Wednesday 13 December 2017

HSBC could break up under 'extreme solution'

Th logo of HSBC Private Bank is pictured in Geneva, Switzerland. Photo: AP
Th logo of HSBC Private Bank is pictured in Geneva, Switzerland. Photo: AP

Stephen Morris

HSBC chief executive officer Stuart Gulliver is facing calls to break up Europe's largest bank after cutting the bank's profitability targets.

Mr Gulliver, who is struggling to contain a tax-evasion scandal at HSBC's private bank that he said brought "shame" to the firm, reported 2014 earnings that missed analysts' estimates, driving the stock down almost 5pc on Monday in London.

He said parts of the investment bank and some national divisions don't offer sufficient returns and may face "extreme solutions".

On Monday, he cited Brazil, Mexico, Turkey and the US as potential markets for disposals, among 74 countries where HSBC operates. While the CEO has cut some 50,000 jobs and exited 77 businesses in four years, the bank's market value of £111bn (€98bn) makes it the biggest in Europe, as global regulators toughen scrutiny on the largest lenders.

"The most obvious solution is to break the bank up, as the evidence suggests that the bank is too big to manage," said Ed Firth, a London-based analyst at Macquarie Group in London.

"It's difficult to get around the numbers."

The shares were little changed at 576.4 pence in London early yesterday after dropping as much as 6.5pc on Monday. The bank's share rating was cut to neutral from buy at UBS Group, while Canaccord Genuity analysts lowered their recommendation to cut from buy.

"There are no sacred cows," Mr Gulliver said. "We're still on a journey to simplify the firm. I don't rule out that we might make more disposals," he said, adding he didn't accept that the bank is too large to be manageable and he still believes in the universal banking model.

Return on equity, a measure of profitability, fell to 7.3pc in 2014 from 9.2pc. HSBC said it's looking for the measure to exceed 10pc, compared to the 12 to 15pc range set in 2011, when Gulliver took over as CEO. "Targeting a 10pc return on equity is hardly market- eading, is it?" Macquarie's Mr Firth said.

The bank's cost-efficiency ratio - a measure of costs versus revenue - jumped to 67pc last year from 60pc in 2013. Though headquartered in London, HSBC still makes most of its earnings in Asia and grew into a global giant through decades of dealmaking, including the acquisitions of Midland Bank in the UK and Marine Midland Bank in the US. Its expansion was only halted by the financial crisis and the resultant increase in regulation and capital requirements.

"If there were disposals from the US, Brazil, Mexico, Turkey, the market would receive it well because it could relieve both cost and capital burdens," said Sandy Chen, an analyst at Cenkos Securities in London.

"A lot of their global banking and markets probably fails their return on risk-weighted asset hurdles," he said, referring to HSBC's investment bank.

Irish Independent

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