Gulliver Pledges HSBC Cost Reductions in Focus on Faster-Growing Economies

HSBC Holdings Plc (HSBA), Europe’s biggest bank, will cut jobs and close offices to reduce costs by about a tenth over the next two years as it expands in faster-growing economies and prepares for stricter capital rules.

The lender will target cost cuts of $2.5 billion to $3.5 billion by 2013, according to a statement today, compared with total operating expenses of $37.7 billion last year. HSBC will cut head office jobs and may sell its U.S. credit card division as it seeks to exit unprofitable units among subsidiaries in 87 countries, the London-based bank said today. The shares fell.

“Perhaps people were expecting something a little bit more seismic, but Gulliver has not come in as a particularly new broom,” said Julian Chillingworth, who helps manage about 15 billion pounds ($25 billion), including HSBC stock, at Rathbone Brothers Plc in London.

Stuart Gulliver, 52, who became chief executive officer in January after four years heading the investment bank, said this week it may take until 2014 to reach the bank’s cost-reduction targets, the highest among its U.K.-based peers. He spelled out the changes at a meeting with investors in London today. Competitors including Barclays Plc (BARC) are also seeking to exit operations with low returns as regulators demand they hold more capital in the wake of the financial crisis.

‘Not About Shrinking’

“This is not about shrinking the business but about creating capacity to re-invest in growth markets and to provide a buffer against regulatory and inflationary headwinds,” Gulliver said. “We will continue to invest in markets with strategic relevance and high actual or potential returns and will either turn around or dispose of other businesses.”

It is “inevitable” that HSBC will employ fewer people by 2013, Gulliver told journalists today.

The bank fell 1.5 percent to 646.1 pence at the close in London, for a market value of 115 billion pounds. That marked the second-biggest decline in the 48-member Bloomberg Europe Banks Index.

HSBC said it will focus on commercial banking globally. The bank will also focus on wealth management in 18 of the “most relevant economies” while scaling back in consumer banking to markets where it can “achieve profitable scale.” HSBC said it plans to hire 150 new front office staff annually for its private wealth division.

The lender said it will focus on retail banking in the U.K., Hong Kong, high-growth markets such as Mexico, Singapore, Turkey and Brazil and smaller countries where it has a leading market share. It plans to boost revenue at its retail unit by $4 billion in the near-to-medium term.

Worldwide Employees

“Do not mistake the marketing strapline, ‘The World’s Local Bank,’ for our strategy,” Gulliver told investors, referring to HSBC’s consumer bank advertising slogan.

The investment’s in China’s Ping An Insurance (Group) Co. and Bank of Communications Co. Ltd. are “core,” while the bank’s plan to trade its stock in Shanghai is a priority, Gulliver said.

HSBC said it would cut $1.38 billion of costs by 2013 through measures including simplifying “regional structures,” consolidating data centers, shifting operations to cheaper cost locations, and reducing paperwork and layers of management. The bank had 295,061 employees worldwide at the end of 2010 compared with 315,520 at the end of 2007.

“There is little revolutionary within the announcements,” Keefe, Bruyette & Woods Ltd. analysts including Mark Phin said in a note to clients today.

‘Cost Problem’

Costs rose to 60.9 percent of income in the first quarter from 49.6 percent, earnings figures showed on May 9. Net income rose 58 percent to $4.15 billion from $2.63 billion a year earlier. The bank has a target to increase revenue faster than costs, HSBC said today.

“We clearly have a cost problem,” Gulliver told investors today. That would be addressed “with some energy,” he said.

The first-quarter results, with emerging markets outperforming developed ones, showed that HSBC is “a developing-market bank trying to escape from the body of a very different type of ‘conglomerate bank,’” Mediobanca SpA analysts said in a note yesterday. HSBC is “immensely powerful” and its results showed structural flaws “that prevent it providing the kind of shareholder returns the bank should be capable of providing.”

HSBC said it would encourage greater cooperation between its investment and commercial banking units to create $1 billion in additional revenue.

HSBC, whose origins date back to 1865 when it operated as the Hongkong and Shanghai Banking Corp. to finance trade in opium, silk and tea, focuses on emerging markets. It has 7,500 offices.

Free Capital

The bank could free $25 billion of capital by selling its U.S. credit-card unit, Rohith Chandra-Rajan, an analyst at Barclays Capital, wrote in a note to investors last week.

HSBC acquired the credit-card unit in 2003 with its $15.5 billion purchase of U.S. subprime mortgage lender Household International, now known as HSBC Finance. In 2009, HSBC halted consumer-finance lending at the unit, which has contributed to about $60 billion of provisions in North America, according to data compiled by Bloomberg.

The cards unit is profitable though “non-strategic” and a sale of the unit will depend upon whether the bank achieves a “sensible price,” Gulliver said.

‘Inefficiency’

“HSBC has a lot of inefficiency and manages a lot of its processes on a region-by-region basis,” Cormac Leech, an analyst at Canaccord Genuity Ltd. in London, said before the statement was published.

The bank reiterated that it seeks a return on common equity of 12 percent to 15 percent. It lowered that goal in February from 15 percent to 19 percent.

HSBC could climb to about 950 pence a share if Gulliver committed to ensuring all businesses generate a return on equity exceeding 10 percent, Gareth Hunt, an analyst at Investec Securities in London, wrote in a note to investors last month. HSBC shouldn’t have “a flag in every country,” he wrote. The bank’s shares closed at 656.2 pence in London trading yesterday.

Among the bank’s peers, Barclays cut its target for return on equity in February to at least 13 percent from the 18 percent CEO Robert Diamond has said it averaged over the past three decades. Credit Suisse Group AG, Switzerland’s second-biggest bank, trimmed its goal to more than 15 percent from more than 18 percent.

To contact the reporters on this story: Stephanie Tong in Hong Kong at stong17@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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