Tuesday, August 01, 2006

Investment Banking Drives Profits at HSBC

The Financial Times, Peter Thal Larsen & Jane Croft, 01 August 2006

Michael Geoghegan will set off on a whistlestop tour next month to introduce himself to HSBC's workforce around the world.

During an 11-day trip, involving 23 presentations in 19 cities, stretching from Buenos Aires to Beijing, the new chief executive will set out his vision for the world's third-biggest bank.

For Mr Geoghegan, the flying visit is a favoured technique.

He went on tour shortly after taking charge of HSBC's operations in Brazil in 1997 and made a similar circuit after returning to run the bank's retail network in the United Kingdom in 2004.

But Mr Geoghegan's first message is designed not to create waves: strategy is not going to change.

Though he and Stephen Green, now HSBC's chairman, formally took charge after the retirement of Sir John Bond earlier this year, both men were heavily involved in setting the bank's strategy of focusing on organic growth while developing its emerging markets businesses.

"Is there a change in strategy? No. Frankly the group strategy remains - I was part of that team who put it together and it is delivering the results we thought it would," Mr Geoghegan insists.

That is not to say, however, there will not be a change of emphasis from Mr Geoghegan, who has a fondness for management speak.

The 52-year-old career banker, who joined HSBC in 1973 and has a reputation as a tough manager, wants to exploit HSBC's international network and cross-refer business to different parts of the group in a more "joined-up" way.

"One of the biggest strengths this group has got is the brand . . . we need to be brought together in a more joined up way and I want to do that across country, across business and across channel and I want to measure it by customer experience," he says.

"All the segments need to be joined up otherwise you end up as silos - we're not a silo driven organisation," he adds, "I think there is a massive amount to do . . . we are still in the foothills."

Mr Geoghegan also wants to simplify HSBC's product range in order to allow staff to concentrate on selling larger numbers of a smaller range of products that they understand really well.

There is a lot at stake. In the past few years, HSBC's premium rating in the stock market has fallen as investors worried that it was over-exposed to heavily indebted consumers in the United Kingdom and the United States. Investors also questioned its plans to build its investment banking arm from scratch.

If HSBC is to regain its premium to the rest of the banking sector it must demonstrate that it has better growth prospects than the its rivals.

Mr Geoghegan says HSBC will not "shy away" from acquisitions, though he echoes Mr Green when arguing that, in the current benign economic environment, the prices of many of its possible targets had risen too high. Banistmo, the Panamanian lender HSBC bought for $1.77bn (£948m) earlier this month is an exception to that principle.

Some analysts and investors have criticised HSBC for not returning capital to shareholders.

Mr Geoghegan and Douglas Flint, finance director, however, strongly defend the bank's ability to spend its capital.

They argue that the bank has generated a 24 per cent annualised return on $9bn of additional capital in the past year.

"We certainly don't think this is a time to skinny the capital - we're in a more uncertain period," Mr Flint says.
The Financial Times, 31 July 2006

Being the world's local bank takes dedication: HSBC's six branches in Lebanon were open for business on Monday. In the current economic climate it is, however, a strategy that delivers outstanding growth. HSBC's organic revenues rose by 14 per in the first half of 2006 compared with last year. Growth has accelerated steadily since 2002 and now clearly exceeds that of Citigroup, still HSBC's only real peer in terms of geographic scope.

Not that HSBC's rating would suggest this. Its prospective price earnings multiple of 12 belongs to a stodgy utility. The world economy will probably slow this year, but market concerns revolve around three specific risks. The first is Household. The acquisition of the sub-prime lender in 2003 can be judged a definitive success: UBS estimates the purchase price equates to just five times this year's earnings. Those earnings, however, are likely to be affected by rising interest rates and weaker housing markets. With Household contributing around one-fifth of pre-tax profits, this is a legitimate risk, albeit it one that is now partially reflected in consensus earnings forecasts.

The second concern is less substantial: the contribution to growth of cyclical investment banking. Given that HSBC has spent years being mocked as a non-entity on Wall Street and the City of London, this is a backhanded compliment. In any case, excluding these activites organic revenue growth was still an impressive 11 per cent. With around half of its activity outside the US and Europe, the investment bank might be less cyclical than peers.

That leaves the final concern of acquisition risk. With a tier one capital ratio of 10 per cent, dividend growth well below that of earnings and a tradition of using its muscle periodically, this cannot be dismissed entirely. However, new chief executive Mike Geoghegan was at pains on Monday to emphasise organic growth. Given HSBC's performance, who can blame him?