Squeezed by Superpowers, HSBC Eyes Next Step of Reboot

(Bloomberg) -- Caught in the crossfire between Washington and Beijing, HSBC Holdings Plc is fighting forces that threaten to upend a business built on connecting China to the West.

Chairman Mark Tucker is overseeing a sweeping review of HSBC’s U.S. and European operations with an eye toward unloading businesses beyond repair, as doubts grow that 35,000 job cuts announced in February will be enough to revive the slumbering giant, say people familiar with the matter.

The stakes could hardly be higher for the London-based institution that earns almost all of its profit in Asia. The 155-year-old bank broke its silence last week over its role in the U.S. pursuit of a Huawei Technologies Co. official after a barrage of Chinese media attacks. Executives have discussed their bind with the Bank of England and begun wargaming potential disruptions to Hong Kong’s U.S. dollar peg, as the worsening political situation endangers its appeal.

“What would be their raison d’etre if they weren’t global?” said Michael Geoghegan, chief executive officer from 2006 to 2010. “If you want to do business worldwide, you have to go to HSBC, Citigroup or one of a very small group of banks. I can’t see where they will benefit from shrinking their network.”

It’s been a miserable stretch for the company born as the Hongkong and Shanghai Banking Corp. in 1865. A decade that began with the global financial crisis ended with the ouster of John Flint, Tucker’s initial pick as CEO, after just 18 months. In between, investors’ frustrations mounted over the languishing stock price, a pair of unsuccessful strategic reboots, and its failure to exploit a leading position in Greater China.

With the global recession darkening prospects for growth, the task of fixing or jettisoning low-return units while doubling down on Asia has gotten a boost from three new directors. They joined a board that spurned more extreme measures in Tucker’s February restructuring, which will cut about 15% of the work force and trim investment banking. The question is the potential damage to the East-West network that attracts clients like Amazon.com Inc.

That’s the riddle Tucker is trying to solve with new allies including James Forese, a former Citigroup Inc. veteran who joined the board in May after being approached about the CEO job. He has partnered with Tucker and Chief Financial Officer Ewen Stevenson in driving change. Alongside, CEO Noel Quinn has assumed a role akin to a chief operating officer, insiders say.

Besides Forese, whose career dates to a different era on Wall Street -- at the Salomon Brothers portrayed in Michael Lewis’s Liar’s Poker -- the board has added Eileen Murray, former co-CEO at Bridgewater Associates LP, the world’s biggest hedge fund group, and Microsoft Corp. executive Steven Guggenheimer.

HSBC declined to comment on restructuring efforts. Its shares fell 3.3% as of 1:49 p.m. in Hong Kong to the lowest level in more than a decade.

Overhaul Targets

Their urgency reflects the central commercial challenge for Europe’s biggest bank: HSBC doesn’t make enough money from its almost $3 trillion in assets. In 2019, even before the deepest recession in decades, its return on shareholders’ equity was less than 4%; JPMorgan Chase & Co., the largest U.S. bank, beat that by more than 10 percentage points.

The obvious targets for boosting profits are the U.S., where it’s weighed down by a costly coast-to-coast branch network, and Europe, which accounted for almost half of its assets in 2019 but generated operating losses.

Expectations of more drastic action as soon as the Aug. 3 announcement of first-half earnings are growing. Goldman Sachs Group Inc. analysts say the pandemic could push the bank to pursue “an even more ambitious restructuring.”

“The strategy ought to be an openness to disposals, but bluntly, I’m not expecting much in the way of disposals in the current market,” said Ian Gordon, an analyst at Investec Securities in London. It “means they have to do a lot more self-medication.”

Quinn’s Rough Ride

To be sure, Quinn has not had an easy run. He was appointed just as the U.K. locked down to arrest the spread of Covid-19. Within weeks, the fallout hit. First, the dividend was suspended. Then, one of his unit’s former clients in Asia, Hin Leong Trading (Pte) Ltd. in Singapore, collapsed, leaving most of HSBC’s $600 million exposure at risk.

Amid the internal pressures, the complex political backdrop has only gotten trickier. HSBC was reprimanded in Washington and London over its support for China’s tough new security law in Hong Kong.

“Imagine a three-legged stool and those legs are being pulled apart,” said David Knutson, head of credit research for the Americas at Schroder Investment Management, an HSBC bondholder. “Difficult decisions will have to be made that will have a significant, material impact on their future.”

Tucker’s Whereabouts

What’s more, Tucker has spent so much time in the U.S. that the bank informed the U.K. authorities of his whereabouts. Having originally relocated from Hong Kong to London when he took the chairmanship in 2017, he received a 300,000-pound ($385,000) allowance for the move.

In the last year or so, he has effectively been based in New York, according to three people familiar with the matter who said the decision raised eyebrows among some executives.

“As the chairman of an international bank Mark Tucker spends his time between Asia, the U.K. and the U.S.,” said a spokeswoman for HSBC “There is no stipulation in his contract about where he has to live.” The Prudential Regulatory Authority declined to comment.

Wherever Tucker calls home, his focus will always return to Asia, which generated almost all of last year’s operating profit, and Hong Kong, which provides one-third of its global revenue.

Having worked for decades in the former British colony, Tucker is finely attuned to the background music, leading a renewed push into China. Tucker emphasized the importance of bolstering the U.K.-China relationship in remarks before the pandemic hit to an audience that included Beijing’s ambassador to London. “I believe that it can become even stronger, even more comprehensive, and even more mutually beneficial,” he said.

Marketing Campaign

Last year, the bank launched a public-relations campaign targeted at the elite in Beijing. The plan envisaged everything from social media ads localized within 500 meters of government buildings to a relationship-building tour among the editors of mainland newspapers by a senior executive. More recently, along with endorsing China’s crackdown in Hong Kong, the bank has begun holding daily meetings to monitor how it’s portrayed in the local media, according to one person familiar with the matter.

The efforts are falling short -- at least publicly. In China, HSBC has been tarred for what officials there see as its role in the 2018 arrest of Huawei CFO Meng Wanzhou on charges of violating U.S. sanctions on Iran and Syria.

In its first public comments about the matter, HSBC said it has no “hostility” toward Huawei and didn’t “ensnare” the company. The bank said it only provided information to the U.S. Department of Justice when it was compelled to do so.

“In response to the U.S. DOJ’s requests for information, HSBC simply presented the objective facts,” the bank said in a statement Saturday. “HSBC did not ‘fabricate’ evidence or ‘hide’ facts. And HSBC would never distort the facts or seek to harm any of our clients for our own gain.”

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