Yesterday HSBC Holdings (LSE: HSBA) announced some pretty weak numbers – Q3 net profit was down 24%, while pre-tax profit was down 18% and revenue fell 3%. What has been driving headlines however, is further moves made by interim CEO Noel Quinn to “remodel” large parts of the bank.
Interestingly, this news of restructuring intentions emphasise a move that has seemingly been on the cards for a while – HSBC concentrating efforts on its Asian business because of weaknesses and uncertainty in Europe and the US.
Moving money to China
With its strong exposure to and historical connections with Asia, HSBC has always been something of a proxy for investment in the region. Over the past couple of years, with low interest rates and Brexit dominating its operations in the West, HSBC’s Asia business has become ever more dominant – accounting for about 95% of pre-tax profit in Q3.
Interestingly however, on an asset and capital basis, Europe and the US still make up much of its cost base – about half of its assets adjusted for risk. It is this disparity that Mr Quinn wants to address. In a statement yesterday, he said HSBC needs to reduce the amount of capital in Europe and the US, and “redeploy some of that into higher growth, higher return opportunities elsewhere”.
Though Mr Quinn said he would not outline the whole strategy until the company’s full-year results in February, he did indicate his two main focuses for a restructuring. Firstly, he intends to move away from Europe and the US, either by divesting businesses or reducing operations in the regions.
Secondly, he will be reducing HSBC’s large cost base by removing “some of the complexity”. This is predominantly expected to come in the form of staff reductions — the company already announcing 10,000 job losses earlier this month.
What will it mean for the shares?
Despite the weak numbers, I can’t help but feel the bank is making some good moves for shareholders. Concentrating its efforts in Asia, where it is most profitable, seems like a good strategy to me. Of course putting all your eggs in one basket can carry risk, but similarly, focusing all your efforts on the most beneficial area can result in exponentially higher returns.
I also see the restructuring as a sign of good management from both Quinn, and a board that is willing to back him even as an interim CEO. Rather than simply being a placeholder, he is undertaking significant changes that could see the firm’s future secured for the next 10 or 20 years.
Though its latest results were soft, it seems they may in fact be an opportunity. With a dividend yield of about 6.4%, HSBC has one of the nicest returns on the FTSE 100. At the same time it is trading at less than 11 times forward earnings, making it pretty cheap.
Its cost-cutting and restructuring will not be quick of course, with the potential to incur more expenses in the foreseeable future before they start to pay off. However I think in the long run, particularly as an income investment, HSBC is well worth considering.
