HSBC Holdings (LSE: HSBA) was making headlines for all the wrong reasons this morning. Along with Santander, the bank had failed to keep up with new regulations set in February 2018 that required it to text its customers when their accounts were close to going into their overdraft – an attempt to avoid high fees the banks charge for such facilities.
HSBC now needs to refund the 115,000 customers who were affected, to the tune of £8m, and now has to investigate if any other breaches have taken place since 2018. The news comes at an important time for HSBC, as it attempts to undergo a fundamental restructure whose main aim is to focus on its Asian operations, and move away from lower profitability regions such as the US.
A temp, but not baby-sitting
Heading up this move is interim CEO Noel Quinn, who far from resting on his laurels as a ‘caretaker’ leader, is leading the restructuring efforts from the front, in concert with CFO Ewen Stevenson.
This is in fact the third time HSBC has made attempts to restructure itself, with similar efforts being made in both 2011 and 2015. Though the exact nature of the latest restructuring plan will be announced with HSBC’s full-year results in February, the main direction it will be taking is already fairly clear.
The bank is well known for having an overly large bureaucracy and workforce in general, which has been a cost drain on its bottom line for years. Reducing these numbers could be key to its profitability – HSBC already announcing 10,000 job cuts earlier this year.
The other key component, and arguably the most important, is a movement of capital and resources away from its less profitable US and European operations, and into its Asian business (where HSBC makes most of its money).
The bank has long failed to make strong gains in the US, despite a number of attempts, and though it will not be withdrawing entirely it seems the leadership may finally be willing to face up to the fact it may just not be worth the trouble.
Similarly, though HSBC is successful in Europe, it terms of profitability, resources could be better put to use – the bank believes – by focusing instead in Asia, particularly Hong Kong and China. In Q3, for example, HSBC made about 95% of its pre-tax profit in the region.
Eggs in one basket
Though it is an over exaggeration to say HSBC will be putting all its eggs in its one, Asia-focused basket, it will still certainly represent a more concentrated effort in the region, presumably at some cost to that of Europe and the US. This may not entirely be beneficial.
One could argue that the company’s global nature is a competitive advantage it has over some rivals, while operating in numerous regions is by its nature a hedge against risks – perhaps highlighted recently by the protests in Hong Kong.
However, there is also another strong argument, and one I think will come to be in the case of HSBC, that focusing resources where they can do the most good is what is best for a business. By cutting its overheads, and moving money and people away from its less profitable regions, I still think this restructuring could be good for the HSBC share price going forward.
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Karl has shares in HSBC Holdings. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019