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.
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