HSBC chief’s quiet revolution

HSBC chief’s quiet revolution

By James Quinn, Sunday TelegraphApril 30, 2011

http://www.montrealgazette.com/business/HSBC+chief+quiet+revolution/4704599/story.html

On the early evening conference call that followed the rushed announcement endorsing Stuart Gulliver as the new chief executive of HSBC last September, the man himself said relatively little.

Having been anointed only hours earlier in the pages of a national newspaper, the then-investment banking chief was keen not to rock the boat after a tumultuous few days for the bank. Weeks of leaks and counter-briefings had exposed divisions among senior management at HSBC and laid bare the arcane way in which the bank operated.

Asked whether his fiefdom would be beefed up as part of his new reign, Gulliver coyly said only that there were “no plans” to change the 30-to-40-per-cent profit contribution of his global banking and markets division and that the focus remained “identical” in terms of shifting profits from the developed world to emerging markets.

“The processes Mike Geoghegan and Stephen Green have started, Douglas Flint and I will continue to execute,” said Gulliver, doffing his cap to his and new chairman Flint’s outgoing predecessors.

But on the morning of May 11, in the confines of an auditorium in the Canary Wharf skyscraper that is the bank’s global headquarters, Gulliver will change all that.

In an almost unprecedented step for HSBC, the 51-year-old will set out his strategy for the future of the bank, ending practices brought in by Geoghegan and Green and attempting to bring a focus to some of the global giant’s sprawling activities.

Bar the strategy day hastily organized in November 2007 in response to dissident shareholder Knight Vinke’s aggressive actions, Gulliver’s full-day event will be the first of its kind, telling investors, analysts and journalists alike how he plans to bring a new focus to the bank’s global operations while delivering profits that match the lofty price/earnings multiple on which its shares trade.

To gain an understanding of his priorities, one only needs to look at some of his comments on the subject, following the release of the bank’s full-year results at the end of February.

He spoke of a “very disciplined approach to allocation of capital” and the fact that the bank’s cost-efficiency ratio was “totally unacceptable.”

In essence, cost control will play a central role in what Gulliver has to say on May 11 and it will be key to the bank’s financial performance. Gulliver will tell investors that he regrets that the bank has not made it a priority earlier.

Instead, attempting to sound a warmer tone with shareholders than Geoghegan – who was known for his gruff monosyllabic responses – he will set out the ways in which the new management team, notably the chief financial officer, Iain MacKay, will evaluate business performance.

One of the key areas for cost-cutting will be in the U.K. and in particular the bank’s retail operations. The Sunday Telegraph understands that an in-depth focus on U.K. retail has led to findings that show a large element of cost could be stripped out, both from the branch network and head office and central operations.

One area under discussion is believed to be separating out U.K. retail’s head office staff from 8 Canada Square, the type of move that other U.K. retail banks did years ago.

Not only would it strip out cost, by moving the staff – believed to total several hundred – to a less expensive part of the country, but it would also make the business more stand-alone were there to be a need to divest it, either as a result of the Independent Commission on Banking or as a result of falling returns.

Certain investors believe that HSBC could sell a tranche of its domestic branches – one went so far as to suggest 500 – which would certainly strip out a significant amount of cost and deliver capital that could be reinvested elsewhere.

Whether Gulliver will be quite so radical remains to be seen. However, it appears clear that the U.K. will be firmly on his radar.

In assessing each of HSBC’s varied global businesses, it is understood that Gulliver will adopt a similar approach to that taken by another new incumbent chief executive, Bob Diamond at Barclays.

Just as Diamond told investors that all Barclays businesses must stand on their own merits in terms of delivering on cost of capital, Gulliver is expected to enforce what is essentially an up-or-out mantra. Each individual business, he will say, must either contribute or risk being shut down or sold.

One former senior company figure said Gulliver will “identify businesses which are not earning the group’s cost of capital and divide them into those which are capable of being reinvigorated to get over this hurdle and those where the prospects are poor, with the latter being sold”.

In part, the move is an obvious response to the regulatory pressure on capital requirements, meaning that such banks as HSBC can no longer carry under-performing businesses. However, this move could be met with cynicism by some, particularly given Gulliver’s 21-year stint at the bank and the fact that he has held a senior management role for much of that period.

One investor spoken to by The Sunday Telegraph said that if Gulliver had never thought of centralizing costs and cutting out under-performing businesses over the 20-odd years he’s been at the firm, “he doesn’t deserve to be there now”.

That comment highlights in one breath the problem Gulliver faces. Unlike his opposite numbers at Lloyds and the Royal Bank of Scotland – Antonio Horta-Osario and Stephen Hester – he has grown up in HSBC’s culture, and has taken part in many of the decisions that find the bank where it is today.

As such, he cannot deliver a strategy review that will produce a total U-turn for the bank, as Horta-Osario may do at Lloyds, but rather has to build on what Geoghegan and Green accomplished.

Part of the strategy day will focus on a set of financial targets, which, although somewhat dry to the outside world, will please the investor community as they will be targets on which the new management team can clearly be measured.

Gulliver has already hinted that he hopes to achieve a dividend payout ratio of 40-to-60 per cent. But in addition, Gareth Hunt at Investec believes there will be the introduction of a return on equity target of between 12-to-15 per cent. Gulliver’s return on cost will be central to achieving this, as will Asia, Hunt argues, because of its importance “as a driver of group return on equity.”

Other financial parameters to be put in place will be a capital adequacy range, which most analysts appear to believe will fall in the 9.5-10.5 per cent area, and a cost income ratio of 48-52 per cent. There are some who will wish Gulliver to be more radical and focus less on targets and more on actual acquisitions.

Simon Maughan, analyst at MF Global, argues that on a country-by-country basis, Gulliver needs to focus on those areas where HSBC can truly make a difference. “For a long time it’s pressed ahead with Brazil, but it’s maybe too late, and the wrong point in the cycle, for it to push on there.”

He pinpoints Mexico as an area where HSBC could make inroads, as well as Poland and Turkey.

On the sale of the U.S. credit- and store-card business – for which Gulliver is said to have hired JP Morgan – he says it possibly makes sense but argues the money should be reinvested in emerging market acquisitions, not in U.S. corporate lending. “I’d like to see him buy up the minorities in Hang Seng, even though it’s pretty expensive. But the cash flow from that alone would reap dividends,” Maughan said.

Investors are similarly of the view that Gulliver should be bold when it comes to divestments and acquisitions.
One discussed the prospect of a sale of the old Midland Marine business in New York state, which encompasses several hundred branches across the state, from its headquarters in Buffalo.

This could make sense, given the loss-making U.S. retail business is believed to fund the profitable commercial division, and one top 10 investor suggested Gulliver may also signal an end to the bank’s push to attract the Asian immigrants on the east and west coasts, which is thought to have been costly and yielded few returns. As part of this, one person suggested the famous “world’s local bank” tag line may begin to be retired, in favour of a newer, more appropriate slogan that recognizes the fact that HSBC cannot be all things to all people in all countries.

Gulliver’s geographic strategy will very much focus on those countries in which HSBC can seize or maintain a leadership position, and the perception of operating in almost every country may not be the best one to promote.

One issue which will not be high on the agenda, however, will be the bank’s domicile. Sources with knowledge of the situation told The Sunday Telegraph that Gulliver will do all that he can during the investor day to attempt to deflect questions on whether the bank should remain in London for tax purposes, or move back to Hong Kong, which it left 19 years ago. Although it remains a “live” issue, with the bank’s board assessing it this year as part of its stated three-yearly review, investors will want to hear about operational strategy rather than tax strategy.

A company watcher said: “It’s about exploiting the operational performance of the review, and I would be amazed if Gulliver wants this to be a distracting element.” Instead, when asked, as investors are bound to, he will just repeat the company’s stated policy, that it is concerned by U.K. regulation and the fact the country appears to be moving farther down a route of anti-bank regulation than many of HSBC’s possible domiciles.

The key issue will be execution and the desire by Gulliver to actually live up to the promises he makes on May 11.

One person who met Gulliver last month told The Sunday Telegraph: “Stuart’s ambitious and isn’t going to want to fall into the trap of not doing anything. I think he recognizes they’ve fallen behind somewhat.”
Leigh Goodwin, analyst at Citigroup, agrees: “I think there’s an issue around how quickly they’re likely to go, which is part of the frustration with investors. For all the talk about growth, etc., when you look at group level there isn’t any top-line growth, and so Gulliver will want to show he can execute his new strategy.”

However, he warns those looking for Gulliver to be radical to think again. “I don’t think it’s HSBC’s style to be revolutionary. In a funny sort of way, the fact they’ve been perceived to have a good crisis is a problem,” he says, pointing out that as a result Gulliver does not have the mandate for total change that some of his rivals have been given.

That said, whatever Gulliver says on May 11, investors and analysts will be watching him closely, to gain not only the measure of the man who is now running one of the world’s largest banks but to see whether he will sail the good ship HSBC into clearer waters, waters that make it more of a profitable bank in the areas it chooses to operate in from now on.

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