Investors support HSBC’s strategic retrenchment plans

[ASIA] In recent months, global banking giant HSBC has taken significant steps to streamline its operations, cutting back on non-core businesses and focusing on high-growth areas, particularly in Asia. Investors have expressed support for these retrenchment plans, seeing them as a strategic move to strengthen the bank’s long-term prospects. The decision to shut down its mergers and equity capital markets teams in the Americas and Europe, part of a broader restructuring effort, has been particularly lauded by several large shareholders.

HSBC’s Strategic Shift Towards Asia

HSBC’s recent retrenchment efforts come as part of a broader strategy to refocus its resources on regions with higher growth potential, especially Asia. The bank, which once operated in over 100 countries, has gradually downsized its global footprint over the last decade, exiting businesses with low returns. As geopolitical tensions and trade uncertainties, particularly stemming from US tariffs, challenge global financial markets, HSBC has been under pressure to optimize its capital allocation.

“Geopolitics are making life more difficult for lots of businesses that operate globally,” said Alex Potter, investment director for European equities at abrdn, a prominent HSBC shareholder. Potter emphasized that while HSBC had once been an expansive global player, the bank now needed to concentrate on its strongest markets to weather the challenges posed by current economic conditions.

The focus on Asia is not only about capitalizing on the region’s trade opportunities but also ensuring that HSBC remains competitive in its core markets. As some investors noted, Asian economies are less vulnerable to the global trade disruptions affecting markets like the US, making them attractive destinations for HSBC’s capital and resources.

Investors’ Perspective on HSBC’s Restructuring

HSBC’s move to downsize its presence in capital markets, especially in the US and Europe, has been met with approval from several key investors. The decision to shut down certain investment banking operations aligns with the bank’s goal of improving profitability and return on equity. According to Sajeer Ahmed, global equities portfolio manager at Aegon Asset Management, HSBC’s management is focused on delivering a sustainable return on tangible equity (ROTE) of around 16%.

“Many US banks with a similar return profile are trading at a significantly higher price-to-book multiple,” Ahmed explained. This valuation differential is a key consideration for HSBC’s restructuring, as the bank seeks to boost shareholder value over time. In fact, despite the cuts, HSBC’s stock has seen impressive gains, with shares rising 11.5% year-to-date, and an overall increase of 20% in 2024.

The bank’s full-year profit for 2024 is projected to be around $31.6 billion, showing minimal change from the previous year’s strong performance. HSBC’s robust financial results indicate that the retrenchment strategy is not only about reducing costs but also about repositioning the bank for sustainable growth.

Balancing Cost Savings and Employee Concerns

One of the primary objectives of HSBC’s restructuring plan is to achieve significant cost savings. Reports suggest that these savings could range from $1.5 billion to $3.8 billion, partly achieved through further cuts to management roles and the closure of certain business units. However, while the bank’s investors may support these moves, the optics of job cuts, especially in high-profile sectors like investment banking, could be more challenging to manage.

Amrit Shahani, a partner at consulting firm BCG Expand, highlighted that investment banking teams, especially those involved in initial public offerings (IPOs), are expected to see substantial growth in the coming years. As a result, the decision to reduce staff in these areas might come under scrutiny, especially as 2025 unfolds and market conditions improve.

Nevertheless, HSBC’s leadership, under CEO George Elhedery, is focused on making these tough decisions to enhance the bank’s long-term value. Elhedery is expected to reveal more details of the bank’s restructuring plans when it announces its full-year results, including the expected cost savings and further adjustments to its management structure.

The Road Ahead: HSBC’s Profitability and Growth Strategy

As HSBC continues its efforts to streamline operations and shift its focus to more profitable markets, the bank’s overall trajectory seems positive. Despite the challenges posed by global geopolitical tensions, HSBC’s ability to adapt and align its business model with changing market conditions will be crucial in maintaining investor confidence.

HSBC’s investors, including some of its largest shareholders, have expressed optimism about the bank’s future prospects. With a strong presence in Asia, a region with solid economic growth potential, HSBC is well-positioned to weather the storm and deliver sustainable returns to its shareholders.

The ongoing restructuring, while challenging for some employees and business units, is viewed as a necessary step for HSBC to remain competitive in an increasingly complex global banking environment. As one insider pointed out, “The sharp switch to profitability from empire building is Elhedery’s attempt to tackle that valuation differential over time.”

In the coming months, as the bank unveils more details of its strategic vision, investors and analysts will be closely watching HSBC’s moves to ensure that the restructuring delivers on its promises of profitability, cost savings, and sustained growth.

HSBC’s retrenchment plans, including the closure of its investment banking teams in key markets, are supported by many of its investors who see the move as a critical part of the bank’s strategy to optimize its resources and focus on high-growth regions like Asia. While the decision to reduce staff and scale back operations may raise concerns in some quarters, it is ultimately seen as a necessary step to improve profitability and shareholder value.

As HSBC continues to adapt to the changing global financial landscape, its commitment to focusing on profitable markets and reducing its exposure to less lucrative sectors will be crucial in securing long-term success. With the backing of key investors and a strong financial foundation, HSBC appears poised to navigate the challenges ahead and deliver solid returns for its shareholders.