HSBC, Sink Your Jaws Into the Flab

(Bloomberg Opinion) -- Too big, too bloated, and too unwieldy. HSBC Holdings Plc's achievement in bringing costs under control in the first quarter shouldn't be an excuse to stand still.

The bank posted a higher-than-estimated pretax profit of $6.35 billion Friday as revenue growth outpaced the increase in expenses, a phenomenon known in industry jargon as “positive jaws.” Revenue climbed 9 percent versus a 3.2 percent rise in costs, helped by a boom in retail banking and inflows to its Asian private bank.

Jaws swung to a positive 6 percent, from a negative 1.2 percent for the whole of 2018. At this rate, the bank's goal of posting a positive number for the full year is within reach. The trouble is that the first quarter's pace of revenue gains is unlikely to be sustained. Dig into HSBC's expense report and there's less to cheer.

Staff costs rose 6 percent to $4.5 billion in the three months through March 31, reflecting a 4 percent increase in full-time equivalent employees plus wage inflation, the London-based bank said. HSBC's staff rose 6,530 to 235,000 last year, making it one of the few global financial institutions to increase headcount.

The bank, Europe's biggest by assets, should remain focused on the cost-cutting review it started earlier this year. A key area: investment banking (or global banking and markets, as HSBC calls the division), where many of its highest-paid employees work.

HSBC is tied with Citigroup Inc. as the top bank in Asia-Pacific for fixed-income, commodities and currency trading, or FICC, according to data from London-based analytics firm Coalition Development Ltd. But in equities trading and dealmaking, even strong relationships with Chinese companies haven't helped it thrive. HSBC ranked 13th as an IPO underwriting bank in its core Hong Kong market last year, down from 11th in 2017, data compiled by Bloomberg show. For overall investment banking, HSBC ranked seventh in Europe and didn't make the top 12 in the U.S., according to Coalition.

The first quarter didn't bring an improvement for the investment bank: Global markets revenue fell 5 percent from a year earlier, global banking revenue slumped 9 percent, and even FICC was down 4 percent.

The environment isn't getting any easier. The prospect of further U.S. rate increases that would improve the profitability of lending has receded. The trade war keeps rumbling on, a concern for an institution that's one of the world's largest trade-finance banks and a big lender to Chinese companies. And digital-only banks are set to start in Hong Kong, stiffening competition in a market that accounted for a third of HSBC's revenue and almost 60 percent of its pretax profit last year.

Efforts to counter that threat may entail unavoidable costs. The expense growth in the first quarter was partly due to digitization, HSBC CFO Ewen Stevenson told Bloomberg TV on Friday. CEO John Flint said in June that the bank planned to spend as much as $17 billion to expand in key Asian markets and improve technology.

All the more reason to take a hard look at that costly and underperforming investment bank.

—With assistance from Elaine He.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.