HSBC doubles turnaround target to $2 billion

HONG KONG/LONDON Thu May 17, 2012 8:32am EDT

Tourists pass an HSBC bank in central London, May 8, 2012. REUTERS/Olivia Harris

Tourists pass an HSBC bank in central London, May 8, 2012.

Credit: Reuters/Olivia Harris

HONG KONG/LONDON (Reuters) - HSBC doubled the annual revenue boost expected from its turnaround plan to $2 billion, as Europe's biggest bank picks 22 markets to drive its growth and eyes more cost cutting to cope with new regulations in the wake of the financial crisis.

Chief Executive Stuart Gulliver said on Thursday that, one year into a three-year recovery plan, HSBC was on target to meet profitability and cost savings targets.

Gulliver said his biggest external worry "is absolutely how the euro zone plays out and whether Greece stays in, whether firewalls are high enough to protect Spain and, frankly, whether markets take things into their own hands before June 17," when Greece holds new elections.

Gulliver wants to streamline HSBC and focus more on its fast-growing Asian markets.

It faces regulatory pressure to reduce its risks and has conceded it has more work to do to revive its lagging European and U.S. businesses.

"Investors have been skeptical about our ability to get our hands around HSBC. The skepticism was about anybody's ability to move such a large firm and change its direction," Gulliver told reporters before a presentation to analysts.

"At the year one report card we can evidence that on things we can control we are demonstrating significant traction. We are delivering with good momentum given a difficult backdrop."

Analysts said the update was reassuring, but think it will be a challenge hitting cost targets.

"HSBC should come out and be honest about it. In reality, there was a force majeure in Europe blowing up, and they will need more than three years to meet their targets," said Mizuho Securities analyst Jim Antos in Hong Kong.

HSBC's London-listed shares were down 1.7 percent at 525 pence at 1040 GMT, its lowest level for four months, and compared to a 2.5 percent fall by the Europe bank index as the sector was rattled again by fears over the euro zone.

The bank has achieved annualized cost savings of $2 billion, absorbing $1.2 billion of wage inflation in emerging markets and $400 million of extra regulatory costs last year. It expects savings to rise to $3.5 billion by 2013.

HSBC has sold 28 businesses, taking 15,000 staff off its payroll, and releasing about $55 billion risk-weighted assets, the bank said. The sales brought in $5.9 billion.

A return to higher interest rates will substantially boost revenues, Gulliver said. HSBC makes money from the massive excess deposits it holds, but Gulliver said it steered clear of risk. Rival J.P.Morgan last week shocked investors by revealing a $2 billion trading loss as it attempted to make higher profits from its excess deposits.

HSBC's balance sheet management unit does not take synthetic credit risk, and its low risk appetite was why it had $153 billion on deposit at central banks, Gulliver said.

22 KEY MARKETS IDENTIFIED

Having focused on shrinking the bank, Gulliver is also attempting to show the bank's growth potential.

In addition to its core "home" markets of Britain and Hong Kong, he identified 20 priority growth markets, including China, India, Indonesia, Germany, Turkey, the United States and Brazil.

Those markets account for about 92 percent of group profit. "Those are the 22 countries we are going to focus our investment on," Gulliver said, signaling no appetite for acquisitions.

HSBC has 89 million customers in 85 countries and has been accused of "planting flags" around the world without enough attention on economic returns.

Gulliver set out targets a year ago to get return on equity - a key measure of profitability - above 12 percent, and to cut costs below 52 percent of revenue. The bank improved both in the first quarter, with an underlying RoE near 11 percent and cost efficiency at 55 percent.

HSBC said the integration of its four businesses - retail banking and wealth management, commercial banking, global banking and markets, and private banking - would deliver incremental revenue of $2 billion, doubling the target it set last year.

Gulliver said commercial banking and GBM should each provide 30-40 percent of group profits in future, with retail banking contributing 20-30 percent and private banking 5-10 percent.

It is moving out of businesses that lack scale, do not make money or do not connect with other areas.

Gulliver is looking at selling parts of its U.S. real estate portfolio to accelerate the run-down of the business, and said he expects a first sale by the end of June.

It has sold its U.S. credit card arm and half its U.S. branches. It has sold or plans to sell businesses in Europe and Latin America, and in Asia too, including Japan, Thailand and South Korea.

HSBC's Hong Kong shares fell 1 percent, adding to a 3.4 percent fall on Wednesday, their biggest one-day fall this year.

(Additional reporting by Lawrence White and Michael Flaherty in Hong Kong; Editing by Elaine Hardcastle)