New HSBC Holdings PLC (LSE:HSBA) boss George Elhedery today revealed his plan to split the business geographically in two, but it was not clear if this was the final step towards a true break-up of the business into its East and West units.
Analysts said the new structure seemed to provide the opportunity for much cost-cutting, but would also be likely to cost several million to achieve.
It was not clear exactly how the changes would work and how much they would cost until more details are provided with final results in February.
Long pivot to Asia
Founded in Hong Kong in 1865 to finance trade between Europe and Asia, the lender that markets itself as a global bank is seen by many investors as a proxy for investing in Greater China, something that previous CEOs have pivoted towards without making the final cut.
HSBC's last big Asian pivot was in 2018, with a multi-billion investment plan to expand in China and improve technology as a reversal of the cost-cutting of the years since the global financial crisis.
But for a section of the investor base, most notably Chinese investor Ping An, a full spin-off of the Asian operations was the only option.
However, the giant Chinese insurer, despite having an 8% stake in the bank, has been unable to force the issue, though its opposition to previous CEO Noel Quinn did possibly hasten his retirement.
Division into two and into four
Elhedery, who took the reins from Quinn last month following stints as group finance chief and co-CEO of the markets division, today announced his "simplification" plan, presumably cooked up with the help of the board.
One of the most eye-catching elements is the split of the management of HSBC business in half, divided into 'Eastern Markets', made up of Asia Pacific plus the Middle East, and 'Western Markets', consisting of the UK non-ringfenced bank, Continental Europe and Americas.
He also has divided operations from three into four: Hong Kong, UK, corporate & institutional banking, and international wealth & premier banking, which Elhedery says will operate as "four businesses with clear lines of responsibility".
The Hong Kong business will be made up of personal and commercial banking businesses. Similarly the UK ring-fenced bank comprises UK personal banking, including First Direct and M&S Bank, and UK commercial banking.
The new corporate & institutional banking arm has been created through the internal merger of the international commercial banking business outside the UK and Hong Kong, with Elhedery's former global banking and markets business, along with the UK non-ring-fenced bank, European and Americas wholesale banking business.
International wealth & premier banking brings together the existing high-end, personalised banking service focused outside of Hong Kong and the UK, the global private bank, and the "wealth manufacturing" businesses, along with HSBC asset management and insurance.
Analysts in the dark
"Unfortunately," said analyst Edward Firth at Keefe, Bruyette & Woods, without any numbers alongside the simplification plans it is "tough to make any meaningful judgement".
A first guess from Firth was that it "feels like in the hundreds of million US dollars to low billions" rather than a repeat of HSBC's 2020-22 transformation programme.
UBS analyst Jason Napier said while Elhedery declared the changes would reduce the duplication of processes and decision-making in the current structure, what was "unknown and important are the magnitude of any required restructuring charges".
"Aligning functions for a group with 213,978 staff involves exceptional costs, a divisional shift provides the opportunity for new CEO cost reductions.
"Also important is whether this structure will prompt other changes," Napier said, including whether Australian retail banking will fit in Asia, whether insurance manufacturing fits in international wealth, and whether HSBC's corporate presence in Latin America needs more to be expanded.
Third-quarter results are due on 29 October, but Napier expects HSBC to defer answers to these and other questions until final results.
Susannah Streeter, head of money and markets, Hargreaves Lansdown:
‘’The new CEO Georges Elhedery has moved swiftly to put his own corporate stamp on HSBC, with a restructuring drive which focuses on elevating the growth levers in the business. Second-quarter revenues got a significant boost from the fees generated in its wealth business, so creating a new division to focus on high and ultra-net-worth accounts is aimed at capitalising on further potential that this area of the business promises.
With Eldhedery maintaining that the bank’s strategic priorities remain unchanged, splitting operations into Eastern markets and Western markets divisions "does not seem to indicate that a hiving off is on the cards", said Susannah Streeter, head of money and markets at Hargreaves Lansdown, who ran with the company line that cost-cutting is a big driver of the changes.
Given that China’s economy is struggling, the timing of a split any time soon might seem to benefit only the Western business – but that could be a short-term mistake in the long run.