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Stuart Gulliver, group chief executive of HSBC Holdings and chairman of The Hong Kong and Shanghai Banking Corporation Limited, is photographed in Toronto, Ont., July 13, 2011.....Sarah Dea/For The Globe and Mail (SARAH DEA For The Globe and Mail)
Stuart Gulliver, group chief executive of HSBC Holdings and chairman of The Hong Kong and Shanghai Banking Corporation Limited, is photographed in Toronto, Ont., July 13, 2011.....Sarah Dea/For The Globe and Mail (SARAH DEA For The Globe and Mail)

Scale of HSBC's brutal revolution emerges Add to ...

When HSBC promoted Douglas Flint and Stuart Gulliver, two of its longest-serving senior directors, to run the bank last year the clear message was one of continuity.

Yet on Monday, as Mr. Gulliver presented his first set of financial results as chief executive, what emerged instead was a picture of just how profound – and brutal – a change he is forcing through at the bank he joined more than 30 years ago.

His early estimates of “several” thousand job cuts shot up to 30,000 – almost one in 10 of the bank’s global workforce.

He revealed early progress in his efforts to reshape the retail business, selling half its U.S. branch network, withdrawing from Russia and Poland and scaling back its insurance operations.

He also cemented the bank’s focus on fast-growing markets, saying it had built up its investment banking capabilities particularly in core markets such as Asia and Brazil.

But while HSBC’s first-half results came in ahead of analysts’ forecasts, largely on the back of better than expected revenue growth in core emerging markets, Mr. Gulliver was clear that the bank was far from where he wanted it to be. “This is the first step in the right direction of what will be a long journey,” he said.

His goal – according to a series of targets he set out three months ago – is to cut costs by $3.5-billion by 2013 and push returns up to 12-15 per cent of shareholder equity.

Keen to play down the progress made on improving profitability – HSBC revealed a 12.3 per cent return on equity for the first-half, up from 10.4 per cent a year earlier and seemingly within its target range – Mr. Gulliver was quick to point out this did not take account of new tougher capital rules.

“This gives me no comfort whatsoever – we needed to make $2-billion more [revenue]in the half to hit the target. We are not celebrating here at all,” he said.

The biggest cause for concern was rising costs, up 13 per cent in the first half to $20.5-billion, as the bank kept pace with rising wages in Asia and Latin America.

Its cost efficiency ratio – a measure of how much it has to spend to generate revenue – rose to 57.5 per cent, markedly higher than the 50.9 per cent in 2010.

Mr. Gulliver pointed out that the quarterly trend was more positive, with a ratio of 54.4 per cent in the three months to June, although this still fell some way short of his 48-52 per cent goal.

He also has more to do to repair the group’s U.S. operation, which was hit hard by its mistimed expansion into subprime lending – although analysts said the sale of 195 branches to First Niagara was a positive start.

HSBC is talking to a “couple” of potential buyers for its credit card operations, which generated a $1-billion profit in the first half of the year, although Mr. Gulliver suggested it could retain the business that issues cards for retailers and other third-party clients.

He said he was modelling HSBC’s future presence in the US on Canada, where it has a minimal retail banking presence centred on wealthier clients and a healthy slice of Canadian corporate business, focused on cross-border trade, especially with emerging markets.

North America made up only 5 per cent of HSBC’s overall $11.5-billion pre-tax profit, although it delivered growth of 23 per cent.

The only region not to deliver profit growth was Europe, after the investment banking business suffered a 12 per cent fall in pre-tax profits.

HSBC blamed this for the fall-away in the overall contribution of European operations. The bulk of its investment banking business is routed through the UK, where global banking and markets profits fell by almost two-thirds.

UK retail banking fared better, with profits up more than 30 per cent as HSBC took 11 per cent of new mortgage lending in the period.

In stark contrast to its European fortunes was the strong growth evident across faster growing markets.

Ronit Ghose, an analyst at Citigroup noted the “particular strength” of Asia excluding Hong Kong, where its loan book grew by 32 per cent, deposits by 22 per cent and net interest income by 23 per cent.

This meant that both Hong Kong and the rest of Asia generated a higher profit – $3.1-billion and $3.7-billion respectively – than Europe, at $2.1-billion.

Mr. Gulliver warned, however, that future growth in Asia would be more measured, while China could expect a “soft landing”.

HSBC’s shares rose 2.6 per cent to 609.8p on Monday. While analysts largely welcomed the results, they said further upside would depend on Mr. Gulliver’s ability to deliver on his promises against an increasingly challenging regulatory environment.

“The question is whether he can wake the sleeping giant that is HSBC,” said Mr. Ghose.

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