Like all big companies, there’s a constant supply of rumours surrounding HSBC (LSE: HSBA). However, due to the size and complexity of the bank, it’s usually the subject of more rumours than most, and now is no exception.
The most recent rumour about HSBC is the speculation that, at its investor presentation next week, HSBC will unveil plans to cut up to 20,000 jobs.
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This rumour stems from a news article published by Sky News, which cited unidentified sources. Sky’s coverage also speculated that the bank was planning to sell operations in Brazil and Turkey, along with its investment bank.
And this rumour could have some truth behind it. HSBC has been struggling with high costs for some time despite four years of drastic cuts. Additional cuts, along with a retreat from some markets, could be the only solution to rising costs.
Leaving the UK
Another whisper is that rising costs and falling profits at HSBC’s UK arm will prompt the bank to move its headquarters out of the UK. Further, it is rumoured that HSBC is looking to spin-off its UK retail banking operations.
Even though this is just a rumour at present, it would make sense for HSBC to spin-off its UK retail bank.
Indeed, ring-fencing rules, which come into force during the next few years, will effectively force HSBC to start up a new independent bank for retail bank customers in the UK.
HSBC has no choice but to comply with these rules and it could be easier to just spin-off or sell the UK arm altogether.
Along with a UK spin-off, there’s been plenty of speculation that HSBC could be considering a full break-up to unlock value and boost returns.
HSBC’s falling return on equity — a key measure of bank profitability — and rising costs indicate that the bank has become too big to manage. A break up would allow HSBC to concentrate on key growth markets, such as Hong Kong and even Europe, where margins are higher.
A slimmer HSBC would also help reduce the bank’s regulatory compliance bill.
A black hole
The last major rumour regarding HSBC is probably the most troubling. That said, this rumour is based on a significant amount of speculation, although there is some evidence to support the conclusion.
Two analysts at Forensic Asia, a boutique Hong Kong research firm, have claimed that HSBC routinely overstates the value of its assets. As a result, there could be $64bn to $92bn of “questionable assets” on the bank’s balance sheet.
The analysts estimate that HSBC could need as much as $100bn in additional capital to fill this gap.
Unfortunately, there’s no way of verifying this rumour. Even the City’s top banking analysts are now finding it almost impossible to understand complex bank balance sheets. So there could be anything hiding in HSBC’s balance sheet figures.
It is becoming clear that HSBC’s size and complexity has started to hold the bank back. Margins are coming under pressure, and returns are falling as the bank struggles to deal with increasing regulatory scrutiny and higher capital requirements.