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19/02/2020 15:16

HSBC restructuring addresses earnings challenges - Fitch

[ET Net News Agency, 19 February 2020] HSBC's (00005) restructuring plan identifies the
main challenges to the bank's business model and, if implemented effectively, should help
HSBC retain the key competitive advantages of its global franchise, Fitch Ratings said.
The bank plans to further increase efficiency and link its US and European operations
more closely to its international activities. Management reiterated that HSBC can reach
its revised target return on tangible equity (RoTE) of between 10% and 12% in 2022 without
depending on favourable market conditions.
The magnitude of another round of cost-cutting to simplify the organisation is
illustrated by the aim to reduce annual operating costs by a further US$4.5 billion, for
which HSBC will incur costs-to-achieve of US$6 billion, mostly in 2020 and 2021. This
compares to US$7 billion costs-to-achieve under the previous transformation programme in
2015-2017, which delivered annual savings of US$6 billion.
Fitch downgraded HSBC's rating to 'A+' in December 2019 reflecting a diminished
assessment of the group's business model, strategic execution and earnings prospects. The
rating is sensitive to management's ability to execute the restructuring while maintaining
the benefits of the group's global network without damaging the franchise.
Under the plan, HSBC will cut over US$100 billion of risk-weighted assets (RWAs), mostly
in its weak-performing operations in the US and in the European non-ring-fenced bank, HSBC
Bank plc. This will enable the group to finance growth in more profitable regions,
including Asia, the UK and the Middle East, and to absorb RWA increases due to regulatory
changes.
Fitch expects that operations in the US and Europe will remain a drag on the group's
performance even after these sharp cuts, but these regions remain important to HSBC's
international franchise and to the group's ability to maintain the global network needed
to support its clients.
Further reductions in less profitable businesses, including the group's French retail
operations, could enable HSBC to generate further efficiency gains.
As part of its updated plan, HSBC also aims to simplify its organisational structure. It
will merge its Private Banking operations into its Retail Banking and Wealth Management
division, reduce the number of reporting regions from seven to four and slim down head
office functions.
The restructuring gives rise to executions risks, but Fitch expects the group's
underlying business to continue to generate sound returns. HSBC's capital position with
common equity Tier 1 (CET1) ratio of 14.7% at end-2019 provides a sizeable buffer if
earnings deteriorate and the group's intention to maintain a CET1 ratio between 14% and
15% supports its rating.
HSBC's 4Q 2019 pre-tax profit of US$3.5 billion (excluding goodwill impairment), and
2019 RoTE of 8.4%, confirmed the group's ability to generate sound operating results.
However, a restructuring-related goodwill impairment of US$7.3 billion drove an overall
reported loss for 4Q19 of US$3.9 billion. Material additional restructuring-related items
- as well as the costs-to-achieve, the bank expects US$1.2 billion in disposal losses -
will weigh on near-term earnings, particularly in 2020 and 2021. However, successful
execution of the restructuring plan would allow the group to focus on stronger-performing
markets, strengthening returns and supporting resilience to interest rate and economic
headwinds in its main markets.
HSBC's businesses in China and Hong Kong have remained resilient to the COVID-19
outbreak, but a prolonged epidemic would affect asset quality. HSBC estimates that a
scenario in which the outbreak is contained in 1Q20 could reduce earnings by US$200
million-US$500 million, including the impact of higher credit losses. (KL)

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