HSBC Holdings Plc is following in the footsteps of its European peers by announcing plans for its investment bank to exit entire businesses, reduce the client base and cut assets by $130 billion.
Europe’s largest lender will withdraw from “legacy credit” and manage down “long-dated rates and low-returning portfolios” to bolster profitability, the company said in a presentation on Tuesday. Risk-weighted assets at the global banking and markets unit will decline by about 31 percent, the London-based bank said in a separate statement.
HSBC’s strategy reflects the changes other European banks including BNP Paribas SA and Barclays Plc have undergone amid tighter regulation. Long-dated securities are difficult for banks to hold under liquidity rules, and reducing risk-weighted assets has become a priority under Basel capital requirements. Deutsche Bank AG exited single-name credit default swaps this year as part of a similar initiative.
“Today’s strategic reset is focused on the delivery of cost and RWA efficiencies, and exiting unattractive markets,” said Ian Gordon, an analyst at Investec. “We particularly welcome more radical action within global banking and markets which will henceforth consume less than one-third of group risk-weighted assets, currently 43 percent.”
HSBC Chief Executive Officer Stuart Gulliver, a former head of the global banking and markets division, is eliminating as many as 25,000 jobs across the company through 2017. The bank anticipates keeping costs “flat” at the securities unit to offset about $1 billion of inflation and investment growth, it said in the presentation to investors on Tuesday.
HSBC isn’t alone. BNP Paribas’s corporate and investment bank is considering cutting costs by 20 percent through 2019 as the company grapples with the growing expense of complying with regulation, a person with knowledge of the plan said on June 5.
HSBC’s cost-cutting plan includes a 20 percent reduction of the global markets client base. It estimates it will save $100 million to $200 million from exiting “dormant” and “low-revenue” clients. HSBC receives 10 percent of relationship revenue from hedge fund clients, paling in comparison to corporate and bank clients, which make up 70 percent of revenue.
In terms of growth, foreign exchange is the bank’s top-ranked product across all regions in adjusted revenue, followed by rates in Hong Kong and Europe. The bank said it will pursue opportunities in the offshore renminbi markets, taking advantage of its Asian presence and anticipating China will settle 50 percent of trade in renminbi by 2020.
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