HSBC’s wealth push is a good story only half told

HSBC Holdings came a long way under Noel Quinn as chief executive officer, becoming a simpler and more efficient firm, while asset sales helped fund billions of dollars in share buybacks. When Georges Elhedery takes over the top job in September, he faces different challenges – and it will be a lot harder to show progress.

HSBC is among the world’s biggest banks, operating in nearly 60 countries and with fortunes tightly coupled to the ups and downs of global trade. It has all the businesses you would expect from a universal bank, but its revenue is highly geared to lending, and its loan books are dominated by two massive centres in Hong Kong and the UK. Between them, these account for more than three-quarters of HSBC’s mortgages and nearly two-thirds of total loans.

With interest rates set to decline in the UK and US (which governs Hong Kong rates through the currency peg) HSBC needs to boost its non-interest income – and fast.

Its great hope is wealth management, where it has invested in people, products and technology. While the story that Quinn and Elhedery tell about this business holds plenty of promise, the numbers do not yet back it up. That needs to change over the next 12 months.

Wealth and private banking is important because it is expected to produce durable fee income that grows over time with the assets it gathers. It needs less capital than traditional lending, so delivers higher returns, and is seen as more reliable than investment banking and transaction banking, which fluctuate more with economic cycles.

The good news: HSBC’s income from wealth, private banking and insurance fees in the first half of 2024 was up 12 per cent compared with the same period last year, it reported on the last day of July.

That sounds great, but there are two problems. First, over the past five years since wealth has been a growing focus, the quarterly revenue has been highly volatile. There is no discernible progress, and revenue this year is still down heavily versus 2021.

Second, the absolute numbers are small: That 12 per cent growth in wealth fees added just US$400 million to last year’s revenue, which is just US$800 million annualised – and that is a generous approach, because client activity tends to peak in the first quarter and drop off through the year.

Compare that with the revenue loss HSBC could suffer from interest rate cuts and you can see the challenge.

As chief financial officer, Elhedery has done a great job of reducing the bank’s sensitivity to rates over the past couple of years through its hedging programme and other efforts. In 2022, a 1 percentage-point drop in rates would have cost the bank US$7 billion in net interest income. Now, the same downshift is significantly less costly, but still takes out US$2.7 billion of revenue in the first year – more than three times the simple annualised growth in wealth fees.

This is not an academic question: The futures market anticipates that the Federal Reserve will cut borrowing costs by that much before the end of this year, and the Bank of England by next May. Further reductions would hurt even more – absent any loan growth – because the bank can only reduce its own interest costs so far: Deposit rates do not go negative.

A key part of HSBC’s optimistic story is that the wealth business will directly benefit from lower rates: Clients will look for more asset management and other investments as high returns on savings accounts disappear. “We deliberately set out to invest in our products and distribution capability for wealth so that that cash, if it did move, it moved within the bank, not outside the bank,” Quinn told investors on the second-quarter earnings call.

This makes sense, and Elhedery said some clients were already moving money in this way. But he also sounded a note of caution. “Yes, there is a component where we do expect more wealth activity to take place as we see deposits being less remunerative,” he said on the same call. “But this is more on a broad trend basis, not a direct linkage.”

Elhedery puts as much emphasis on the structural trend of Asia becoming richer. That is a long-running thesis, which has become less persuasive with China’s slowing growth and geopolitical tensions affecting global trade.

Elhedery and HSBC face plenty of other issues. The impact of relations between West and East, especially China and the US, are hard to predict politically and even harder to assimilate into revenue expectations. Then there are questions about whether it could further simplify its business and reallocate capital, costs and management time that are not earning their keep.

Its Australian retail bank, for example, is a subscale businesses that could free up funds for faster-growing markets, according to Jason Napier, an analyst at UBS Group. Australia accounts for just over 6 per cent of the bank’s mortgages and less than 3 per cent of corporate and commercial loans.

HSBC has already pared a lot of what it does in Europe and North America. Its remaining lending exposure and local business profits still do not look fantastic, but its argument is that many clients in those regions are the source of trade and corporate finance and other fees in Asia.

In other words, there may not be ways to become much more efficient in those places.

This only underlines the importance of HSBC’s wealth push. Elhedery’s first year in charge will be crucial to demonstrate that the investments the bank has made in that fiercely competitive business can pay off. For now, investors can only take the story on trust. BLOOMBERG