosucceed", and want to know next week how the bank's bossespropose to increase profitability at a sprawling group beset byhuge costs.
Investors believe CEO Stuart Gulliver and Chairman DouglasFlint need to announce bold moves to restore the London-basedbank's flagging fortunes at a strategy day on June 9.
While shareholders accept not all their concerns will beanswered at the meeting, they say no action can be too big todebate, including a break-up of Europe's largest lender.
"This investor day is potentially a very significant event,"said Chris White, head of UK equities at Premier AssetManagement, which owns HSBC stock. "The world has moved againstthem and HSBC has to try to react to that. That is why we couldend up seeing some quite radical surgery here."
HSBC largely had a less troubled global crisis than itspeers, some of which were bailed out by governments fearing theycould drag down the financial system due to their great size.
It needed no such help, partly thanks to its extensiveglobal business which offset heavy losses in the United Statesand Europe. But it is the expense and difficulty of maintainingthis global reach that is now worrying investors.
Tougher banking regulation imposed since the 2008-09 crisishas hurt HSBC deeply. Watchdogs have exposed weak supervisorylinks between some far-flung operations and the London centralcommand of what once called itself "the world's local bank" toadvertise its expertise in a wide range of countries.
HSBC has paid around $8.6 billion in fines for a series ofcompliance failures. These include allowing money laundering inMexico and doing business with the likes of Iran, Libya andSudan in violation of sanctions. Now it faces allegations thatits Swiss private banking unit helped clients to dodge tax.
The bill for fines is modest compared with the $14 billionpaid by Barclays or no less than $80 billion by Bank of America.
(For graphic, click on:
http://graphics.thomsonreuters.com/15/bankfines/index.html )
But coupled with low interest rates, the soaring cost ofensuring compliance across more than 70 countries has putprofitability and return targets under pressure and raisedquestions on whether such global reach is worth the expense.
VAST AND COMPLEX
HSBC's first-quarter pretax profit rose a better thanexpected 4 percent from a year earlier to $7.1 billion after abounce in investment banking revenue offset the risingcompliance costs.
HSBC doesn't publish a single separate figure for the costof its regulatory programmes and compliance, which can includefines, legal advice and hiring staff to ensure it doesn't breakthe rules. However, it has said this was one of the reasons whyadjusted group operating expenses rose 6.1 percent year-on-yearin 2014 to $37.9 billion.
Analysts such as Thomas Stoegner and Ken Ang at Macquariesay the costs of running such a vast and complex global networkhave begun to overshadow any potential financial benefits.
"There is the risk that HSBC simply accepts to barely earnits CoE (cost of equity) just to keep the global empiretogether," they said, pointing out the high cost to investorsand adding that it was "sleep walking towards a break-up".
At the Reuters Global Financial Regulation Summit last monthFlint acknowledged the challenge to prove its worth.
"The challenge and the responsibility of management is todemonstrate that scale has benefits. You can make the case thatit is good for customers but can you make the same case that itis for shareholders?" Flint said, accepting that investors wereincreasingly asking that question.
HSBC declined to comment for this article.
BOLD ACTION NEEDED
Gulliver has already pulled the bank out of 77 countries orbusinesses through sales or closures since becoming CEO justover four years ago. This has marked a notable departure fromHSBC's long history of accelerating growth via acquisitions.
He has cut more than $5 billion in annual costs and HughYoung, head of Aberdeen Asset Management Asia, a top 10shareholder, said the bank needed to "go on tidying".
But others believe HSBC hasn't gone far or fast enough toshrink its $2.6 trillion balance sheet compared with Barclays or the bailed-out Royal Bank of Scotland.
"June 9th will be some of what the market wants but notall," said one of the bank's 30 largest investors, who declinedto be named. "Rather, I would expect management to acknowledgean openness to further restructuring," he said, adding: "Therange of views on the board means that nothing ever happens asquickly as the market would like."
HSBC is expected to update investors on progress in sellingoperations in Brazil and Turkey, and how it plans to overhaulits U.S. and Mexican businesses to pare back costs and improvereturns.
But shareholders want to hear how Gulliver intends to wieldthe axe in global banking and markets (GB&M), the investmentbank he ran for five years, particularly in its credit and ratesteams, according to some analysts.
The bank declined to comment on a Sky News report on Mondaythat citing unidentified sources as saying it was planningbetween 10,000 and 20,000 job losses. It is unclear how many ofthose cuts have already been announced.
"THIS NO LONGER WORKS"
GB&M made $5.9 billion, or roughly a third of group profitslast year, but it accounts for 42 percent of the bank's totalassets on a risk-weighted basis. That gap is likely to widen ascapital rules bite into trading activities, analysts said.
Moreover, GB&M's returns on risk-weighted assets (RoRWA)were just 1.2 percent last year and dragged group RoRWA to 1.5percent, well below Gulliver's target of 2.2-2.6 percent.
Slashing the size of GB&M should reassure investors on theregulatory and compliance bill, which pushed group costs to 67percent of revenues last year compared with a mid-50s target.
"The GB&M business was built for a prior regulatoryenvironment. We have to have acknowledgement from HSBC that thisno longer works and that something needs to be done about that,"said Rob James, analyst in the UK equities team at Old MutualGlobal Investors, another investor in the bank.
"Rather than the geographical split that has been mentioned,I think it is more reasonable to consider a functional splitbetween wholesale and retail," he added.
Offloading uncompetitive regions and non-core businessessuch as its principal investments portfolio should allow HSBC todevote greater resource to its strengths, namely its Asian andcommercial banking business, investors said.
RoRWA in its Asian division have averaged 3.8 percent in thelast three years.
Gulliver is also expected to address the question of whetherHSBC should move its headquarters from to Asia, most likely HongKong, where it was based until 1993. Tax demandson British banks are rising while regulations will force them toseparate their retail banking operations from 2019. (Additional reporting by Lawrence White in Hong Kong and MattScuffham in London; editing by David Stamp)
