Gulliver’s Asia Push for HSBC Faces Hurdle in China Slowdown

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Stuart Gulliver
Stuart Gulliver, CEO of HSBC Holdings. Photographer: Jerome Favre/Bloomberg

Just as Stuart Gulliver’s effort to revive HSBC Holdings Plc’s profit is showing signs of paying off, China’s market turmoil is threatening to undermine it.

The lender posted a 10 percent increase in first-half profit Monday, helped by a surge in income from Asia. HSBC also announced the sale of its money-losing Brazilian unit for $5.2 billion, $1 billion more than analysts had anticipated, and is preparing to follow that with the disposal of its Turkish unit.

Those sales will leave the bank more reliant on Asia, where it already makes 69 percent of its profit. Gulliver, 56, said performance in Asia will “undoubtedly” worsen in the second half amid a slowdown in Chinese growth and the Shanghai Composite Index’s biggest monthly loss in six years in July.

“I absolutely expect a softening of results in Asia, so it will be much more challenging for the bank in the second half,” said Ian Gordon, an analyst at Investec Plc with a buy rating on the stock. “I was encouraged by today’s progress, but there’s quite a lot left to do.”

Gulliver, who has served as chief executive officer for more than four years, has sought to pare back HSBC’s sprawling geographic spread, shut money-losing operations and eliminate jobs. He has failed to reverse an 8 percent decline in the bank’s stock over the past year, even after announcing plans to reduce headcount by about 50,000 and sell units.

‘Market Reassured’

“The market has been reassured by HSBC, particularly by the sale of the Brazilian unit,” but the bank “will probably have to go further,” Andrew Parry, head of equities at Hermes Investment Management Ltd., told Francine Lacqua on Bloomberg Television on Monday. “We know from other big banks that it takes quite a long time to turn around these supertankers.”

After rising as much as 1.7 percent in London trading on Monday, HSBC shares erased most of that gain and were little changed on Tuesday. The stock has lost 4.5 percent this year.

Pretax profit in Asia rose 19 percent to $9.4 billion in the first six months of the year, helped by a surge in equities trading in Hong Kong that boosted earnings at its wealth management unit and at the investment bank. Gulliver said about half of the $180 billion to $230 billion of risk-weighted assets the bank plans to redeploy will be invested in Asia.

Wealth-management revenue will decline in the second half as sales of exchange-traded funds fall and the investment bank will see “more muted activity” among major clients, Gulliver told reporters on Monday.

Eyes on Prize

“More accommodating monetary conditions should help the mainland Chinese economy to stabilize after first half challenges,” HSBC said in its results statement.

“Asia is the area where they are decent growth at high return-on-equity, and longer-term they should benefit from the growth in the region,” said Chris White, who helps oversee about 3.9 billion pounds ($6 billion), including HSBC shares, at Premier Fund Managers Ltd. in Guildford, England. “Shorter term, investors may worry about slowing growth” and “the China stock market collapse but Gulliver will see through this and keep his eye on the longer-term prize.”

China is just one threat to Gulliver’s turnaround effort. His headcount cuts have been slowed by thousands of compliance hires required after a series of costly scandals, among them lapses in anti-money-laundering controls. Expenses as a proportion of revenue, known as the cost-income ratio, were little changed in the first half at 58.2 percent. The bank is targeting the “mid-fifties” for that measure.

Compliance Hires

HSBC has hired more than 2,200 staff to monitor internal processes so far this year, helping to increase operating expenses by 7 percent to $17.6 billion. The bank employed 295,000 people at the end of 2010 and has reduced that number to 266,000 during Gulliver’s tenure, annual reports show.

Among the most politically sensitive tasks, Gulliver and Chairman Douglas Flint will have to decide whether to move the bank’s headquarters to lower some of the tax burdens of its U.K. base. HSBC said Monday that it plans to complete the review of its domicile by year-end.

While the bank is searching for a replacement for Flint, who bore the brunt of criticism from politicians over HSBC’s past misconduct, analysts and investors are giving Gulliver time. Still, some of the precedents at the bank’s peers might give him pause.

Jain, Jenkins

At Deutsche Bank AG, co-CEO Anshu Jain announced his resignation in June, just two months after presenting a strategic update that investors considered too weak. Barclays Plc CEO Antony Jenkins was fired by new Chairman John McFarlane after the pace of change at the bank was deemed too slow, while Standard Chartered Plc’s Peter Sands was ousted this year, partly a victim of slowing business in Asia.

Since Gulliver became CEO in January 2011, HSBC has fallen about 11 percent. While that’s better than the 44 percent drop at its fellow emerging-market focused British bank, Standard Chartered, Barclays’s stock is up 19 percent.

“Gulliver showed today they aren’t standing still on this, and they are in fact moving very quickly,” said Christopher Wheeler, a banking analyst with Atlantic Equities in London. “If you look at how Barclays’s and Deutsche Bank’s CEOs were criticized by their chairmen and investors for not moving fast enough, Gulliver’s determined he’s not going to be tarred with that brush.”

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