HSBC cut by Goldman after falling short on investment bank cuts

[LONDON] Goldman Sachs Group Inc downgraded HSBC Holdings Plc to neutral from buy because its decision to cut assets from its investment bank, without exiting underperforming businesses, will reduce revenue more than costs.

HSBC opted to restructure rather than sell its Mexican and US consumer divisions, indicating the bank doesn't plan to make more major regional disposals, which are key to improving the bank's returns, Goldman Sachs analysts led by Martin Leitgeb said in a report on Tuesday. The London-based bank was removed from its pan-Europe conviction buy list.

Europe's largest bank said on June 9 it will eliminate as many as 25,000 jobs and sell operations in Turkey and Brazil as it seeks to restore profit growth. Chief Executive Officer Stuart Gulliver, 56, also announced he would cut a net US$130 billion of risk-weighted assets from the investment bank, about a third of its balance sheet, as it lags behind the performance of other units and attracts regulatory scrutiny.

"HSBC delivered on the size of the cuts, but we see these as more focused on capital optimization than on exiting specific sub-scale businesses," Mr Leitgeb said. "We see the risk of earnings implications, as it is much more challenging for HSBC to offset potential revenue attrition with cost reductions in the investment bank."

The shares fell 0.4 per cent to 575 pence at 10:42 am in London, extending the decline this year to 5.5 per cent.

"Streamlining of sub-scale retail operations is key to addressing group returns, as global retail accounts for almost half of HSBC's cost base," Goldman Sachs wrote. The analysts had expected HSBC to sell its Mexican unit, according to the note.

BLOOMBERG