DealBook: HSBC Aiming to Cut $3.5 Billion in Costs

10:51 a.m. | Updated

HSBC said on Wednesday that it planned to cut jobs, scale back its retail banking operations and possibly sell its bank card business in the United States as part of a strategy to reduce costs by as much as $3.5 billion in the next two to three years.

The bank said it would focus on commercial banking and wealth management, while selling or shutting down some less profitable retail banking operations. HSBC, one of the biggest European banks, said the steps were expected to help it improve returns despite slower economic growth and a stricter regulatory environment.

“This is not about shrinking the business but about creating capacity to reinvest in growth markets and to provide a buffer against regulatory and inflationary headwinds,” said Stuart Gulliver, who took over as chief executive in January. He added that it was too early to say how many jobs would be cut.

Banks are seeking to streamline their business as new financial regulations require them to maintain higher capital reserves, putting pressure on profitability. The Barclays chief executive, Robert E. Diamond Jr., said in February that he would review businesses and close some that did not generate enough return.

Less than a month after taking over as chief executive, Mr. Gulliver held a two-day meeting with his management team at HSBC’s Hong Kong offices to discuss necessary changes. They agreed that HSBC’s branches failed to focus enough on the special demands of local markets and clients.

“We always tried to do everything, everywhere, always, and I’m not going to do that,” said Mr. Gulliver, who previously ran HSBC’s investment banking operation.

Having already decided to withdraw from Russia’s retail banking market, HSBC said it would test all of its operations and businesses for profitability. The bank also set a target of 48 percent to 52 percent for its cost efficiency ratio. Costs as a proportion of income were 55 percent last year, which the bank said was “unacceptable.”

Mr. Gulliver also said he planned to radically change HSBC’s business in the United States, which had been a drag on earnings ever since the subprime mortgage crisis dealt a blow to Household, the American lender HSBC acquired in 2003. HSBC is considering the sale of its American consumer bank card operation and plans to expand its private banking business to Latin America. It also hopes its commercial banking unit will benefit as America’s export industry rebuilds, Mr. Gulliver said.

“We need to get to a situation where the U.S. doesn’t lose us a colossal amount of money,” Mr. Gulliver said. The business was a “significant financial cost to HSBC and a management distraction.”

Despite large losses in the United States, HSBC weathered the financial crisis better than many of its rivals, mainly because it generated about half of its earnings from Asia and had strong deposit inflows on the commercial banking side. HSBC did not have to ask for financial help from the British government.

But this year the bank’s share price started to lag behind that of Deutsche Bank, JPMorgan Chase and Barclays as some investors expressed concerns about rising costs and the pace of growth. The strategy HSBC announced on Wednesday failed to spark enthusiasm among some analysts and the bank’s share price was down 1 percent in London.

“We would have loved to see a little bit more” change, said Pawel Uszko, an analyst at Keefe, Bruyette Woods. “The main thing they said was cost-cutting and that will take two to three years to get there.”10:51 a.m. | Updated

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