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HSBC 'running hard to stand still' with restructure

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK

HSBC’s (HSBA.L) plans for its biggest overhaul in a generation have been greeted warily by the City, with analysts warning that the ambitious plan comes with plenty of risks.

HSBC on Tuesday announced a radical shake-up aimed at improving performance and boosting its share price. The bank will radically scale back investment banking operations in the US and Europe, instead focusing resources on faster growing regions like Asia and the Middle East.

The plan will see 35,000 jobs go — about 15% of HSBC’s global headcount — and cost an estimated $7.2bn (£5.5bn). Interim chief executive Noel Quinn called it “one of the deepest restructuring and simplification programmes in our history.”

A bronze lion statue outside the HSBC headquarters in Hong Kong. (AP Photo/Vincent Yu)

Read more: HSBC to axe 35,000 jobs as profit slumps

Quinn’s overhaul is aimed at improving profitability and boosting HSBC’s share price, which has fallen more than 20% over the last two years. However, analysts and investors were lukewarm on the plan.

“With significant restructuring risk... we remain cautious on near term trading,” UBS banking analyst Jason Napier wrote in a note to clients on Tuesday.

HSBC is doubling down on Asia at a time when the region is facing a string of crises. China is struggling to control an outbreak of novel coronavirus and economists expect the epidemic to significantly dent GDP growth. Hong Kong is also feeling the effects and still reeling from pro-democracy protests that sent the region into recession last year. HSBC’s pivot to Asia could be a miscalculation.

Protestors vandalize a HSBC branch in Hong Kong, on 1 January. (Lee Jin-man/AP)

The City of London is also wary given HSBC’s track record. Quinn’s new vision for the company marks the third significant strategic shift in the last 10 years. Neither of the previous two plans failed to do much to improve the lender.

“As with every European bank, it seems we are just constantly restructuring, rinse and repeat every few years,” said Neil Wilson, chief market analyst at Markets.com.

Even if the pivot to Asia does prove to be the right move, it may be too little too late. Despite its historic roots in Hong Kong, HSBC has largely missed the Asian economic boom of the last decade. The banks shares are almost 20% lower than where they were in 2010. Now, as it goes all-in on China, the country’s growth has slowed to its lowest rate since 1990.

Read more: Chinese inflation hits eight-year high as coronavirus anxiety climbs

“We expect the shares to be weak today with HSBC seemingly running hard to stand still on restructuring,” analysts at Barclays said.

Others are more optimistic about HSBC’s plans. Investment bank Jefferies called the restructure “ambitious and very credible” and Bank of America rated HSBC’s stock ‘buy’ on “an expectation that forthcoming restructuring supports share buybacks, in addition to a high and sustainable dividend as well as driving profitability.”

The wider market needs more convincing. HSBC’s stock opened 4% lower in London on Tuesday and was down 6.3% after almost three hours of trading.

Part of the weakness is driven by worse-than-expected 2019 results, published alongside the strategy update, but Jefferies said the market was more focused on the restructuring plan.

Ian Forrest, an investment research analyst at stockbroker The Share Centre, said: “While the bank is clearly taking action, the changes will take time to feed through into the figures and the degree of uncertainty about current activity levels in a number of areas is likely to dampen sentiment towards the shares for some time.”