Look upon my works ye mighty

Mint – Blain’s Morning Porridge

Look upon my works ye mighty, and despair. Nothing beside remains; round the decay...

I’m probably going to upset a large number of people this morning, including some very good friends, but markets are what markets are – they ain’t fair. And when they change they can change suddenly and violently. Yesterday’s apex predator can quickly become tomorrow’s fossil. When troubles come they come not as single spies, but in mighty battalions.

HSBC has been hit by a very solid storm of woe. Swiss tax and its dismal results yesterday – down 17% and the 5% stock price crash (on the very day the FTSE hit a new record) – should be a wake-up call. Perhaps the concerns should not only be about HSBC, but what other global banks could be vulnerable to the hubris/nemesis combine and dramatic swings in sentiment towards them?

In the wake of the deluge of negative news, it’s no wonder we’re suddenly hearing increased speculation about how the bank could be broken up – CEO Stuart Gulliver warns that that would destroy shareholder value. Shareholder value will certainly be destroyed if the current rot is not dramatically and aggressively addressed. As for the scale of the beast – there is always room to diet, but do we really need to see the UK’s last global bank hung, drawn and quartered to make a point as part of the Game of Politics blame the banks approach to re-election? Sure they did wrong years ago re Swiss taxes – but so did everybody else.

Unfortunately, HSBC has failed the front page of the FT test – but its travails over the last few weeks, triggered by the Swiss tax tales, have been brewing for years. The bank has become the news… and that’s never a good thing. As the largest UK bank it’s been an easy target. Perhaps they will get a break this morning as the UK electorate is fed yet more tasty morsels about how respected UK politicians have been prostituting themselves out to business. Did Jack Straw really rewrite European sugar laws in return for a bung from ED&F Man? £60k seems cheap.

Unfortunately, the defenestration of a few superannuated UK politicos won’t save HSBC in the long-term. Its primary problem is the World’s Local Bank no longer qualifies as “Dull, Boring and Predictable”. That is the very guinea stamp of any premier bank investment. The lustre has worn off. Let’s not gild the lily, but it needs a new coat of bright shiney stuff.

Views on the potential value desecration of the UK’s largest bank are mixed. Some folk think it’s brought disaster upon itself. Others (including myself) think it’s a victim of the system and the current environment. The truth probably lies between. While the tax “arrangements” of CEO Gulliver may be entirely lily-white, they just don’t look that way – and that’s a problem.

HSBC is pushing the line that “increased regulatory and compliance costs” have been a major factor hitting the bank. You have to feel some sympathy – as the largest global bank it’s been on the receiving end of lots of regulatory attention and fines. The burden has been shocking – in the wake of the Mexican money laundering scandal, some insiders say the bank has been managing itself to avoid upsetting US regulators rather than for shareholders.

Distracted by the regulatory burden, the actual offer to customers has become increasingly blurred. It’s more than a little monolithic. (I could tell you about my experiences trying to redo a mortgage or why I’ve switched to the more nimble Clydesdale [ironically enough, once owned by the former Midland Bank that was subsumed into HSBC in banking pre-history], but I’ll stick to the point..)

Yesterday, a very well argued piece from Mark Gilbert on Bloomberg (I would put in a link, but the new Bloomberg website is less than useless and about as user-friendly as a hungover polar bear), made some highly significant points: far from being a global bank (I believe it quietly dropped the World’s Local Bank epithet) over 78% of profits come from Asia. Europe accounts for a mere 3.2%. Remind me why is it UK regulated?

Last year it was disgruntled Asian analysts warning the bank has been overstating assets, and would need to raise somewhere between $58bn to $111bn of new capital to meet CRD IV/Basel III targets. They warned of a potential dividend cut. Is there smoke without fire?

As the storm builds around it, HSBC is waking up to a new reality. ROE is a struggle – down to 7.3% from 9.2%. The bank’s management has to demonstrate it understands how to manage “lower for longer” returns. The big question is can HSBC turn itself around? Can it successfully realign a quarter of a million staff and make it work?

I think yes. HSBC is not RBS. The bank may be very very big and in need of a slim-down, but the management bench is thick with talent. There are some really clever folk who understood banking and do it extremely well. Chief among these is the current Chairman, Douglas Flint. I rather hope Flint will be giving the parliamentary committee laldy [a Scottish dialect word that would translate roughly into English argot as 'welly'] when he defends the bank later this week. I wish him luck. HSBC needs a bit of a reality check and an aggressive decluttering (including near the top).

I wonder how many other European banks would have the same likelihood of successfully changing as I ascribe to HSBC?

Bill Blain

44 207 786 3877

44 7770 881033

[email protected]

[email protected]