HSBC: The questions investors want answered on Elhedery’s global shake-up

HSBC’s new chief executive has made his play to cut costs and home in on core divisions for the next phase of growth at Europe’s biggest bank.

Georges Elhedery, the lender’s ex-finance chief who succeeded Noel Quinn last month, announced a sweeping restructuring on Tuesday that will reorganise the group’s existing three divisions into four new units.

Among the changes, to take effect on 1 January 2025, HSBC will merge global commercial and investment banking operations. The bank will also split up its UK and Hong Kong businesses into standalone units and create a new wealth division.

But investors have questions. Such a shake-up is bound to incur significant restructuring charges before delivering any savings and the market wants numbers.

Ed Firth, an analyst at Stifel-owned KBW, said in a note that the restructuring could cost between $100m and “low $bns”, although it was “tough to make any meaningful judgement” without figures from the bank.

“Aligning functions for a group with 213,978 staff involves exceptional costs,” Jason Napier, an analyst at UBS, said in a note. “A divisional shift provides the opportunity for new CEO cost reduction.”

Analysts have said HSBC must reduce costs by around $2bn over the coming years to maintain its current efficiency ratio, a key measure of profitability.

There also remain unknowns as to where specific parts of the group will fit. Napier raised questions over the position of Australian retail, insurance manufacturing and HSBC’s corporate Latin America presence within the new structure.

HSBC has jettisoned parts of its sprawling global operations in recent years as it pivots towards more profitable markets in Asia. The strategy has seen it exit retail markets in the US and France, while selling its Canada and Argentina businesses this year.

“The real question that the market is waiting to hear about, given that the bank is searching to cut costs to offset topline pressure, is which parts of the group could be next on the chopping block,” Benjamin Toms, an analyst at RBC Capital Markets, told City AM.

Elhedery, HSBC’s first Mandarin-speaking CEO, will reorganise its operations into two camps – called “Eastern markets” and “Western markets”.

The move comes at a time of growing tensions between China and Western nations, with HSBC among the biggest foreign-owned financial firms operating in the country.

Splitting along geographical lines may be seen as a partial victory for Chinese insurer Ping An. One of HSBC’s largest shareholders, it has pushed the bank to hive off its Asia business from the rest of its operations. HSBC’s investors rejected the proposal last year.

HSBC has also come under fire for its support of China’s clampdowns on Hong Kong’s pro-democracy movement in 2020 and faced allegations of freezing activists’ bank accounts.

“HSBC’s organisational overhaul seems aimed at curtailing cost growth, with the separation of its Asia business likely to be welcomed by Ping An,” Tomasz Noetzel, an analyst at Bloomberg Intelligence, told City AM

“Yet the lack of details on expected savings and potential synergies makes it hard to assess the impact.”

Job cuts

While HSBC did not disclose how jobs would be affected, it emerged earlier this month that Elhedery was considering trimming senior banker roles as part of a $300m cost-saving plan.

HSBC’s latest accounts show average employee pay at the bank is £63,000 per year, including benefits. The upper quartile of its workforce made £121,000 per year on average.

Its top bankers earn far more than that, making them an easy target for job cuts which are fewer in number than rank-and-file employees.

According to data reported under EU pay transparency rules, HSBC paid 512 of its bankers more than €1m last year, with 18 earning more than €5m. Quinn saw his pay nearly double to £10.6m in 2023 as the lender enjoyed record profits on the back of higher interest rates.

On Tuesday, HSBC announced several executive departures, including Middle East and North Africa head Stephen Moss and Europe operations boss Colin Bell.

Stripping down management layers has been a key part of rival Citigroup’s restructuring, which the Wall Street titan unveiled last September in a bid to streamline itself.

That plan is set involve 20,000 job cuts by 2025 or 2026, affecting around 10 per cent of Citi’s workforce.

Still, achieving $300m in savings would only put a tiny dent in HSBC’s overall cost base, which totalled $32bn last year – including $17bn on wages and salaries.

Wealth push

HSBC is on a mission to boost its non-interest income as central banks around the world lower interest rates from fresh peaks.

Net interest income – the difference between what banks pay on deposits and earn from loans and other assets – made up 54 per cent of HSBC’s total revenue last year at $35.8bn.

In recent years, the bank has tried to plant its flag in wealth management as part of its diversification and on Tuesday announced “International Wealth & Premier Banking” as one of its four new businesses.

The unit will be led by Barry O’Byrne, currently CEO of HSBC’s wealth and personal banking business. In his new role, O’Byrne will sit on the bank’s 12-strong group operating committee steering its executive decision-making.

Wealth management as an industry is likely to benefit from a reining-in of interest rates as clients move money from savings accounts and into investment assets.

Meanwhile, it is considered a less volatile non-interest income source than investment banking as it delivers durable income from fees and requires less capital.

HSBC enjoyed a 12 per cent increase in income from wealth, private banking and insurance fees in the first half of 2024 compared to a year earlier.

However, that $4.3bn of income remained a small part of the wider group’s $37.3bn half-year revenue.

HSBC is due to report its third-quarter results on 29 October, its first set of earnings under Elhedery’s leadership.

Management is expected to hold back further details on the new strategy and its impact until HSBC’s full-year results announcement in early 2025.