Of Special Interest

13th May 2011

HSBC cost cutting promises underwhelming

HSBC announced cost cutting which would amount to between $2.5bn and $3.5bn by 2013. Whilst there is goodwill to Stewart Gulliver, the new CEO, the lack of detail left analysts disappointed and the bank was punished with selling of stock and a fall in share price of nearly 1.5%, though it gained some of this fall back later in the day.

Some of the points which upset the audience were:

1 - Stated minimum ROE target of 12.5% C/I 48%

2 - No commitment to sell US Card business (which would free $25bn of capital). Confirmation the business was under review.

3 - Too slow decision making, when challenged Chairman Douglas Flint said the bank was too busy dealing with the effects of the financial crisis to have developed policies sooner

4 - Only example of definite cost savings provided was from the withdrawal of retail banking in 39 countries where they had minimal presence. Talk of reducing the number of regional management layers but again not very specific.

HSBC also indicated that it needed significant additional capital. Whilst Tier 1 is 10.5 currently this is to Basel II standard, Basel III basis could reduce this level by as much as 3%. Anything under 10% Core Tier 1 is considered weak for a major bank and the independent banking commission has recommended that TBTF UK banks, such as HSBC, should have minimum Core Tier 1 of 10% in its provisional report. Even including the planned changes the bank could still be 1.8% short of the 10% level.

Analysts and the media have been kind to HSBC until recently usually giving the bank the benefit of the doubt and believing that rapid growth in Asia would make up for shortcomings elsewhere. This has now changed, and unless the executive show results more rapidly than indicated so far they are going to have an increasingly difficult time which will undoubtedly not be good for the share price.