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HSBC is no man's land for its interim CEO - or anyone
HSBC Holdings is embarking on a radical overhaul while it continues the hunt for a permanent chief executive. For investors, the strategic muddle of this bizarre situation should be at least as troubling as the stinging cuts, US$7.3 billion in charges and suspension of buybacks that the bank announced with its earnings on Tuesday.
The London-based lender will cut as many as 35,000 jobs, reduce gross assets by more than US$100 billion by 2022, shave annual costs by US$4.5 billion and slash the size of its investment bank in Europe and the United States in the biggest raft of changes for years.
All this will be overseen by interim chief executive officer Noel Quinn, pending the appointment of a permanent successor to John Flint, who was ousted last August.
Mr Quinn was left to present the plan even as HSBC declined to confirm him in the job. This is bad on two levels:
First, it undercuts the authority and investor confidence that he might otherwise be expected to enjoy, should he eventually be appointed. At the very least, the delay signals that the board has harboured doubts about his suitability.
Second, going ahead with the revamp may impede the search for a replacement.
A personal stamp
Any chief executive worth his or her salt will expect to put a personal stamp on the company. But the biggest decisions have already been made. This reshaping will have Mr Quinn's fingerprints all over it. That may narrow the options for HSBC chairman Mark Tucker.
Stephen Bird, Citigroup Inc's former top executive in Asia and the leading external candidate for the job, already has ruled himself out, the UK's Sunday Times reported last weekend, citing unidentified sources.
HSBC might argue that waiting was not an option after years of sub-par performance. Mr Quinn said in Tuesday's statement: "Parts of our business are not delivering acceptable returns."
HSBC will shift resources to higher-returning markets, while squeezing the cost base and exiting some business lines. "The current strategy is in no man's land," as one investor told Bloomberg News pre-earnings.
No one could accuse HSBC of sparing the knife this time. The job cuts are equal to about 15 per cent of the workforce, and also an answer to those who, like this writer, have criticised the bank for being overly timid in the past. Still, the overhaul may end up exacerbating some of the vulnerabilities the bank seeks to address.
The restructuring makes the bank even more hostage to the fortunes of Hong Kong and mainland China, two economies struggling with slowing growth aggravated by the coronavirus outbreak. Hong Kong was already the source of 90 per cent of HSBC's profit in the third quarter. The city is going to become an even more glaring presence in its books.
Besides an economy in recession, competition is getting tougher for HSBC in the city, as online lenders backed by Tencent Holdings Ltd and Alibaba Group Holding Ltd prepare to launch this year.
Hong Kong's dominant bank has also had to navigate political minefields, including being the target of the public ire last year after it closed an account linked to pro-democracy protesters.
China, meanwhile, remains a challenge. HSBC is still struggling to extricate itself from Beijing's bad books for providing US prosecutors with information that led to the arrest of Huawei Technologies Co's chief financial officer in late 2018. And disruption to supply chains from the virus outbreak may lead to more credit losses, the bank has said.
A long time
That means it is going to take a long time before HSBC achieves the returns Mr Tucker seeks. While 2019's adjusted pretax profit of US$22.2 billion beat analysts' estimates, HSBC's fourth-quarter return on tangible equity was a mere 8.4 per cent - much lower than the more than 11 per cent target it abandoned in October.
Even its new goal of 10 per cent to 12 per cent by 2022 looks unambitious beside the 18 per cent return of JPMorgan Chase & Co.
HSBC shares closed 2.8 per cent lower in Hong Kong after the earnings, the biggest decline in more than a year.
Ultimately, the bank's biggest risk may be that Mr Quinn's cuts cause the lender to double down on greater China just as growth in this part of Asia is uncertain. Outside CEOs will not be clamouring to steer this ship. Mr Quinn may just be stuck with the job. BLOOMBERG