HSBC job cuts are a sign the global bank is getting smarter not smaller

HSBC is scaling back the unprofitable businesses it has bought or tried to develop and focussing on where it makes money: Asia. The question is how far it should reverse its expansion strategy, writes Hamish McRae

Pedestrians walk past HSBC in Hong Kong, where the bank was founded (Getty)

What is happening at HSBC is encapsulated in three stories. One is about the bank itself. One is about banking as an industry. And one is about the way the global economy is pivoting to Asia.

HSBC matters a lot. It is Britain and Europe’s biggest bank, arguably the only UK or European financial organisation to have credible global ambitions. It is still huge and still profitable. But profits were down by a third, and now it is both cutting jobs and, to some extent at least, scaling back those ambitions.

To understand what is happening you have to recognise that it is basically a stunningly profitable Hong Kong bank that has used those profits to turn itself into a global one. So over the past 30 years it has bought financial institutions around the world, starting with Midland Bank in the UK in 1992, Marine Midland in the US five years later, and a string of other institutions since then. Some, such as Midland, have been successful. Others, notably the US mortgage group, Household International, which got caught in the American housing market crash, have been disastrous. Some other purchases have not done too well either.

So in one sense HSBC is indeed a global group in that it has branches all over the world, it actually makes nearly 90 per cent of its profits in Asia, and most of that in Hong Kong. What it is now doing is scaling back the unprofitable businesses it has bought or tried to develop, such as investment banking in New York and retail banking in continental Europe, and focussing on where it makes money: Asia. It is a partial reversal of the strategy of the past 30 years. The difficult thing is to judge how partial the reversal should be.

That leads to story two. Had banking continued to be a booming business, HSBC would probably have been able to ride through it all. But while some parts of the financial services industry are racing on – it is a bull market, after all – basic banking, particularly in Europe, is flat. Look at what is happening to the job losses at RBS and Deutsche Bank.

There are a number of reasons for this. One is the legacy of the misbehaviour of the banks in the past, the miss-selling, the money laundering, the over-charging and so on. Another is the impact of regulation, and the fines, imposed as a result of this. Then there is the pressure from very low (and in Europe negative) interest rates, which cut banking margins. And finally there is the new challenge from online banking and the retreat from branches. This is a tough industry in which to make money, particularly in continental Europe.

It seems, however, for the time being at least, to be less tough in Asia. There is, of course, the blow to the region’s economy, and to some extent the world economy, from the coronavirus epidemic. In addition, the Hong Kong economy has been hit by political unrest. But the general point that Asia will increasingly dominate the world economy surely stands. To take the HSBC report on the global economy in 2030, the pecking order of the world’s largest economies will be China, the US, India, Japan. So three out of the top four will be in Asia, and 70 per cent of the total growth in the world will come from Asia.

Growth in Asia does not necessarily mean profits for a London-based bank with its main business in Hong Kong. But insofar as HSBC is the best-placed western bank to be able to continue to participate in this boom, it makes sense to devote resources to that region, and if necessary cut back elsewhere.

Indeed, it is a bit of a no-brainer that it should do so.