HSBC Targets $3.5 Billion Cost Savings With Office, Job Cuts

May 11, 2011, 5:31 AM EDT By Stephanie Tong and Gavin Finch

(Updates with analyst comment in third paragraph.)

May 11 (Bloomberg) -- HSBC Holdings Plc, Europe’s biggest bank, will cut jobs and close offices as to reduce costs by about a tenth over the next two years to expand in faster- expanding economies and prepare for stricter capital rules.

The lender will target cost cuts of $2.5 billion to $3.5 billion by 2013, according to a statement today, compared with total operating expenses of $37.7 billion last year. HSBC will cut head office jobs and may sell its U.S. credit cards division as it seeks to exit unprofitable units among its 87 national subsidiaries, it said today. The shares fell in London trading.

The targets “are a reiteration of those announced with the full-year results,” Ian Smillie, an analyst at Royal Bank of Scotland Group Plc, said in a note to investors today. He has a “buy” rating on the stock. They “will disappoint those anticipating a revised round of more ambitious targets.”

Stuart Gulliver, 52, who became chief executive officer in January, said this week it may take as long as three years to reach the bank’s targets on reducing costs, which are the highest among its U.K. peers. He is spelling out the changes at a meeting with investors in London today. Competitors including Barclays Plc are also seeking to exit operations with low returns as regulators demand they hold more capital in the wake of the financial crisis.

‘Not About Shrinking’

“This is not about shrinking the business but about creating capacity to re-invest in growth markets and to provide a buffer against regulatory and inflationary headwinds,” Gulliver said. “We will continue to invest in markets with strategic relevance and high actual or potential returns and will either turn around or dispose of other businesses.”

The bank fell 0.9 percent to 650 pence at 9:57 a.m. in London, for a market value of 115.9 billion pounds. That marked the biggest decline in the FTSE 350 Index of Britain’s five biggest banks.

HSBC said it will focus on commercial banking globally, while scaling back in consumer banking to markets where it can “achieve profitable scale.” The lender said it will focus on retail banking in the U.K. and Hong Kong, high-growth markets such as Mexico, Singapore, Turkey and Brazil and smaller countries where it has a leading market share.

HSBC said it would cut $1.38 billion of costs by 2013 through measures including simplifying “regional structures,” consolidating data centers, shifting operations to cheaper cost locations, and reducing paperwork. The bank had 295,061 employees worldwide at the end of 2010 compared with 315,520 at the end of 2007.

‘Little Revolutionary’

“There is little revolutionary within the announcements,” Keefe, Bruyette & Woods Ltd. analysts including Mark Phin said in a note to clients today.

Costs rose to 60.9 percent of income in the first quarter from 49.6 percent, earnings figures showed on May 9. Net income rose 58 percent to $4.15 billion from $2.63 billion a year earlier. The bank has a target to increase revenue faster than costs, HSBC said today.

“We clearly have a cost problem,” Gulliver told investors today. “The team will address the issues of the firm with some energy.”

The first-quarter results, with emerging markets outperforming developed ones, showed that HSBC is “a developing-market bank trying to escape from the body of a very different type of ‘conglomerate bank,’” Mediobanca SpA analysts said in a note yesterday. HSBC is “immensely powerful” and its results showed structural flaws “that prevent it providing the kind of shareholder returns the bank should be capable of providing.”

U.S. Unit

HSBC, whose origins date back to 1865 when it operated as the Hongkong and Shanghai Banking Corp. to finance trade in opium, silk and tea, focuses on emerging markets. It has 7,500 offices.

The bank could free $25 billion of capital by selling its U.S. credit-card unit, Rohith Chandra-Rajan, an analyst at Barclays Capital, wrote in a note to investors last week.

HSBC acquired the credit-card unit in 2003 with its $15.5 billion purchase of U.S. subprime mortgage lender Household International, now known as HSBC Finance. In 2009, HSBC halted consumer-finance lending at the unit, which has contributed to about $60 billion of provisions in North America, according to data compiled by Bloomberg.

‘Lot of Inefficiency’

“HSBC has a lot of inefficiency and manages a lot of its processes on a region-by-region basis,” Cormac Leech, an analyst at Canaccord Genuity Ltd. in London, said before the statement was published.

The bank reiterated that it seeks a return on common equity of 12 percent to 15 percent. It lowered that goal in February from 15 percent to 19 percent.

HSBC could climb to about 950 pence a share if Gulliver committed to ensuring all businesses generate a return on equity exceeding 10 percent, Gareth Hunt, an analyst at Investec Securities in London, wrote in a note to investors last month. HSBC shouldn’t have “a flag in every country,” he wrote. The bank’s shares closed at 656.2 pence in London trading yesterday.

Among the bank’s peers, Barclays cut its target for return on equity in February to at least 13 percent from the 18 percent CEO Robert Diamond has said it averaged over the past three decades. Credit Suisse Group AG, Switzerland’s second-biggest bank, trimmed its goal to more than 15 percent from more than 18 percent.

--With assistance from Jon Menon in London. Editors: Francis Harris, Edward Evans.

To contact the reporters on this story: Stephanie Tong in Hong Kong at stong17@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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