Via Financial Times

When Noel Quinn accepted the job of interim chief executive of HSBC in August, he had one condition. He told chairman Mark Tucker he did not want to be a caretaker manager who would keep the bank chugging along until a permanent successor was appointed, according to people briefed on the negotiations. 

Instead, Mr Quinn, a 32-year veteran of HSBC, has embarked on a major restructuring of Europe’s largest bank. Although the plan will not be unveiled until the bank’s full-year results in February, his intentions are already clear: he wants to rid the lender of its infamous bureaucracy while reducing the amount of capital tied up in the US and Europe, where it makes subpar returns. To do so, he will have to slash thousands of jobs.

Investors are understandably sceptical. This is the third time the bank has attempted a big overhaul in a decade, following similar efforts in 2011 and 2015. But returns still lag behind global peers such as JPMorgan despite HSBC’s unparalleled exposure to high-growth markets in Asia, which accounts for about four-fifths of profits. 

At a meeting with analysts last month, the bank’s chief financial officer Ewen Stevenson acknowledged shareholder frustration, according to a transcript of his remarks seen by the Financial Times. “The main discussion point . . . with investors, the media and others is why is this time any different to any other time,” he said. 

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But Mr Stevenson, who was poached from Royal Bank of Scotland last year and has become Mr Quinn’s main lieutenant in designing the overhaul, insisted failure would put their careers and reputations on the line. “[It] carries a high degree of management risk if we don’t deliver,” he said at the meeting. 

One analyst who attended the briefing said they had been left with the impression that Mr Quinn and Mr Stevenson knew they “have to produce something very market-friendly and ambitious” in February. 

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“Ewen was basically saying they’re putting their careers in jeopardy, that they can’t offer something halfhearted,” the analyst said. “They have to try something which carries quite a big risk of failure.”

The overhaul comes at a difficult juncture for HSBC, with Hong Kong, its most profitable market, hobbled by months of violent protests that threaten to wreak economic and social havoc. 

Mr Quinn’s plan to reshape HSBC has two distinct parts, according to several people briefed on it. The first is to strip back a top-heavy management structure, which has mushroomed since his predecessor but one, Stuart Gulliver, tried to impose central oversight of the bank’s operations in 60 countries. Mr Gulliver made the changes following a damaging scandal in Mexico, where the bank helped drug cartels launder their ill-gotten gains. 

The command-and-control structure introduced by Mr Gulliver might have left HSBC less exposed to localised corruption but also resulted in a proliferation of new managers who went on to build themselves expensive fiefdoms. 

Line chart of Share prices rebased showing HSBC is left behind

“You have for every business line a global head, regional heads and country heads in 60 countries, many of them doing the exact same work,” said one person working on Mr Quinn’s plans. “And then all of them have their own bag carriers, their own heads of finance and comms, and so on.” 

Second, Mr Quinn wants to reduce the amount of capital allocated to two underperforming businesses: its US operation and its “non-ring fenced bank” in Europe, which was created after it had to hive off its UK bank to comply with new legislation. 

About $280bn of assets adjusted for risk are contained in these businesses but they generated a return on tangible equity — a key measure of profitability — of about 1 per cent in the first nine months of this year. 

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Most of the assets are tied up in HSBC’s investment bank, known internally as the global banking and markets division. Last week the Financial Times reported that the long-serving head of the division, Samir Assaf, would be moved aside to a non-executive role as part of a broader management shake-up being prepared by Mr Quinn. 

It is not yet clear whether Mr Assaf will be replaced like-for-like. Some senior insiders are lobbying for the role to be left unfilled, and for the heads of banking and markets — Greg Guyett and Georges Elhedery — to report directly to Mr Quinn. “I hope we don’t have a replacement, just a demise of the role,” said one. “That would reduce a lot of costs at a stroke.” 

The focus on HSBC’s investment bank has damaged morale at the division, according to several people working there. “We have taken a real kicking,” said one. Some of the people argued that Mr Quinn was less concerned about the flaws of the commercial banking unit that he ran before he was elevated to the top job. 

The two parts of the plan will result in thousands of job losses, as layers of management are taken out and bankers supporting the European and US assets are made redundant. The FT reported last month that the cost-cutting drive threatened 10,000 jobs

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One person working on the revamp said the combined effect of cost-cutting, the reduction of risk-weighted assets in the US and the sale of businesses such as the French retail bank could result in a much larger reduction to the bank’s 238,000 headcount by the time the bulk of the overhaul is completed about two years from now. 

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If successful, the restructuring has the potential to substantially improve HSBC’s returns, as costs come down and the capital trapped in the US and Europe is returned to shareholders via larger buybacks or, to a lesser extent, redeployed in faster-growing Asian markets. 

But it is not without risks. Some investors fret that HSBC has limited capacity to pay for the chunky writedowns it will have to take to cover the lay-offs and balance sheet reduction. Management has insisted that the dividend — which many shareholders cite as their main reason for owning the stock — will not be put at risk. However, one large investor thinks that could change if Hong Kong’s economy Hong Kong’s economy continues to deteriorate. 

“In my investor meetings . . . one key area of discussion has been how much capital flexibility HSBC has,” said Ronit Ghose, banks analyst at Citi, who notes that the bank is only 30 basis points above its target of a 14 per cent core equity tier 1 ratio, a key measure of balance sheet strength. 

Then there is a risk that Mr Tucker decides to recruit a chief executive from outside. Mr Quinn has used the latitude he asked for in August to instigate a major shake-up, and an external successor would have to decide whether to abide by the plan, or tear it up and start again, potentially lengthening the period of turmoil. 

Executives and directors think Mr Quinn has a chance of winning the permanent job. But as Mr Ghose notes, the temptation to bring in fresh blood could prove decisive. “This is a once in a generation opportunity for HSBC’s board to bring an experienced external international banking executive who can execute a major business . . . transformation.”