HSBC’s cuts a warning signal to banks

It may seem out of character for HSBC to be weighing an aggressive round of cost-cutting, putting up to 10,000 jobs at risk. This, after all, is the lumbering giant of global banking, an institution with 238,000 staff and operations in 65 countries around the world. With pre-tax profit of $12.4b in the first half of this year, it is performing fine, too.

Many western peers are struggling as net interest margins are squeezed by ultra-low or zero interest rates, but HSBC’s presence in fast-growing Asian markets has given it a powerful offset to near-stagnation in Europe.

It is also unusual for an interim chief executive to launch such an initiative. Noel Quinn was installed as acting CEO in August after the abrupt ejection of John Flint. Quinn has quickly grasped one of the few levers a bank can pull in such an environment.

Chairman Mark Tucker is likely to have played a key role. Even in the months before his departure, Flint had remained optimistic that an improving interest-rate environment would bolster profits — a promise that has been undone as the trend of tightening monetary policy in the US and Europe was loosened again.

Such a wayward call will have played a big role in the chairman’s decision to axe Flint, and hardened his successor’s resolve to be more forceful.

Ever since the financial crisis, all big banks have been trying to cut costs. HSBC’s efforts have been uninspiring. In the post-crisis years, then CEO Stuart Gulliver set stringent targets to reduce the so-called costincome ratio — overheads as a share of revenue — to just over 50 per cent. With revenue growth elusive, the ratio has remained stubbornly closer to 60 per cent.

HSBC’s expanding business in Asia and other parts of the world performs better than average in terms of revenue and costs, but the European operation is declining. In the first half of 2019, the group’s cost-income ratio in Europe was 99.9 per cent — barely a break-even result.

HSBC is not the first bank to respond decisively to a more challenging environment this year. Deutsche Bank and Societe Generale have announced restructuring operations but HSBC is the first to do so from a position of strength. It actually increased profitability in the first half of the year and generated a return on tangible equity of more than 11 per cent — far ahead of most European rivals.

For HSBC to be seen in the vanguard of adapting to a changed macro situation is at odds with its justifiable characterisation as a big bureaucracy. Evidence suggests the view is accurate nonetheless. Despite regular changes of management over the past decade or so, it seems to be in the bank’s DNA to be ahead of the curve on the big calls. In 2007, it was the first to blow the whistle on the forthcoming subprime mortgage crisis. In the spring of 2009 it raised an unprecedented £12.5b in a rights issue, shoring up its balance sheet ahead of fresh regulatory demands.

There are idiosyncratic reasons why HSBC needs to cut costs now: previous attempts have not gone far enough; the added overheads of ringfencing the group’s UK operations have added to inefficiency; and political concerns in its core Hong Kong market will have rattled risk managers. All of that comes on top of slowing global growth and the mounting pressure on lending margins from looser monetary policy. As in 2007, other banks would do well to heed the early warning signal.