HSBC may be less local in some parts of world

11th May 2011 07:04

Banking giant HSBC is to cut costs and may abandon some business areas in order to direct investment to faster growing markets.The group plans to focus on wealth management in 18 of the "most relevant" economies while limiting retail banking to those markets where it believes it can achieve profitable scale. "We have launched a programme to target $2.5-3.5bn of cost saves to reach our cost efficiency ratio target of 48-52%. This programme will consist of implementing consistent business models in Retail Banking and Wealth Management and Commercial Banking; re-engineering and de-layering global business functions; re-engineering business processes; and streamlining IT," said group chief executive Stuart Gulliver, announcing the results of a strategic review he has been working on since moving into the hot seat in January 2011.Gulliver said the bank intends to reach a cost-efficiency ratio target of 48 - 52% by 2013. The ratio was running just a shade below 61% in the first quarter of 2011, from 49.6% in the first quarter of 2010 and 58.9% for the whole of 2010.The new chief executive's cost cutting zeal could see the bank's workforce sharply reduced in the 87 countries in which it operates, with whole layers of management thought to be set for the chop.In the US, the group is conducting a strategic review of its cards business and parts of its branch network "to better align it with group strategy and reallocation of capital".The group said it is targeting a return of 12 - 15% over the business cycle, supported by pre-tax return on risk weighted assets of 1.8 - 2.6%.With its strong balance sheet, the group sees room to grow its advances-to-deposits ratio from 79% to a maximum of 90%.Mitigating management actions could limit pro-forma Basel III capital impact to around 120 basis points (1.2 percentage points), Gulliver said. Basel III is the proposed bank capital adequacy and liquidity levels agreed by the members of the Basel Committee on Banking Supervision. There was reassuring news for income investors, with Gulliver saying the bank would look to pay out between 40% and 60% of retained earnings as dividends. "This is not about shrinking the business but about creating capacity to re-invest in growth markets and to provide a buffer against regulatory and inflationary headwinds. I and my experienced management team are committed to achieving these operating and financial targets and are wholly accountable for their delivery," Gulliver said. HSBC Group chairman, Douglas Flint, has told the bank's investors the economic background may still be uncertain but the "acute phase of financial crisis is over".He said economic growth was strong in faster growing markets and improving in mature markets and that financial markets were functioning with good liquidity in core areas.There had also been a return in market confidence evidenced by resumption of M&A activity across many sectors, Flint added.However, he highlighted a number of areas of concern.Among these were the challenges posed by fiscal deficits in mature economies, a fragile US housing market and volatile commodity prices.He also cited inflation risks, particularly in terms of food and energy in emerging economies.Flint told investors that there had been "an intense period of regulatory change" since 2007 that yet had to bed down.Regulatory conditions in the UK were singled out as particularly uncertain as the bank awaits the final report from the Independent Commission on Banking, due in September."We are alert to the possibility of an unlevel playing field compared to the rest of the EU and other banks operating in UK," he told investors.---jh & mm