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Breakingviews - HSBC’s renewed Asia focus goes only so far

A Chinese national flag flies in front of HSBC headquarters in Hong Kong, China, July 28, 2020.

LONDON (Reuters Breakingviews) - Gymnasts know that failing to fully commit to a move increases the chances of landing face-first. Noel Quinn, chief executive of $124 billion HSBC, risks something similar with his half-hearted jump further into Asia.

Quinn on Tuesday mostly tweaked his strategy for HSBC, which he has run on a permanent basis for roughly a year. He wants to axe another $1 billion of costs by 2022, in addition to some $4.5 billion already planned. The former commercial banker also will double down in China and the broader continental region, its fastest growing and ancestral home. That includes investing $6 billion in wealth-management advisers and new technology infrastructure for transaction banking and other wholesale businesses.

There’s little for shareholders to get excited about beyond the imminent resumption of dividends, following a Bank of England ban. The new savings, for example, will merely offset the adverse effects of foreign-exchange fluctuations on HSBC’s costs. In effect, Quinn is having to slash faster just to keep operating expenses below his original $31 billion target for 2022.

And the results of Quinn’s charge into fee-based Asian businesses like wealth management seem modest. Over the “medium to long term”, the region will account for around half of tangible equity, compared with 42% now. The proportion of revenue generated from fee-based units and insurance, as opposed to traditional banking, will rise to 35% from 29%. Those changes are marginal, and Quinn has yet to unveil a concrete plan for quitting U.S. retail banking.

Even the new, more modest target of at least a 10% return on tangible equity over time looks a stretch. It would require producing revenue of over $60 billion, a heroic 20% lift from 2020. That’s according to Breakingviews calculations that assume Quinn hits his cost targets, a 21.5% tax rate and 2022 consensus analyst estimates for tangible equity, bad debt and other income statement items.

The upshot is that in a few years HSBC is destined to look much the same as it does today: a sprawling global bank that probably fails to surpass its cost of equity. More radical twists, like spinning off the ring-fenced UK bank, would improve the whole apparatus.

Breakingviews

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