A strategy of substantial cost-cutting exercises and a concentrated focus on its most lucrative markets has prompted resurgence in the profit margins at UK-based bank HSBC.
In recent times the bank has struggled to boost revenues strangled by the sovereign-debt crisis in Europe, the winding down of its US consumer-finance arm and slowing growth in China.
As a result, in 2013 HSBC said its global headcount would likely be reduced to 240,000–250,000 by 2016, having been close to 300,000 just three years previously.
Chief executive Stuart Gulliver is driving the cuts and is on record as saying the bank has already achieved annual cost savings of £2.5bn since he took over running the bank in 2011. He is aiming to cut that amount by an additional £1.8bn.
The bank is broadly looking to achieve this by undertaking tight cost discipline and by streamlining processes and procedures, to be able to invest in growth and global standards.
HSBC has already cut 34,000 full-time jobs since 2010 and, at the end of 2012, the bank employed 261,000 staff around the world.
As part of the cuts and a general cleaning up of its structure, HSBC has closed or sold off more than 60 businesses, helping to reduce its risk-weighted assets by about £58bn.
HSBC is currently structured as a collection of country-based subsidiaries and the holding company wholly owns its businesses around the world. The main exception is its 62% holding in Hong Kong bank Hang Seng.
So far, sales have resulted in gains of £5bn for the bank and have included its stake in Chinese insurer Ping An.
The bank has also suggested it could begin buying back shares to enhance returns as it targets a return on equity of 12%–15%. HSBC was the second largest dividend payer in the FTSE100, setting aside £5bn for payments to shareholders in 2012, up £600m on the previous year and £1.2bn on its payout in 2010.
Focus on 'home markets'
Another important step the bank has identified is to focus its greatest efforts on its most lucrative markets, namely Hong Kong and the UK.
Gulliver stressed in recent results that Hong Kong and the UK are its twin ‘home markets’, together accounting for more than half of profits in 2013.
Profits in the UK have rebounded after several difficult years when the domestic economy slowed, while profits in Hong Kong have been boosted by a ‘stabilising’ Chinese economy.
HSBC's profits are expected to rise to nearly £16bn in 2013 from £13bn the previous year, according to an average of analysts polled by the company.
It made £8.5bn in the first half of 2013, up 10% on 2012. Operating expenses fell by 7% to £5.8bn in Q3 of 2013 following a number of one-off costs during the previous quarter.
Gulliver has also pledged to instil a more responsible culture and to reduce risk across his bank after it was fined a record £1bn in 2012 for compliance failings in Mexico.
HSBC said in August 2013 it might have to pay out another £1bn to settle with a US regulator over allegations it mis-sold mortgage-backed bonds during the housing bubble.
In addition, UK lenders have been taking charges over the payment-protection insurance mis-selling and other scandals for the past year.
HSBC set aside £270m for consumers sold loan insurance they either didn’t want, need or understand, businesses wrongly sold interest-rate hedging products and to investigate sales practices in its UK wealth business.
UK and Swiss regulators are also probing the £3.2 trillion-a-day foreign exchange market after Bloomberg News reported in mid-2013 that dealers in the industry said they had been front-running client orders and attempting to rig benchmark rates.
These issues are among those to have demonstrated serious flaws in the bank’s risk management and they have left HSBC under pressure to improve compliance.
The industry remains under close scrutiny from regulators.
The UK is forcing banks to safeguard their retail and commercial operations after recommendations in the Vickers report, an independent review on the structure of banking, although the changes are not due to come into force until 2019.
HSBC Holdings is considering floating up to 30% of its UK retail and commercial banking arm to help meet UK regulation and unlock value for shareholders. A listing would be a logical move to meet that requirement.
Gulliver remains confident for the future. He says: ‘We see reasons for optimism with some evidence of a broadening recovery. Indications are that economic growth in mainland China is stabilising with positive implications for Hong Kong and the rest of Asia Pacific.
‘The US should continue to grow, albeit at a low rate by historical standards. The UK should see positive growth and outperform the eurozone. We expect GDP growth in Latin America to remain slow, although the Mexican economy should strengthen in 2014. Our forecasts for global growth remain constant at 2.0% in 2013 and 2.6% in 2014.
‘We remain focused on delivering organic growth, streamlining the businesses and implementing global standards and so supporting a progressive dividend.’
What HSBC has shown is that despite a subdued revenue environment and during extremely turbulent times, strong management can make decisions to take costs out of a business to deliver improved profitability.