HSBC Holdings Plc, Europe’s biggest bank by market value, said it will cut jobs and close offices as it seeks to lower costs by about a tenth within the next two years to invest in faster-expanding economies and prepare for stricter capital rules.
The bank said it would target cost cuts of $2.5 billion to $3.5 billion by 2013, according to a statement today, compared with total operating expenses of $37.7 billion last year. The lender may exit unprofitable units among its 87 national subsidiaries, cut head office jobs and conduct a strategic review of its U.S. cards business, it said today.
“There is little revolutionary within the announcements,” Keefe, Bruyette & Woods Ltd. analysts including Mark Phin said in a note to clients today.
The bank’s new Chief Executive Officer Stuart Gulliver, 52, this week said it may take as long as three years to reach the bank’s targets on reducing costs, which are the highest among its U.K. peers. He’ll spell out the changes at a meeting with analysts in London today. Competitors including Competitors including Barclays Plc are also seeking to exit businesses with low returns as regulators demand they hold more capital in the wake of the global financial crisis.
“This is not about shrinking the business but about creating capacity to re-invest in growth markets and to provide a buffer against regulatory and inflationary headwinds,” said Gulliver, who replaced Michael Geoghegan in January. “We will continue to invest in markets with strategic relevance and high actual or potential returns and will either turn around or dispose of other businesses.”
HSBC said it would cut $1.38 billion of costs by 2013 through measures including simplifying “regional structures,” consolidating data centers, shifting operations to cheaper cost locations, and reducing paperwork.
The bank had 295,061 employees worldwide at the end of 2010 compared with 315,520 at the end of 2007, according to the bank.
The bank fell 1.4 percent to 647.5 pence at 8:28 a.m. in London, for a market value of 115.4 billion pounds. That marked the biggest decline in the FTSE 350 Index of Britain’s five biggest banks.
Costs rose to 60.9 percent of income in the first quarter from 49.6 percent, earnings figures showed on May 9. Net income rose 58 percent to $4.15 billion from $2.63 billion a year earlier.
The first-quarter results, with emerging markets outperforming developed ones, showed that HSBC is “a developing-market bank trying to escape from the body of a very different type of ‘conglomerate bank,’” Mediobanca SpA analysts said in a note yesterday. HSBC is “immensely powerful” and its results showed structural flaws “that prevent it providing the kind of shareholder returns the bank should be capable of providing.”
HSBC, whose origins date back to 1865 when it operated as the Hongkong and Shanghai Banking Corp. to finance trade in opium, silk and tea, focuses on emerging markets. It has 7,500 offices.
The bank could free $25 billion of capital by selling its U.S. credit-card unit, Rohith Chandra-Rajan, an analyst at Barclays Capital, wrote in a note to investors last week.
HSBC acquired the credit-card unit in 2003 with its $15.5 billion purchase of U.S. subprime mortgage lender Household International, now known as HSBC Finance. In 2009, HSBC halted consumer-finance lending at HSBC Finance, which has contributed to about $60 billion of provisions in North America, according to data compiled by Bloomberg.
‘Lot of Inefficiency’
“HSBC has a lot of inefficiency and manages a lot of its processes on a region-by-region basis,” Cormac Leech, an analyst at Canaccord Genuity Ltd. in London, said before the statement was published.
The bank reiterated that it seeks a return on common equity of 12 percent to 15 percent. It lowered that goal in February from 15 percent to 19 percent.
HSBC could climb to about 950 pence a share if Gulliver committed to ensuring all businesses generate a return on equity exceeding 10 percent, Gareth Hunt, an analyst at Investec Securities in London, wrote in a note to investors last month. HSBC shouldn’t have “a flag in every country,” he wrote. The bank’s shares closed at 656.2 pence in London trading yesterday.
Among the bank’s peers, Barclays cut its target for return on equity in February to at least 13 percent from the 18 percent CEO Robert Diamond has said it averaged over the past three decades. Credit Suisse Group AG, Switzerland’s second-biggest bank, trimmed its goal to more than 15 percent from more than 18 percent.
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