Lending

HSBC to revamp business model as lower interest rates affect profits

HONG KONG / LONDON (Reuters) – HSBC Holdings PLC said on Tuesday it would embark on a pandemic-induced overhaul of its business model, seeking to shift its main source of income from interest rates to paying companies.

Signaling a 35% drop in quarterly profits, Europe’s largest bank also accelerated its downsizing plans, targeted deeper cost cuts and said it would resume prudent dividend payments as soon as possible.

The planned business model changes mark one of the biggest strategy shifts to date from HSBC, which has long touted its ability to generate interest income from its more than $ 1.5 trillion. dollars in customer deposits.

But with global interest rates now at their lowest and even turned negative, the bank is struggling to charge more for loans to borrowers than it pays depositors, and it has warned that net interest income will stay below. pressure.

Earlier this year, the bank announced that it would merge its wealth management and personal banking businesses with the goal of selling more lucrative products to a larger portion of its larger customer base.

Now the bank is signaling it could go further and start charging for much more basic products like standard checking accounts that customers in some markets like Britain expect to be free of charge.

He will also examine how he can generate more fee income from corporate clients, having done well to help clients raise funds through bond and equity finance during the COVID-19 crisis.

“We will have to consider charging for basic banking services in some markets because a lot of our customers in this environment will lose money to us,” CFO Ewen Stevenson told Reuters.

This could prove to be a tough pill to swallow in some markets, industry experts have said.

FILE PHOTO: An HSBC bank is pictured during the coronavirus disease (COVID-19) pandemic in the Manhattan neighborhood of New York City, New York, United States, October 19, 2020. REUTERS / Carlo Allegri / File Photo

“This will need to be done with care so as not to damage brand confidence or cause customers to change, especially in countries where competitors offer the service for free,” said Sudeepto Mukherjee, senior vice president of financial services of the consulting company Publicis. Wise.

The bank said it will give more details on the fee increase when it releases its annual results in February.

The announcement of restructuring plans allowed HSBC stock to climb more than 6.5%, although it has still lost almost half of its value since the start of the year.

Highlighting its challenges, the bank’s third-quarter revenue fell to $ 11.9 billion, down 11% from the previous year.

Its 35% drop in pre-tax profit to $ 3.1 billion exceeded a consensus estimate of $ 2.07 billion, with HSBC signaling an easing of bad debt provisions.

“Although the outlook for depreciation is still very uncertain … HSBC reported strong third quarter results overall and the optimistic comments on the outlook for strategy execution are reassuring,” said John Cronin , analyst at Goodbody.

HSBC now expects bad debt losses to be at the low end of the $ 8 billion to $ 13 billion range it set earlier this year.

“There are encouraging signs that the credit assumptions we have are holding up, the government support we see for the corporate sector has bought them time,” Stevenson told investors on a conference call.

RESTRUCTURING ON THE RISE

Faced with fewer options to spur revenue growth, Asia-focused HSBC sought to cut costs globally and resumed plans in June to cut around 35,000 jobs it had put away. on the back burner after the coronavirus epidemic.

The bank has no plans to cut more jobs immediately, Stevenson told Reuters, but it could happen as its transformation plans continue.

HSBC on Tuesday announced plans to cut annual costs to less than $ 31 billion by 2022, a more ambitious target than that set in February and well below the operating expenses of $ 42.3 billion announced in 2019 .

It will also accelerate the transformation of its business in the United States, where it has long struggled to compete with much larger players, and will provide an update on its 2020 results in February.

HSBC, which like other UK lenders, stopped paying dividends earlier this year at the behest of regulators, said it would release a revised dividend policy in February.

Analysts and investors are concerned that the lender will cut long-term payments.

“When we start paying distributions again, we’ll start cautiously and build from there,” Stevenson said on the conference call.

Reporting by Sumeet Chatterjee in Hong Kong and Lawrence White in London; Additional reporting by Scott Murdoch in Hong Kong; edited by Edwina Gibbs and Jason Neely

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