HSBC’s plan to redeploy resources to Asia, shrink its investment bank, and cut costs is unlikely to have a positive rating effect while being potentially negative over the long run, says Fitch Ratings. In particular, how HSBC manages its significant planned growth in China and south-east Asia could hurt the ratings if this leads to a higher overall risk profile and concentration.
The plan, announced as part of an Investor Update on 9 June, reinforces an earlier strategic plan from 2011 which was first updated in 2013 and focuses on several key themes. These include a regional focus on Asia and China, and operating a diversified universal banking model with three divisions of equal weight – Retail Banking and Wealth Management, Commercial Banking, and Global Banking and Market. Financial targets remain unchanged, including a return- on- equity target of above 10% based on a CET1 ratio of 12%-13% – both figures were adjusted earlier in the year.
The announced cost and capital reallocations would only provide a positive credit and ratings effect if HSBC outperforms on the execution of its strategy and at the same time boosts capitalisation significantly. In terms of maximising efficiencies, HSBC plans up to 25,000 job cuts – mainly from reducing back-office functions and through the use of digital technologies and automation. The cost savings will be reinvested, with the overall cost base remaining stable at USD32bn.
Positive factors are the plans to reduce a combined USD140bn in risk-weighted assets (RWAs) in the investment banking division through quicker reduction of legacy assets, selling assets that no longer meet their cost of capital, and focusing on transaction banking-type businesses and multi-product and multi-country relationships However, we view this as a natural extension of ongoing efforts to scale back investments that have become overly capital intensive.
HSBC confirmed that it would also exit Turkey and reduce its operations in Brazil to only a small presence, while holding on to its Mexican business. The capital released from the sales in Turkey and Brazil will be used mainly to finance growth in Asia, enhance transaction banking and building key trade hubs for example in places like Germany. HSBC has already retreated from several dozen retail markets since 2011, including India, Russia, Colombia, Thailand and South Korea. The bank is targeting an increase in investments of USD180bn-230bn in RWAs in the Pearl River Delta (PRD) in southern China and ASEAN countries, which will also involve quadrupling the PRD workforce over the medium term.
Extracting more value from its global network and from increasing the share of international client revenues – which it quantified at USD22bn or 40% of revenues in 2014 – would be positive for HSBC, but there are few details as yet as to how this will be measured and accomplished. In this regard, the bank emphasised that maintaining a substantial US presence is most critical for its transaction banking operations which generated revenue of USD16bn in in 2014.
