If banks are asking the wrong question, what’s the right one?

If asking what should we do about the Fintech disruption is the wrong question, what’s the right question?

I would claim it is how can we change the bank to be a Fintech platform?  A good illustration of this is HSBC and its past, present and future.

Under John Bond, HSBC became a global financial behemoth, in the same vein as Citigroup.  Both banks had visionary leaders – John Bond and Sandy Weill – and aspired to offer universal banking globally.  The we can be all things, to all people, everywhere model of banking.

They were closely tracked by Barclays, Deutsche Bank, JPMorgan Chase, BNP Paribas, Bank of America, Royal Bank of Scotland and a few others.  They all got it wrong, just that it wasn’t obvious until now.   All of these banks are retrenching and retrenching fast, pulling back from the global universal model to a more focused, core markets structure.

Why has it gone wrong?

Three reasons: regulation, markets and innovation.

On the one hand, regulation has smacked down the too big to fail approach, and a global universal bank is that too big to fail approach.  This is why the Volcker rule is clamping down on proprietary trading; the Vickers reforms want to split the bank in two; the Banking Union wants to cap charges and tax transactions; the Federal Reserve wants to make sure that the dollar’s strength as a reserve currency isn’t undermined by money launderers in South America and the Middle East; and governments everywhere want to make sure their citizens pay tax rather than avoid it.

For these reasons, banks are seeing investment banking and wealth management as a slightly poisoned chalice today, so the global universal model gets picked apart.  No European bank has any real strength left to continue in investment markets today.  RBS has shut theirs down, along with global transaction services; HSBC is shrinking theirs; Deutsche’s co-CEOs have been ousted by trying to keep theirs going; UBS and Credit Suisse are likely to merge theirs; and so on and so forth.

Forget global universal when regulations make it unworthy and unprofitable.

Then you can ask: so which markets should we be in that are worthy and profitable?

The answer is not many if you look at HSBC.  HSBC were operating in 85 countries in 2008.  Today, it’s 73 and there are three in the short-term that are also likely to close: Brazil, Mexico and Turkey.  The bank is selling by auction their Brazilian and Turkish operations, and likely to make up to $5 billion by doing so.  Why is it selling what were viewed as growth markets?  Maybe because the growth has not happened lately and their success in those markets is actually not successful.  Neither operation is profitable, and part of that is down to trying to crack open these markets for 20 years and failing. Now, with an economic slowdown, a failing, loss-making operation makes more sense to sell to someone who might make it succeed – BBVA or Santander in Brazil and Mexico; ING or BNP Paribas in Turkey – than to keep on flogging HSBC’s dead horse.

In fact, if you look at the markets HSBC has pulled out of, they have either shut down or sold ops in most countries that were their fledgling global markets expansion operations – USA, South America, Continental Europe.  These markets still have an HSBC footprint for supporting corporate multinational clients, but retail?  Forget it.  In fact, where there is an operation of trust is in UK, where they’ve been for eons, and Asia, where they’ve been for eons.

So, like Bank of America and Citi, HSBC is retrenching to core markets where they have a great name and competence.  But even that’s not enough as, whilst dealing with the regulatory overhead and market slowdown, they’re being attacked in their core competence by innovators.

Goldman Sachs future of finance report estimates that 20% of old bank profit will move to innovations in payments and lending.  So $1 out of every $5 disappears by 2020.  What does that do to a bank model based upon humans and buildings who are being displaced by a model based upon software and servers?  For every $1 of profit that disappears, that’s 1 employee in every 5 that has to be automated to disappear with it.  And that’s just to keep up.

So HSBC has 73 countries and 260,000 employees today, compared with 84 countries and 320,000 employees in 2008.  Seven years of shrinkage and seven more to come.  But the shrinkage to come must be focused upon replacing buildings and humans in the countries that remain, to an evolution towards software and servers with humans where they’re needed and buildings only if the cost-income model works.

In other words, after dealing with all the regulatory and market issues, what remains must answer the question: how can we change the bank to be a Fintech platform?  

No wonder people are questioning Stuart Gulliver’s mettle, but what’s the alternative?

 

All eyes on Gulliver as he prepares second HSBC shake-up plan

From The Financial Times, June 4 2015 by Martin Arnold in London and Samantha Pearson in São Paulo

HSBC will next week present investors with its second attempt in four years to simplify and shrink Europe’s biggest bank by assets by reversing the acquisitive growth strategy it pursued over several decades.

Stuart Gulliver, chief executive, will announce plans to cut thousands of jobs, shed a multibillion-dollar portfolio of investment banking assets and retreat from underperforming markets including Brazil and Turkey.

Together the moves represent a further retrenchment in the global ambitions of a group that once branded itself “the world’s local bank” and still has 266,000 employees in 73 countries and territories.

The bank has already kicked off the auctions of its Brazilian and Turkish operations, which it expanded aggressively during the late 1990s as part of a global acquisition spree. Together analysts expect the two sales to raise some $4bn-$5bn.

The Brazilian process has attracted interest from several lenders in the region. HSBC is expected to receive offers from local rivals Bradesco and Itaú Unibanco as well as Spain’s Santander and BBVA, which are keen to examine the chance to expand in the Brazilian market. All parties declined to comment.

In a move likely to attract as much attention, Mr Gulliver will also tell investors in London on Tuesday morning what methodology he will use to decide whether to keep the bank’s headquarters in the UK or move to another region, such as Hong Kong.

However, analysts and investors say that expectations are high ahead of next Tuesday’s strategic update and Mr Gulliver risks incurring their disappointment if his plans to turn round the bank’s flagging performance are not considered ambitious enough.

This scepticism stems from the fact that he launched a similar drive to cut costs and simplify the group after taking over at the start of 2011. But those efforts have failed to produce the promised results and Mr Gulliver has in the past year been forced to retreat from targets on cost efficiency and return on equity.

Shares in HSBC have fallen about 5 per cent during the 56-year-old’s time in charge, underperforming the MSCI world banks index by about a fifth. However, there is still considerable sympathy for the scale of the challenge he faces.

“The problem that Gulliver has is like that of Sisyphus, in that he keeps rolling the boulder up the hill only for it to roll back down again,” says Ronit Ghose, banking analyst at Citigroup. “It is a thankless task.”

Stuart Gulliver, group chief executive officer of HSBC Holdings Plc, pauses during a news conference in Hong Kong, China, on Tuesday, Aug. 2, 2011. HSBC, which plans to eliminate 30,000 jobs globally by the end of 2013 to curtail surging salary costs, said a "war for talent" in Asia will drive up compensation for bankers in region.

“They cut headcount by 40,000 between 2011 and 2013 and their returns have still gone down,” Mr Ghose says. “Investors want to hear more about how they are going to meet their target on returns this time.”

Many of the new job cuts are expected to fall in HSBC’s retail banking operations, where it is set to follow rivals such as JPMorgan and Barclays by reducing staff numbers in its branches to reflect the shift of customers to digital services.

But the bank is also taking a knife to its investment banking operations, which investors say are dragging down the performance of the group, particularly if $3bn of extra revenues from managing its excess deposits are excluded — as most rivals do.

One top 20 investor in HSBC estimated that to hit Mr Gulliver’s target of keeping annual operating costs unchanged at about $41bn between 2014 and 2017, he needs to strip out some $3bn of gross costs to offset rising compliance expenditure and wage inflation in Asia.

James Laing, deputy head of UK and European equities at Aberdeen Asset Management, a top 10 investor in the bank, says: “In HSBC’s defence, most banks have failed to hit their targets for cost-cutting and returns. The regulatory environment makes it challenging for all banks, however they just have to keep working hard at it and that is something I am confident they are doing.”

Since Mr Gulliver took over as CEO, HSBC has retreated from consumer banking in more than 20 countries, such as Colombia, South Korea and Russia, leaving it with retail and wealth management operations in about 40 markets.

But the exits it is preparing from Brazil and Turkey are expected to be more comprehensive, leaving it with little more than a representative branch to carry out trade finance and cash-management services for foreign multinationals.

Mr Ghose at Citi says: “I’d be very surprised if they completely got out of Brazil. They need to have some presence there to serve big corporates.”

When HSBC entered Brazil in 1997, it sparked widespread panic among local operators by buying Banco Bamerindus, one of the country’s top 10 biggest banks at the time.

However, after its gutsy opening move, HSBC failed to invest enough in Brazil to keep up with the likes of Bradesco and Itaú or to adapt to the rapidly developing industry, boosted by the stabilisation of Brazil’s economy after a succession of crises.

“HSBC ended up with many branches but ones that weren’t profitable,” says Luís Miguel Santacreu at Austin Asis, a banking sector consultancy in São Paulo. “The right thing to do would have been to either attract more clients or close the lossmaking branches, but it did neither,” says Mr Santacreu.

Last year, HSBC made a loss of $247m in Brazil, where it is the seventh-largest bank by assets with more than 800 branches.

It is a similar story in Turkey, where HSBC’s sale of its lossmaking operations is entering the second round of bidding. Qatar National Bank, BNP Paribas and ING are among those expected to take part with bids valuing the business at close to its $1.1bn book value.

For some investors, however, there is still a question of whether HSBC should sell other struggling operations, such as its Mexican business or its US retail unit. “Are they really the best owner of everything they have got?” asks a top 20 investor. “My personal feeling is they will have to exit Mexico too — they just can’t compete.”