HSBC is to streamline its wealth management business, retreat from retail banking in some countries and may sell its U.S. credit cards arm as new CEO Stuart Gulliver attempts to cut $3.5 billion in costs and revive flagging profits.
Europe's biggest bank said the savings would help it cut costs as a share of revenue to 48-52 percent by 2013 from 61 percent in the first quarter. Many banks, including HSBC, have seen this ratio rise sharply as they compete for staff in Asia.
By comparison, rival Standard Chartered's cost/income ratio was 56 percent last year. But others have done more to reduce costs to below 50 percent, such as Spain's Santander, where it was 43 percent.
The extent of HSBC Chief Executive Gulliver's task was laid bare on Monday, after a jump in costs dragged quarterly profits down some 14 percent.
A target of 2013 will give them enough time, said John Wadle, an analyst with Mirae Asset Securities in Hong Kong. They are going to streamline high-cost income businesses and my personal guess is that the actual cost cutting may result in only about $1-2 billion.
HSBC will focus its wealth management business on 18 of the most relevant economies, and limit retail banking to markets where it can achieve profitable scale, it said.
Currently, the bank has operations in 87 markets, 95 million customers and employs 307,000 staff.
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.
It has already said it will exit retail banking in Russia and review its U.S. operation, where it has 475 branches.
Gulliver reckons he can get $4 billion in additional revenues from winning business from wealthy customers in fast growing markets, and get an extra $1 billion from making commercial and investment banking work more closely together.
The U.S. card and retail business delivered profit before tax of $306 million in the first quarter of this year, down about 15 percent from a year ago. HSBC could free up to $25 billion from selling the credit card operations, analysts at Barclays Capital had estimated before the statement.
The United States has typically been seen by many analysts as a low-return area for the bank, following HSBC's disastrous purchase of the Household mortgage business there before the global financial crisis.
We will increase capital deployment discipline, directing investment to faster growing markets and businesses as we scale back elsewhere, Gulliver said.
The 51-year-old was named CEO in September after a damaging boardroom power struggle, and had been expected to put most immediate attention on the retail arm, especially in the United States.
He expects to be able to limit the impact of tougher regulations on its capital ratios to about 120 basis points through mitigating action. The bank had previously warned Basel III regulations could hurt capital by 250-300 basis points.
The bank will also target a dividend payout ratio of 40-60 percent.
Gulliver needs to act to lift return on equity to his 12-15 target, from 9.5 percent last year and around 5 percent in the previous two years. It could take two to three years to achieve that goal, he said.
After a disappointing first-quarter update, HSBC shares could be vulnerable if the review disappoints, analysts said.
Aside from potential around the cards business as expected, there is little revolutionary within the announcements, so the key is that the group can give some confidence around delivery, said Mark Phin, analyst at Keefe, Bruyette & Woods.
(Additional reporting by Clare Jim and Denny Thomas in Hong Kong; Editing by Lincoln Feast and Alexander Smith)