Bad Loans, Trade War, and Street Protests: HSBC’s Dismal Quarterly…

Europe’s biggest bank, HSBC, said on Monday it was working on a major restructuring of its U.S. And European businesses as it reported a slide in profits and raised its provision for bad debts in protest-hit Hong Kong, its most profitable market.

Noel Quinn, who took over as interim chief executive in August when John Flint was ousted after just 18 months in the job, said decisive action was needed to tackle low returns at the bank’s U.S. And continental European operations. The problems had been there for “a while”, he told analysts on a call, but a weaker global economy had made tackling them more urgent.

HSBC is headquartered in Britain, where businesses have been grappling for months with uncertainty over the country’s planned exit from the European Union, but its historic roots lie in Hong Kong, which has tumbled into recession amid months of anti-government protests and a U.S.-China trade war.

News reports this month said HSBC could cut up to 10,000 of its 237,000 staff, one of many European banks paring down as the economy sours and negative interest rates bite into profits.

The Asian-focused bank gave no details on Monday, saying that would have to wait until fourth-quarter results in February, but it warned that changes to its cost base could lead to significant charges in the fourth quarter and beyond—an indication of potentially deep job cuts to come.

“Parts of our business, especially Asia, held up well in a challenging environment in the third quarter,” Quinn said in a statement. But performance was unacceptable in some other parts of HSBC’s business, mainly business activities in continental Europe, its investment bank in the U.K., and the United States.

“Our previous plans are no longer sufficient to improve performance for these businesses, given the softer outlook for revenue growth. We are therefore accelerating plans to remodel them, and move capital into higher growth and return opportunities,” Quinn said.

HSBC, ranked ninth-biggest bank in the world by trade publication The Banker, said pre-tax profit for the third quarter ended Sept. 30 fell 18% from a year ago to $4.8 billion. That fell short of analysts’ expectations for a profit of $5.3 billion. Revenue dropped 3% to $13.4 billion.

HSBC shares fell more than 4% as the market digested the news.

“We are clearly facing a more challenging revenue environment than in the first half of 2019 and the outlook for revenue growth is softer than we anticipated at the half year,” Quinn said. Because of this, the bank had scrapped its target of achieving a greater than 11% return on tangible equity—a key measure of profitability—in 2020, he said.

Quinn said retail banking had “held up well” in Hong Kong despite the situation there. However the bank raised its expected losses on bad loans to $883 million, compared with $545 million in the second quarter, and said that included a charge of $90 million related to the deteriorating economy in Hong Kong.

Chief Financial Officer Ewen Stevenson said the U.S.-China trade dispute was affecting trade with Hong Kong while the protests were hitting tourism and shopping. HSBC was seeing “emerging signs of distress” in some small businesses, he added.

Some $4.65 billion of HSBC’s third-quarter pre-tax profit, or 96% of the total, came from Asia, while North America contributed a profit of $299 million and Europe made a $424 million loss. Some $3 billion of profit was produced in Hong Kong.

HSBC’s American arm, HSBC Bank USA, said in June it planned to extend its 220-branch network by opening up to 50 new branches. Analysts at investment bank Jefferies suggested earlier this month that HSBC should consider selling its U.S. Retail and commercial banking business.

Jefferies, which has a hold rating on HSBC’s shares, said on Monday the results revealed a revenue miss related to its global banking and markets business, higher credit costs due to the changed outlook in Hong Kong and a better cost profile. The results illustrated the need to simplify the bank, said Jefferies, which has a “hold” rating on the stock.

Angling for the top job

HSBC said it intended to sustain its dividend and maintain a common equity Tier 1 ratio—a measure of solvency—of above 14%.

By dispensing tough medicine to improve HSBC’s profitability, Quinn will be hoping to show he has the credentials to be given the top job permanently. HSBC Chairman Mark Tucker said in August the search for a permanent CEO could take 6-12 months.

The previous CEO’s tenure was short-lived because the board was reported to be dissatisfied with the slow pace of change in the bank.

The banking industry, particularly in Europe, has been undergoing a new wave of deep job cuts as the sector suffers from weak investment bank revenues, low economic growth in Europe and negative interest rates across much of the Eurozone. Add it up, and the banks are finding it increasingly hard to make a decent lending margin.
Deutsche Bank unveiled plans in July to cut 18,000 staff as part of a deep restructuring while France’s third biggest bank Societe Generale has announced 1,600 job losses. Germany’s Commerzbank also plans to shed thousands of jobs.

HSBC said in August that up to 2%, or around 4,700, staff would lose their jobs this year. However, the quarterly report said the headcount had risen by 2,195 since the end of last year.

The bank previously announced plans in 2015 to cut 50,000 jobs and shrink its investment bank.

China: still a growth engine

In today’s earnings call, Quinn summed up the bank’s performance in Hong Kong last quarter as “resilient” in the face of the continuing US-China trade war and ongoing protests in the city. Profits from Asia rose 4% in comparison to the previous quarter. “Parts of our business, especially Asia, held up well in a challenging environment,” Quinn said.

Even with these issues, HSBC still clearly views the region as a growth market. Quinn did not elaborate as to how exactly the company will direct funds after “restructuring” and its downsizing in Europe, but transferring at least some of these funds to Asia would seem a logical next stop.

Quinn said that several of HSBC’s wealthy clients have opened additional bank accounts in other countries as a contingency plan in the event that Hong Kong’s situation further deteriorates. He also mentioned that because the firm is so tied to the city, and controls much of the city’s finances, the company would certainly be impacted if the local economy declines further.

HSBC opened for business in Hong Kong in 1865, helping to finance trade between Europe and Asia. That relationship has remained a central part of its business as it has grown to serve more than 40 million customers in 65 countries.

HSBC, short for Hongkong and Shanghai Banking Corporation, moved to London in 1993 when it bought Midland Bank. After a 2016 review, it decided to keep its headquarters in Britain, deciding against moving back to Hong Kong.

Grady McGregor in Hong Kong contributed additional reporting to this story.