Breakingviews - Gulliver exits HSBC with nearly full scorecard

Stuart T Gulliver, Group Chief Executive of HSBC Holdings plc, looks on at a panel discussion during the Asian Financial Forum in Hong Kong, China January 18, 2016. REUTERS/Bobby Yip - D1BESHVOSLAA

LONDON (Reuters Breakingviews) - Stuart Gulliver claims to have left behind a “simpler, stronger” bank than the one he took charge of in January 2011. The departing HSBC chief executive is mostly right. He has shrunk the Asia-focused lender’s geographical footprint and boosted its common equity Tier 1 capital ratio to a hefty 14.5 percent. Though return on equity fell short of Gulliver’s target last year, following winds should help his successor clear that hurdle.

The bank on Tuesday pointed to having fulfilled eight out of 10 “strategic actions” announced in 2015. In some cases the bar was low – one objective was to conduct a review of the location of the bank’s headquarters. But Gulliver achieved arguably the most important: he shrank HSBC’s risk-weighted assets (RWAs) by $338 billion and he cut annual costs by $6 billion.

Generating a return for shareholders has proved trickier. Underlying return on equity was just 8.2 percent last year, below HSBC’s 10 percent target. The bank only just met its aim of expanding revenue faster than costs. The promise of a progressive dividend has also yet to be fulfilled: payouts have remained broadly flat since 2013, though the bank bought back shares worth around $5.5 billion during Gulliver’s tenure.

With HSBC shares trading at 1.4 times its tangible book value – a chunky premium to European peers – investors are expecting further improvement. One issue for new Chairman Mark Tucker and Chief Executive John Flint is the size of HSBC’s balance sheet in Europe. The region accounts for 35 percent of RWAs – a figure which is admittedly inflated by the London-based investment bank – but brought in only 5 percent of adjusted pre-tax profit last year. By comparison Asia brought in three-quarters of HSBC’s earnings with just 41 percent of its RWAs.

However, those pushing for the bank to deploy substantially more assets to Asia miss the point. Net loans in the region have grown by a fifth to $426 billion since 2014.

Besides, the new team should benefit from a number of tailwinds. Fines and compensation payments, which have averaged around $2 billion per year under Gulliver, should shrink. And higher interest rates should boost the bank’s historically low net interest margin, which fell 10 basis points to 1.63 percent last year. That should ensure Gulliver hands over a bank in substantially better shape than the one he inherited.


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