HSBC is all set for an Asia/China pivot, but how well can it manage the transition without crossing the US and UK governments? Image Credit: Bloomberg

HSBC Holdings had little choice.

It’s a measure of how much the world has changed that the 35,000 job cuts it announced in February, a plan that looked like radical surgery at the time, are now almost certainly inadequate. The economic damage wreaked by COVID-19 and the political quagmire into which the bank has sunk over its support for a national security law in Hong Kong meant that a return to retrenchment was inevitable sooner rather than later.

The London-based bank has restarted its cost reduction programme, according to a memo from CEO Noel Quinn, having placed it on pause in March as the pandemic spread. The plan calls for HSBC to eliminate those jobs over three years and shed $100 billion in risk-weighted assets by shrinking its underperforming US operations and European businesses and cutting back on its investment bank.

Few expected HSBC to hold out indefinitely. The longer the virus lasts, the more bad loans will accumulate and the heavier will weigh its network of 235,000 employees across 64 countries. The bank, a major player in trade finance, warned in February that it could face more credit losses from disruption to supply chains.

Caught in several crossfires

Since then, worsening geopolitical tensions between China and the US have added a further negative. A strong first quarter for fixed-income and foreign-exchange trading will be hard to sustain. Improving its paltry 1.9 per cent return on equity is a priority. JPMorgan Chase & Co., comparable in size with a workforce of 257,000, has an RoE of 15 per cent.

A quagmire no less

The controversy over Hong Kong provides an added incentive for HSBC to push ahead with its transformation. The bank has upset the US and the UK by its stance on the security bill, with HSBC’s Asia head Peter Wong signing a petition this month in support of the legislation that China is imposing on the former British colony. Hong Kong contributes 54 per cent of profit and a third of global revenue.

Most of the job cuts are targeted at less profitable or money-losing units in other regions. HSBC has made its choice and may as well follow through: Expect an acceleration of the “pivot to Asia” begun under Quinn’s predecessor Stuart Gulliver five years ago.

Dollar clearing role

Granted, HSBC cannot afford to give up its global footprint or alienate Washington. Its status as a dollar-clearing bank is valuable, and many of China’s biggest banks use HSBC’s system to trade in the US currency. Multinational clients may be less inclined to stick with HSBC for European and US business as it scales back. At the same time, it has an opportunity to strengthen its hold as a corporate bank for multinationals operating in China.

Challenges remain even in the market on which HSBC has bet its future. The bank is still a target of suspicion in China after providing US prosecutors with information that led to the arrest of Huawei Technologies Co.’s chief financial officer in late 2018. Having sided with authorities over the security bill, it also risks alienating a large part of its customer base in Hong Kong.

HSBC already drew the ire of pro-democracy protesters in the city after closing an account linked to the movement last year. And the axing of its dividend in April stung the bank’s base of small shareholders in Hong Kong.

Walking that tightrope is unlikely to get any easier. In the meantime, HSBC has plenty of tasks to get on with elsewhere in the world. The bank is already looking for a buyer for its French retail operations. A tiny US retail presence and sub-scale businesses in countries such as the Philippines and New Zealand are among unneeded units that could go.

Hong Kong, at least, can expect gentler treatment for now.