HSBC reshuffles decks as the bank braces for a more challenging operating environment

Chad Bray

John Flint, then-HSBC chief executive, declared in June of last year that it was time for the bank “to get back into growth mode”.

Under his predecessor Stuart Gulliver, the lender, once known in its advertising as the “world’s local bank”, had cut thousands of jobs, shrunk its global footprint from 87 countries to 67 and spent tens of millions of dollars to revamp its compliance following a scandal over its money-laundering controls that saw it pay US$1.9 billion in a settlement with US authorities.

The outlook was generally positive at the time: central banks, including the Federal Reserve, had begun tightening after a decade of historically low interest rates. And Flint was betting HSBC could further expand its business in fast-growing Asian markets which account for about half of its revenue.

Fourteen months later, Flint is out of a job and the macroeconomic environment is a lot grimmer as tensions over trade and technology have escalated between the United States and China, sparking a realignment of the global supply chain.

HSBC’s CEO makes surprise departure as bank seeks new growth

The bank also has been forced to go on a charm offensive with Beijing as it has faced calls by some in China to be placed on an “unreliable” foreign entities list following the arrest of Huawei Technologies’ chief financial officer in Canada last year.

Flint’s unexpected exit shows the lower tolerance that HSBC’s directors have for underperformance, particularly as the lender faces more challenging market conditions, according to analysts. The bank missed a key target for expense growth last year and a more positive first half opened the door for a smooth exit.

Mark Tucker, the HSBC chairman, said last week the decision to replace Flint was about the bank’s future and cited the “pace, ambition and decisiveness” of interim CEO Noel Quinn as “absolutely essential to capitalise on the opportunities ahead”.

The abrupt departure of Flint was a “surprise” to many in the company, executives say, but comes as the bank faces a much more difficult operating environment than it did when Flint, a career HSBC executive, took over as CEO in February 2018.

The year-long US-China trade war cut into business sentiment globally as some companies were delaying future investments, sending some investors to the sidelines as recession fears grow.

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Hong Kong – HSBC’s biggest market – has been hit by two months of protests, which is starting to hurt the economy, even though the bank said the effect on its business has been “limited” so far.

Plus, central banks are becoming dovish as the outlook for the global economy has weakened, which could put pressure on the bottom lines of HSBC and other banks, analysts said.

“Global uncertainty has changed sentiment and further [interest rate] rises are unlikely, and we may see some of the improved net interest margin reverse in 2019,” Paul McSheaffrey, head of banking and capital markets at KPMG China, said in a recent report.

Another nail in the coffin for Flint may have been HSBC’s share price.

The bank’s shares have been under pressure since he took the top job, declining 23 per cent over his tenure. Through Wednesday’s close, HSBC’s shares were down 10.5 per cent for the year in Hong Kong.

“Whilst the abrupt CEO’s exit without the appointment of a successor shows weaknesses in corporate governance, it also signals the board’s intention to more aggressively target underperforming businesses and cost structure, which – if appropriately executed – would improve efficiency and profitability of the group,” Alessandro Roccati, a Moody’s Investor Services senior vice-president, said.

S&P Global Ratings said the ousting of Flint shows an “increased ruthlessness” on the part of HSBC’s directors when it comes to middling performance.

HSBC executives said that the abrupt departure of John Flint was a “surprise” to many in the company. Photo: Reuters

HSBC expects to take six to 12 months to find a replacement and look at candidates both inside and outside the bank.

“I think we’re looking again for somebody with ability to deal with scale, ability to deal with multiple geographies, ability to understand Asia, ability to understand banking, again, both tactically and strategically focused, someone who will continue to move with pace and think about the simplification, and somebody who has a great ambition for the group,” said Tucker.

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As it prepares to search for a new leader, HSBC also has found itself uncomfortably thrust into the middle of the trade war following the arrest in Canada on US charges last year of Meng Wanzhou, the Huawei CFO and daughter of its founder. Her arrest has become a flashpoint in diplomatic relations between China and the US, as well as between China and Canada.

The bank has been quietly reassuring officials in Beijing that it had an obligation under financial regulations in the US and a court-ordered monitorship at the time to comply with requests for information by authorities about its dealings with Huawei, according to people familiar with the effort.

HSBC has declined to comment, saying it is not a party to the criminal case against Meng.

HSBC has had to reassure Beijing over its involvement in the US investigation of Huawei Technologies, after its CFO Meng Wanzhou was arrested in Canada. Photo: Reuters

Last month, HSBC also was ordered by the Malaysian government to transfer more than 1 billion ringgit (US$238.5 million) from an account held by the state-owned China Petroleum Pipeline Engineering in a dispute over a pipeline project that was suspended last year. HSBC has declined to comment.

There have been calls by some netizens in China to add HSBC to the unreliable list since word of the bank’s cooperation in the Huawei case and the Malaysian seizure became public. On July 15, the day after the funds seizure in Malaysia, a blog operated by China's state-owned Beijing Daily newspaper started publishing calls to put HSBC on the unreliable list.

The Chinese Ministry of Commerce, responsible for the list, has said it is still in the process of preparation and declined to comment on specifics.

Staying on Beijing’s good side is critical as mainland China becomes a larger component of the bank’s business, particularly as the country’s financial services industry opens further.

In the past four years, HSBC has opened the first majority-owned joint venture securities company in China, debuted a sole-branded credit card and doubled the size of its workforce. In July, the bank said that it was creating a US$880 million technology fund to provide financing to early stage companies in the Greater Bay Area.

Tucker, the HSBC chairman, said that the company remains committed to its strategy, which is heavily reliant on growth in mainland China and Hong Kong.

Operating income, which is similar to revenue in the US, rose 5.9 per cent to US$7.54 billion in the bank’s Asia business in the second quarter.

HSBC to cut 2 per cent of its workforce as bank looks to reduce costs

Despite the positive quarter, HSBC said last week that it would cut less than two per cent of its workforce. That was less dramatic than the 18,000 job cuts announced at Deutsche Bank in July, but represented an admission that the bank, which employs nearly 238,000 people worldwide, needed to reduce the pace of its expense growth to achieve its target for returns in 2020.

“We could see the revenue outlook softening. We knew to get to 11 per cent [return on tangible equity] we had to get there a different way,” Ewen Stevenson, the HSBC CFO, said.

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