HSBC sets new earnings targets after 2019 profit falls 33%

HSBC is in over 50 countries across Europe, North America, the Middle East and Asia — with the latter accounting for roughly half of its revenue and 90 percent of profit. (AFP)
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Updated 18 February 2020

HSBC sets new earnings targets after 2019 profit falls 33%

  • A sluggish performance in Europe and the United States has pulled down HSBC’s returns
  • HSBC said the ongoing coronavirus epidemic had significantly impacted its staff and customers

HONG KONG/LONDON: HSBC on Tuesday unveiled plans to cut $100 billion in assets, slash its investment bank and restructure in the United States and Europe, as it launched its biggest overhaul in years in a bid to improve returns.
The restructuring announcement comes against the backdrop of its 2019 profit before tax dropping 33 percent, hit by one-time write-offs linked to its investment banking and commercial banking businesses in Europe.
The wider strategy overhaul also comes amid slowing economic growth in HSBC’s major markets, an outbreak of a fast-spreading coronavirus, Britain’s protracted withdrawal from the European Union, and lower central bank interest rates.
While the London-headquartered bank has benefited from billions of dollars of investment in Asia over the last few years — mainly in China — sluggish performance in Europe and the United States has pulled down its returns.
The strategy update was presented by interim Chief Executive Noel Quinn. HSBC said the process for appointing a permanent CEO was ongoing and that it expected to make an appointment within six to 12 months as earlier outlined.
In announcing restructuring efforts, HSBC veteran Quinn is also auditioning for the permanent role of CEO, people with knowledge of the matter said earlier.
“This should create a leaner, simpler and more competitive group that is better positioned to deliver higher returns for investors,” Quinn said in a statement, referring to the restructuring initiatives.
Europe’s biggest bank by assets, which makes the bulk of its revenue in Asia, reported profit before tax of $13.35 billion for 2019 versus $19.89 billion a year earlier. That compared with the $20.03 billion average of brokerage estimates.
The profit drop was a result of $7.3 billion in write-offs linked to its global banking and markets and commercial banking business units in Europe, HSBC said in its earnings statement.
The bank said it planned to achieve a reduced adjusted cost base of $31 billion or below in 2022, underpinned by a new cost reduction plan of $4.5 billion, and return of tangible equity in the range of 10 percent to 12 percent in the same period.
In 2019, the bank reported a return on equity of 8.4 percent, down from 8.6 percent in 2018.
HSBC is in over 50 countries across Europe, North America, the Middle East and Asia — with the latter accounting for roughly half of its revenue and 90 percent of profit.
In the US, where the bank has underperformed for years, HSBC said it needed “to reshape the US business in order to improve returns” and would close around a third of its 224 branches and target only international and wealthier clients.
As part of its efforts to simplify the group structure, HSBC said it would combine its retail banking and wealth management business unit with global private banking to create one of the world’s largest wealth management businesses.
The bank will also reduce its sales and research coverage in European cash equities with a focus on supporting equity capital market transactions, it said.
Reuters reported last month, citing people familiar with the matter, that HSBC was cutting around 100 roles in its cash equities business with the bulk of the layoffs falling on its continental European trading floors.
HSBC said the ongoing coronavirus epidemic had significantly impacted its staff and customers, and that the outbreak could in the long run reduce its revenue and cause bad loans to rise as supply chains are disrupted.
“Longer term, it is also possible that we may see revenue reductions from lower lending and transaction volumes, and further credit losses stemming from disruption to customer supply chains,” Quinn said.
The number of new coronavirus infections in mainland China fell below 2,000 on Tuesday for the first time since January, although global experts said it is still too early to say the outbreak is being contained.


WEEKLY ENERGY RECAP: Despite long-term challenges, oil prices remain in healthy range

Updated 4 min 13 sec ago

WEEKLY ENERGY RECAP: Despite long-term challenges, oil prices remain in healthy range

Oil prices have been stable since early January, with Brent crude price hovering around $55. Brent crude closed the week slightly higher at $55.41 per barrel,
while West Texas Intermediate (WTI) closed slightly lower at $52.27 per barrel.

Oil price movement since early January in a narrow range above $50 is healthy, despite pessimism over an increase in oil demand, while expectations of US President Joe Biden taking steps to revive energy demand growth are
still doubtful. The US Energy Information Administration (EIA) reported a hike in US refining utilization to its highest since March 2020, at 82.5 percent. The EIA reported a surprise weekly surge in US commercial crude stocks by 4.4
million barrels. Oil prices remained steady despite the bearish messages sent from the International Energy Agency (IEA), which believes it will take more time for oil demand to recover fully as renewed lockdowns in several countries weighed on oil demand recovery.

The IEA’s January Oil Market Report came as the most pessimistic monthly report among other market bulletins from the Organization of the Petroleum Exporting Countries (OPEC) and EIA. It forecast oil demand will bounce back to 96.6 million bpd this year, an increase of 5.5 million bpd over 2020 levels.

Though the IEA has lowered its forecast for global oil demand in 2021 due to lockdowns and vaccination challenges, it still expects a sharp rebound in oil consumption in the second half of 2021,
and the continuation of global inventory depletion.

The IEA reported global oil stocks fell by 2.58 million bpd in the fourth quarter of 2020 after preliminary data showed hefty drawdowns toward the end of the year. The IEA reported OECD industry stocks fell for a fourth consecutive month at 166.7
million barrels above the last five-year average. It forecast that global refinery throughput is expected to rebound by 4.5 million bpd in 2021, after a 7.3 million bpd drop in 2020.

The IEA monthly report has led to some short term concern about weakness in the physical crude spot market, and the IEA has acknowledged OPEC’s firm role in stabilizing the market.

Controversially, the IEA believes that a big chunk of shale oil production is profitable at current prices, and hence insinuated that shale oil might threaten OPEC market share.

It also believes that US shale oil producers have quickly responded to oil price gains, winning market share over OPEC producers. However, even if US shale oil drillers added more oil rigs for almost three months in a row, the number of operating rigs is still less than half that of a year ago, at 289 rigs.

The latest figures from the Commodity Futures Trading Commission show that crude futures “long positions” on the New York Mercantile Exchange are at 668,078 contracts, down by 18,414 contracts from the previous week (at 1,000 barrels for each contract).