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HSBC faces job cuts as bank prepares significant overhaul

HSBC Holdings is poised to unveil its third overhaul in a decade this week, a move that is seen leading to thousands of job cuts, withdrawals from businesses and some global markets, and a reshuffle of the senior executives as the U.K.-based lender targets growth and ways to boost its sluggish returns.

In October, interim chief executive Noel Quinn, who strives to run the bank full-time, announced plans to strip-down continental Europe and U.S. companies that consumed too much funding but generated poor returns. Instead, he aims to redeploy in America, Latin America, Canada and Asia, into areas like retail banking and wealth management.

Information on the manner of the exits, the scale of the write-downs, the effect on earnings and lastly, the jobs at risk has been scarce so far. Quinn, who in last August was named interim CEO after John Flint was ousted from the position he held for less than 18 months, had promised to unveil complete plans in February beforehand.

It is uncertain whether HSBC will reveal its decision on a permanent CEO this week, though Quinn has made it known that he wants the role.

“For HSBC, this is a pivotal time,” said a London-based executive at a fund management firm that holds shares in HSBC. “The bank has little to show in results after years of restructuring and billions in costs, and the board knows that investor tolerance is wearing thin. I believe serious attempts have been put in place for a big-bang overhaul.”

The executive broadly supports the focus on Asia, particularly China and Hong Kong, but warns that the bank should avoid losing its global network and ensure proper execution of the plan because any mistakes would threaten the confidence of investors. The executive also said that HSBC should put speculation about the CEO role to rest, as the market has anticipated Quinn to have been named as permanent CEO by now.

The executive said, “It is a straightforward question about who’s leading the troops and takes ownership of the planned overhaul.”

The overhaul plans for the company will be announced on Tuesday when it will publish results for 2019. Analysts predict on average that HSBC will declare a pretax profit of USD 20 billion for the full year, which has improved little from USD 19.9 billion in 2018.

HSBC chairman Mark Tucker said the hunt for a new CEO would take six to twelve months and the board is seeking a candidate with expertise in the fields of asset management and investment banking. Earlier this month, the Financial Times, citing people briefed on the plans, reported that when it unveils a strategic overhaul this month, HSBC will not name a permanent chief executive and that the search was still underway.

The idea of reshaping the bank is not new to investors. The first attempt began about ten years ago and escalated shortly after a money-laundering scandal which resulted in fines of USD 1.9 billion. The bank later cut back tens of thousands of jobs and exited businesses.

In 2015, the second overhaul, which seems similar to the one anticipated this week, was unveiled. This also became a pivotal factor for Asia, with the bank aiming to reduce assets allocated to less profitable markets such as Europe and the U.S. and use the freed-up capital to bulk up in fast-growing Asian economies.

More than four years on, the deployed capital of the bank has not moved much, underscoring the challenge of reshaping a bank that has roughly 238,000 employees spanning around 65 countries and territories.

While the bank accounts for over 95 per cent of its profits on Asia, about 45 per cent of its capital still supports assets deployed in the U.S., Europe and the U.K. Asia accounts for a little over 40 per cent of the risk-weighted assets.

Group return on tangible equity, which stood at 10 per cent in the nine months ending September 30th, would leap to 14 per cent if the U.S. and European operations were discontinued. However, a full exit is not possible given that HSBC benefits from its global network, a Goldman Sachs investor report showed in December.

In the report, Goldman Sachs analysts Gurpreet Singh Sahi and Yingqiang Guo said they anticipated cutbacks primarily in global banking and markets, which houses the investment bank and trading arms and the corporate centre. In commercial banking, they had seen ‘modest’ cuts.

If he is appointed permanent CEO, Quinn hopes to be more successful than his predecessors by rapidly shrinking businesses in the U.S. and Europe, or by selling off units such as the company’s French bank which is currently on sale. He also hopes to cut the cost base by simplifying operations, although he has not given full details on this.

Both moves would require job cuts, and HSBC has acknowledged that it expects to take impairment charges for “material”. In October, the bank abandoned its profitability target of reaching an 11 per cent yearly return on tangible equity.

“Investing in Asia is the right move, especially in China and Hong Kong,” Hao Hong, head of research at Bocom International, said. “This is a historic opportunity for Asia-focused HSBC to take the lead in China where the market is opening up. A bold strategic move by investing in the market now will send the right signal to investors and persuade them to back the bank.”

So far this year, HSBC shares in Hong Kong have declined 2.6 per cent, extending the 4.5 per cent drop in 2019. The company’s shares closed on Monday at HK$59.40, down from Friday by 0.4 per cent.

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