HSBC CEO fails to achieve $5b in cost sav­ings

The Pak Banker - - COMPANIES/BOSS -

HSBC CEO Stu­art Gul­liver did not un­veil any sil­ver bul­lets and Wall Street is scep­ti­cal that HSBC can ac­tu­ally achieve $5 bil­lion in cost sav­ings by the end of 2017, given past misses on cost tar­gets.

The world's lo­cal bank just got mauled by July's blood­bath in Shang­hai, Shen­zhen and Hong Kong. While firsthalf 2015 profit was up 10 per cent - above Wall Street sell-side con­sen­sus - the stock mar­ket is still con­cerned about the slump in emerg­ing mar­kets ex­ports and cur­ren­cies. HSBC also sold its Brazil sub­sidiary to Banco Brade­sco for $5.2 bil­lion or 1.8 times book value. Even though HSBC pre­tax prof­its for the first half of 2015 was $13.6 bil­lion, the bank is ex­posed to eco­nomic slow­downs in China, Hong Kong, South­east Asia, Europe, the Mid­dle East and Sub-Sa­ha­ran Africa's oil/me­tal ex­porters.

HSBC in­tends to slash 50,000 jobs world­wide and "pivot" to its Asian roots, since the bank gen­er­ates two thirds of its rev­enues from the Pa­cific Basin. Now that HSBC is selling Demir­bank, its Turk­ish sub­sidiary, af­ter cat­a­strophic losses in con­sumer bank­ing/credit cards, the mes­sage is clear: Bri­tain's largest listed bank is no longer the world's lo­cal bank, if lo­cal mar­kets do not cover their cost of al­lo­cated cap­i­tal.

The bank plans to slash $290 bil­lion in risk-weighted as­sets from its global bal­ance sheet, mostly from global bank­ing and mar­kets, or GBM, 33 per cent of group rev­enues. This ba­si­cally means cut­backs in cap­i­tal in­ten­sive struc­tured prod­ucts and com­plex de­riv­a­tives trad­ing busi­nesses world­wide. The fi­nan­cial mar­kets will also scan HSBC's cost con­tain­ment projects as out­lined in Stu­art Gul­liver's June strate­gic re­view.

HSBC's cap­i­tal, liq­uid­ity and ef­fi­ciency ra­tios are stel­lar. The Basel Tier One cap­i­tal ra­tio is 12 per cent. The loan/de­posit ra­tio is 72. The cost in­come ra­tio is 60. Its val­u­a­tion met­rics are mod­est at 10.8 times for­ward earn­ings and 0.84 times price/book value. The div­i­dend yield is five to six per cent, among the most at­trac­tive in global bank­ing.

True, Gul­liver did not un­veil any sil­ver bul­lets and Wall Street is scep­ti­cal that HSBC can ac­tu­ally achieve $5 bil­lion in cost sav­ings by the end of 2017, given past misses on cost tar­gets. It is also un­clear how Gul­liver can boost share­holder re­turn on eq­uity to 10 per cent and shrink GBM as­sets by $130 bil­lion at the same time. HSBC has been in restruc­tur­ing mode since 2011 but the ur­gency in­creased once pre­tax prof­its fell 17 per cent in 2014 and the bank's Swiss pri­vate bank­ing sub­sidiary was en­snared in a money laun­der­ing probe. It is ap­par­ent that the stock mar­ket would ap­plaud a HSBC exit from Mexico or even most US com­mer­cial bank­ing. Lit­i­ga­tion risk in the Swiss pri­vate bank­ing scan­dal and the bil­lion-dol- lar-plus UK bank levy will hit prof­its.

HSBC's in­ten­tion to re­de­ploy $200 bil­lion as­sets to the Pearl River Delta, Hong Kong and South­east Asia is prob­lem­atic. The bank is ex­posed to the Chi­nese credit bub­ble via its own­er­ship stake in Bank of Com­mu­ni­ca­tions and its sub­stan­tial Hong Kong/Main­land branch net­work. This means Asian im­pair­ments will rise in the next 12 months. I have no warm feel­ings about HM Trea­sury's im­mi­nent pri­vati­sa­tion of the Royal Bank of Scot­land on the Lon­don Stock Ex­change. If ever there was a case study of a global bank de­stroyed by the hubris and strate­gic my­opia of an im­pe­rial CEO (Fred the Shred, ex-Sir Fred since Buck­ing­ham Palace re­voked his knight­hood), it was RBS. The Scot­tish bank once hailed as the hottest deal-mak­ing bank on the planet (Natwest, Cit­i­zens, Char­ter One, Green­wich Cap­i­tal Mar­kets, the failed epic bid for ABN Amro) was na­tion­alised by Gor­don Brown and forced to write off $148 bil­lion in dud as­sets amid one of the most dra­co­nian down­siz­ings in in­ter­na­tional fi­nance and the vir­tual de­struc­tion of its in­vest­ment bank. I see no cred­i­ble rea­son to buy RBS even though the loan/de­posit ra­tio is 100, fully-loaded Basel Tier One is 11.4 per cent and Cit­i­zens Fi­nan­cial will be floated on Wall Street next year. Restruc­tur­ing costs and mar­gin pres­sures mean RBS can­not cover its cost of cap­i­tal in 2015 de­spite its exit from cash eq­ui­ties/air­craft leas­ing. RBS is a value trap for now.

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