Yesterday was a big day for global bank HSBC (LSE: HSBA). It said early in the day that it is looking to cut around 35,000 people from its workforce, or around 17.5% of its total. The main reason? Profits are not as strong for 2019 as it would like, despite it still looking at a pre-tax profit of over £10bn.
As a result, the share price lost almost 6% in London trading, to close at 555p, just above the year-to-date lows of 551p. Should this price give way, then it would be the lowest since 2016 for the banking giant. So what can we, as investors, do from here?
Is it really that bad?
My initial reaction to the news and the sell-off in the share price is that the latter looks slightly overdone. How so? Firstly, the usual turnover of personnel at HSBC is 25,000 per year. That is a huge number and puts into context the size of the bank and the number of employees who come and go each year. So 35,000 job cuts may sound like a lot, but when you look at it from a relative level, the natural turnover of staff would account for some of this number, in a usual year anyway.
Secondly, the job cuts are part of a wider strategy to cut down the size of the bank, getting rid of unprofitable areas and allowing it to become leaner and more nimble. Areas to be trimmed down include the US retail banking arm, operations, and the investment bank. Bar the investment bank, most of the other areas can be replaced with technology.
I wrote a piece recently on the value I see in another bank, Lloyds, due to the push towards digital and technology generally. The move by HSBC mirrors this, and so while in the short term it will be bad for those losing their jobs and the share price will take a hit, it should all benefit the business in the longer term by helping it move with the times.
The streamlining will also ultimately allow the business to become more profitable, with the bank targeting £3.5bn worth of cuts over the next two years.
Reason for concern
Despite all these positive thoughts, there is still a strong reason why the share price fall this week simply continued a fall that has been happening for much of the past year. HSBC as it currently stands is very concentrated on one key region, even with its global operations. Some 50% of revenues and 90% of profits come from Asia. Any impact on this key market (which we will likely see due to the coronavirus and Hong Kong protests) will unduly affect HSBC versus other banks such as Barclays.
So while I think it is doing the right things to boost its business, there is always a risk in having a single region/country focus (as Lloyds is finding out at present in Brexit Britain). For me, the road to a slimmer, nimbler HSBC that can focus on profitable areas alone is going to take several years of cost-cutting and strategy changes. The job cuts were the beginning. I think the goal will be achieved, but that there is more pain to come. I will avoid the share price for now, but retain cash ready to invest later this year.
