Reuters Breakingviews delivers agenda-setting financial insight. Its global correspondents react to stories as they develop, delivering sharp and provocative commentary on big financial news as it breaks. Click here to read more international insights.
HSBC is digging in for a low-interest-rate world. Economic malaise in the West has depressed demand for loans. Central bank money printing is weighing on the lender's large deposit base. With no pickup in sight, HSBC's returns depend on its ability to keep cutting costs.
The bank's balance sheet at the end of March sums up the challenge. Gross customer loans of almost $974-billion (U.S.) were lower than at the end of December. Granted, the effect of the stronger dollar and the decision to earmark some businesses for sale explain the decline. HSBC's U.S. subprime loan portfolio also continues to shrink. But even then, loan growth was largely restricted to pockets of Asia, the Middle East and Latin America.
This malaise comes as no surprise: it's the reason central banks are keeping interest rates low and accumulating ever-larger stockpiles of assets. HSBC's problem, however, is that it has roughly $3 in loans for every $4 of customer deposits. Low rates squeeze the margin between what it has to pay to attract those deposits and what it can charge for the loans.
Granted, quantitative easing has its benefits. Investors' appetite for yield will help the bank to offload some of its unwanted U.S. mortgages at better prices than previously anticipated. Record bond issuance powered a 31-per-cent revenue jump in HSBC's capital markets business. And HSBC's capital base is sufficiently strong that it can afford to increase both lending and dividends.
The cycle will turn at some point. Yet for now HSBC's financial performance depends heavily on cost-cutting, weeding out underperforming businesses, and reducing bad debts. These three factors were largely responsible for the 34-per-cent jump in underlying pretax profit in the first quarter.
The question is how many more strings HSBC has to pull. In the two years since unveiling his strategy to make the bank smaller and simpler, CEO Stuart Gulliver has cut the bank's work force by 38,000 and shed more than 50 businesses. The bank has scheduled a strategy update for May 15. The suspicion is that, at a bank HSBC's size, there are always more costs to trim. Mr. Gulliver will have to show that he has enough fresh ideas to keep economic malaise at bay.