By IFR Editor-at-large Keith Mullin
May 20 (IFR) - The May 15 strategy update by HSBC, ably andconfidently fronted by CEO Stuart Gulliver, seems to have gonedown pretty well.
Truth be told, I couldn't find anything particularlycontentious in there, although the cost-income miss and thedelay in hitting targeted ROE were far more noteworthy, in myview, than the additional job cuts that got all the headlines.
The thing is: you can't argue with any of that dull butworthy stuff that Gulliver said about simplifying and delayeringthe organisation to make it more manageable, derisking inhigher-risk locations, maintaining tight cost discipline,streamlining processes, focusing on high-growth regions, oraspiring to global standards. And all under that cheesy "actingwith courageous integrity" value proposition for staff. It justticks all the right boxes.
But if the update offered up good content on the bank'sprogress, it lacked glamour, glitz and razzmatazz - actually abit like HSBC really. There's a broadly positive bias on thestock among the 33 brokers in the Thomson Reuters consensus.
With almost poetic justice, the bank sits just on the rightside of the grey neutral zone: 12 are "hold" while 14 are "buy"although the consensus has been trending a little south on athree-month view.
A lot of the media focus has been on the up to 14,000additional job cuts that are coming on top of the 46,000 thathave already gone; many through business disposals. Not to bedismissive of the pain that accompanies downsizing at anindividual level, it's worth pointing out that HSBC stillemploys the equivalent of the population of a medium-sized town- not far off 260,000 people - and has lagged many of thepreviously top-heavy universal banks in getting its headcountdown. On a percentage basis, the additional cuts look modest.
EFFICIENCY SHORTFALLS
At the end of the day, the numbers are the numbers and thebank had little choice but to target US$3bn in cost savings by2016 on top of the US$4bn made to-date. And that's just to keepits cost efficiency ratio in the mid-50s, a big miss and someways off the previously articulated 48%-52% target.
Gulliver said this was down to revenue shortfalls emanatingfrom events such as the eurozone crisis and the consequentdifficulty in achieving top-line growth as opposed to hittingcost targets, where he said the bank has outperformed. But thetiming of delivering revenue growth is a big issue. To deflectattention from the miss, Gulliver had a pop at peers such as JPMorgan, Barclays or Standard Chartered, which he pointed outsport CERs in the high 50s or low 60s. That usually works.
Even though the lag in the run-offs of the US loan book andlegacy investment bank assets will act as a drag on hitting theROE target of 12%-15%, Gulliver is steadfastly sticking to thatrange, which he says is being achieved in the underlyingbusiness. And he is committed to hitting a CET1 ratio of10%-plus and maintaining the advance-to-deposit ratio well belowthe 90% cap.
Fair's fair, selling or shuttering 52 businesses in twoyears with an US$8bn gain on sale; cutting RWAs by US$95bn;achieving US$4bn of annualised sustainable cost savings; andhitting double-digit loan growth in 15 out of 22 prioritymarkets is no mean feat. "We're not even halfway throughunlocking the value in HSBC. The strategy is not changing, it isworking," Gulliver told analysts.
There was no pullback either from the plan to super chargegrowth in high-growth markets such as Asia away from laggardssuch as Europe (why would there be?) and this will comeorganically; no acceleration through acquisition. On the plusside, HSBC has all of the benefits of being a diversifieduniversal banking group. Like everyone else in its peer group,one of the goals is to leverage synergies between divisions tosqueeze some revenue benefit.
GBM, which accounted for 43% of the US$8.4bn group Q1 PBT,also looks pretty diversified across areas it sees as corestrengths: DCM, project finance lending and advisory, export andtrade finance, FX, securities services as well as event-drivenactivity in emerging markets (the latter in particularfacilitated by its massive balance sheet). Of course, macrothemes such as RMB internationalisation, bank disintermediationand EM spending on infrastructure all play into HSBC's priorityfocuses.
CREDIT
By referring to GBM's "distinctive" and "differentiated"wholesale business model vis-a-vis bulge-bracket investmentbanks and not falling for presenter hyperbole and describing itas unique, Gulliver deserves credit.
His goal for GBM is to be a top five bank to its priorityclients. When a bank says it's focusing on priority clients asopposed to targeting market leadership per se - the annoying newmantra - it's hard to gauge from the outside how successful itis. League tables certainly show the group firing in some areas;arguably lagging in others. HSBC is top three in Asia ex-JapanM&A so far this year: number one in India, but surely punchingbelow its weight in China, 13th; MENA, 11th, and LatAm, eighth.
Its DCM business is solid across the board; it's aconsistent performer across most areas, particularly in Asia andmore broadly in EM. (Its number one YTD ranking in euro bonds -a whisker ahead of Deutsche Bank - is a bit of a turn-up). ItsECM business is average at best: irrelevant in EMEA but perhapsof more concern sixth in Asia and way off Goldman Sachs and UBS(which are running neck and neck way out in front).
I await the next update with interest, although I implorethe bank's marketing gurus to please, please come up withsomething more imaginative than: "Strategy unchanged: nextphase". I almost went for the alternative of watching paint dry.
HSBC Holdings (HSBA)
