These days, markets forgive and forget anything except the suspension of share buybacks.
By Nick Corbishley, for WOLF STREET:
Global banking behemoth HSBC’s net profit slumped 53% in 2019, to $5.97 billion, after the lender announced a $7.3 billion write-off to reflect weakened conditions in global banking and markets, and European commercial banking. Its shares dropped 6% in London and are now down 25% from a peak in January 2018.
Many of the bank’s problems originated in Europe, where the ECB’s negative-interest-rate policy is decimating even large Eurozone banks’ ability to turn a profit. HSBC’s write-down in the 4th quarter resulted in a pre-tax loss of $4.65 billion in the bank’s European business. In the U.S., where lower interest rates also took a toll on the group’s performance, revenue shrank 3%, to $4.7 billion, and adjusted profits before taxes fell 39% to $600 million.
In a bid to reverse this trend, HSBC will embark on an ambitious global restructuring program that will see it withdraw even further from certain markets. The number of countries it operates in has already dwindled from 87 in 2011 to just over 50 today, spurring HSBC to eventually ditch its slogan, “the world’s local bank.” The number will keep falling as it doubles down on its Asian pivot.
The bank also plans to slash around 15% of its global workforce over the next two years, which would amount to 35,000 job cuts, bringing its workforce down to about 200,000 people, in the hope of reducing operating costs by just over $4 billion. “This represents one of the deepest restructuring and simplification programs in our history,” said interim CEO Noel Quinn.
Quinn said some of the job cuts would occur through natural attrition as existing employees leave HSBC of their own volition. But its under-performing investment bank is likely to suffer a large number of the cuts. So, too, are the bank’s European operations, where it aims to reduce costs by 25%. It’s not yet clear how many jobs could be on the line in its domestic UK market where the bank employs some 40,000 people. Workers in the U.S. also face significant job losses amid HSBC’s planned closure of around a third of its 224 branches there.
The bank also plans to shed $100 billion of assets by 2022, with the stated goal of keeping pace with its sharper, nimbler, more focused competitors.
HSBC will also suspend share buybacks for the next two years to pay for the restructuring costs. In this climate, markets forgive and forget anything except the suspension of share buybacks. The announcement of cutting 35,000 jobs would have normally boosted shares, as even massive write-offs are ignored. But the suspension of share buybacks is toxic.
While HSBC blames the bulk of its poor performance on mature markets in Europe and North America, with their low or negative interest rates, it’s in its most important market of all, Hong Kong and mainland China, where it faces the biggest headwinds and risks. HSBC’s headquarters may be based in London but it’s in Hong Kong where the lion’s share of its money is made.
By far Asia’s biggest financial hub, servicing not just China but many other Asian markets, Hong Kong accounted for 60% of HSBC’s global pretax income in 2019. Throw in mainland China and it reaches 75%. As Bloomberg notes, “few if any of the world’s largest financial companies dominate a single market quite like HSBC does in Hong Kong”. The bank is the city’s biggest mortgage lender in the secondary market, rules the roost in investment banking, and is one of Hong Kong’s three note-issuing banks.
But Hong Kong’s local economy, already mired in a deep contraction during the second half last year due to the combined result of months of political upheaval and a protracted trade war between the U.S. and China, is now reeling from the impact of the coronavirus.
In 2019, despite all the political turmoil, HSBC managed to increase its pre-tax profits in Hong Kong by 5%. But now, COVID-19 has been thrown into the mix.
“Since the start of January, the coronavirus outbreak has created significant disruption for our staff, suppliers and customers, particularly in mainland China and Hong Kong,” Quinn said. “Depending on how the situation develops, there is the potential for any associated economic slowdown to impact our expected credit losses in Hong Kong and mainland China. Longer term, it is also possible that we may see revenue reductions from lower lending and transaction volumes, and further credit losses stemming from disruption to customer supply chains.”
HSBC’s leading role in global trade finance means it’s acutely vulnerable to the widespread disruption that’s already beginning to dislocate global supply chains as a result of China’s official reaction to the coronavirus.
“As of yet there’s no huge immediate impact,” says Andrew Rigden Green, a partner at law firm Stephenson Harwood. “But what will happen if this goes on for a long period of time, or the banks in China continue to be closed, or the correspondent banks are unable to issue export letters of credit in relation to certain sales? Then there could be failures in the trade finance chain.”
HSBC has already moved into action to try to mitigate this risk, offering to provide $3.9 billion in liquidity relief for businesses in Hong Kong, including cash flow support for trade finance customers. Together with a number of other large Hong Kong-based lenders, it has also announced plans to allow mortgage holders and struggling small businesses to make interest-only payments on loans, in the hope that this will keep the customers in its most important market solvent. By Nick Corbishley, for WOLF STREET.
It’s not only Chinese tourists, business travelers, and property buyers who’re not showing up, but also travelers from all over the world who’ve gotten second thoughts about sitting on a plane…. THE WOLF STREET REPORT: Coronavirus Slams Airbnb, Airlines, Hotels, Casinos, San Francisco, Other Hot Spots
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Oh boy, we’re about to see how insulated the US economy really is and what degree of resilience the US dollar hegemony will show in these next few years. More importantly at what lengths the fed will go to protect as such.
HSBC is a British bank for all those reading the article.
In every practical sense it’s a Hong Kong bank with a rump HQ in the UK.
60% of profit from HK and 75% once China included.
Which are a big part of its current distress. HK in political turmoil and recession and now both HK and China getting first wave of COVID.
It started as Hang Seng drug cartel bank.
Good riddance to bad rubbish as the brits say.
A true criminal enterprise.
The Fed can’t manufacture widgets, but they sure as heck can throw sabots in the gears.
Everybody was looking at Deutschebank and it was HSBC that we needed to be worried about I guess Probably both and others lurking in the shadows
Deutsche Bank has been restructuring and shrinking its operations for years. It has announced serial layoffs globally. It has shrunk its balance sheet. It’s trying to sell divisions. It started doing years ago all the things that HSBC is now talking about.
DB is the same old basket case, and to make matters worse nobody has a clue on what big pile of scandals they are sitting on right now. It will be interesting to see what the new German government will do about that now that all the old Merkel Era crooks are scrambling for the exit.
HSBC is different: it has long been one of Europe’s most profitable banks. If they are seeing profits drop at that rate it means the rot caused by monetary policies is getting at them as well.
HSBC in the specific is a victim of the “Europification” of the Chinese economy,long a major source of excellent profits: Chinese authorities are slashing rates, cutting reserve requirements, injecting cash and generally stealing a page from Mario Draghi’s book to avoid at any cost even the mildest correction (note: not recession) in an economy that desperately needs a lot of iron discipline.
If authorities in Beijing continue their Long March towards ZIRP or even NIRP HSBC is going to be squeezed harder and harder, with nowhere else to run: HSBC is already heavily invested in Asia’s emerging markets. Differently from the Johnny Come Lately Asia Bulls they have long ridden that train, and made a ton of money out of it, but now that train is running out of steam as economies mature, the temptation to engage in monetary alchemy become too strong to be resisted and the world has to tackle the excesses of the 2010’s.
To give this a personal perspective. I’m a member of the British Club in Bangkok. The longest serving fellow of the establishment joined the Hong Kong Bank (as was then) just after WW2. One night we had a very interesting chat, that which pertains to this article (and your comments) was that banking a couple of generations back was simplicity itself, especially in an environment were the real economy was growing at at least 10% pa. You asked about, you found the best local bet, and then you bankrolled them – under strict supervision. Their businesses skyrocketed and your loan business blossomed.
Today Thailand has GDP growth that mirrors that of Britain in the 1970’s. China says it has 7-8%, but that’s tripe with even biblical QE and Ozymandias-like cement laying resulting in anemic 3-4% growth. Krugman was right on the money in his FA article of ’98. East Asia isn’t a miracle, it’s a model of extensive rather than intensive exploitation, and the chickens are coming home to roost, big time.
Who are their biggest financial entity counter-parties? Any in U.S.?
Things just got real.
“HSBC will also suspend share buybacks for the next two years to pay for the restructuring costs.”
What next? Apple missing guidance and sales because all their factories and suppliers are shut down due to a virus and being concentrated in a single country…?
The sooner American companies diversify their supply chains out of China, the better.
SARS or the Coronavirus or the filthy-pig-virus du jour offer convenient cover to move.
Its taken 25 years to build up those Chinese supply chains.
Like I said, the sooner US companies diversify out of China, the better. If they could do it by next Tuesday, that’d be great.
the Mexican flue originated from “squeaky-clean” Netherlands, just sayin …
and who knows what we have been importing from the US.
I’m pretty sure England will save them if need be with no effort “on England’s part”. The Brexit dividend will save all. That’s not even bringing up the unstoppable might of all that British sovereignty. Pretty soon HSBC like the rest of Britain will be so used to winning, they will get bored of winning.
One of HSBC’s original lines of business was in providing infrastructure and services for money-laundering. They paid 5% of the profits or so in a no-fault settlement and so were duly castigated. Then they moved to HK and started servicing the Chinese Market for ‘capital relocation services’.
Part of the ‘Brexit dividend’ not talked so much about is for the UK to get out from under EU’s tax-evasion and money-laundering framework, which quite by totally random coincidence happens to kick in during 2020. Hence the desperate rush for the Exit!
From that, one would think that someone like HSBC would fit right into whatever ‘visions’ the UK has for the future. They can be one of Dominic Cummings exotic misfits.
Alot of people online mentioned the tax evasion law, it was mentioned often on the Brexit reddit. The problem for England though is that now that the UK is out of the EU, why let any of the EU money escape through the UK. England doesn’t seem to understand that without being in the EU, it will make more and more sense to funnel money through other countries. If I’m a rich guy/company in Germany rather than funneling money though the UK I can just funnel it through Switzerland, the Cayman Islands directly, the Czech Republic “they don’t use the euro”, or many others. There is no longer any reason to use the UK. For many reasons not just because they left the EU, the EU will will have reasons to crush England. The constant attacks on the EU even as they left, didn’t do them any favours. The talk of the brexiteers was approaching a country about to declare war. Maybe not a combat war, but at least an economic war.
‘Rich Guy’. You do know that Monopoly money isn’t real money, right?
Real money or not they still can funnel it. Also there is real wealth in Germany. Those german factories have very real value. While most money floating around is fake in the EU and America, there still is a lot of real assets.
Dunno about the UK saving HSBC. We’ve been here before.
Threadneddle St rescued RBS, and the cost of that rescue ran into billions.
So what you’re saying with the increasingly-bad news out of China is that Tesla shares will blow past $1000 this week, yes? :)
Resign Carrie Lam, Resign…PJS
rates been low since ‘09, stock peaked in j’18, your going to restructure/pivot into a pool of fecal soup, but its the fault of someone that sucked the snot out of his bird so he could roll it for some fun tickets, and the authorities for being distracted on talent night at the open air prison? well, besides hiring dewey, cheatham, and howe for their mad forecasting skills, i think we found the other problem.
“But the suspension of share buybacks is toxic.”
Not least of which because it *directly* props up share price.
I think people badly underestimate how thin retail investor interest can get when spread across 6/8/10k+ possible stocks.
In contrast, those controlling the corporate treasury/buybacks are focused on one stock – their own.
Once that source of demand is gone…very bad things can happen.
Corporate buybacks provide an excellent means to ensure that other traders are able to buy low and sell high. It’s important for the markets to have a reliable pool of “buy high, sell low” traders, such as corporate share buyback systems. Trading as a whole is a zero-sum game, and every buyer has to have a seller. That means every loser creates a winner. Corporations only buyback stock when they are flush with cash and stock prices are high. They cannot afford to buyback stock when they are in financial distress and share prices are low. But they can issue stock to execs at that time (in lieu of cash compensation, it even looks good for the balance sheet), and then if the company recovers the execs can sell back to the company buyback plan. What’s not to like? /SARC
The idea is to buyback shares when the DOW falls to fair market value around the 4,000 level where it should be. Buying back shares 100 years in the future today = chapter 11 bankruptcy.
God, I love reading stuff from guys like The Real Tony. Knowing that DOW FMV is 4000 (83% decline from today) offers such peace of mind.
Of course, I doubt Tony knows squat about markets; But then knowing Tony has spent every last cent he has shorting everything in sight is somewhat of a consolation.
Puts in HSBC are relatively cheap right now. A couple things to consider if playing the short side though …
1. The liquidity with a yield at 5.58% can attract investment from various high yield diversified funds.
2. HSBC is very likely a beneficiary of Chinese central bank easing, so they won’t necessarily face liquidity problems anytime soon.
Still, the chart is bearish with significant support at the 2016 low of $30, and I could see it potentially re-testing that. A $35 put for June 19 is just $1.70 and for
Sept 18 is $2.50. Might be worth a small gamble, but not with serious money … it’s basically a double-or-nothing bet.
1. HSBC $ denom debt (in LQD) is rated A2/A3 currently with with coupons ranging from 3.0 to 6.2 BUT nearly all of it trading way above par so you deff wont get anything near 5.8 now. Only 5 out of 20 of the issuance even yields above 5, and all of that has maturity dates greater than 2036! HY folks will stay the hell away from that much duration risk (median maturity date is Nov 2026), and all of it is unsecured (“-NT”):
2) Chinese liquidity != $ liquidity, any increase in credit risk $ debt outstanding and they’ll loose access to $ funding markets at current rates
I am all for HSBC’s workforce being reduced by 100% in the next two weeks. Heck, all banks need to have their workforce reduced by 100% and all debt canceled.
Much better if all major central banks see 100% workforce reduction and a reduction to rubble for their complete infrastructure. Some normal banks still do a bit of useful work, central banks are only destroying the real economy nowadays and organizing the biggest bank robbery in history.
Please start with reducing the ECB with its Gucci chair to below zero as they are the worst of them all.
“organizing the biggest bank robbery in history.”
It is amazing that more people don’t realize the huge transfer of earning/spending power that ZIRP effects, from savers to the government.
For every $10 trillion in savings (about the size of US bank savings alone…ignoring bonds, MBS, etc…) a 4 pct reduction in rates due to ZIRP transfers 400 *billion* *every* yr from savers to borrowers (very frequently the US gvt).
20 yrs of this…8 *trillion*.…with not so much as a thank you…much more often…you did not build/save/earn that.
Gvts in their death throes will pretty much do anything.
yes, sadly 95% percent of people who consider themselves intelligent will give you a blank stare if you explain to them what is really going on. Especially government workers of course who are reaping huge benefits at the moment (in my country, probably elsewhere in Europe and US too).
The real “Umbrella Corporation” is not some Wuhan research lab, but BIS/FED/ECB etc. who are turning the whole world into economic zombies while pretending to do something good. The past few days have shown that nothing can stop the zombie stampede they have caused, too late for quarantine ;(
It’s about time the zombies turn on their creators, but I’m afraid that will only happen when it is too late and that the worst villains will have fled to their bunkers in Switzerland or New Zealand by then :(
All debt canceled Why Nobody forced you to borrow the money now did they You need to send a check to Bernie ASAP
Sounds like the movie “Fight Club,” lol.
1) The west is losing HK. Is Japan next.
2) The Nikkei peaked on Dec 1989 $1T.
11) HK is probably gone. HK might start a domino chain collapse that will reach Japan within few years.
Losing HK to whom? Hong Kong was always a part of China as shall forever be. The Chinese teach their kids about the Opium War and have a long memory, so the west should realize that yes, you lost Hong Kong. Get over it.
Also, the Japanese are xenophobes and will not want to be assimilated by the west.
Get out and travel and talk to some people in foreign countries. It will do you some goo.
I can think of CONTAGION here.
A few years ago HSBC and Wachovia were caught laundering billions in Sinaloa Cartel drug money. Naturally, there were no criminal charges against any bank officers. Instead, our corrupt DoJ gave them the usual slap-on-the-wrist fines and sternly worded letters, then let them go right back to business as usual.
Meanwhile, kids selling dime bags on inner city street corners went to prison for years. “Some animals are more equal than other animals” — George Orwell, ANIMAL FARM
Not true: We were with Wachovia at the time, and it was wrapped up and sold, along with a more regional SE bank who was either next in line after or previous to Wachovia,, Colonial I think was its name… both were rolled into BBT if I remember correctly, and newspapers reported execs from both Wachovia and Col? doing jail time, as they should have done.
Sorry my memory is not very good about this, but we were not really harmed or greatly affected as our accounts all remained viable through the whole process.
Otherwise, I agree totally with the concept that not enough of these higher level white collar criminals are doing the jail time they so richly deserve, along with their assets, including those hidden in their wife’s sisters mother in law being taken and distributed to the real victims, not just put into the general funds of states, etc.
Wachovia was purchased by first union bank, lovingly referred to as FU bank by its customers. They were the beginning of the end for that great North Carolina based regional. Wells Fargo simply applied the final death blow. They’re all corrupt.
Wachivia was taken over by wells fargo
Seems to me part of the solution to Hong Kong and China’s problems are obvious:
1). QE and liquidity (already doing that).
2). Fracking. Think of the jobs it will create.
Must be lots of frackable land in Hong Kong. And the mainland has lots and lots of mountains people can’t live on, anyways. They can just keep crowding into overpopulated coastal cities. When the oceans keep rising from all the methane released…well…that’s just the weather and is far in the distant future. And I’m sure they can live w/o clean water. And if anyone doubts all that, we can just demand they provide 5 links showing otherwise…which seems to the norm.
My prediction: China will eat HSBC – and the entire HK FIRE sector – in the next decade.
China smartly suckered “Western” Moneybags into financing their miraculous leap from 3rd-world to 1st. I suspect that they’re approaching the point where continued reliance on outside finance will be unnecessary. When the current Asset Bubble pops, China will be able to recover quickest. They’re the only (?) major country where Gov’t controls the Central Bank, so they will be more able to coordinate counter-cyclical Fiscal & Monetary policy. (there are down-sides: centralization increases the cost of mistakes & corruption)
The longer the US postpones a crash by propping up Wall Street, the more China will be able to profit from the bust.
Yes, instead of a WWII type fast-track re-industrialization it looks like it will be a Fed / Wall Street prop-job until the ultimate collapse.
The bank was going to take a hit from the HK situation, you could see it coming for months. I heard their foreign staff left HK months ago.
My gut instinct tells me the 35K reduction in workers is not going to save them much because their workers don’t make much, especially in Asia.
Keep in mind this is on top of the approximately 15,000 layoffs announced last year. To lift a quote from Biden to Obama, this is a big f@cking deal.
These banks cannot make money in negative rate environment.
Sure they can. Non interest fee income. Oh, wait, here comes fintech to disrupt their world. Yep, they’re screwed.
Closed green today…
HSBC is just another TBTF run by Banksters. None of them go to jail. Look at the continual Ponzi that they run. Look at the HFTC scams that drive this fake market and repress PM. Who really cares. No one……
I’ve thought for some time now that HSBC is a systemic risk to the UK banking system and that it’s most probably technically bankrupt and has been for some time now.
An objective, forensic analysis of it’s trading and property books would I wager show that the thing is a busted flush. Luckily for them a combination of their unholy corporate structure and the more general post-2007 Alice in Wonderland economic environment + the China card has bought them (up to now) a high degree of camouflage. My guess is that this is unravelling right now, and that the bank’s most senior ex’s are busy lobbying The BoE, the Treasury, the Feb and their Beijing counterparts in a desperate attempt at rescue package that will leave them independent and the current ruinous management in-situ. Good luck with that you bunch of shysters. More in hope than expectation, I pray that Boris, or rather Cummings cuts the bastards loose and lets the CP in Beijing pick-up the pieces.
And those holdings they’re going to shed? Would that be Alibaba, Alphabet, Facebook, Apple…?