HSBC seen cutting investment banking, with equities at risk

LONDON: HSBC Holdings is poised to announce deeper cuts at its investment bank as part of a plan to revive profitability that CEO Stuart Gulliver will present next week.
Foreign exchange and rates trading may be prioritized because they have the highest return on equity of any part of the investment bank and help HSBC service its corporate clients operating globally, said a person with knowledge of the matter, who asked not to be identified as the plans aren’t finalized.
The equities trading division has the lowest returns and should be the first in line for cuts, the person said.
Gulliver pledged in February that underperforming businesses would face “extreme solutions” after annual earnings fell 17 percent and the lender cut its profitability targets.
HSBC’s investment banking operation has an ROE of about 6 percent less than the lender’s 10 percent target.
“If cuts are coming it seems most likely that its sub- scale equities business could be a candidate,” said Jonathan Tyce, senior banks analyst at Bloomberg Intelligence in London.
“FX, credit and rates go hand in hand with its client facilitation revenues, and must be core going forward.”
Thousands of jobs may go at HSBC as part of the overhaul, a person with knowledge of the matter said June 2. On June 9, Gulliver will also detail plans to sell underperforming operations in Turkey and Brazil, and set out the criteria the bank will use to decide whether to move its headquarters out of London.
“What we like about the stock is the HSBC of old: a well-capitalized and conservative global bank with strong positions in growing emerging markets,” said David Moss, head of European equities at F&C Asset Management in London, who helps oversee about 83 billion pounds ($127 billion), including HSBC shares.
“What we don’t like is the investment bank and the capital it swallows in exchange for low returns — how they say they’re going to deal with that issue is key for us on the day.”
The stock has increased about 0.6 percent this year, trailing Deutsche Bank and Barclays 10 percent advance in the period.
Heidi Ashley, a spokeswoman for HSBC in London, declined to comment on the bank’s deliberations.
HSBC’s markets operation, which includes credit, rates, foreign-exchange and equities had $6.3 billion of revenue in 2014, according to its annual report.
Equities account for $1.2 billion and currencies and rates together $4.5 billion.
The investment bank, run by Samir Assaf, doesn’t disclose the profitability of each of the business lines, nor does it publish how many people are employed in each part.
Investors are seeking greater disclosure about the performance of each business, according to analysts at Barclays.
Europe’s largest bank is the seventh-largest foreign exchange dealer this year with a 5.4 percent market share, falling from fifth-place in 2014 with 7.1 percent, according to a Euromoney Institutional Investor Plc survey.
By comparison, the bank doesn’t feature in the equity- trading market share or reputation rankings for the US, Asia or Europe compiled by Greenwich Associates, based on surveys of institutional investors.
HSBC is also only the 13th biggest arranger of equity offerings globally with a 1.3 percent market share, according to data compiled by Bloomberg.
“More detail on the products that HSBC plans to focus on, the returns they can deliver and how much capital this consumes will be a key factor in establishing the credibility of the strategic plan,” Barclays analysts Rohith Chandra-Rajan and Sharnie Wong, wrote in a note earlier this week.
HSBC has “highlighted its leadership position in trade finance, payments and cash management, foreign-exchange,” something that “suggests that these are seen as higher return businesses where HSBC has some competitive advantage,” they wrote.
HSBC may also sell parts of the rates operation, including project finance loans and parts of its structured credit portfolio, Chirantan Barua, an analyst at Sanford C. Bernstein in London, said in a June 4 report following a meeting with HSBC’s investment banking head.
The global banking and markets unit consumes about 40 percent of the bank’s risk-weighted assets, yet only generates about a 6 percent return on equity, analysts at UBS Group and JPMorgan Chase estimate.
The return is only a third of what HSBC generates in Asia, where it makes 78 percent of its pretax profit and has almost 50 percent of its full-time employees.
Investors are also looking to hear the bank’s latest succession plans, with both Gulliver and Chairman Douglas Flint having served in their positions for at least four years.
“We certainly would like to see some consideration of succession planning as Gulliver and Flint have been around at the top for some period,” said F&C’s Moss.
“If not next week then we’d like to hear something soon.”

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