HSBC has solid quarter but warns of IT risks of proposed break-up

(Image sourced via HSBC)

HSBC, one of the world’s largest financial institutions, has delivered a solid set of interim results that saw its share price trending positively in London this week. However, executives at the European-headquartered bank are attempting to push back on a proposal by shareholder Ping An Insurance Group of China to split the lender - citing that the move would have significant IT risks over three to five years. 

Ping An wants to separate HSBC’s Asian operations from the rest of the business, as it believes this will deliver better returns for shareholders. However, the leadership team have argued this week that a unified HSBC is more sustainable for the future and will benefit from global scale. 

HSBC executives pointed to the success of its current transformation plan too and said that the bank is digitizing and improving the efficiency of its processes. 

Noel Quinn, Group Chief Executive of HSBC, said: 

We've made good progress with our transformation program. If you look back a few years ago, we had loss-making businesses in the U.S. and Europe, and capital was being used inefficiently. We have structurally repositioned our portfolio, our businesses and our operating model for higher returns.

The two most material adjustments in our portfolio have been the exit and wind down of nonstrategic assets and clients in the U.S. and Europe, and the strong impetus behind organic and inorganic growth in Asia, especially in Wealth and Personal Banking. This reposition effect is starting to pay off in terms of growth and returns, as these results show.

Normalising interest rates give us confidence in the returns trajectory for the coming years, as we will explain later. We have also got good cost control with adjusted costs stable in the first half despite inflation and higher spending on technology.

Digitizing HSBC continues to improve the client experience and make our processes more efficient. We've continued to raise our spending on technology with more than half spent on changing the bank initiatives to drive growth and efficiencies. This is in spite of the commitment to keep our overall costs stable in 2022.

HSBC said that after delivering an annualized return on tangible equity of 9.9% in the first half - a key metric for performance - it is confident on delivering at least 12% from 2023 onwards. CEO Quinn said that this would represent the bank’s best financial performance for a decade.

The key numbers for HSBC’s interim results include: 

• Profit after tax increased by $.08 billion to $9.2 billion. Reported profit before tax decreased by $1.7 billion to $9.2 billion. 

• Reported revenue decreased marginally to $25.2 billion, but adjusted revenue increased by 4% to $25.7 billion. 

Quinn said: 

We are simplifying and digitizing the bank. We are engaging and will continue to engage with all our shareholders. We share the desire for improved returns and understand the importance of dividends to them. 

We think the best and safest way to improve returns is to focus on our strategy, which we are confident we'll deliver a return on tangible equity of at least 12% from 2023 and materially increased distribution.

Separation risks

HSBC CFO Ewen Stevenson took the opportunity during the results call to warn about the potential effects of breaking up HSBC, with its Asia region operating as a separate business. Stevenson pointed to the risks associated with setting up new IT systems for Asia, as well as the lost synergies of operating as a unified global business. Stevenson said: 

“If you just look at the one-off costs associated with setting up a structure, if you were to have a separately listed Asian subsidiary, you would have to be able to demonstrate that you had standalone IT systems, which would probably take three to five years to construct, would run into the probably billions of dollars to be able to do that.

You would have potential tax impacts because of triggering capital gain steps, implications as you did the restructuring and other one-off costs associated with effectively recreating a standalone business here, here being Hong Kong where I am today.

And then you go into the ongoing dis-synergies. For example, in the slides, we've shown that of the $20 billion of wholesale revenues, 45% of them relate to international customers. So you can run your own maths on what portion of that $9 billion would be at risk, but it wouldn't be immaterial. 

You would have to effectively duplicate corporate functions and IT run costs that we get global synergies on today. You would lose group purchasing power benefits that we get today. 

All of the timelines point to three to five years. In that three to five years, we would have to prioritize IT change in respect of the separation rather than IT change in respect of the core business.

CEO Quinn also pointed to the bank’s use of technology and people to deliver cost savings and operational improvements in recent quarters. He said: 

We've more than doubled the proportion of our agile workforce over the past year, which we expect to translate into a much faster release frequency for new features and propositions. Our cloud adoption across public and private cloud continues to increase beyond 30% with an ambition to go much further. 

We're continuing to build a dynamic and inclusive culture. We remain on track to achieve our revised target of 35% of senior leadership roles filled by women by 2025. The total number of hours spent by colleagues learning about sustainability, digital and data increased sevenfold, reflecting the increased priority placed on future skills.

And to give you an example of how we're opening up a world of opportunity for our people, we're rolling out a talent marketplace, which uses AI to match colleagues with short-term projects and learning based on their skills and ambitions.

We're reducing the global real estate footprint, reducing our global retail infrastructure, using more automation and reducing our operations headcount. We’re still only part way through these journeys with an ambition to achieve even greater savings.