HSBC Plans Up to $3 Billion in Cost Savings by End of 2016

By Howard Mustoe 

HSBC Holdings Plc (HSBA), Europe’s largest bank, will target $2 billion to $3 billion of additional cost savings as Chief Executive Officer Stuart Gulliver continues with his plan to increase profitability.

HSBC will have a cost efficiency ratio in the “mid-50s” for 2014-2016, the London-based bank said in a statement to the Hong Kong stock exchange today. That compares with a target of 48 percent to 52 percent for the previous three-year period. Gulliver, 54, has announced the sale or closing of 52 businesses to revive earnings and 46,000 job cuts to eliminate $4 billion of annual costs since taking his job in 2011, beating his initial target set that year. The bank, which earns most of its profit in Asia, has also pledged to create additional revenue through greater cooperation across its divisions.

“The additional cost savings is the biggest surprise -- that may imply more disposals or staff layoffs,” said Steven Chan, a Hong Kong-based analyst at Citic Securities International Co., who has a buy recommendation on the stock. “The shares will continue to climb because they are now moving from a slow growth phase to a stronger growth phase.”

The shares gained 0.2 percent to HK$88.15 at 1:03 p.m. in Hong Kong, compared with a 0.5 percent increase in the benchmark Hang Seng Index. HSBC has gained 15 percent this year in London trading.

Job Reductions

The bank forecasts that it will have 240,000-250,000 employees over the next three-year period. Since taking over, Gulliver has reduced the number employed to 260,000. The employee count will fall to 254,000 as previously announced job cuts and disposals are implemented, Gulliver said on May 7.

HSBC, whose common equity Tier 1 ratio was 10.1 percent in the first quarter, aims to keep that gauge at more than 10 percent for the next three-year period, it said in the filing today. That compares with the 2011-2013 target of 9.5 percent to 10.5 percent.

“For the coming few years, they will start to enjoy the benefit of these costs savings and faster growth,” Chan said.

HSBC is keeping its goal of return on equity, a measure of profitability, of 12 percent to 15 percent. It was 8.4 percent in 2012.

Asset sales have helped the bank boost capital as regulators seek to shield taxpayers from the cost of rescuing banks in the future. HSBC’s capital ratio under the latest rules set by the Basel Committee on Banking Supervision increased to 9.7 percent in the first quarter from 9 percent at Dec. 31.

Dividends, Investment

The bank’s financial strength will allow it to invest and increase dividends, Gulliver said last week. HSBC on March 4 increased its 2012 dividend by 10 percent from 2011 to 45 cents a share. The payout ratio will remain at 40 percent to 60 percent for the next three-year period, the bank said today.

HSBC sold its stake in Shenzhen, China-based Ping An Insurance (2318) (Group) Co. for about $9.4 billion in February and the same month said it would sell its Panama unit for $2.1 billion. It completed the sale of its U.S. credit card unit to Capital One Financial Corp. (COF) for a premium of $2.5 billion last May, the same month it agreed to sell four units in Latin America for about $400 million to Colombia’s Banco GNB Sudameris SA.

To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net

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