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Why HSBC Holdings plc Could Go Nowhere For The Next 3 Years…

Since the end of the financial crisis, HSBC (LSE: HSBA) (NYSE: HSBC.US) has been in the process of a huge turnaround.  

As part of this overhaul, Stuart Gulliver — who was at the time the newly appointed CEO of HSBC — unveiled a three-year plan in 2011 to slash costs, exit non-core markets and simplify the business.

And all seemed to be going to plan until last year, when the bank hit several speed bumps. 

Sudden stop

Initially, when it set out on its three-year plan during 2011, HSBC was looking to shave around 10% off its total cost base. Costs as a proportion of revenues were projected to fall from 55% to 48% over three years. Additionally, the bank was targeting a return on equity ratio — a key measure of banking profitability — of 12% to 15%. 

Unfortunately, three years on and HSBC has failed to meet these key targets. Return on equity fell from 9.2% in 2013 to 7.3% in 2014, despite lower bad debt charges, with a $2.2bn increase in operating costs the key driver.

For 2014, the group’s cost income ratio leaped above 60% and profits at the reported level dropped by 17%. Fines, settlements and customer redress costs all ate away at the bank’s net income. 

Another three years 

HSBC has failed to accomplish what it set out to do three years ago and now the bank is facing the prospect of yet another three years spent restructuring. 

In some regions around the world, namely Europe, HSBC’s cost income ratio stands above 80%. Hong Kong is the only region in which HSBC’s cost income is below 50%.  

So, management are now looking to cut costs further in some regions. At the same time, the bank is targeting a tier one capital ratio — financial cushion — of 12% to 13%, up from the current level of around 11%. This means that the bank will have to reduce the size of its loan book, or curtail lending growth, to reduce leverage, which is likely to slow overall revenue growth. 

But after cutting some 50,000 jobs and exiting 77 businesses in four years, HSBC is going to have to take drastic action if it wants to cut costs further. 

As a result, some analysts now believe that HSBC will embark on yet another three year plan in which the company will set out to cut costs further, exit more markets and restructure its remaining businesses.

There is also some speculation that HSBC will consider breaking itself up, separating its European and Asian businesses. Although the costs of performing a split like this may far outweigh the benefits. 

The bottom line

So overall, after spending the last three years cutting costs it looks as if HSBC is going to have to embark on yet another three year plan. 

Another three years of sluggish growth and deep cost cutting is not going to ignite HSBC’s share price or earnings growth. With that in mind, if you’re looking for growth, there are better deals elsewhere.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.