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Squeezed by superpowers, HSBC eyes next step of reboot

Bank reviewing its US and European operations even as it doubles down on Asia, where it earns almost all of its profit

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The central commercial challenge for HSBC is that it doesn't make enough money from its almost US$3 trillion in assets. In 2019, its return on shareholders' equity was less than 4 per cent.

London

CAUGHT in the crossfire between Washington and Beijing, HSBC Holdings Plc is fighting forces that threaten to upend a business built on connecting China to the West.

Chairman Mark Tucker is overseeing a sweeping review of HSBC's US and European operations with an eye toward unloading businesses beyond repair, as doubts grow that 35,000 job cuts announced in February will be enough to revive the slumbering giant, said people familiar with the matter.

The stakes could hardly be higher for the London-based institution that earns almost all of its profit in Asia. The 155-year-old bank broke its silence last week over its role in the US pursuit of a Huawei Technologies Co official after a barrage of Chinese media attacks.

In China, HSBC has been tarred for what officials there see as its role in the 2018 arrest of Huawei CFO Meng Wanzhou on charges of violating US sanctions on Iran and Syria.

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In its first public comments about the matter, HSBC said it has no "hostility" toward Huawei and didn't "ensnare" the company. The bank said it only provided information to the US Department of Justice when it was compelled to do so.

Meanwhile, executives have discussed their bind with the Bank of England and begun wargaming potential disruptions to Hong Kong's US dollar peg, as the worsening political situation endangers its appeal.

"What would be their raison d'etre if they weren't global?" said Michael Geoghegan, chief executive officer from 2006 to 2010. "If you want to do business worldwide, you have to go to HSBC, Citigroup or one of a very small group of banks. I can't see where they will benefit from shrinking their network."

It's been a miserable stretch for the company born as the Hongkong and Shanghai Banking Corp in 1865. A decade that began with the global financial crisis ended with the ouster of John Flint, Mr Tucker's initial pick as CEO, after just 18 months. In between, investors' frustrations mounted over the languishing stock price, a pair of unsuccessful strategic reboots, and its failure to exploit a leading position in Greater China.

With the global recession darkening prospects for growth, the task of fixing or jettisoning low-return units while doubling down on Asia has gotten a boost from three new directors. They joined a board that spurned more extreme measures in Mr Tucker's February restructuring, which will cut about 15 per cent of the workforce and trim investment banking. The question is the potential damage to the East-West network that attracts clients like Amazon.com Inc.

That's the riddle Mr Tucker is trying to solve with new allies including James Forese, a former Citigroup Inc veteran who joined the board in May after being approached about the CEO job. He has partnered with Mr Tucker and chief financial officer Ewen Stevenson in driving change. Alongside, CEO Noel Quinn has assumed a role akin to a chief operating officer, insiders say. Besides Mr Forese, the board has added Eileen Murray, former co-CEO at Bridgewater Associates LP, the world's biggest hedge fund group, and Microsoft Corp executive Steven Guggenheimer.

HSBC declined to comment on restructuring efforts. Its shares fell 3.3 per cent as of 1.49pm in Hong Kong to the lowest level in more than a decade.

Their urgency reflects the central commercial challenge for Europe's biggest bank: HSBC doesn't make enough money from its almost US$3 trillion in assets. In 2019, even before the deepest recession in decades, its return on shareholders' equity was less than 4 per cent.

The obvious targets for boosting profits are the US, where it's weighed down by a costly coast-to-coast branch network, and Europe, which accounted for almost half of its assets in 2019 but generated operating losses. Expectations of more drastic action as soon as the Aug 3 announcement of first-half earnings are growing.

Amid the internal pressures, the complex political backdrop has only gotten trickier. HSBC was reprimanded in Washington and London over its support for China's tough new security law in Hong Kong.

David Knutson, head of credit research for the Americas at Schroder Investment Management, an HSBC bondholder, said: "Difficult decisions will have to be made that will have a significant, material impact on their future."

What's more, Mr Tucker has spent so much time in the US that the bank informed the UK authorities of his whereabouts.

Having originally relocated from Hong Kong to London when he took the chairmanship in 2017, he received a £300,000 (S$533,000) allowance for the move.

Wherever he calls home, his focus will always return to Asia, which generated almost all of last year's operating profit, and Hong Kong, which provides one-third of its global revenue. Having worked for decades in the former British colony, he is finely attuned to the background music, leading a renewed push into China.

He emphasised the importance of bolstering the UK-China relationship in remarks before the pandemic hit to an audience that included Beijing's ambassador to London.

"I believe that it can become even stronger, even more comprehensive, and even more mutually beneficial," he said.

More recently, along with endorsing China's crackdown in Hong Kong, the bank has begun holding daily meetings to monitor how it's portrayed in the local media, according to one person familiar with the matter. The efforts are falling short - at least publicly. BLOOMBERG

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