HSBC Holdings Plc, Europe’s largest bank, doubled its target for generating additional revenue from greater cooperation among its four businesses to $2 billion.
The lender, based in London, is also on schedule to meet the top end of its target for eliminating as much as $3.5 billion of costs by the end of next year, according to a filing to the Hong Kong stock exchange today.
Chief Executive Officer Stuart Gulliver, 53, who took over in January 2011, pledged in May last year to cut costs as a percentage of revenue and increase return on equity, a measure of profitability, to at least 12 percent by retreating from less profitable markets. He’s announced the sale of 28 businesses since the start of last year.
“Revenue growth is a key issue HSBC needs to address, and revenue growth tends to be harder to achieve than cost savings,” said Gary Greenwood, an analyst at Shore Capital in Liverpool, England. “The market tends to be a bit more skeptical on those than cost savings and they take longer to get priced in.”
HSBC fell 0.9 percent in London to 529.6 pence at 9:38 a.m., giving the company a market value of 96.2 billion pounds ($153.9 billion). The stock has gained 8.8 percent this year, compared with a 5.7 percent advance by the FTSE 350 Banks Index.
Revenue gains will come from “further cooperation between” HSBC’s investment bank “and commercial banking and between commercial banking and the private bank,” Gulliver said on a conference call with journalists today.
“It’s as simple as things like ensuring foreign-exchange deals are done at our end in trade finance rather than at another bank’s end,” he said.
Gulliver has announced about $6 billion of asset sales, led by its disposal of its U.S. credit card unit to Capital One Financial Corp. for a premium of $2.5 billion. It agreed in August to sell its upstate New York branch network to First Niagara Financial Group Inc. for about $1 billion.
“The revenue synergy and the revenue target are encouraging as it suggests that HSBC’s cost-efficiency effort is not just focusing on reducing costs,” Sandy Mehta, CEO of Hong Kong-based Value Investment Principals Ltd., said by telephone today. “That’s a fine balance.”
The bank has increased its estimate for potential additional revenue from integrating its four global businesses in the “short to medium term” by $1 billion, Gulliver said in the statement. HSBC said a year ago it would encourage greater cooperation among its investment and commercial banking units to create $1 billion in extra revenue.
ROE Target Raised
The bank will exit four markets in Latin America and change its model in another four, concentrating on the “priority markets” of Argentina, Brazil and Mexico.
HSBC said a year ago it would target a return on equity of 12 percent to 15 percent. That compares with 11 percent in 2011. The bank also said it would seek to reduce costs to a range of 48 percent to 52 percent of revenue. That measure stood at 56 percent at the end of March.
In April, 27 percent of Barclays Plc’s shareholders voted against CEO Robert Diamond’s 12 million-pound ($19 million) compensation package. HSBC, which will have its annual meeting on May 25, has tried to align its executive pay with shareholder interests, Gulliver said. His long-term bonus is deferred for five years, paid in HSBC stock and is inaccessible until his retirement, he said.
“We think we are in a slightly different situation than some,” he said.
The bank was criticized on May 15 by Pensions & Investment Research Consultants Ltd., a shareholder adviser, for the reliability and audit quality of its accounts, which may be affected by the International Financial Reporting Standards. Shareholders should vote down the audit report, PIRC said.
Using the standards is required by regulators, Finance Director Iain Mackay said on today’s conference call. “To object to a set of international standards is an interesting point of view, but it is simply not a basis on which to recommend that the accounts are not approved.”