HSBC strategy fails to impress

It's the shake-up investors have been waiting for, but instead of surprises capable of reigniting interest in the shares, HSBC's hotly anticipated investor update failed to please the City. It's not good news for HSBC employees, either, with around 25,000 facing the sack.

Management plan on cutting the bank's risk weighted assets (RWAs) by around $290 billion - $140 billion from the investment bank - shrinking the contribution from Global Banking and Markets (GB&M) to less than a third of the group total. In 2014, European RWAs contributed 30% of the global business, coming second to Asia's 40%.

But that will mean targeting some regional businesses, GB&M and the Consumer and Mortgage Lending portfolio. Bernstein's senior analyst Chirantan Barua says this leaves around $100 billion of unaccounted RWA reduction targets, expected to be split between GB&M and other poorer performing franchises.

From the four regions tipped for restructuring, HSBC has decided to sell its operations in Turkey and Brazil - a "good move", according to Barua. Although HSBC wants to continue serving large corporate clients in Brazil, it could be sold as soon as August, with three bidders already rumoured to be queuing up.

Instead, HSBC will be focusing on developing its Asian investments, specifically in the Pearl River Delta in Guangdong province, China, and in the ASEAN region. Management reckon they can forge a revenue stream from investment in foreign exchange, payments and cash management, and global trade and receivables finance. These opportunities will be leveraged from its position in "renminbi internationalisation".

Management want to cut costs by $4.5-$5 billion over the next two years, but it won't be cheap. The cost has been put at $4-$4.5 billion. Chiefs target a return on equity above 10% by 2017, they are looking to secure sales growth above cost growth and commit to progressive dividends to shareholders. The UK branch network is likely to be renamed, too - a return to Midland perhaps?

(click to enlarge)

"We recognise that the world has changed and we need to change with it," said chief executive Stuart Gulliver. "The world is increasingly connected, with Asia expected to show high growth and become the centre of global trade over the next decade. I am confident that our actions will allow us to capture expected future growth opportunities and deliver further value to shareholders."

An outline of Gulliver's transformation also includes rebuilding NAFTA [North American Free Trade Agreement] profitability, launching a ring-fenced bank and completing its headquarters location review by the end of 2015.

"We think the financial logic for HSBC to escape the clutches of the UK (and Europe) is overwhelming," said Ian Gordon, an analyst at Investec. "What possible reason is there to stay?"

Putting a target price of 650p on HSBC, Barua added:

HSBC - in its release today - has failed to bring out anything radically different from moves which have been widely expected for some months now. The initiatives taken by management are all welcome but the moot point is that HSBC will find it hard to break the 70bps RoTA level till 2018 when base rates are likely to be in the 1.5%+ range and the capital build will be well and truly over. Given valuation and the Street's expectations of earnings momentum, we would at this stage prefer to hold on to the stock but wouldn't expect it to outperform.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser