HSBC warns of restructuring pain ahead as outlook darkens

Hong Kong/London (Reuters): HSBC Holdings Plc dropped its 2020 profit target, reported a sharp fall in earnings and warned of a costly restructuring, as interim Chief Executive Noel Quinn seeks to tackle its problems head-on in his bid for the full-time role.

Quinn branded the lender’s sluggish performance in Europe and the United States as “not acceptable”, but said investors may have to wait until early next year to hear his full plans to “remodel” Europe’s biggest bank by assets.

The latest bid to restructure HSBC comes amid a gloomy business environment, including an escalating Sino-US trade war, Britain’s protracted withdrawal from the European Union, an easing monetary policy cycle, and unrest in Hong Kong.

HSBC reported pre-tax profit of $ 4.8 billion for the third quarter on Monday, compared with the $ 5.3 billion average of analysts’ forecasts.

“Overall a poor set of results,” said analyst Edward Firth at broker KBW.

“But the good news is that this performance looks set to finally goad the management into taking some of the actions to address underperforming businesses that we have been awaiting.”

The earnings update is HSBC’s first under Quinn, and is widely seen by shareholders and insiders as a report card on his audition for the CEO role full-time.

“Our previous plans are no longer sufficient to improve performance for these businesses, given the softer outlook for revenue growth,” Quinn said of the bank’s US and European operations.

As a result of a “more challenging” revenue outlook compared with the first half of the year, HSBC said it did not expect to meet its return on tangible equity (RoTE) target of 11% in 2020.

One of Quinn’s biggest headaches is HSBC’s US retail banking business, which has struggled for years against much bigger domestic rivals and where it booked a loss of $189 million in the first nine months of the year.

Some analysts have said the bank could look to shutter the business entirely, but Quinn dismissed the notion.

“You should not read into anything I’ve said that we are looking to exit the retail bank in the US,” he said on Monday.

A veteran of the bank since 1987, Quinn, 57, has made no secret that he is keen to secure the permanent appointment of CEO from Chairman Mark Tucker, who said in August the search to replace the ousted John Flint would take six to 12 months.

Quinn said the bank, which generates the bulk of its revenue and profit in Asia, would rebalance capital away from low-return businesses and adjust its cost base.

HSBC will also look to cut costs by simplifying its notoriously complicated management structure and internal reporting lines.

“There is scope throughout the bank to clarify and simplify roles, and to reduce duplication,” Quinn told Reuters.

Such action could result in significant costs in the fourth quarter and beyond, including the possible impairment of goodwill and additional restructuring charges, the bank said.

Hong Kong protests

The near- to medium-term outlook for HSBC, and rival Standard Chartered PLC, has also been clouded by anti-government protests in Hong Kong, their single biggest profit centre.

Hong Kong has fallen into recession, hit by more than five months of protests that show no sign of relenting, and is unlikely to achieve annual economic growth this year, the city’s financial secretary said on Sunday.

HSBC said its expected credit losses – including a “charge to reflect the economic outlook in Hong Kong” – increased by $ 400 million in the third quarter. Revenue for the first nine months of the year in Hong Kong, however, rose 7%.

“Obviously the economy is getting impacted by two things – the US-China trade dispute and the protests,” said Chief Financial Officer Ewen Stevenson.

The bank is particularly monitoring its portfolio of small business customers who may be feeling the strain, he added.