HSBC Investors Support Management's Plan to Scale Back Investment Bank Despite Optimism Around U.S. Deregulation

Investors back HSBC’s strategy to cut back investment banking in light of shifting global market conditions / Reuters 

HSBC’s recent decision to reduce its investment banking presence, particularly by cutting its mergers and equity capital markets teams in both the Americas and Europe, has received strong backing from key investors. This move comes as the bank refocuses its efforts on its core business in Asia, with investors citing it as a strategic alignment to strengthen HSBC’s presence in higher-growth markets.

The shift follows a decade-long process of narrowing HSBC’s global operations, as the bank looks to divest from low-return sectors. Once a sprawling international giant, HSBC has been reshaping its portfolio to concentrate on more profitable and strategic regions. As global trade faces challenges, notably from U.S. tariffs, the pressure to reassess the bank’s capital allocation in less vulnerable markets has intensified.

According to several major HSBC shareholders, including two of its top 20 largest investors, the restructuring, especially in regions that have faced stagnant or low-profit margins, makes strategic sense. In particular, HSBC is positioning itself to take advantage of the growing economic opportunities in Asia, which is seen as a more resilient region amidst the broader global uncertainties. This pivot also comes amid increasing concerns over the effects of U.S. tariffs on trade finance, a business HSBC is heavily involved in.

Alex Potter, investment director at abrdn, a significant HSBC shareholder, highlighted the challenges of maintaining global market share in U.S. equity investment banking, especially considering that many foreign banks have struggled to establish a substantial foothold despite years of acquisitions. He further emphasized that geopolitical tensions and trade disruptions are making global operations more difficult for multinational companies like HSBC.

As HSBC's CEO, George Elhedery, prepares to present further details of his restructuring plan in the upcoming February 21 full-year earnings report, analysts are eager to see how the bank plans to balance cost reductions with its strategic shift toward Asia. While the exact figures remain unconfirmed, media reports suggest that HSBC could achieve significant cost savings through additional job cuts and business unit reductions. These savings, potentially amounting to between 1.2 billion and 3 billion pounds, would be directed towards improving HSBC’s operational efficiency.

The bank’s shares have shown strong performance, rising by 11.5% since the beginning of the year, reflecting positive investor sentiment despite the ongoing restructuring efforts. Sajeer Ahmed, global equities portfolio manager at Aegon Asset Management, believes the focus on sustainable returns, particularly a return on tangible equity (ROTE) target of around 16%, is key to enhancing HSBC’s long-term value. This metric suggests that HSBC’s profitability trajectory is becoming increasingly attractive compared to other global banks, such as Morgan Stanley, which has a higher price-to-book ratio despite a similar return profile.

Despite these positive financial signals, the restructuring process is not without internal challenges. The decision to cut teams associated with high-profile roles in mergers and IPOs has sparked concerns about employee job security, particularly among staff in affected departments. The optics of these changes could become more complicated as 2025 progresses, especially with U.S. President Donald Trump’s deregulation agenda potentially boosting the capital markets in the U.S. The anticipated deregulation is expected to fuel a wave of consolidation and growth, which could leave the bank’s decision to scale back investment banking teams in Western markets looking increasingly contentious.

In light of these changes, many employees fear further downsizing, which could negatively impact morale across the bank. However, external analysts like Alex Marshall from CIL argue that HSBC’s strategic focus on Asian markets is crucial. Asia’s rapidly growing capital markets present a massive opportunity for HSBC, and its ability to leverage this regional growth story has been a key factor in the bank’s success. The shift away from weaker markets in Europe is seen as a pragmatic move, especially given the comparative stagnation in Europe’s share of global capital flows.

Ultimately, HSBC’s restructuring strategy signals a significant shift in its global operations, with a growing emphasis on Asian markets and a retreat from areas with lower growth potential. Investors and analysts are watching closely as Elhedery continues to fine-tune HSBC’s path forward, balancing the need for cost reductions with a focused approach to higher-growth economies.