HSBC urgently needs to cut costs in its investment bank, but is now a bit stuck

HSBC is probably cutting bonuses in its global banking and markets (GB&M) unit, which constitutes its investment bank. In the presentation accompanying today's first quarter results at the bank, HSBC says costs in GB&M were down in the first quarter due to lower "discretionary spend." How much was discretionary spending down by? By 2%, or $50m. 

For a bank that announced a new strategy with big cost cutting plans and 35,000 job cuts in February, including cuts to its European rates business, cut to European cash equities sales and coverage, the transplantation of structured products capabilities to Asia and a focus on midmarket transactions in high growth markets, HSBC's first quarter looks strangely static. Operating expenses in GB&M were largely flat. Promised cost reductions were nowhere to be seen.

Of course, COVID-19 is to blame. Although HSBC made some immediate early cuts in its rates business in February, in late March it promised to put its restructuring plan on hold and to delay "the vast majority" of its layoffs during the pandemic. This hasn't prevented HSBC from cutting senior people occupying top management roles at its investment bank, but trimming anyone more junior is currently out of the question.

This could yet prove a problem. In the first quarter of 2020 profits at HSBC's global banking and markets business fell by 35% globally and losses deepened in Europe and the U.K., which were due to bear the brunt of the planned cuts.  As usual, it was Asia that drove profits in GB&M. - But showering the HSBC Asia business with love will be harder when all the Europeans can't be quietly moved out of the building.

As the chart below shows, HSBC's FX traders had an exceptionally good three months: revenues rose 62%. Rates were also strong, despite the bank's February redundancies and promised restructuring of its rates desks. However, traders' efforts were offset by $543m in 'expected credit losses and credit impairment charges' inflicted by the pandemic. 

Impairments have the potential to worsen as the year goes on. HSBC said today that credit losses across the bank could rise to as much as $11bn because of the virus. By comparison, a few $100m in extra trading revenues look immaterial. 

HSBC hasn't entirely jettisoned its cost cutting plan. It said today that it's still combining the middle and back offices in its wholesale banking business (within GB&M) and that it's still launching a unit to optimize its risk weighted assets (RWAs). In February, it said it planned to move RWAs out of Europe and into higher performing businesses in Asia, so this is presumably going ahead. 

However, without associated cuts to headcount, HSBC risks finding itself with surplus people sitting in its combined support functions and with traders sitting in London whose ability to take risk has been transplanted to Asia. At some point, it will need to discontinue their employment. Until then, it seems HSBC will be paying some of its people to do very little. That could soon seem unaffordable.

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