HSBC’s New Boss Faces Challenges From China and Brexit

(Bloomberg Businessweek) -- John Flint, a lifer who rose to the top job at HSBC Holdings Plc in 2018, inherited an institution that had already seen shake-ups. In the previous seven years, 60,000 jobs had been eliminated and operations in 21 countries were sold, closed, or shrunk. Even so, the same core problem remains in the 67 countries where HSBC still does business: Costs are too high and revenue isn’t increasing fast enough.

Profit in the fourth quarter of 2018 came in 23 percent below analysts’ forecasts, stoking worries that Europe’s biggest bank by market value still lacks a recipe for growth. London-based HSBC has exposure to some of the world’s fastest-expanding markets—it was born as the Hongkong and Shanghai Banking Corp. in 1865 and derives 90 percent of its profits from Asia. And yet its return on equity is mired in the single digits, while U.K. rival Lloyds Banking Group has earned almost 12 percent even though it’s focused on Britain’s slumping domestic economy.

“HSBC is a behemoth—it is a massive challenge to change the direction of the ship,” says Edward Firth, an analyst at Keefe Bruyette & Woods. “It’s got these fantastic businesses, such as the Hong Kong retail operation, but somehow after they pass through the miasma of the rest of the bank, you end up with a 9 percent return on equity.” There’s no turnaround on the horizon. Even the bank’s global reach could prove to have a downside as HSBC faces the dual threats of Brexit and a slowdown in China.

The opening up of China to the global financial and trading system was a profit engine for HSBC for decades, but lately the bank has been caught in the middle of trade tensions between Washington and Beijing. Brexit poses a more immediate threat. With a no-deal exit from the European Union looming, HSBC is on the fault line of a schism that could have disastrous consequences for its home market.

The poor fourth-quarter numbers were driven by a revenue decline brought on by chaotic financial markets. But even with markets stabilizing, the path to higher revenue might not be so straightforward. For one, interest rates, which boost profits from lending when they rise, appear to have leveled off.

Analysts at UBS say the bank might well have to give up on one of its key targets—to increase revenue faster than costs—and settle for having the two rising at about the same rate. UBS estimates the bank’s costs will grow by 2 percent or 3 percent per year. Speaking hours after the publication of the annual numbers on Feb. 19, Flint nodded to the challenges the lender faces. Although his task was to get the bank “growing again,” he would defer investments to contain expenses, he said.

Managing costs in an organization with 235,000 employees is no mean feat, particularly because 55 percent of staff are based in Asia, where wage inflation is a problem for employers. Like other established institutions, HSBC is also grappling with the fast pace of change in the industry. Technology is undercutting once unchallengeable businesses, such as retail foreign exchange and even deposit-taking, meaning any move to postpone investments in information technology systems carries risk.

Mergers could also change the competitive landscape, particularly if the bank’s smaller U.K. rival Standard Chartered were to be bought by a U.S. competitor or an Asian banking group. As does HSBC, Standard Chartered conducts much of its business in Asia. A beefed-up competitor could provide a direct threat to the crown jewel of HSBC, its Hong Kong operations.

Hopes of improved growth were high in late 2017 when veteran insurance executive Mark Tucker arrived as HSBC’s chairman. The role had typically gone to an insider, so bringing in the hard-charging former chief of insurer AIA Group Ltd. was a widely welcomed break from the past. But Tucker’s appointment of Flint as chief executive officer showed there was a limit to culture change. Flint had served a three-decade HSBC apprenticeship advancing toward the top job. Some investors are getting restless as he enters his second year as CEO. “It’s too early to judge Flint’s credibility, but he probably only has another six months to a year to deliver,” says Joseph Dickerson, an analyst at Jefferies.

There appears to be little appetite for more major surgery after cuts executed by Stuart Gulliver, Flint’s predecessor as CEO. “The trick with HSBC is patience. They work in decades, not years,” says Mike Fox, head of sustainable investments at Royal London Asset Management, one of the 15 largest shareholders in the bank. “The return on equity does need to move higher, and that is the mission for the CEO and the chairman. But the way to do that is not big restructurings. It’s about making incremental improvements.”

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