HSBC seen making investment banking cuts, with equities at risk

[LONDON] HSBC Holdings Plc is poised to announce deeper cuts at its investment bank as part of a plan to revive profitability that Chief Executive Officer Stuart Gulliver will present next week.

Foreign exchange and rates trading may be prioritized because they have the highest return on equity of any part of the investment bank and help HSBC service its corporate clients operating globally, said a person with knowledge of the matter, who asked not to be identified as the plans aren't finalized. The equities trading division has the lowest returns and should be the first in line for cuts, the person said.

Mr Gulliver, 56, pledged in February that underperforming businesses would face "extreme solutions" after annual earnings fell 17 per cent and the lender cut its profitability targets. HSBC's investment banking operation has an ROE of about 6 per cent less than the lender's 10 per cent target.

"If cuts are coming it seems most likely that its sub- scale equities business could be a candidate," said Jonathan Tyce, senior banks analyst at Bloomberg Intelligence in London. "FX, credit and rates go hand in hand with its client facilitation revenues, and must be core going forward."

Thousands of jobs may go at HSBC as part of the overhaul, which Gulliver will announce on June 9, a person with knowledge of the matter said June 2. He will also detail plans to sell underperforming operations in Turkey and Brazil, and set out the criteria the bank will use to decide whether to move its headquarters out of London amid rising taxes and tougher regulation.

The stock is up 1.2 per cent this year, trailing Deutsche Bank AG and Barclays Plc's 10 per cent advance in the period. Heidi Ashley, a spokeswoman for HSBC, declined to comment on the bank's deliberations.

HSBC's markets operation, which includes credit, rates, foreign-exchange and equities had US$6.3 billion of revenue in 2014, according to its annual report. Equities accounts for US$1.2 billion and currencies and rates together US$4.5 billion.

The division, run by Samir Assaf, doesn't disclose the profitability of each of the business lines in its investment bank, nor does it publish how many people are employed in each part. Investors are seeking greater disclosure about the performance of each business, according to analysts at Barclays.

HSBC is the seventh-largest foreign exchange dealer this year with a 5.4 per cent market share, falling from fifth-place in 2014 with 7.1 per cent, according to a Euromoney Institutional Investor Plc survey.

By comparison, the bank doesn't feature in the equity- trading market share or reputation rankings for the US, Asia or Europe compiled by Greenwich Associates, based on surveys of institutional investors. HSBC is also only the 13th biggest arranger of equity offerings globally with a 1.3 per cent market share, according to data compiled by Bloomberg.

"More detail on the products that HSBC plans to focus on, the returns they can deliver and how much capital this consumes will be a key factor in establishing the credibility of the strategic plan," Barclays's Rohith Chandra-Rajan and Sharnie Wong, wrote in a note earlier this week.

HSBC has "highlighted its leadership position in trade finance, payments and cash management, foreign-exchange," something that "suggests that these are seen as higher return businesses where HSBC has some competitive advantage," they wrote.

HSBC may also sell parts of the rates operation, including project finance loans and parts of its structured credit portfolio, Chirantan Barua, an analyst at Sanford C Bernstein in London, said in a June 4 report following a meeting with HSBC's investment banking head.

The global banking and markets unit consumes about 40 per cent of the bank's risk-weighted assets, yet only generates about a 6 per cent return on equity, analysts at UBS Group AG and JPMorgan Chase & Co estimate. The return is only a third of what HSBC generates in Asia, where it makes 78 per cent of its pretax profit and has almost 50 per cent of its full-time employees.

"What we like about the stock is the HSBC of old: a well- capitalized and conservative global bank with strong positions in growing emerging markets," said David Moss, head of European equities at F&C Asset Management Plc in London, who helps oversee about 83 billion pounds, including HSBC shares.

"What we don't like is the investment bank and the capital it swallows in exchange for low returns - how they say they're going to deal with that issue is key for us on the day."

BLOOMBERG