London: HSBC Holdings Plc’s interim CEO Noel Quinn is considering going much further than his former boss in cutting fat at the bank. He may triple job reductions announced just two months ago to as much as 6 per cent of the workforce.
Sure enough, Quinn may be trying to impress the board and investors to secure the No. 1 position at HSBC on a permanent basis. But his rivals at other financial firms could follow in his footsteps: Fresh revenue pressure and a lingering problem with costs at European banks don’t give many alternatives.
HSBC is reportedly questioning why it has so many people in Europe, while it has double-digit returns in parts of Asia. HSBC may target highly-paid bankers in the latest round of reductions and asset sales that could affect 10,000 roles. It isn’t hard to see why HSBC, Europe’s biggest bank, wants to tighten expenses.
Asia could get tricky
The London-based lender, which generated 80 per cent of pretax profit in Asia in the first-half, has made China a focus for growth. But the bank’s expansion there is now threatened by the economic slowdown stemming from the China-US trade spat. The deepening unrest in Hong Kong, where it is the biggest bank, will compound the hit to growth.
Cutting back in Europe and the Americas, where analysts at Citigroup Inc. say HSBC has a structural profitability problem, seem the right thing to do — just over 30 per cent of its full-time employees are in Europe and North America.
Scaling down in Europe
But HSBC is not alone in facing challenges in Europe that will give lenders little choice but to accelerate and deepen cost cuts. The 60,000 jobs that have already been earmarked for the chop this year, mostly by European banks, are probably just a taste of things to come.
Too many lenders are still far too inefficient. The top 20 European banks have done little to improve their cost-income ratios, which remained largely flat around the 68-70 per cent level between 2016-18, according to a Moody’s report.
By contrast, their US peers have improved efficiency considerably, lowering their ratios to closer to 62 per cent from about the same starting point in 2014. As a result, Moody’s says banks in Germany, France, Italy and the UK lag those in the US in a measure of operating profitability.
Those in Germany, the most inefficient EU market, had the lowest score among institutions in the European Union. Even before the European Central Bank’s latest interest rate reduction, the average return on equity was about 6 per cent across the industry, well below the cost of equity, estimated at 8-10 per cent, according to Moody’s.
It’s no surprise then that the mood at a recent banking conference was so subdued. Analysts at Bank of America Corp., which hosted 50 lenders and investors from Europe, the Middle East and Africa at the end of September, concluded that the outlook for revenue has declined “materially” with little scope for new loan demand.
About one-fifth of the event’s participants said there’s nowhere for financial services firm to hide. While some are starting to pass the cost of negative rates on to individuals further down the wealth rankings, large charges to retail clients don’t appear to be on the cards just yet. The potential damage to their franchises is too much of an unknown quantity.
The Bank of America analysts concluded that more cost cuts are on the way, though probably not till banks report full-year earnings. Competition in trading and lower rates will continue to hurt French banks, so much so that they said some conference participants expected “major cost saving plans”.
UniCredit SpA in Italy is considering as much as 10,000 cuts, while in Germany Deutsche Bank AG and Commerzbank AG have both embarked on fresh plans. Analysts estimate that 2020 earnings per share (excluding one-time charges) should improve by 5.2 per cent on a 1.5 per cent increase in net revenue, according to data compiled by Bloomberg Intelligence. Both of those will probably come down.
In signalling now that more pain is needed, HSBC’s Quinn may have shown his mettle, and he’s certainly upping the pressure on rivals.