HSBC Holdings CEO Stuart T. Gulliver, up against rising capital demands and a sluggish global economy, is facing calls to break up Europe’s largest bank after saying profitability will be lower.
Gulliver, who is also struggling to contain a tax-evasion scandal at HSBC’s private bank that he said brought “shame” to the company, reported 2014 earnings that missed analysts’ estimates, driving the stock down by almost 5 percent. The CEO said parts of the investment bank and some national divisions don’t offer sufficient returns and may face “extreme solutions.”
On Monday, he cited Brazil, Mexico, Turkey and the United States as potential markets for disposals among 74 countries where HSBC operates. The bank has more than 250,000 staff members, even after exiting 77 businesses and cutting about 50,000 jobs in Gulliver’s four-year tenure. HSBC is the largest European bank by market value, leaving it exposed to the toughest regulator scrutiny.
“The most obvious solution is to break the bank up, as the evidence suggests that the bank is too big to manage,” said Ed Firth, a London-based analyst at Macquarie Group Ltd. in London. “It’s difficult to get around the numbers.”
On the New York Stock Exchange, shares in HSBC Holdings dropped by $2, or 4.28 percent, to $44.68 on Monday.
“There are no sacred cows,” Gulliver said on a conference call. “We’re still on a journey to simplify the firm. I don’t rule out that we might make more disposals,” he said, adding that he didn’t accept that the bank is too large to be manageable and that he still believes in the universal banking model.
Return on equity, a measure of profitability, fell to 7.3 percent in 2014, from 9.2 percent. HSBC said it’s looking for the measure to exceed 10 percent, compared with the range of 12 to 15 percent set in 2011, when Gulliver became CEO.
“Targeting a 10 percent return on equity is hardly market-leading, is it?” Firth said.
The bank’s cost-efficiency ratio – a measure of costs versus revenue – jumped to 67 percent last year, from 60 percent in 2013. Adjusted revenue was little changed at $62 billion in 2014 from the previous year.
Although headquartered in London, HSBC still makes most of its earnings in Asia and grew into an emerging-market giant through decades of deal-making, including the acquisitions of Midland Bank in the U.K. and Buffalo-based Marine Midland Bank. Its expansion was only halted by the financial crisis and the resultant increase in regulation and capital requirements.
“If there were disposals from the U.S., Brazil, Mexico, Turkey, the market would receive it well because it could relieve both cost and capital burdens,” said Sandy Chen, an analyst at Cenkos Securities in London. “A lot of their global banking and markets probably fails their return on risk-weighted asset hurdles,” he said, referring to the unit that houses the investment bank.
Global regulators have already toughened rules for the largest lenders. The Financial Stability Board, the global regulator led by Bank of England Governor Mark Carney, proposed last year that the biggest banks be forced to have subordinated debt and other loss-absorbing liabilities equivalent to as much as one-fifth of their assets weighted for risk.
The rule, intended to keep taxpayers off the hook when lenders fail, would apply to the FSB’s list of 30 systemically important banks worldwide, with HSBC and JPMorgan Chase & Co. identified as the most significant.