Wednesday19 February 2020 ★ FINANCIAL TIMES 13
COMPANIES
DAV I D C R OW A N D AT T R ACTA M O O N E Y
LONDON
WhenNoel Quinntook to the stageyes-
terday to unveil his plan to overhaul
HSBC, he promised to deliver “one
of the deepest restructuring and simpli-
fication programmes in [the bank’s]
history”.
Peering over a pair of rimless specta-
cles, the interim chief executive
sketched out a radically different future
for HSBC that will tie the bank even
more closely to Asia. It sounded
remarkably similar to the vision of
HSBC’s founders, who set the bank up in
1865 to capitalise on trade flows
between east and west.
Achieving this will involve extensive
surgery. Mr Quinn intends to drastically
shrink the bank’s presence in Europe
and the US, mainly by taking an axe to
its underperforminginvestment bank.
Over the next three years, the lender
plans to remove $100bn of assets,
adjusted for risk, from its balance sheet
and use the extra capacity to pursue
new business opportunities in Asia and
other emerging markets.
By the time the overhaul is complete,
three years from now, the bank esti-
mates it will havecut around35,
jobsfrom its current headcount of
235,000 and taken about $7.2bn of
restructuring charges.
In addition, Mr Quinn wants to rid the
lender of its fabled bureaucracy, which
is sometimes compared to the Foreign
Office during the British empire. Highly
paid investment bankers and traders
working in Canary Wharf will bear the
brunt of job cuts.
If the plan works, HSBC says it can
boost its return on tangible equity — a
headline measure of profitability —
from 8.4 per cent last year to between
10 and 12 per cent by the end of 2022,
bringing returns closer to those gener-
ated by large US banks.
However, Mr Quinn and histeam
must complete thistransformation at a
time when the economy in Hong Kong,
HSBC’s main profit engine, issplutter-
ing after months ofsocial unrestand
before they know how badly the spread
of coronaviruswill affect the bank.
Investors have been calling for a plan
like Mr Quinn’s ever since the financial
crisis, pointing out that too much of
HSBC’s capital is trapped in European
and US businesses where it makes little
to no money, even thoughAsia accounts
for90 per cent of pre-tax profits.
But the overhaul unveiledyesterday
disappointed the stock market, with
London-listed shares in HSBC closing
down6 per cent. Over the past 12
months, the share price has declined by
almost 13 per cent, underperforming
the wider European banking sector.
Some investors are worried that Mr
Quinn, who has been running the bank
on aninterim basissince August, will
not be in his job long enough to seethe
overhaulthrough. He was appointed on
a temporary basis after his predecessor,
John Flint,was sackedbecause the
board decided his own turnround effort
was too slow and lacked ambition.
Several shareholders said they were
concerned that HSBC was embarking on
suchan overhaul without a permanent
leader. “It’s barmy,” said one large inves-
tor, adding that theyhad expectedthe
bank to appoint either Mr Quinn or an
external candidate before the strategy
was announced.
Another top20 shareholder
said uncertainty around who
will lead the bank in the long
term was “not helpful”.
Mark Tucker,chairman, is
unapologetic. Having
botched onesuccession proc-
ess by appointing Mr Flint
in 2017, only to force
him out after 18
months on the
job, he does
not want to
make another mistake. On a call with
reporters,Mr Tucker pointed out that
he has always said the search for a new
CEO would take six months to a year —
even if investors want clarity more
quickly — meaning he has until August
to make a pick.
He bristled in response to a question
asking why some shareholders were
unnerved by the lengthy search. “You
should ask investors that. We set out
very clear guidance and we’ll follow
that,” he said. “None of this should be a
surprise.”
However, that argument does not
wash with some investors, whosay it
will be difficult to find a high-calibre
external candidate to lead a bank where
the strategy is effectively set in stone.
“There have been too many strategy
changes to bring in someone else now,”
saidColin McLeanofSVM Asset Man-
agement, which owns HSBC shares.
“The longer the interim arrange-
ment persists, the harder it will
be to convince the market.”
Another point of contention
among someis that HSBC will use the
capital freed up by shedding assets in
Europe and the US to fund an ill-defined
growth spree in Asia.
Some had hoped that at least part of
the capital trapped in low-returning
markets would be returned to share-
holders via chunky buybacks, as has
happened at other European banks.
Italy’sUniCredit, for instance, has
dramatically reduced the size of its bal-
ance sheet and now plans to reward
investors with a€2bn buybackand
higher dividends.
HSBC also ruled out any buybacks
this year or next to neutralise the
impact of the “scrip dividend”, which
allows some investors to receive addi-
tional shares in the bank instead of a
cash payout. The bank spent $3bn on
buybacks in 2018 and 2019 to offset the
dilution of shareholders.
Ewen Stevenson,finance chief, said it
was not fair to compare HSBCwith
other European banks, which had little
choice but to return excess capital to
investors given the paucity of growth
opportunities in theirmarkets.
“The core difference for us versus oth-
ers is we have areas to invest in to grow
that they don’t have,” he said.
However, Ronit Ghose, a banks ana-
lyst at Citigroup, said that while HSBC
had set out “some detailed analysis” on
how it will reduce the size of its balance
sheet, there was “limited quantification
on how this $100bn will reinvested”.
Another complicating factor is the
darkening outlook not only in Hong
Kong but also in mainland China, which
is struggling to contain the spread of
coronavirus. Even before accounting for
the impact of the virus, HSBC warned
that its revenueswould fall this year in
large part due to lower global interest
rates that reduce the amount banks
Lender’s shake-up plan meets cool reception
HSBC investors question ‘barmy’ decision to launch overhaul without permanent leader while other gripes include lack of buybacks
HSBC unveils plan for a slimmer and stronger bank
Share price (pence)
Sources: Bloomberg;companies; FT research
Jan Feb
Employees (’ )
Fall from about
to
within three yearsForecast
Announced job cuts since
HSBC
Deutsche Bank
UniCredit
Santander
Commerzbank
Barclays
SocGen
CaixaBank
KBC
BNP Paribas
UBS
- - - -
HSBC became the
latest bank to
announce radical
job cuts with the plan
to axe about 35,
positions in its
European and
US operationsAs a of
employees
Number of employees (’ )
Job cuts across Europe’s banks
J O E M I L L E R— FRANKFURT
Germany’s top-tier companies issued a
record number of profit and sales
warnings in 2019, withautomakersin
particular forced to revise their targets
in the face of a downturn in theglobal
car marketandtrade tensionsbetween
theUSandChina.
More than 170 negative forecasts were
issued by the 300-plus businesses listed
on Frankfurt’s premium indices, includ-
ing chemicals giantBASFand car indus-
try heavyweightsDaimlerandConti-
nental, according to research by EY.
That number represents a 25 per cent
increase on 2018, and the highest level
inthe eight years since EY began keep-
ing records. On average, German com-
panies, including10 of the12 leading
auto manufacturers and suppliers,
reduced their profit targets by 37 per
cent.
The analysis comes as several Ger-
man multinationals are expected to
take a further hit to their profits, due to
effects of thecoronavirus outbreakon
global supply chains.
“China is likely to fail as a growth
engine in the first quarter,” said Marc
Förstemann, a partner at EY. “Alterna-
tive suppliers are hectically being
sought” by companies with strong links
to the country, he added.
On Monday,Volkswagenconfirmed
that plants at one of its jointly owned
Chinese subsidiaries,SAIC, would
remain closed for a further week due to
infection concerns. Sales in the com-
pany’s largest single market had already
fallenmore than 11 per cent in January.
“We are working hard on getting back to
our normal production schedule, while
facing delays due to national supply
chain and logistics challenges, as well as
limited travel options for production
employees,” VW said.
Parts-maker Continental, which
employs 24,000 people at 50 locations,
is also highly exposed to production
delays.
Meanwhile, Europe’s car market con-
tracted by 7.5 per cent in January, and
fell by a similar amount in Germany,
compounding the industry’s concerns
over its ability to fund the transition to
battery-powered vehicles.
Targets
Profit warnings hit record in Germany
‘If I wanted an easy
headline... I’d have just
made the decision to sell
the US retail business’
make from lending. Mr Stevenson said
the bank would have to set aside an
extra $600m this year in the event that
the coronavirus outbreak drags into the
second halfso it can cover losses from
souring loans. He also said that if the
virus continued to rage beyond the next
six weeks, there would be a “progres-
sively more acute” hit to revenues,
profit and capital.
While Mr Quinn’s plan to overhaul the
investment bank and cut costs is dra-
matic, he has taken a more cautious
approach to the lender’s underperform-
ing retail operation in the US. Although
HSBC said it plans to close more than 60
US branches out of a total of 224, Mr
Quinn resisted calls from some inves-
tors to dispose of the business.
“If I wanted an easy headline and an
easier day-to-day, I’d have just made the
decision to sell the US retail business,
but I genuinely don’t believe that’s the
right answer,” he said.
Rather, Mr Quinn believes that the
bank can develop a retail offering that
appeals to wealthy, internationally
mobile customers in the US, while using
their deposits to fund its corporate
banking activities.
In addition to charting a different
course for HSBC, Mr Quinn has cleared
the bank’s top ranks, forcing some exec-
utives out and shunting others aside, in
the biggest shake-up sinceStuart Gul-
liverbecame CEO in 2011.
The latest casualty isAntónio Simões,
head of the global private bank, who will
leave HSBC after 13 years following the
decision to subsume his unit into a
beefed-up retail division.
Aware that his job was at risk, Mr
Simões applied to become head of
HSBC’s commercial bank but lost out to
one of Mr Quinn’s trusted lieutenants.
In just six months, Mr Quinn has
reshaped HSBC in his image. Now inves-
tors want to know whether he will finish
the job — and Mr Tucker is running out
of time to decide.
See Lex
Noel Quinn’s
role as interim
chief means
any successor
will be forced
to confront a
strategy
already set in
stone
Anthony Wallace/AFP
FEBRUARY 19 2020 Section:Companies Time: 18/2/2020-18:51 User:jon.wright Page Name:CONEWS2, Part,Page,Edition:USA, 13 , 1