(7) HSBCʼs cuts are an early warning signal to banks | Financial Times 13/10/2019, 20)40

Opinion The FT View

HSBC’s cuts are an early warning signal to banks

Plans to cut up to 10,000 jobs suggest group is ahead of the curve

THE EDITORIAL BOARD

HSBC's London headquarters at Canary Wharf. © Bloomberg

The editorial board OCTOBER 8 2019

It may seem out of character for HSBC to be weighing an aggressive round of cost-cutting, putting
up to 10,000 jobs at risk. This, after all, is the lumbering giant of global banking, an institution
with 238,000 staff and operations in 65 countries around the world. With pre-tax profit of $12.4bn
in the first half of this year, it is performing fine, too. While many western peers are struggling as
net interest margins are squeezed by ultra-low or zero interest rates, HSBC’s presence in fast-
growing Asian markets has given it a powerful offset to near-stagnation in Europe.

It is also unusual for an interim chief executive to launch such an initiative. Noel Quinn was
installed as acting CEO in August after the abrupt ejection of John Flint. Mr Quinn has quickly
grasped one of the few levers a bank can pull in such an environment. In the background, chairman
Mark Tucker is likely to have played a key role. Even in the months before his departure, Mr Flint
had remained optimistic that an improving interest-rate environment would bolster profits — a
promise that has been undone as the trend of tightening monetary policy in the US and Europe was

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(7) HSBCʼs cuts are an early warning signal to banks | Financial Times 13/10/2019, 20)40

loosened again. Such a wayward call will have played a big role in the chairman’s decision to axe
Mr Flint, and hardened his successor’s resolve to be more forceful.

Ever since the financial crisis, all big banks have been trying to cut costs. HSBC’s efforts have been
uninspiring. In the post-crisis years, then CEO Stuart Gulliver set stringent targets to reduce the
so-called cost-income ratio — overheads as a share of revenue — to just over 50 per cent. With
revenue growth elusive, the ratio has remained stubbornly closer to 60 per cent. The bank’s focus
for fresh cuts is Europe. That is logical. While HSBC’s expanding business in Asia and other parts
of the world performs better than average in terms of revenue and costs, the European operation is
declining. In the first half of 2019, the group’s cost-income ratio in Europe was 99.9 per cent —
barely a break-even result.

HSBC is not the first bank to respond decisively to a more challenging environment this year.
Deutsche Bank and Société Générale have announced restructuring operations, amid a particular
weakness in their investment banking units. But HSBC is the first to do so from a position of
strength. It actually increased profitability in the first half of the year and generated a return on
tangible equity of more than 11 per cent — far ahead of most European rivals.

For HSBC to be seen in the vanguard of adapting to a changed macro situation is at odds with its
justifiable characterisation as a big bureaucracy. Evidence suggests the view is accurate
nonetheless. Despite regular changes of management over the past decade or so, it seems to be in
the bank’s DNA to be ahead of the curve on the big calls. In 2007, it was the first to blow the
whistle on the forthcoming subprime mortgage crisis, to which its woeful Household unit was
horribly exposed. In the spring of 2009 it raised an unprecedented £12.5bn in a rights issue,
shoring up its balance sheet ahead of fresh regulatory demands.

There are idiosyncratic reasons why HSBC needs to cut costs now: previous attempts have not gone
far enough; the added overheads of ringfencing the group’s UK operations have added to
inefficiency; and political concerns in its core Hong Kong market will have rattled risk managers
about the outlook. All of that comes on top of slowing global growth and the mounting pressure on
lending margins from looser monetary policy. As in 2007, other banks would do well to heed the
early warning signal.

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