HSBC Says U.S. Unit Among Most Challenging Parts of Strategy

(Bloomberg) -- Fixing HSBC Holdings Plc’s troubled U.S. division will be one of the toughest parts of the lender’s new $17 billion strategy, Chief Executive Officer John Flint said.

“Of all the things we have to execute on in the next three years, this is one of the most challenging pieces,” Flint said on a call with reporters Monday. “We’ve struggled with this for a while.”

HSBC Says U.S. Unit Among Most Challenging Parts of Strategy

HSBC considered scaling back “significantly” in the U.S. and also weighed buying a rival before deciding to “build on what we’ve got” instead, Flint said. Returns in the U.S., where the London-based company has lost billions of dollars on subprime mortgages and payments for misconduct, will climb over the next three years, driven by “organic growth” across businesses, according to a bank presentation.

HSBC North America Holdings Inc., the U.S. subsidiary, had about $290 billion of assets at the end of 2017, according to Federal Reserve data. The division aims for a return on tangible equity -- a measure of profit -- of at least 6 percent by 2020, compared with less than 1 percent last year, according to the presentation.

“Six percent return will still be a drag on the rest of the business, which is targeting more than 11 percent,” said Richard Smith, an analyst at Keefe, Bruyette & Woods. “To get there, they aim to pull three levers: revenue growth, greater cost efficiency and capital release.”

Their U.S. operation is important to the company because of clients’ international trade needs, “but it isn’t the focus of their growth ambitions,” Smith said.

Subprime Legacy

HSBC completed running off its U.S. legacy portfolio last year, according to the presentation. Those were mostly subprime mortgages that blew up during the 2008 crisis. Even though the remaining loans were earning interest and contributing to profit, global rules demanded high capital backing for such assets. Their elimination probably helped the U.S. unit pay $4.5 billion in dividends to the parent company last year, which HSBC said was the first such transfer since 2006.

HSBC Finance Director Iain Mackay said the bank still has more than $2 billion of surplus capital in the U.S. and would like to bring most of that back to the U.K. with approval from the Federal Reserve.

“The U.S. has been a difficult geography for us,” Flint said. “Net-net, the bank is profitable but not generating the right returns.”

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