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HSBC to redeploy funding to Asia after profit goal is missed

On Monday, HSBC Holdings acting CEO Noel Quinn announced plans to revamp the bank by withdrawing from underperforming businesses, removing a profit target and flagging “major” charges in the current quarter as profits failed to meet expectations.

In a recent media conference call, Quinn said he would like to operate the bank full-time, reduce the bank’s Europe and U.S. business sector which consumed too much capital but produced insufficient returns, and redeploy in areas like retail banking and wealth management across Asia, Canada and Latin America.

He did not give precise information on the restructuring and instead said that the company wants investors to be briefed before the February full-year earnings report.

This month, the Financial Times reported that Quinn, who in August was appointed interim CEO after John Flint was removed from the position he held for less than 18 months, could cut as many as 10,000 jobs out of his 238,000-strong workforce.

Although the Asian business of the bank delivered in the quarter, “performance was not acceptable in some parts, mainly business operations within continental Europe, the non-ringfenced bank in the UK, and the US,” Quinn said in a statement. “Our previous plans are no longer sufficient to boost performance for these businesses, given the softer outlook for revenue growth. We are, therefore accelerating efforts to remodel them, and transfer capital into higher growth and return opportunities.”

The bank has been hit by five months of political instability in Hong Kong where it earns half its income, low-interest rates that affect client activity, speculation over Britain’s exit from the European Union and the U.S. and China trade war.

Hong Kong’s performance was “resilient,” and the number of employees there had risen by 1,000 over the last year, it added, while it boosted a credit loss charge to reflect the economic outlook of the city. Financial Secretary Paul Chan said in a blog on Sunday that Hong Kong has fallen into a recession and may not achieve economic growth this year.

The Asian business, which saw a 4 per cent rise in reported profit before tax to USD 4.7 billion and recorded growth across almost all divisions, would naturally be a “recipient” of the capital redeployment, Quinn said. Over the year, the bank employed 2,000 Asian staff, he said.

The restructuring plans or a further revenue decline could result in “major charges,” the bank said. It shed its target to achieve a return on tangible equity of more than 11 per cent in 2020. The measure in the third quarter stood at 6.4 per cent, down from 11.7 per cent three months beforehand.

Although the bank said, charges are likely to be similar to the third quarter in Hong Kong during the three months leading up to December 31st. It will have to write down technology investment if it exits any segments and goodwill associated with its European businesses. If the restructure resulted in employment cuts, it would also have to provide for severance payments, Chief Financial Officer Ewen Stevenson said in the media call.

While the board will choose who is selected for the CEO position, Quinn said, “The management team and I are focused on doing what is best for the bank, solving the challenges we face and helping the businesses that are performing well.”

The aim is to free up the bank to invest in the best technology and be agile enough to meet “rapid change,” he said.

Adjusted profit before tax, except one-off items, dropped 12 per cent in the three months ended September 30th to USD 5.3 billion, compared with USD 6.1 billion in the same period last year, the bank said. That missed the banks’ consensus pretax profit estimate of USD 5.7 billion.

Profit has been affected by additional compensation for overcharging fees on customers and staff severance costs, the bank added. Revenue dropped 3 per cent to USD 13.4 billion due to reduced client activity in its global markets business, which provides asset class trading in over 60 countries.

In comparison, its commercial banking business, wealth management and private banking were growing, the bank said.

HSBC shares closed 2.3 per cent lower at HK$60.25 in Hong Kong, bringing losses to 5.5 per cent for the year. It dropped 4.2 per cent to 591.3 pence a-piece in early afternoon trade in London where the stock is also listed.

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