For a second, forget about things like stock prices and capital ratios. If you're a bank, return on equity is what you really care about. Or at least it's what your investors care about, so you have to focus on it.
Although HSBC hasn't come out and explicitly said it, a weak ROE has to be a key factor behind its strategic review. HSBC's ROE was 9.5 per cent last year, and was around only 5 per cent the two years prior. Those figures are far short of the levels around 20 per cent that Canadian banks are posting.
Not only is HSBC's low, there are worries the bank will have trouble raising it because Basel III capital requirements will force global banks to hold more capital. If profits don't grow while the equity base expands, ROE will fall.
That very concern forced HSBC chief executive officer Stuart Gulliver to lower his ROE expectations from 15 to 19 per cent down to 12 to 15 per cent in February.
Then, add the bank's geographic mix into the breakdown and the picture is even grimmer. Although HSBC is often linked with the Asia Pacific region, only 27 per cent of the bank's revenues come from this area of the world. Slow growth Europe and North America combined account for double that.
Put all those things together and it's clear that the bank had to act. Costs, which were 55 per cent of revenues last year, have been targeted to fall to 48 to 52 per cent of revenues by 2013. To do that, HSBC expects to cut $2.5-billion (U.S.) and $3.5-billion in spending over the next three years
Where exactly those cuts will come from is unclear. The only unit that has been floated as a potential candidate for a sale is the U.S. credit card business.
However, HSBC did say that it will refocus its wealth management and retail banking operations, and that could have implications here in Canada.