When Noel Quinn took to the stage on Tuesday to unveil his plan to overhaul HSBC, he promised to deliver "one of the deepest restructuring and simplification programmes in [the bank's] history".
Peering over a pair of rimless spectacles, the interim chief executive sketched out a radically different future for HSBC that will tie the bank even more closely to Asia. It sounded remarkably similar to the vision of HSBC's founders, who set the bank up in 1865 to capitalise on trade flows between East and West.
• HSBC to shed 35,000 jobs in radical overhaul
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• HSBC looks on course for a future based in Asia
• HSBC: Chinese headwinds threaten to blow bank off course
Achieving this will involve extensive surgery. Quinn intends to shrink the bank's presence in Europe and the US drastically, mainly by taking an axe to its underperforming investment bank. Over the next three years, the lender plans to remove US$100 billion ($156.3b) of assets, adjusted for risk, from its balance sheet and use the extra capacity to pursue new business opportunities in Asia and other emerging markets.
By the time the overhaul is complete, three years from now, the bank estimates it will have slashed about 35,000 jobs from its current headcount of 235,000 and taken about US$7.2b of restructuring charges.
In addition, Quinn wants to rid the lender of its fabled bureaucracy, which is sometimes compared to the Foreign Office during the days of the British empire. Highly paid investment bankers and traders working in Canary Wharf will bear the brunt of job cuts.
If the plan works, HSBC says it can boost its return on tangible equity — a headline measure of profitability — from 8.4 per cent last year to between 10 and 12 per cent by the end of 2022, bringing returns closer to those generated by large US banks.
However, Quinn and his executive team must complete this tricky transformation at a time when the economy in Hong Kong, HSBC's main profit engine, is spluttering after months of social unrest and before they know how badly the spread of coronavirus will affect the bank.
Investors have been calling for a plan like Quinn's ever since the financial crisis, pointing out that too much of HSBC's capital is trapped in European and US businesses where it makes little to no money, even though Asia accounts for 90 per cent of pre-tax profits.
But the overhaul unveiled on Tuesday disappointed the stock market, with London-listed shares in HSBC closing down 6 per cent. Over the past 12 months, the share price has declined almost 13 per cent, underperforming the wider European banking sector.
Some investors are worried that Quinn, who has been running the bank on an interim basis since August, will not be in his job long enough to see the overhaul through. He was appointed temporarily after his predecessor, John Flint, was sacked because the board decided his own turnround effort was too slow and lacked ambition.
Several shareholders said they were concerned HSBC was embarking on such a dramatic overhaul without a permanent leader. "It's barmy," said one large investor, adding that they had expected the bank to appoint either Quinn or an external candidate before the strategy was announced.
Another top-20 shareholder said uncertainty around who would lead the bank in the long term was "not helpful".
Mark Tucker, HSBC chairman, is unapologetic. Having botched one CEO succession process by appointing Flint in 2017, only to force him out after 18 months in the job, he does not want to make another mistake.
On a call with reporters on Tuesday, Tucker pointed out that he had always said the search for a new chief executive would take six months to a year — even if investors wanted clarity more quickly — meaning he has until August to make a pick.
He bristled in response to a question on why some shareholders were unnerved by the lengthy search. "You should ask investors that. We set out very clear guidance and we'll follow that," he said. "None of this should be a surprise."
However, that argument does not wash with some investors, who argue it will be difficult to find a high-calibre external candidate to lead a bank where the strategy is effectively set in stone.
"There have been too many strategy changes to bring in someone else now," said Colin McLean of SVM Asset Management, which owns HSBC shares. "The longer the interim arrangement persists, the harder it will be to convince the market."
Another point of contention among some investors and analysts is that HSBC will use the capital freed up by shedding assets in Europe and the US to fund an ill-defined growth spree in Asia.
Some had hoped that at least part of the capital trapped in low-returning markets would be returned to shareholders via chunky buybacks, as has happened at other European banks. Italy's UniCredit, for instance, has dramatically reduced the size of its balance sheet and plans to reward investors with a €2b ($3.3b) buyback and higher dividends.
HSBC also ruled out any buybacks this year or next to neutralise the impact of the "scrip dividend", which allows some investors to receive additional shares in the bank instead of a cash payout. The bank spent US$3b on buybacks in 2018 and 2019 to offset the resultant dilution of shareholders.
Ewen Stevenson, chief financial officer, told the FT it was not fair to compare HSBC to other European banks, who had little choice but to return excess capital to shareholders given the paucity of growth opportunities in their domestic markets.
He said: "The core difference for us versus others is we have areas to invest in to grow that they don't have."
However, Ronit Ghose, a banks analyst at Citigroup, said that while HSBC had set out "some detailed analysis" on how it would reduce the size of its balance sheet, there was "limited quantification on how this US$100b will be reinvested".
Another complicating factor is the darkening outlook not only in Hong Kong but also in mainland China, which is struggling to contain the spread of coronavirus. Even before accounting for the impact of the virus, HSBC warned that its revenues would fall this year in large part because of lower global interest rates that reduce the amount banks make from lending.
Stevenson said the bank would have to set aside an extra US$600 million this year in the event of the coronavirus outbreak dragging into the second half of 2020 so it could cover losses from souring loans. He also said that if the virus continued to rage beyond the next six weeks, there would be a "progressively more acute" hit to revenues, profit and capital.
While Quinn's plan to overhaul the investment bank and cut costs is dramatic, he has taken a more cautious approach to the lender's underperforming retail operation in the US. Although HSBC said it planned to close more than 60 US branches out of a total of 224, Quinn resisted calls from some investors to dispose of the business.
"If I wanted an easy headline and an easier day-to-day, I'd have just made the decision to sell the US retail business, but I genuinely don't believe that's the right answer," he said on Tuesday.
Rather, Quinn believes the bank can develop a retail offering that appeals to wealthy, internationally mobile customers in the US, while using their deposits to fund its corporate banking activities.
In addition to charting a different course for HSBC, Quinn has cleared out the bank's top ranks, forcing some executives out and shunting others aside, in the biggest shake-up since Stuart Gulliver became CEO in 2011.
The latest casualty is António Simões, head of the global private bank, who will leave HSBC after 13 years following the decision to subsume his unit into a beefed-up retail division. Aware that his job was at risk, Simões applied to become head of HSBC's commercial bank but lost out to one of Quinn's trusted lieutenants.
In just six months, Quinn has reshaped HSBC in his image. Now investors want to know whether he will finish the job — and Tucker is running out of time to decide.
Written by: David Crow and Attracta Mooney
© Financial Times