by Wolf Richter, Wolf Street:

These days, markets forgive and forget anything except the suspension of share buybacks.

Global banking behemoth HSBC’s net profit slumped 53% in 2019, to $5.97 billion, after the lender announced a $7.3 billion write-off to reflect weakened conditions in global banking and markets, and European commercial banking. Its shares dropped 6% in London and are now down 25% from a peak in January 2018.

Many of the bank’s problems originated in Europe, where the ECB’s negative-interest-rate policy is decimating even large Eurozone banks’ ability to turn a profit. HSBC’s write-down in the 4th quarter resulted in a pre-tax loss of $4.65 billion in the bank’s European business. In the U.S., where lower interest rates also took a toll on the group’s performance, revenue shrank 3%, to $4.7 billion, and adjusted profits before taxes fell 39% to $600 million.

In a bid to reverse this trend, HSBC will embark on an ambitious global restructuring program that will see it withdraw even further from certain markets. The number of countries it operates in has already dwindled from 87 in 2011 to just over 50 today, spurring HSBC to eventually ditch its slogan, “the world’s local bank.” The number will keep falling as it doubles down on its Asian pivot.

The bank also plans to slash around 15% of its global workforce over the next two years, which would amount to 35,000 job cuts, bringing its workforce down to about 200,000 people, in the hope of reducing operating costs by just over $4 billion. “This represents one of the deepest restructuring and simplification programs in our history,” said interim CEO Noel Quinn.

Quinn said some of the job cuts would occur through natural attrition as existing employees leave HSBC of their own volition. But its under-performing investment bank is likely to suffer a large number of the cuts. So, too, are the bank’s European operations, where it aims to reduce costs by 25%. It’s not yet clear how many jobs could be on the line in its domestic UK market where the bank employs some 40,000 people. Workers in the U.S. also face significant job losses amid HSBC’s planned closure of around a third of its 224 branches there.

The bank also plans to shed $100 billion of assets by 2022, with the stated goal of keeping pace with its sharper, nimbler, more focused competitors.

HSBC will also suspend share buybacks for the next two years to pay for the restructuring costs. In this climate, markets forgive and forget anything except the suspension of share buybacks. The announcement of cutting 35,000 jobs would have normally boosted shares, as even massive write-offs are ignored. But the suspension of share buybacks is toxic.

While HSBC blames the bulk of its poor performance on mature markets in Europe and North America, with their low or negative interest rates, it’s in its most important market of all, Hong Kong and mainland China, where it faces the biggest headwinds and risks. HSBC’s headquarters may be based in London but it’s in Hong Kong where the lion’s share of its money is made.

By far Asia’s biggest financial hub, servicing not just China but many other Asian markets, Hong Kong accounted for 60% of HSBC’s global pretax income in 2019. Throw in mainland China and it reaches 75%. As Bloomberg notes, “few if any of the world’s largest financial companies dominate a single market quite like HSBC does in Hong Kong”. The bank is the city’s biggest mortgage lender in the secondary market, rules the roost in investment banking, and is one of Hong Kong’s three note-issuing banks.

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