BusinessBanking & Finance

HSBC retail revamp key to end drag of redress on profits

Banking giant's salary structure overhaul aims to cut risk of sales misdeeds and compensation payments, which remain a drag on earnings

PUBLISHED : Monday, 07 April, 2014, 4:38am
UPDATED : Monday, 07 April, 2014, 5:16am

Redress is a word that comes up a lot in an interview with John Flint, the first he has given since taking over as HSBC's global head of retail banking and wealth management 16 months ago.

Given the about US$3.6 billion - equivalent to 16 per cent of the group's net profit last year - that his division of the world's second-biggest bank by assets has set aside, or paid out, since 2011 to compensate customers worldwide for various infractions, it is hardly a surprise.

Redress remains a significant drag on profit growth in the retail and wealth management business, which accounts for about 40 per cent of revenue in the banking group.

By Flint's own admission, it could be so for years to come, despite his insistence that full provision has been made for all remediation costs incurred or foreseeable.

"My personal view is that we are through the worst of this, but it would be a very brave man to say it is finished," he said in his office at HSBC's iconic Hong Kong headquarters last week.

While "this" is broadly about compensation HSBC has been ordered to pay for past misdeeds, particularly over its sales of payment protection insurance in Britain, it is also part of a worldwide regulatory response to the excesses in the international banking industry that ultimately sparked the 2008-09 global financial crisis.

Mis-selling of insurance by banks did not bring the system to its knees, but it was symptomatic of the way in which lenders over the previous two decades had lost sight of their role as providers of the financial services that keep the global economy turning, preferring to see themselves instead as manufacturers and sellers of products.

Flint believes the pendulum will swing the other way for 10 to 20 years, which is one key reason why HSBC is revamping its entire salary structure as part of its "global standards" initiative to improve earnings quality.

Key is breaking the direct relationship between sales and pay and rewarding staff instead for being "customer-centric". The change affected 10,000 staff in Flint's wealth management business last year. It hits 64,000 others in his retail bank this year.

A clutch of Hong Kong brokers unhappy at the prospect very publicly jumped ship last month.

Their departure from what is still the most successful business in the group - HSBC Hong Kong - is hardly a ringing endorsement of the strategy in a market where the bank enjoys a special place in the public mind and gets special scrutiny along with it.

"The fact that a significant number of our customers here are also investors means that the duty of care that exists from us to all of our retail customers globally is felt even more acutely here," Flint said, adding that the departures would not alter the strategy.

The business challenge is ... to reposition the business for the future, and at the same time grow it
John Flint, HSBC

"What I'd like to think is - pick a period, five, 10 years from now - when you look at HSBC versus its peers, our risk-adjusted returns on a fully risk-adjusted basis will be better than our peers because we took firmer decisions earlier in the process," he said.

Analysts were generally constructive about the effort to manage conduct risk alongside credit risk, he said.

But while the consensus view on HSBC stock of 22 analysts tracked by Reuters has improved over the past three months, they still rate it barely better than a "hold" - as many recommending HSBC as a "buy" believe it will underperform.

Flint concedes that investors do not yet have a clear view of how much an improvement to returns better risk controls will have, but he is certain that the impact redress has had on profits so far means it will be identifiable.

"The business challenge is to effect all this change, to reposition the business for the future, and at the same time grow it. Because there is an expectation that we can do both," he said.

HSBC's recent annual results showed that the retail bank did grow revenue last year, but the main driver of improvement in underlying profitability after adjustments was ultimately lower costs for redress than in 2012, Flint said.

"That is not how we aspire to grow our business."



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