Gulliver: Commercial banking is our DNA

HSBC unveiled a strategic overhaul yesterday that will see the bank cut up to $3.5bn (£2.14bn) in costs, cut “subscale” retail operations and review its presence in 39 countries.

“We are not going to try to be all things to all people in all markets,” said chief executive Stuart Gulliver as he launched a plan to refocus the firm on commercial banking, which he called its “DNA”.

“Sometimes we struggle to explain why we’re in 87 countries. We have allowed the market to view us as a retail bank,” he told an all-day gathering of investors and analysts in the bank’s Canary Wharf headquarters.

He added that in fact, the lion’s share of the bank’s profits stem from commercial and wholesale activities.

Highlighting its ballooning cost base, he said: “We’ve got multiple layers of head offices – two in this building alone… We clearly have a cost problem.” But he said the cost-cutting would have to go beyond tinkering measures like cutting down on hotel laundry expenses during business trips: “It takes an awful lot of socks to get to $2.5bn.”

In a presentation that offered “selected examples” of how the bank would achieve its income-to-cost ratio target of 48-52 per cent by 2013, finance director Iain Mackay promised to save $300m by shutting down head offices, $275m by overhauling the bank’s IT and $100m from a “reduction of paperwork”.

But investors were told not to expect cuts in other areas: while expenses rose $1.5bn between 2009 and 2010 due to “wage inflation”, Gulliver said HSBC was “not going to compromise on talent” and would continue to increase costs for recruiting purposes.

Investors keen for details of asset disposals were disappointed, however. While Gulliver said that the bank would look for an “exit” from businesses that offered neither returns nor a solid deposit base, he said only that specific sales would be announced over the coming months.

However, a sale of the bank’s US credit cards business looks all but certain. Gulliver said it was “not fully aligned with strategic customer base” and that it required further investment for which “HSBC’s appetite is limited”. He would give no details of other disposals, except to deny that the bank has plans to sell its 16 per cent stake in Chinese insurer Ping An.

THE MANAGEMENT | THE EXECUTIVES CHARGED WITH OVERHAULING HSBC

CHIEF executive Stuart Gulliver said yesterday that HSBC’s top executives would be evaluated based on a new “report card” that would put “courageous integrity” at the heart of its dealings, which he added was “not some happy clappy strap-line”. The strategy they will have to implement involves evaluating the bank’s businesses on the basis of their returns, efficiency and “connectivity”. Comparing the bank’s global footprint to the networks of a telecoms company, Gulliver said that its most profitable activities “rely on the network, the network of branches that we have and the position we have in more than 80 countries. I strongly believe we do benefit from a network effect”.

AT A GLANCE: THE MAIN POINTS

RETURNS
The bank reiterated its 12 to 15 per cent return on equity target, saying it would achieve this by concentrating on growing its private bank and wealth management divisions as well as investing heavily in Asia, including in wage costs and new branches, with China and India the top priorities for retail banking growth.

COSTS
Reiterated target for cost-to-income ratio of 48 to 52 per cent (versus 61 per cent last quarter) by 2013. In order to do so, Gulliver said the bank would cut $2.5bn to $3.5bn in expenses by 2013. This would be achieved by shifting from a “loose, federal structure” to “consistent business models”, enabling shared IT. A broader IT overhaul will consolidate hubs and move infrastructure to cheaper locations. The bank will also shut down surplus head offices and get rid of extra managers.

LIQUIDITY
HSBC intends to maintain a 90 per cent ceiling on its loans-to-deposits ratio and will consider keeping low-returns businesses if they contribute significantly to group funding.

DISPOSALS
Little new information was divulged, but the bank summarised its decisions so far: it will save $90m in Europe by exiting retail businesses in Russia, save $180m to $200m by exiting pension businesses in Mexico and Costa Rica, “review” US cards and retail businesses for a likely sale of parts and announce other disposals of low-returns businesses in due course.

CORPORATE GOVERNANCE
The strategy day is to become annual and the bank will continue with full quarterly earnings updates. It will introduce a new “report card” for executives who will be asked to display “courageous integrity”. This will involve both concrete targets and a shift from “command and control” to a “values” culture.