HSBC ramps up Asia pivot as Covid-19 hammers profit

24 Feb 2021 / 00:37 H.

LONDON/HONG KONG: HSBC Holdings PLC on Tuesday vowed to accelerate its Asia pivot despite spiralling tensions between China and the West after it reported a 30% plunge in profits for 2020 due to the coronavirus pandemic.

Reported profit after tax came in at US$6.1 billion (RM24.66 billion), which the bank blamed primarily on higher-than-expected credit losses and other bad debt charges.

The results came as HSBC published a new strategy laying out plans to redouble its attempt to seize more of the Asian market – the region of the world where Europe's largest lender makes the vast majority of its profits.

The strategy will see the London-headquartered bank plough some US$6 billion into shoring up operations across Asia, with a particular focus on targeting wealth management in the increasingly affluent region.

The bank made specific mention of markets in Southeast Asia such as Singapore, as well as China and Hong Kong, and also the Middle East.

After “the economic impact of Covid-19 hit” profits, HSBC will invest in “markets that set us apart, whilst also moving the heart of the business to Asia, including leadership”, chief executive Noel Quinn said in webcast.

The global economic slowdown caused by the virus has hit financial giants hard but HSBC has a further headache – its politically precarious position as a major business conduit between China and the West.

HSBC makes 90% of its profit in Asia, with China and Hong Kong the major drivers of growth. As a result, it has found itself more vulnerable than most to the increasingly frayed relationship between China and western powers, especially after Beijing imposed a draconian security law on Hong Kong last year and cracked down on democracy supporters.

HSBC endorsed the security law, a move that led to criticism from lawmakers in Britain and the United States. It has frozen the bank accounts of some Hong Kong democracy activists with Quinn summoned to testify before British lawmakers earlier this month.

At the same time HSBC has found itself called out by Chinese state media for providing information that helped lead to the arrest in Canada of a top Huawei executive.

HSBC says it has to obey the laws in each jurisdiction it operates in.

But the dual crises neatly encapsulate the delicate position that a bank so reliant on China has now found itself in.

“The geopolitical environment remains challenging – in particular for a global bank like HSBC – and we continue to be mindful of the potential impact that it could have on our strategy,“ chairman Malcolm Tucker said in a statement attached to Tuesday’s results.

Despite those complications, HSBC looks set to go all in on Hong Kong.

According to Bloomberg and the Financial Times, the bank is planning to move three of its top executives from London to Hong Kong in the coming months. The trio collectively head up wealth and personal banking, global banking and markets, and global commercial banking.

Bloomberg said the move would mean businesses responsible for some 95% of net revenue will soon be run out of Hong Kong.

Other major banks have started moving some senior executives away from Hong Kong to rival cities such as Singapore and Tokyo.

The latest strategy comes just 12 months after HSBC announced a worldwide overhaul to slash 35,000 jobs by 2022, primarily in its less profitable European and American divisions. The job cuts represent some 15% of the bank's global workforce.

HSBC has spent a year in vain looking to sell its French retail arm and the Financial Times on Tuesday reported it was also planning to end its consumer banking business in the US.

The bank said on Tuesday that adjusted pre-tax profit was halved in the fourth quarter to US$2.2 billion, though that was better than the US$1.8 billion forecast, thanks to the lender keeping costs down as part of the major restructuring it has already embarked on.

Citing the low interest rate environment and tough market conditions, HSBC ditched its goal of achieving a return on tangible equity of 10 to 12%, and said instead it will aim for 10% over the medium term.

The move by Europe's biggest bank underlined the tough outlook for the banking sector as low interest rates worldwide curb profits, even as a global markets rally boosted the prospects for the wealth management business.

“The big structural shift that’s gone on since we set out the plan last February has really been the shift in interest rates down toward zero in most markets that we do business in,“ Ewen Stevenson, HSBC's group chief financial officer, told Reuters.

“If interest rates were 100 basis points higher today across the board it would improve our returns by 3 percentage points.”

The bank said it would pay a dividend of US$0.15 a share in cash, the first payout announced since October 2019, after the Bank of England blocked all big lenders from payouts in 2020 to conserve capital.

However, it said it would stop the previous practice of paying a quarterly dividend, and target a payout ratio of between 40% and 55% of reported earnings per ordinary share from 2022 onwards, well below the level in recent years.

HSBC also set out plans to reduce its office space globally by 40% over the long term as part of its cost-cutting drive, in a further sign the pandemic could mean permanent changes to working patterns.

The bank's CEO Noel Quinn said the reduction would come from axing office buildings as their leases come to an end and would not include branches or HSBC's headquarters building in London's Canary Wharf. Retained buildings will be used more flexibly, he said.

“We are focused on those offices with support functions and head office activities when we talk about the 40% reduction,“ Quinn said.

“It’s hard to have high ambitions in this climate, or at least dangerous to declare them if they exist,“ said Hugh Young, managing director at Aberdeen Standard, HSBC's ninth-largest shareholder.

HSBC said that its growth in Asia for the next five years will be driven by around US$6 billion of additional investment in its wealth management and international wholesale business.

Quinn said he could shift some executives, who report directly to him, from London and other locations to the Asian financial hub, including global business heads, but the decisions have not been finalised.

Elsewhere in the world, HSBC said it is in talks with potential buyers for its troubled retail banking unit in France, which it has been trying to dispose of for over a year, but no deal has been confirmed.

It said it expected to make a loss on the sale given the business's underlying performance.

The bank also said it is “exploring organic and inorganic options” for its US retail banking franchise, suggesting it is trying to sell the unit where it has already closed 80 branches in the last year.

The bank is however confident of restoring profitability in its Mexico business, Quinn told Reuters. – AFP, Reuters

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