HONG KONG (BLOOMBERG) – HSBC, which generated about half its revenue in Asia last year, is accelerating its investment in the region even as it announced its biggest overhaul with plans to cut up to 35,000 jobs over three years and shrink its investment bank in the US and Europe.
Europe’s biggest lender, created 155 years ago as a merchant bank in Hong Kong, is betting that a China slump sparked by the coronavirus will be fleeting. Even if it’s right about the impact of the virus, protests in Hong Kong remain a persistent risk in its biggest market. Complicating matters is the fact that HSBC hasn’t yet announced who will lead this push as the bank’s permanent chief.
“The coronavirus is clearly a very serious situation and it will clearly have a negative impact on the economies of China, Hong Kong and Asia generally over the next few weeks and months,” said interim chief executive officer Noel Quinn. “But we do not see that change in the long-term strategic position of Asia.”
Quinn said the bank plans to deploy resources into building the Asian wealth and retail businesses. HSBC has an affinity with China and also plans to grow in India, Singapore and Indonesia, he said.
In the short term at least, the plan faces plenty of challenges. While the bank said the Hong Kong business showed “resilience” in the fourth quarter following months of pro-democracy protests, it still expects more provisions this year.
“The scale of any slowdown is difficult to forecast at the moment,” said Alan Beaney, CEO at RC Brown Investment Management, which holds HSBC shares. “This will be rapidly reversed once the spread of the virus is under control – factories and business will quickly make up the lost production. The question is how long this is going to take.”
In the most extreme scenario, in which the virus continues in the second half of 2020, the bank could see US$600 million in additional loan losses. The impact won’t be anywhere near that in the first quarter, Chief Financial Officer Ewen Stevenson said on a conference call. Stevenson said earlier in a Bloomberg Television interview that some customers in Hong Kong are “obviously struggling” in retail and real estate, but so far the “credit matrix continues to be pretty robust.”
China is also facing trade disputes with the US and an aging population that’s pushing up labor costs. UBS Group estimates growth in China will slow to 3.8 per cent in the first quarter from a 6 per cent pace at the end of last year, improving to 5.4 per cent for 2020 if the virus is contained within three months. If the virus is more protracted, annual growth could dip below 5 per cent, UBS said.
Still, Asia still remains “a fantastic secular growth opportunity” for CFO Stevenson, who said the bank is “uniquely positioned” among international banks to take advantage of it.
Born as the Hongkong and Shanghai Banking Corp in 1865, HSBC’s latest “pivot to Asia” was initiated in 2015 by former CEO Stuart Gulliver and strengthened under ousted boss John Flint.
The region accounted for about half of the bank’s revenue in 2019 and contributed almost all of its operating profit, more than enough to offset losses in Europe. HSBC said that adjusted pretax profit in the region increased 6 per cent to US$18.6 billion last year.
“Asia is central to the group and will in the future form a larger proportion of the group’s capital resources,” regional CEO Peter Wong said in an internal memo on Tuesday, contents of which were confirmed by a Hong Kong-based spokeswoman. “Growth will be achieved by investing resources where most opportunities lie.”
Among the bank’s growth spots are the region around Hong Kong, Macau and Guangzhou, along with wholesale banking in Southeast Asia and wealth management, Wong said. HSBC also plans to increase its share of intra-regional structured trade and payment flows.
The overhaul failed to impress investors, who pushed the stock down as much as 7 per cent in London, its biggest decline in three years.
In China, HSBC has ramped up its investment across financial sectors including commercial banking, credit cards, investment banking and wealth management. The bank now employs more than 8,000 staff in about 170 outlets across China, according to its website.
“Asia contributes strongly to the group’s performance and that means we have a responsibility to deliver,” Wong said in the memo. “We must ensure the business we write meets the group’s return thresholds.”
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