HSBC, long an iconic figure on the streets of Europe and around the world, has announced the end of one of its strategic ambitions: competing with JPMorgan Chase, Goldman Sachs and other Wall Street and City of London titans. This move, which has caught many within the bank off guard, is part of the bank’s decision to scale back its corporate advisory and equity underwriting operations in key global financial hubs like New York, London, and continental Europe.
The announcement came last Tuesday, after select managers in the affected departments were informed last Friday. Most of the bank’s staff members, however, had no prior warning about the cuts. On the day of the announcement, employees were asked to join a conference call where CEO Georges Elhedery, along with Michael Roberts, HSBC’s new head of corporate and institutional banking, delivered the news. As the call went on, it became clear that once the bank’s current deals were concluded, their positions would be eliminated.
For those in the firing line, the losses will probably include a reduction of staff numbers into the low hundreds. However, there is an upside for some: HSBC has offered some employees the choice to transfer over to its operations in Hong Kong or Dubai, where the bank continues to keep a strong position in investment banking.
Although HSBC refused to issue official statements, the internal discussion has clearly spelled out the nature of the evolving approach of the bank. When called, Elhedery pointed out that it was no longer possible for the bank to incur the costs to run smaller scale operations that barely had a shot at competing with the industry big guns. Roberts added, “The bank needs to focus on its core strengths in Asia and the Middle East. That’s where HSBC is significantly more competitive.”
It is the largest bank in Europe and a major player in the global debt market, but HSBC has struggled considerably in M&A and equity underwriting. Last year, the bank was ranked 15th in equity and equity-linked deals in the U.S., showing a minor improvement from last year’s position but still behind smaller players like Jefferies Financial Group and Mizuho Financial Group. HSBC has not done better in M&A activities in the U.K. and Europe, ranking only 15th in the region. Last year—a step forward from 26th the year before but not near the ranks of the major investment banks.
HSBC was struggling to build scale in US and European equities, and M&A over time, says Joseph Dickerson, a bank analyst at Jefferies. This was an important reason why the bank is leaving these lines of business, he adds.
By contrast, HSBC remains a consistent European debt issuance top 10 performer, and at times in the top five. In Asia, it has had an outsized advantage and generally outperforms peers. The regional structure, as highlighted by Roberts, was built to play off the large network into clients and an opportunity for a lot of investments and financing from anywhere in the world.
The company has also established incentives for the employees who are in the middle of the deals that they are working on as part of the restructuring. The staff employees will be provided with special bonuses till their current work is completed, which acknowledges the unsettling nature of the company’s decision to shutter its M&A and equity underwriting divisions.
The bank continues to advise on live transactions, such as Fortress’s £350 million bid for UK-listed Loungers Plc. Although exiting M&A and equity capital markets is a rare decision for a corporate bank, the management of HSBC is evidently shifting its attention to more lucrative and sustainable ventures. This comes at a time when global dealmaking activity is rebounding, especially in Europe.
This move is in line with the overall strategy of the bank’s CEO, Elhedery, to reduce the bank’s cost base by about $3 billion. The restructuring, which has already reduced the management board by a third, reflects the bank’s determination to streamline its operations into four key divisions.
Meanwhile, the Middle East business of HSBC, which has been grouped under the Asia umbrella as part of the reorganization, has been largely spared from the cuts that are hitting the bank’s European operations. This has provided relief to employees in the region who are less affected by the ongoing changes.
Edward Firth, an analyst on banks at Keefe, Bruyette & Woods in London, said that though the changes seem small for a bank of HSBC’s dimensions in global reach, it is has been long apparent that the bank was struggling in these areas. The change marks one other chapter of the going efforts of the bank to refocus its strategy and strengthen its core business areas.