Investors in HSBC Holdings Plc have expressed strong support for CEO Georges Elhedery’s decisive move to scale back the bank’s investment banking operations in Western markets. This strategic retrenchment aligns with HSBC’s long-term vision to concentrate on its more lucrative Asian franchises, even as U.S. President Donald Trump’s deregulatory policies spark optimism for increased capital markets activity.

In January 2025, HSBC announced plans to wind down its M&A and certain equities businesses in Europe, the United Kingdom, and the Americas. This marks one of the bank’s most significant retreats from investment banking in decades, underscoring a strategic pivot toward Asia. The decision entails the dissolution of mergers and equity capital markets teams in these regions, allowing HSBC to reallocate resources to areas with robust growth prospects and reduced exposure to global trade disruptions.

Four shareholders, including two among the top 20, have endorsed this strategy, recognizing the prudence of concentrating on HSBC’s strengths in its core Asian markets. Alex Potter, investment director for European equities at abrdn, a top-30 investor in HSBC, noted, “Geopolitics are making life more difficult for lots of businesses that operate globally.” He further emphasized the challenges foreign banks face in gaining significant market share in U.S. equity investment banking, despite numerous acquisitions over the years.

CEO Georges Elhedery, who assumed leadership in September 2024, is poised to unveil further details of his strategic vision during the bank’s full-year results presentation on February 19. Insiders suggest that the restructuring could yield annual cost savings ranging from £1.2 billion to £3 billion ($1.5-$3.8 billion). These savings are anticipated to result from reductions in management roles and the elimination of units closely associated with those already targeted for closure.

HSBC’s London-listed shares have appreciated by 11.5% year-to-date, following a 20% surge in 2024. This upward trajectory reflects investor confidence in the bank’s strategic direction. Sajeer Ahmed, global equities portfolio manager at Aegon Asset Management, an HSBC investor, commended the management’s meticulous evaluation of each business segment. He highlighted the bank’s commitment to achieving a sustainable return on tangible equity (ROTE) of approximately 16%.

For context, HSBC reported a 19.3% ROTE in the first nine months of 2024, trading at a multiple of 1.04, which is less than half of Morgan Stanley’s 2.16 multiple, despite the latter’s 18.8% return last year. Ahmed remarked, “The sharp switch to profitability from empire building is Elhedery’s attempt to tackle that valuation differential over time.”

Analysts project HSBC’s full-year profit to be $31.6 billion, maintaining stability after a 78% increase to $30.3 billion in 2023. This forecast underscores the bank’s resilience amid a challenging global economic landscape.

Internal Dynamics and Employee Sentiment

The strategic overhaul, while lauded by investors, has introduced a degree of uncertainty within HSBC’s workforce. The planned reduction of M&A and ECM teams, particularly in regions like Europe and the Americas, has led to concerns about job security among employees in these divisions. Additionally, staff in related sectors are apprehensive about potential future cuts, which has impacted overall morale. A company executive, speaking on condition of anonymity, revealed that the bank’s wealth management division in China is “bracing for uncertainty,” with pending decisions on operational adjustments.

This sentiment is further compounded by reports from November indicating HSBC’s intention to scale down its digital wealth initiative, Pinnacle, and its credit card operations in China, highlighting the complexities of expanding in the Chinese market. These operational challenges come at a time when global banks are reassessing their strategies in China amid regulatory tightening and economic uncertainties.

The restructuring signals a fundamental shift in HSBC’s approach, reflecting the reality that its Western investment banking division has struggled to compete against dominant U.S. firms such as JPMorgan Chase and Goldman Sachs. The profitability of investment banking operations in these regions has not justified their high costs, leading HSBC to double down on its strongest franchises in Asia, particularly in Hong Kong, Singapore, and mainland China.

Strategic Realignment and Organizational Restructuring

In a bid to enhance efficiency and align operations with its strategic priorities, HSBC has embarked on a comprehensive organizational restructuring. This initiative includes the consolidation of its commercial and investment banking units and the reorganization of its global operations into four primary lines: the UK, Hong Kong, corporate and institutional banking, and wealth banking. This structural realignment aims to streamline decision-making processes and bolster the bank’s focus on its most profitable regions.

As part of this restructuring, HSBC has implemented significant personnel changes. Approximately 40 investment bankers in Hong Kong have been laid off, including at least four managing directors, as the bank seeks to reduce costs and optimize its workforce. These layoffs are indicative of HSBC’s broader strategy to recalibrate its investment banking operations and concentrate on areas with the highest growth potential.

A key driver of HSBC’s decision to pull back from certain investment banking activities is the evolving global financial landscape. The rise of regional financial hubs in Asia has diminished the need for global banks to maintain large investment banking operations in Europe and North America. Additionally, China’s economic slowdown and regulatory crackdowns on various sectors, including technology and real estate, have made it more challenging for foreign banks to operate there profitably.

Elhedery’s leadership has also emphasized technology-driven banking solutions, particularly in wealth management and retail banking. HSBC has been investing heavily in digital banking platforms to cater to a growing segment of tech-savvy customers in Asia. While the bank’s digital transformation efforts have been well-received, there remain challenges in execution, particularly in integrating new technology with legacy banking systems.

Leadership Vision and Future Outlook

CEO Georges Elhedery, who took a six-month sabbatical in 2022 before ascending to the chief executive role in September 2024, brings a wealth of experience from his 17-year tenure at HSBC. His leadership is characterized by a commitment to building upon the bank’s existing strategy while navigating the complexities of a dynamic global financial environment. Elhedery has emphasized that the ongoing restructuring is not indicative of a split within the bank but rather a strategic move to enhance efficiency and regional focus.

In line with this vision, HSBC is also exploring partnerships with fintech companies to strengthen its digital banking ecosystem. By leveraging artificial intelligence and big data, the bank aims to offer more personalized financial services to its customers, particularly in Asia. These initiatives are expected to play a crucial role in driving future revenue growth while reducing reliance on traditional banking models.

As HSBC continues its strategic shift, investors will be closely watching the impact of these changes on the bank’s financial performance. While the cost-cutting measures are expected to improve profitability in the short term, the long-term success of HSBC’s strategy will depend on its ability to execute its Asia-focused growth plans effectively. The coming months will be crucial in determining whether HSBC’s bold restructuring efforts will pay off, solidifying its position as one of the world’s leading banks in the Asia-Pacific region.

For now, HSBC’s strategic retrenchment has won investor approval, reflecting a broader trend of global banks reevaluating their business models in response to shifting economic and geopolitical realities. Whether this move will ultimately strengthen HSBC’s competitive position remains to be seen, but it is clear that Elhedery is making bold decisions in an effort to reshape the bank’s future.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

18th February, 2025