Making the cut: StanChart, HSBC race to slash costs seen stumbling

HSBC has more than four years of restructuring on its rival and analysts say at least the bank has a clear plan. Standard Chartered’s master plan is missing

PUBLISHED : Sunday, 01 November, 2015, 12:00pm
UPDATED : Sunday, 01 November, 2015, 11:03pm

Standard Chartered and HSBC are in full sprint to cut down costs but their third-quarter earnings reports this week may show the banks running in place.

HSBC is far ahead of its cross-town rival in marking out a route for cutting down costs. But that’s not saying much given that Standard Chartered has left investors only a few clues as to its next master restructuring plan under new leader Bill Winters.

HSBC, Europe’s biggest bank, has just set off on the latest leg of its strategy to exit bad businesses and reinvest assets in faster-growing markets . The course is a long one and analysts worry that while the bank has been seen slashing back and forth with a cleaver to cut costs, it might not be making contact in the right places.

The exit targets for HSBC against the current dismal economic backdrop are lacking, analysts pointed out.

“The bank is surely struggling right now with global credit demand muted and rates being pushed out,” Chirantan Barua, a senior analyst at Sanford C Bernstein in London, said in a note. “There is only so much cost you can cut.”

Questions on what can be cut have been matched with similar one on where such a heavy load of risk-weighted assets can be reinvested. The bank has said it wants to cut US$290 billion in risk-weighted assets and redeploy up to US$190 billion into fast-growing markets such as southern China and Southeast Asia. Investors and analysts have questioned if that plan, aimed at a cooling Asia, might be overly ambitious.

The bottom line is that analysts do not expect much of an update from HSBC on exits in the third quarter. They are more cheerful on pre-tax profit, projecting a strong recovery of nearly 20 per cent year on year to US$5.5 billion between July and September, according to a poll of four analysts by Thomson Reuters.

There is only so much cost you can cut
Chirantan Barua, a senior analyst at Sanford C Bernstein

When announced in June, HSBC’s plan underwhelmed. Including exits from Turkey and Brazil, the bank said it would cut about 50,000 full-time jobs worldwide. By the end of 2017, it will look to save US$4.5-$5 billion per year and hit a return on equity of 10 per cent. The target for costs at that time is to keep them flat.

The meat of the plan was in its work to reduce risk-weighted assets with a focus on shrinking its global banking and markets division to less than a third of the groups’ total risk-weighted assets.

The Brazil unit was hawked off in August and the bank did some heavy lifting on risk-weighed assets in the first half of the year. It managed to cut US$50 billion out of its global balance sheet, of which US$30 billion were re-invested.

At the half-year mark, pre-tax profits at HSBC grew by about 10 per cent year on year to US$13.6 billion, coming in above expectations. Operating expenses climbed to US$19.2 billion, an increase of about 5 per cent from the same period last year. The bank also booked US$1.14 billion in legal fees.

Even lacklustre results from HSBC might look enviable when Standard Chartered reports earnings on Tuesday. Some analysts are projecting that the bank will report some of its worst results in years – even after it said pre-tax profit in the first half of the year sunk 44 per cent from the same period last year to US$1.8 billion, an easy act to follow.

New chief executive Bill Winters was expected to start provisioning heavily in the third quarter for oncoming bad loans, something that would have weighed down profits.

HSBC has more than four years of restructuring on its rival. Though its plan may falter, analysts say at least the bank has a clear plan. Standard Chartered’s master plan is missing.

“The lack of clarity on the direction they want to take is reflected in the weak share price,” said Jim Antos, banks analyst at Mizuho Securities Asia. “We honestly can’t tell how much progress they are making since they haven’t given a hint about targets.”

The bank showed that it had reduced risk-weighted assets by 5 per cent to US$326 billion, lifting its common equity tier-1 ratio, a measure of a bank’s capital strength and a growing worry, to 11.5 per cent, up from 10.7 per cent at the end of last year. That was an instant crowd pleaser after concerns mounted regulatory capital.

But investors’ sole guiding light on the next move has been a series of unpredictable cuts that Standard Chartered announces every few months. So far those amount to just 4,000 jobs and a series of exits from businesses under the investment bank, such as equities derivatives last week or cash equities in January.

The small exits appear to be strategic as they are cuts to similar businesses that are likely performing poorly, Mark Phin, an analyst at Keefe, Bruyette and Woods, said. But beyond the similarity, the bank has yet to release a concerted plan on the same level as HSBC.

Winters is expected to deliver that guidance during the bank’s investor day, which could get pushed back to early December as it waits for the results of a stress test from the Bank of England. But given the economic climate, Standard Chartered’s master plan may come up short as well.

A survey of analysts by Thomson Reuters projected full-year pre-tax profits to hit US$3.2 billion, down about 38 per cent from last year.