HONG KONG -- HSBC Holdings on Tuesday revealed plans to cut nearly 35,000 jobs and shrink its U.S. and European operations, as it flagged $7.2 billion in costs as it carries out its third major overhaul in a decade.
The U.K.-based bank already has begun implementing the plan and took a $7.3 billion write-down, largely on the value of its global investment banking unit and its commercial banking unit in Europe, a move that slashed its 2019 pretax profit by 33% to $13.35 billion. HSBC said it aims to cut gross risk-weighted assets by $100 billion by the end of 2022 and invest in Asia.
The company also will cut $4.5 billion in costs by reducing geographic reporting lines, consolidating back- and middle-offices, and reorganizing the head-office structure, it said in a statement.
"Parts of our business are not delivering acceptable returns," interim Chief Executive Noel Quinn, who aspires to run the bank full time, said in a statement. "We are therefore outlining a revised plan to increase returns for investors, create the capacity for future investment, and build a platform for sustainable growth."
Quinn said later in a media briefing that the company's head count of 235,000 would be cut by nearly 35,000 over the next three years.
"There will be job reductions necessary to achieve cost reduction," Quinn said. "We would expect our head count to decrease from the current level of 235,000 to be closer to 200,000 in 2022."
"In any one year we get natural attrition of about 25,000 people. As a consequence of that, we will look to manage the achievement of our cost reduction plans in a sensitive and appropriate manner," he said.
The bank said in its statement that the process for appointing a permanent chief executive is ongoing, and that it expects to make a decision within the next six to 12 months. Quinn has made clear to investors that he would like to be named permanent CEO.
HSBC expects to incur restructuring costs of around $6 billion and asset disposal costs of $1.2 billion -- a total of $7.2 billion -- through 2022, with the majority of restructuring costs to be incurred over the next two years. HSBC, which dropped its 11% return on tangible equity target in October, now aims for a 10% to 12% return in 2022. The measure stood at 8.4% in 2019.
"Achieving the ROTE [return on tangible equity] target will be dependent on revenue and growth assumptions, which are likely to be more challenging if the [Hong Kong] banking sector stays weaker for a couple of years," Morgan Stanley analysts led by Anil Agarwal said in an investor note after the results.
HSBC shares in Hong Kong dropped as much as 3.2% after the announcement, marking the biggest intraday fall in six months. It closed at HK$57.75, down 2.8%.
While the bank warned that the coronavirus outbreak could hurt its business this year, Quinn said that China "remains a significant opportunity for growth." He said the outbreak "does not change the long-term strategic attractiveness of China."
Quinn also said that Hong Kong "continues to be central to our growth plans."
"We aim to increase our business and investment in Asia and in Hong Kong," he said. "We are looking to create more roles in Hong Kong around our global banking and markets capability by putting more of our sector and product specialists in that business in the Hong Kong market."
The main part of the overhaul involves cutting investment banking unit assets adjusted for risk by around 35% in Europe and 45% in the U.S. The sales, trading and equity research operations will be shrunk in Europe and the structured products unit will be moved from London to Asia. The freed-up capital will be deployed in higher-growth areas, especially in Asia.
In the U.S., where returns have lagged the Asian operations for years, HSBC said it would cut the retail branch network by almost one-third and move fixed-income trading to London, reducing operating costs by as much as 15%.
The bank will simplify the organizational structure to save costs by reducing the geographic reporting lines from seven to four and merge the "back and middle office" sections of its investment bank and commercial bank. It also plans to merge its private banking unit, which provides services to the wealthy, with its retail bank unit. Antonio Simoes, who heads the private bank, will leave HSBC as a result of the changes.
Given the costs associated with the overhaul, the bank will suspend share buybacks but maintain its dividend and keep its core equity tier 1 ratio, which is a measure of a bank's ability to absorb future losses, at between 14% and 15%.
Investors' attention will now shift to HSBC's ability to execute the plan. The bank, which has attempted similar changes before, has had little success so far and any further missteps could undermine confidence, analysts say.
"Investing in Asia, especially in China and Hong Kong, is the right move," Hao Hong, head of research at Bocom International, said before the announcement. "It is a historic opportunity for Asia-focused HSBC to take the lead in China where the market is opening up. A bold strategic move by investing in the market now will send the right signal to investors and convince them to back the bank."
HSBC hopes to have greater success this time by quickly shrinking businesses in the U.S. and Europe or selling off units, such as the company's French bank that is up for sale.
The first attempt to remodel the bank began about 10 years ago and accelerated soon after a money-laundering scandal that resulted in $1.9 billion in fines. The bank later exited businesses and cut tens of thousands of jobs.
The second overhaul, which appears to be similar to the one revealed on Tuesday, was unveiled in 2015. It, too, was a pivot to Asia, with the bank planning to reduce assets allocated to less profitable markets such as Europe and the U.S., and use the freed-up capital to bulk up in fast-growing Asian economies.
More than four years later, the bank's deployed capital has not moved much, underscoring the difficulty in reshaping a giant bank with operations in roughly 65 countries and territories.
While HSBC counts on Asia for more than 95% of its profits, about 45% of its capital still backs assets deployed in the U.S., Europe and the U.K. Asia accounts for just over 40% of the risk-weighted assets.
Group return on tangible equity, which stood at 10% in the nine months ended Sept. 30, would jump to 14% if the U.S. and European operations were removed, although a full exit is not possible given that HSBC benefits from its global network, an investor note by Goldman Sachs in December showed.