What’s next for HSBC’s strategy and shares?
Stuart gulliver, an hsbc lifer who was once the legendary head of its global treasury and capital markets business, described the job of HSBC CEO as one of the great prizes in banking. Unfortunately, his seven year tenure as CEO was spoilt by the worst crisis in the history of HSBC since the Japanese invasion of Hong Kong and Chairman Mao’s victory over the Nationalist in Mainland China.
In 2012, US regulators fined HSBC $1.9 billion for enabling money laundering by two of Latin America’s most vicious drug cartels via its Mexican branch network. Gulliver was forced to spend billions of dollars in compliance, risk controls and operation, slashing the bank’s return on equity. The Federal Reserve and the Bank of England’s quantitative easing programme also slashed profits in HSBC’s global banking and markets unit since rock-bottom interest rates compressed the bank’s net interest margins.
HSBC shares fell almost 40 per cent from the Fed’s “taper tantrum” in May 2013 to the Chinese yuan mini-crisis in February 2016. Gulliver was forced to slash the bank’s payroll by a third and exit dozens of emerging markets. HSBC was no longer “the world’s local bank”. It was unable to grow revenues for six successive years as Gulliver’s epic restructuring saw the bank exit more than 100 underperforming businesses worldwide while paying tens of billions of dollars in fines related to US mortgage misselling, the Libor rate manipulation and foreign exchange trading scandals, a data theft in HSBC’s Swiss private bank and litigation related to Sir John Bond’s acquisition of US subprime lender Household International. Financial markets applauded the success of Gulliver’s restructuring plans as HSBC’s share price rose 65 per cent from April 2016 to now.
Few global banks are as leveraged as HSBC to a steeper US Treasury bond yield curve given its $400 billion in surplus deposits. HSBC also benefits from the synchronised global recovery and stellar loan growth in its major Asian banking markets, led by Hong Kong, China, India and South Korea. Gulliver bequeathed a bank that had finally emerged from a nightmare decade when his protégé John Flint became CEO in February 2018. The malign ghosts of Grupo Bital, Household International, the Republic Bank in Switzerland no longer haunt HSBC, even though the bank needs to boost return on equity to its 10 per cent target, scale up in asset management and insurance, boost its Asian investment bank, streamline its underperforming US operations and meet the challenge of “virtual banks” like Alibaba, Tencent and the fintech constellation. Above all, HSBC has to execute its strategic pivot to Asia, source of 76 per cent of its profits despite being only 50 per cent of its loan book and one third of its capital base.
HSBC has shed $300 billion in risk-weighted assets from global banking and markets since 2015. This has led to capital commitments to China’s Peal River Delta, the new growth engine of Asian banking. Flint’s first quarter as CEO was not exactly auspicious. Costs rose by 8 per cent due to the bank’s investments in the UK High Street, a Chinese securities venture and the Group’s digital transformation, HSBC’s $2 billion share buyback programme was far below Wall Street sell-side analyst consensus estimates. The bank was forced to provision almost $900 million for regulatory fines related to US mortgage misselling. Return on equity has fallen to a mediocre 7.5 per cent.
HSBC, with $2.3 trillion in assets and operations in 72 countries, has become “too big to manage”, akin to the old Citigroup. Europe is HSBC’s Achilles heel as negative ECB interest rates gut bank profits in the Old World. UK regulators have also insisted on ring fencing High Street retail banking at a time of Brexit. The Basel Three capital adequacy reforms will also force HSBC to trim the size and complexity of its balance sheet. HSBC must also repair its relations with US regulators, strained by the Grupo Bital scandal, sanctions breaches with Libya, Iran and Sudan and the latest foreign exchange rate manipulation scandal. A US China trade war or emerging markets contagion from Turkey, Argentina or Brazil would also be catastrophic for HSBC’s share price. HSBC has taken a $3.2 billion impairment of good will charge from its ill-fated 1999 acquisition of Edmond Safra’s Republic National Bank in Geneva. HSBC is not expensive at 11 times forward earnings and a 5.4 per cent dividend yield but new money can wait for a correction to reenter, ideally at 640 pence.