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Money-laundering and other poor decisions put breaks on HSBC’s revenue growth, 5,000 more jobs might be cut

The bank, once known as “the world’s local bank,” has spent the past few years trying to find its way through the financial crisis.  What has emerged since then is a bank riddled with scandals, poor decision-making and a management team out of focus.

 

Pre-Financial Crisis

 

Though HSBC’s problems became clear only during the financial crisis, some of the problems were present well before 2008.  Let’s start first with 2003.  This was the year HSBC acquired Household International in the US.  A well-known predatory lender, which had its run-ins with the law for its predatory practices.  HSBC, a global bank by all standards, was merely a New York bank in the US, with a few branches in Miami and Los Angeles.  The pressure was on senior management to make a significant acquisition in the US to enhance its footprint in the market.

Analysts at the time were expecting the bank to acquire another bank, most likely in California, having a sizable branch network.  Instead, management chose to purchase a predatory mortgage lender having also a sizable credit card portfolio for $15.5 billion.  It was obvious to outsiders that this was a bad decision from day one.  For a bank, which prides itself on a clean reputation, this purchase went against this core value.

The real estate market in the US was hot at the time, executives at Household received massive payoffs, enough to spark outrage in the UK that Household executives were getting millions of dollars above what was acceptable.  This outrage went nearly unnoticed at the time as the lender was delivering strong earnings growth.

Post-Financial Crisis

Fast forward to 2011, HSBC has had to set aside $68 billion for loan losses arising mainly from its Household unit.  Here’s more on this from Bloomberg:

The book value of the assets being sold was about $3.4 billion at the end of 2012, HSBC said.

They are taking a loss on this, but it’s not a very big one,” said Simon Maughan, an analyst at Olivetree Securities Ltd. in London. “It’s a good deal because it frees up capital that would otherwise be tied up backing loans.

HSBC boosted its core Tier 1 capital ratio, a measure of financial strength, to 12.3 percent at the end of 2012, from 10.1 percent a year earlier, it said on March 4.

The lender, which last year agreed to pay $1.92 billion to settle U.S. probes of money laundering, completed the sale of its U.S. credit-card unit to Capital One Financial Corp. for a premium of $2.5 billion in May. It agreed in August 2011 to sell its upstate New York branch network to First Niagara Financial Group Inc. for about $1 billion.

Gulliver said on March 4 that the lender would make an announcement on $3.7 billion of U.S. non-real estate consumer loans within weeks. The bank reported full-year pretax profit in North America surged more than 20-fold to $2.3 billion from $100 million, helped by a 51 percent drop in loan impairments.

Read the full article from Bloomberg.

In a matter of years, the bank, which couldn’t expand fast enough into the US, now cannot exits fast enough.  It’s even resorted to scaling down its original footprint and branch network in the US.  The analyst above who seems to think that the bank is only taking a small loss is obviously not looking at the bigger picture.  HSBC paid $15.5 billion in 2003 for the lender and is now taking losses on the sale of its remaining pieces along with $68 BILLION set aside for loan losses.  This was a massive failure for HSBC’s management.  Was anybody fired for this screw-up?

Here’s what he New York Times Blog had to say about this: “Reducing the loan book in the United States, which it acquired through the takeover of the former Household International subprime lender, has been a priority for HSBC’s management. The bank started to wind down the American loan portfolio about five years ago after huge loan losses at the business prompted management to admit the 2003 acquisition was a mistake.”  Again, was anybody fired for this mistake?

If things couldn’t get worse for the bank, last year it had to pay $1.9 billion to settle allegations of money-laundering by the US Justice Department.  The bank should have suffered more than this and senior executives should have been jailed, but The Economist has a new definition for HSBC and the other big banks, they are not only too big to fail, they are now too big to jail.

As a result of giving up the lucrative business of money-laundering, HSBC reported a 5.5% decline in revenues for 2012.  Profits for the year were $22.6 billion, so the penalty for money-laundering represented only 9.3% of profits.  That’s not a bad tax to pay for a lucrative business.

Has anyone from HSBC gone to jail for money-laundering?  Has the bank stopped money-laundering?  The answer to both is no.  No jail time means that these actions were not the actions of one person or even a group of people.  Sadly, it means that these activities were sanctioned by the bank and were a practice of the bank, not individuals.  Had this been the practice of a few individuals at the bank, they would have suffered the fate of Kweku Adoboli, the rogue trader from UBS.  HSBC did not have rogue traders because it’s a rogue bank.

Have they stopped this practice?  Here’s a recent story from Bloomberg:

Argentina’s tax agency accused the local unit of HSBC Holdings Plc. of conspiracy to hide bank accounts, thereby helping private companies evade tax payments and launder money.

The Buenos Aires-based agency investigated accounts at the bank over a six-month period and discovered tax evasion of 224 million pesos ($44 million) and 392 million pesos in money laundering, it said. According to agency Director Ricardo Echegaray, the bank set up a system to help companies hide bank accounts.

“It’s clear to us that there was a conspiracy between HSBC and private companies,” Echegaray told reporters today in Buenos Aires. “The first thing they have to do is to pay the state what it’s owed and dismantle a gang of swindlers.”

Federal Judge Javier Lopez Biscayart of the tax crimes court in Buenos Aires has received the agency’s file against the bank, Echegaray said.

“The allegations made by regulators in Argentina are of great concern,” Lyssette Bravo, an HSBC spokeswoman for Latin America, said in an e-mailed response to Bloomberg News. “We are committed to working cooperatively with authorities to ensure a thorough review and appropriate resolution of the matter.”

Read the full story from Bloomberg.

Islamic finance and the bank’s shrinking footprint

As a result of these fiascoes, HSBC has had to scale down its operations, not only in the US, but also across the Middle East, Asia and Eastern Europe.  The bank has already exited or announced exits from the following countries in Asia; Bangladesh, Brunei, Macau, New Zealand, Pakistan, the Philippines and Sri Lanka.  It is also exiting Russia and Panama.

Across the Middle East, the bank made headlines for its decision to exit the Islamic finance business in all but Saudi Arabia and Malaysia… leaving a small presence in Indonesia.  Islamic banking is not only very popular in the Middle East representing one-third of all banking assets in some cases, but HSBC has also been one of the early adopters and champions of Islamic finance globally.

In the wake of all these mishaps and scandals, HSBC’s group chairman, Douglas Flint, had this to say “Banking has been given a huge wake-up call and we are determined to play our part in restoring its reputation and there by regaining society’s trust.”  HSBC is far off from restoring its reputation, especially in countries where they have exited or closed operations.  Leaving these markets and Islamic finance will make it very difficult for the bank to return to these markets in the future.  Trust has been lost and will not easily be regained.

More cost-cutting and layoffs

As for HSBC’s employees, they are in for another round of layoffs:

Fresh off its $1.92 billion money laundering settlement, British banking giant HSBC is reportedly nearing a decision to further slash costs by axing another 5,000 jobs.

According to the Financial Times, the London-based lender is “gearing up” for thousands more layoffs that could be outlined at an annual investor meeting in two months.

“There is no fantastical new strategy out there,” one person familiar with the bank’s planning told the paper. “But there’s still huge potential to be more efficient.”

The job cuts still need to be finalized, but sources told the FT that up to 5,000 staff could be eliminated. If the bank keeps its recent rate of staff cuts to cost savings, that number could rise to nearly 10,000, the paper said.

HSBC declined to comment on the report.

Last week HSBC announced plans to find another $1 billion in annual savings in 2013 but didn’t specify how it would achieve that goal. HSBC CEO Stuart Gulliver said the company would “fixate on costs.”

While HSBC has exceeded its cost-savings goals, the bank’s cost-income ratio of 62.8% remains well above a target of 48% to 52%, the FT said.

Read the full story from Fox Business.

The scandals are not over, the money-laundering has not stopped, revenue growth has slowed and cost-cutting is off to another round.  The bank’s problems are far from over.  HSBC should go back to being an honest, conservative bank looking out for its customers, playing above the law and growing a sustainable revenue stream instead of chasing the fast money deals.  It can start by replacing the senior management team.