HSBC Job Cuts Should Come As Little Surprise

News (Other OTC: NWSAL - news) that HSBC is cutting 25,000 jobs, including up to 8,000 here in the UK, should not be a shock.

Many factors lie behind the announcement, some going back years.

First (Other OTC: FSTC - news) and foremost is the need to generate a competitive return to shareholders. HSBC’s shares have underperformed those of rivals in recent years while its return on equity last year - a measure of investor returns - was a feeble 7.3%.

To raise that above 10%, as HSBC aims, it must either grow its business or cut costs.

The latter is easier when net interest margins - the difference between what the bank pays savers and charges borrowers - have been compressed for many years due to ultra-low interest rates and when many household and business customers have been trying to cut debts rather than take on new ones.

Second is the changing nature of banking. People do not use cash as they used to.

The number of transactions done by credit or debit card last year overtook those done in cash for the first time. So they are using branches less.

That is why all banks, HSBC included, are cutting branch networks and investing more in payment networks and internet banking services.

Third, is HSBC’s evolution. During the last three decades, HSBC has expanded massively, planting its flag in dozens of new territories encompassing all kinds of banking activities.

This is known as the 'universal banking' model, the notion that, whatever type of customer you were, wherever in the world, HSBC had a service for you.

However, since the financial crisis, it has become clear investors have fallen out of love with universal banking.

Scandals have highlighted how HSBC and others have become too big to manage. Consequently, banks everywhere are quitting activities and countries where they cannot achieve a decent return - think of how Barclays (LSE: BARC.L - news) is shrinking its once-mighty investment banking division - and focussing on those where they can.

In HSBC’s case, that means pulling out of Brazil and Turkey and concentrating on Asia, where it already has a powerful market presence.

A fourth factor is specific to the UK. HSBC is by far the biggest contributor to the banking levy, a charge applied by the taxman on the global balance sheets of banks, even though the UK generates just 6% of HSBC’s global profits.

Some of HSBC’s big international rivals, like Citigroup (NYSE: C - news) and Deutsche Bank (Xetra: 514000 - news) , meanwhile, only pay the levy on the UK portion of their balance sheets. The levy was initially intended to reduce the riskiness of banks, but, critics say, has merely become just another tax used by the Chancellor whenever he has a shortfall elsewhere.

This is why HSBC may leave the UK. According to some estimates, it could save up to £4bn over the next decade by doing so. HSBC must also, under tough new regulations, ring-fence its UK retail banking assets.

This, again, makes the UK a costlier place to do business and creates an imperative for HSBC to cut costs here rather than elsewhere.

The UK job losses, of course, will also serve to remind George Osborne, on the eve of a Mansion House speech in which he is widely expected to signal an easing of hostilities with the banking sector, of how much worse things could get if HSBC genuinely does decide to leave the UK.

Financial services account for around 8% of UK GDP. Mr Osborne needs banks like HSBC more than they need Britain right now.