HSBC in $3.5 billion cost-cutting overhaul

A HSBC logo is seen on the Private Bank Building in Geneva March 28, 2011.

LONDON/HONG KONG (Reuters) - HSBC's (HSBA.L) new boss is to cut back in retail banking and may sell its U.S. credit card arm in a bid to cut $3.5 billion in costs and revive flagging profits.

Europe's biggest bank faces an urgent need for action as more than two-fifths of its businesses are not delivering their cost of capital, Chief Executive Stuart Gulliver said.

Retreating from high street services in some countries and savings ranging from IT cuts to reducing paperwork would help trim costs as a share of revenue to 48-52 percent by 2013 from 61 percent in the first quarter.

Many banks, including HSBC OOO5.HK, have seen this ratio rise sharply, partly through competition for staff in fast-growing Asian markets. Standard Chartered's (STAN.L) cost/income ratio was 56 percent last year.

But others have kept costs below 50 percent, such as Spain's Santander (SAN.MC), where the ratio was 43 percent last year.

"We clearly have a cost problem," Gulliver said in a presentation to explain his strategic overhaul on Wednesday.

"We've added $3 billion in costs over the last few years with no revenue to show for it," said the 51-year-old CEO, who took the top job at the start of the year after a damaging boardroom struggle last year.

Gulliver said a lot of the savings will be reinvested in higher growth areas, with a target of $4 billion a year in additional revenues by winning business from wealthy customers and an extra $1 billion from making commercial and investment banking work more closely together.

But improving revenues remains a challenge, investors said.

"They're operating in an environment where revenue growth will be hard to come by," said Brown Shipley fund manager John Smith, who has HSBC shares in his portfolio.

HSBC's results on Monday showed a jump in costs dragged quarterly profits down some 14 percent.

Investors and analysts were unimpressed, saying the moves were not radical enough, and HSBC shares closed down 1.5 percent at 646.1 pence, valuing the bank at $185 billion.

"Half of...(the) things they should be doing anyway," Brown Shipley's Smith said.

The retreat marks a big shift from HSBC's traditional strategy, which has been criticized as "planting flags" around the world with little consideration to profitability. It has 95 million customers and 300,000 staff in 87 markets.

"Things that previously would never have been considered, we're now going to kick the tires on," Gulliver told reporters. "Historically we've tried to do everything, everywhere. We're not going to do that."

"What is radical for HSBC is just not that radical for outsiders looking in," said Simon Maughan, analyst at MF Global.

HSBC will concentrate its wealth management business on 18 of the most relevant economies, and in retail banking it will focus on core markets such as Hong Kong and Britain, high growth markets like Mexico, Singapore, Turkey and Brazil, and smaller countries where it has a strong position, like Malta and Panama.

The bank will look at selling, shutting or slimming down retail operations in 39 markets, where operations are sub-scale and unprofitable. It has 420 branches in these markets. It has already said it will exit retail banking in Russia.

HSBC will look to offload its U.S. credit card arm, but not at any price. A sale could free up as much as $25 billion of capital, Barclays Capital analysts estimate.

"The cards business in not strategic to us. However, we have lots of capital and lots of liquidity so we're not a forced seller," Gulliver said.

Credit card industry experts said HSBC would be lucky to get a slim premium on the $31 billion loan book. They said potential suitors could be Barclays (BARC.L), Capital One (COF.N), General Electric's GE Money Bank (GE.N) and Citigroup (C.N), especially for the store cards portfolio.

HSBC said it will also shrink its network of 475 U.S. branches to focus on the international business of U.S. clients and the U.S. business of overseas firms, as well as on a revival in the U.S. manufacturing industry.

Cost savings will range from saving $300 million a year by simplifying its regional structure and saving $175 million by moving its IT operations to lower cost locations, to reducing paperwork to save $100 million.

Gulliver also expects to be able to limit the impact of tougher regulations on its capital ratios.

The CEO is under pressure to lift return on equity to his 12-15 percent target, from 9.5 percent last year and around 5 percent in the previous two years. Achieving that goal could take two to three years, disappointing some analysts.

"They are sending a pretty damning message for achievable returns for banks in general on a worst-case interpretation of regulations. It's a negative message about what (returns) banks can generate," MF Global's Maughan said.

And with some 42 percent of the bank's businesses delivering a return below its 11 percent cost of capital, Gulliver said: "You can see why there is an urgency to get on with this."

Gulliver dismissed speculation about HSBC's investments in businesses in China, saying holdings such as its 16 percent stake in insurer Ping An (601318.SS)(2318.HK) were not for sale.

(Additional reporting by Clare Jim, Denny Thomas in Hong Kong, Sudip Kar-Gupta in London and Maria Aspan in New York; Writing by Alexander Smith; Editing by Lincoln Feast and Andrew Callus)