The EconomistFebruary 22nd 2020 Finance & economics 711L
ast autumnthe board of hsbc asked
Egon Zehnder, an executive-search
firm, to find it a new chief executive. The
bank had fired John Flint in August, after 18
months in the job, for being too shy about
pursuing profits. hsbc then dodged the de-
cision, appointing Noel Quinn, a no-non-
sense insider, only on an interim basis. Mr
Quinn soon made it clear he wanted the job
permanently. He seemed a shoo-in.
Yet six months on his appointment is
less certain. On February 18th hsbc, Eu-
rope’s largest bank by assets, unveiled re-
sults that fell short of already pale expecta-
tions. Hobbled by write-downs of $7.3bn
(mainly at its global investment bank and
European commercial bank), its profit
slumped by a third in 2019, to $13.3bn. Its
return on tangible equity (rote) slipped to
8.4%, down from 8.6% in 2018 (investors
reckon 10% is par). And the chairman, Mark
Tucker, said nothing about the top job.
Undaunted, Mr Quinn announced “one
of the deepest restructuring and simplifi-
cation programmes in our history”. The 155-
year-old bank is to shed 35,000 of its
235,000 staff. It intends to cull risk-weight-
ed assets by over $100bn, out of a total of
$843bn, by 2022. Its investment bank, its
European arm (where assets will shrink by
35%) and its American business (where itwill shed 30% of branches) will bear the
brunt of $4.5bn in annual cost cuts. It will
thus become even more focused on Asia,
where it already makes 90% of its profits.
Investors were unimpressed: the share
price lost nearly 6% on the day. The over-
haul is hsbc’s third since the global finan-
cial crisis of 2007-09. They had hoped that
the bank would at last be able both to aim
for higher returns and to hand out some of
the bounty to its owners. Yet hsbcset its
rotetarget for 2022 at 10-12%—in effect, no
different from its previous objective of 11%.
Worse, it said it would suspend share buy-
backs for 2021 and 2022. Investors feel
hsbcis “running to stand still”, says Tom
Rayner of Numis Securities, a broker.
But even standing still may be difficult.
Asia is feeling the chill of a global eco-
nomic slowdown, and disruption caused
by the coronavirus infection is likely to
harm growth further. The bank estimates
that the epidemic will cost it $200m-500m
in the first quarter of 2020. Analysts expect
more loans to sour in Hong Kong and
mainland China. Elsewhere, commercial
property is also starting to look iffy in post-
Brexit Britain; negative interest rates are
eating banks’ margins in Europe.
A bigger worry for investors is whether
the bank can do as it promises. Joseph
Dickerson of Jefferies, an investment bank,
says the overhaul marks hsbc’s first real
stab at trimming its bloated middle office.
But controlling costs is becoming more dif-
ficult. For its previous round of scalpel-
wielding, in 2015, which was aiming to gen-
erate about $5bn in annual cost cuts, hsbc
booked $4.5bn in restructuring charges.
The latest plan looks to generate similar
savings, yet the bank this time expects to
incur costs totalling $7.2bn.
Boosting sales while cutting expenses is
not easy to pull off. Demoralised staff may
be hesitant to launch new products. Scale
matters in banking, and losing it will make
it harder to gain an edge. The asset sales
may compound the problem. Reinvesting
$100bn in proceeds could take some time:
hsbc’s Asian risk-weighted assets have
barely budged since 2017. It also wants to
grow its retail and wealth-management
arms, but most investment banks, penal-
ised by heftier capital requirements, are
earlier at it. In the interim parking the cash
in low-yielding, liquid alternatives, like
money-market funds, may reduce income,
notes Daniel Tabbush of Tabbush Report, a
research firm.
The uncertain outlook makes hsbc’s
dithering over its new chief executive all
the more surprising. Mr Tucker has not yet
entrusted Mr Quinn with the authority a
boss needs to enforce a painful overhaul;
yet recruiting an external candidate, after
such a thorough restructuring has been an-
nounced, will be hard. Mr Tucker should
make his choice, sharpish. 7Europe’s largest bank has a new
strategy—but no permanent bossHSBC pivots east, againThe incredible
shrinking bank
O
n february 13 th1990 Drexel Burnham
Lambert, which only a few years earlier
had been America’s most profitable invest-
ment bank, filed for bankruptcy. Its death
knell had sounded ten months earlier
when Michael Milken, who created the
junk-bond market on which the bank’s suc-
cess was founded, was indicted for fraud.
He would plead guilty to six counts and
serve 22 months in prison.
Thirty years on, Mr Milken has been
pardoned by President Donald Trump.
Among his petitioners was Rudolph Giu-
liani, the president’s personal attorney,
who had led the investigation into Drexel
three decades ago. The pardon was much
sought after. Many of the people who
worked at Drexel have long felt that the
prosecution of Mr Milken was, in essence, a
vendetta. Drexel was an upstart firm. It un-
settled corporate America by supplying
junk-bond finance to a new breed of cor-
porate raiders. It used its dominance of
high-yield-bond trading, which Mr Milken
had built up in the 1970s and early 1980s, to
push into mergers and acquisitions and
underwriting. That put noses on Wall
Street out of joint. “We were not very hum-
ble about our success,” says a former col-
league. So when the Feds came for him, Mr
Milken had few friends in high places and a
lot of enemies. He made a handy scapegoat
for the savings-and-loan crisis.
If that was the reality then, things are
quite different now. A statement from theAmerica’s junk-bond king gets a
ratings upgradeMichael MilkenFriends in high
places
Milken itCorrection:In “Structural adjustment” in last week’s
issue, we said that, by convention, America chooses
the first managing director of the IMF. In fact it
chooses its first deputy managing director. Sorry.