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Is This The Beginning Of The End For HSBC Holdings plc?

HSBC (LSE: HSBA) has been working hard to cut costs and improve margins over the past five years.

However, these actions have yielded little in the way of results. The bank’s costs are still rising and return on equity, a key measure of bank profitability, remains below management’s target. 

HSBC has already sold more than 70 businesses since 2011 and 50,000 jobs have been axed, shaving around $5bn from the bank’s cost base. But even this drastic restructuring hasn’t been enough.

More cuts 

Last month HSBC announced yet another round of job cuts, business disposals and a retreat from some non-core markets. 

It’s believed that the bank is planning to cut another 25,000 jobs over the next few years. Businesses in Brazil and Turkey are up for sale, and market chatter suggests that HSBC is planning to exit the UK by spinning off its UK retail bank. 

All in all, HSBC is shrinking — and shrinking rapidly. 

Over expansion 

HSBC’s troubles can be traced to the bank’s massive acquisition spree, which started during 1999 under the leadership of chairman, Sir John Bond. 

Between 1998 and 2003, HSBC’s customer base jumped from 25m to 110m following acquisitions in the US, Europe, Latin America and China.

The largest acquisition during this period was the $15bn deal to buy Household International, the US consumer finance company. Unfortunately, not only did this deal turn out to be HSBC’s largest acquisition but it also proved to be the bank’s biggest mistake.

Six years later, HSBC wrote down the value of Household International to zero as the financial crisis took hold. 

Money laundering 

The next deal to turn bad was HSBC’s 2002 deal to acquire Mexican bank, Grupo Financiero Bital. Ten years later, during 2012, regulators published a report showing that Mexican drug cartels had exploited HSBC’s lax controls at the Mexican branch to launder at least $881m through HSBC. The fine from regulators totalled $1.9bn. 

Finally, there are the problems HSBC’s Swiss private bank has caused. Management recently had to apologize for the fact that its Swiss private bank has been encouraging tax evasion

Full retreat

These three scandals have destroyed HSBC reputation.

Once praised for its rigorous money laundering controls and international reach, HSBC is now consolidating its footprint, exiting markets where its reputation lies in tatters. 

Further, HSBC’s management seems to have accepted the fact that the bank is no longer the international behemoth it once was. Indeed, HSBC’s size and global scale once convinced management that a return on equity of 12% to 15% was possible. 

Management has now reduced this target to “more than 10 percent” — a vague goal. 

The beginning of the end 

As HSBC embarks on yet another round of business closures and job cuts, it’s becoming clear that the bank is a shell of its former self. And as the group retreats to its core markets, notably China and Hong Kong, HSBC is set to shrink in size dramatically. 

Overall, HSBC’s best days now look to be behind it. The bank is only going to shrink in size over the next few years. 

Clearly, if you’re looking for growth, HSBC is not the answer.

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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.