HSBC's results look terrible for its London traders
HSBC's results are out today. Overall, the bank made a profit - but only just. A group profit of $6.2bn in the second quarter of 2019 became a group profit of just $1.1bn in the second half of 2020 as the bank booked another $3.8bn in credit impairment charges as a result of COVID-19. HSBC is now predicting full year impairment charges at anything from $8bn to $13bn. As an analyst pointed out on today's call, the bank could yet slip into a quarterly loss.
Something needs to be done. And indeed, something is. HSBC resumed its programme of 35,000 layoffs in June and has already cut 3,800 people including contractors since the start of the year. It's behind in its quest to cut $1bn from costs in 2020, but has already extracted $300m and expects to take out a further $500m before December, and to compensate for the $200m shortfall by cutting more aggressively in 2021. "We will be accelerating our transformation in the second half of the year and making other necessary changes in light of the new situation since February," said CEO Noel Quinn.
Where will those cuts come from? Quinn outlined his cutting plan in February. In global banking and markets (GB&M) it included shrinking in equities, exiting G10 derivative market making in London, focusing on midmarket transactions and generally pivoting to Asia. Although this is now being updated it remains the blueprint for what's coming next.
What's coming will surely not be good for HSBC's bankers and traders in London. Several times today, Quinn pointed out that the problem areas in the second quarter and in the first half of 2020 were precisely those that the bank wants to pull back from. The chart below shows regional profits in GB&M (ie. the investment bank) by country in the first half of 2019 versus the first half of 2020. HSBC's UK bankers and traders weren't profit-making last year. Now they're even less so.
With the UK's global banking and market operations making a loss of -$1.2bn in the first half of 2020 (out of a $3.4bn loss across the UK businesses as a whole), bankers, traders and their support staff based in London look particularly ripe for picking-off in any intensified programme of cost-cutting. It's surely no coincidence that HSBC already cut 38% of staff at it global banking and markets in France, where HSBC's global banking and markets business made a loss of -$207m in the first half. By comparison, HSBC's Hong Kong-based traders saw profits increase 33% in the first half of this year, and are surely deserving of additional resources and attention on this basis alone.
Some traders in HSBC's GB&M business certainly had an excellent second quarter. As the second chart on this page shows, HSBC's credit trading revenues were up a massive 238% year-on-year in the second quarter, and rates trading revenues were up 69%. London traders might argue that they too had something to do with this too. However, high London costs are against them. You can see why some HSBC insiders argue that London is disadvantaged: as HSBC's home and head office, they suggest that costs are unfairly allocated to the City and that HSBC's Asian traders are unfairly flattered. London traders will need to hope that Quinn buys this line in the months to come.