"It's about a substantial restructuring"

In an interview with B?rsen-Zeitung, Colin Bell, CEO of HSBC Europe, shares the group's targets for the buiness in Europe, news on its recent performance and on the group-wide effects of capital requirements according to the finalization of Basel III. For HSBC Trinkaus in Germany "it's about a substantial restructuring" to be completed in 2023. Regarding the dispute with the work council at Trinkaus about an already announced reduction of the workforce by about 600 jobs he is announcing an agreement "in due course".

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Mr Bell, HSBC recently announced the integration of its German subsidiary HSBC Trinkaus AG into its Paris-based European subsidiary. Why?

First of all, our German business is a very successful one. We have a great team and important clients here. Under the EU Capital Requirements Directive, we are required to set up an intermediate holding company for our European business by the end of 2023. At the same time, we continuously look at how to improve our services and products. So when we looked at our structure in Europe, we weighed up the pros and cons of different scenarios and decided that locating the intermediate holding company at our subsidiary in France and integrating the German subsidiary was best for us.

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What are the consequences?

There are several advantages. We can consolidate balance sheets and thus generate more firepower for our business in Europe. Also, the future structure is more efficient, as it costs us less to run a branch. And we can standardize our client processes. Last but not least, the integration gives us the opportunity to bring the entire IT in Germany onto a new platform. We can use it to simplify systems, customer journeys and other things.

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So you can say that regulation helps you to reduce costs?

First of all, the transition will require a lot of work and also major investments, especially in systems and technology. Whenever we make a change in the organization, we look at it from the business case and from the strategic perspective. But of course, for a commercial organization, the financial aspects also play an important role.

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How much will HSBC save as a result of the transformation?

I won't give details on that. But we think an integrated wholesale business in continental Europe with a hub in Paris and various branches is the most efficient way to use the network in Europe. But we are not only interested in cost reductions. Rather, we see this as an opportunity to reinvest in our German platform. This applies in particular from a technological point of view. And this will benefit the client.

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Currently, HSBC Trinkaus is integrated into the Group's IT, but the German subsidiary also uses systems developed in-house.

Yes. Large global banks develop separate infrastructures over time, and the German subsidiary certainly has a set of systems that are unique. So for us, this is an opportunity to modernise the systems and bring them more efficiently into the wider HSBC infrastructure.

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So IT is likely to account for most of the savings and synergies.

Primarily, yes. Just maintaining a whole series of individual platforms in a subsidiary versus an integrated platform should allow for a decent amount of the synergies.

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Will HSBC cut jobs in the German business in this context?

We haven't got that far with the planning yet. We have only just put together the team for the implementation. This will be a multi-year project. It's about a substantial restructuring.

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When should it be completed?

We are aiming for it to be completed in 2023.

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In the German business, a mediation is still pending in the dispute with the works council of Trinkaus about the already announced reduction of 600 jobs. Most recently, the Board of Management had called in a judicial conciliation board. What is the status?

We will reach an agreement and present it to our colleagues in due course.

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What about the strategy for European business? For a long time, the European business was not in the best position within the group. The return was relatively weak, also because Europe bore a disproportionately high share of the operating costs, and the music played in Asia anyway. How do you see it as CEO of Europe?

That is indeed my main job. You see, we want to be a global bank, for that we need a global network. HSBC operates in more than 60 countries, and over the past 18 months we have been looking at how we can serve that network as effectively and efficiently as possible. Europe is an incredibly important part of that network, whether it's supporting clients in the West who want to invest in the East, or vice versa. So to be successful in Asia, you need to have our footprint in Europe and at the same time do very well, because Europe is Asia's biggest trading partner. And we see real synergies in that network. The challenge in the European business in the past was that it actually carried a high proportion of overhead costs and was also quite complex as an organisation. Now, with our focus on wholesale business, complemented by wealth management and private banking activities, the performance is coming back.

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How does this show?

Our costs and risk-weighted assets fell 8% year-to-date in the third quarter, which allows us to deploy that capital elsewhere where it brings more return.?Adjusted pre-tax profit for the European business in the year to date is $1.8 billion, compared with a loss of $0.2bn last year. Earnings are stable and tangible return on equity is currently between 5 and 6%. We see a very strong recovery in the wake of this transformation.

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If the performance in Europe is so encouraging, would it not be an argument to increase rather than reduce risk-weighted assets in the European business?

The Group needs to be disciplined in the use of its capital. Capital is global and the Group has alternatives. But if the return is right and opportunities open up, I can also justify to the Group that we need more equity. But to do that, I need a credible track record in terms of cost reductions, successes and credibility. We are still in the middle of restructuring. We want to grow the business, but I want this growth to be targeted, and first I need to achieve further successes.

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How are you going about this?

In Commercial Banking, for example, which has developed very well across Europe and especially in Germany this year, and in Global Banking and Markets, I ask the managers to look for the respective best practice. Because Europe is such a diverse place. Is there something we do particularly well in German commercial banking? We take that and apply it elsewhere.

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Where do you want HSBC to grow in Europe?

We want to focus on clients, be it organisations or corporates, that operate internationally, that want to expand in the Middle East or in Asia. And at the same time, I want to make sure we open up the corridors for Asia, especially for investors who want to put money into European assets. In Wealth Management and Private Banking, we have a number of strong offerings, for example for expats, people living outside their home country. As a group, we want to invest in this business as well.?

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What are the targets for HSBC in Europe?

At the moment we are still talking about reducing costs and capital requirements. So we are not looking at earnings or growth targets. We are looking more at productivity, whether that is return on equity, cost/income ratio or earnings as measured by equity and leverage. We need to think about how we balance costs, revenues and capital and manage our risks effectively to do sustainable profitable business.

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So what are the targets for productivity?

Our target is to bring our return on tangible equity in Europe to around 5% by the end of 2022 and to increase this to between 7 and 8 % by the end of 2024. This year we have delivered a strong performance, but next year we need to make some investments and we are finalising the planning process. And towards 2023 or 2024, we will hopefully have completed the sale of the French retail business, which should contribute to sustainable profitability with the transformation of the German business.

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What do you expect in terms of risk provisioning?

We have certainly had some writebacks this year, which has supported our results. So far, we have been appropriately conservative in our provisioning because of the uncertainty that continues. In the UK, for example, the Furlough Scheme has now come to an end. Up to September, we have not yet registered an increase in unemployment, but it is still too early to judge whether it will stay that way. The October data, for instance, is ?still to come. It will be some time before we see the full effect.

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When HSBC presented new-month figures a few weeks ago, there was also talk of possible acquisitions. That didn't mean Europe, did it?

As you know, we have acquired the insurance activities of Axa in Singapore. We feel comfortable in this size of $300 million to $500 million, and the strategic focus is indeed on Asia. Europe is important for us because of the contribution of the business to the strategy of the Group and less as a region for acquisitions.

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How does private banking in Europe fit into the strategy of focusing on wholesale business?

Very well. It is a good source of non-interest income. And it is a strong business that does not require too much equity. In Europe, however, our private banking has not been of the required size so far. So this is certainly an area that we will look at to see where opportunities are in Europe and whether we need to adapt there.

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Does this mean that HSBC is thinking about a sale or acquisition because the business does not have the necessary size?

I can't say that yet. At the moment, our focus is on the transformation and the work that lies ahead of us. After that, we will think about the other aspects of the business. European private banking certainly has potential. There are a lot of people in Europe with a need for private banking services.

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But there are also a lot of private banking providers in Europe.

Yes, there are some challenges.

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Globally, political polarisation seems to be increasing. What does this mean for HSBC's corporate banking if the bank wants to accompany Europeans and Asians to invest in the other continent?

We want to continue to be a globally active bank. And frankly, we cannot yet see, for example, a reduction in trade flows that was predicted some twelve to eighteen months ago.

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Nevertheless, an increasing polarisation is expected. Deutsche Bank, for example, is considering integrating advisory services in a polarised environment into its strategy. And hardly any bank is as global as HSBC.

Of course, this is something we have to watch very carefully. If it were to happen, we would have to react, and we are constantly looking at our strategy. But at the moment we are seeing rather the opposite: real appetite for investment, especially from investors in the East who want to put money into ESG assets in Western European companies. We see demand for ESG financing and products across all business lines. Therefore, we are also thinking about expanding our wealth management business in Asia. Everything else is hypothetical for now.

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Furthermore, what do the general conditions look like from HSBC's point of view at the moment?

As a result of Brexit, but also in the course of a number of other measures, there has undoubtedly been a fragmentation of balance sheets between the UK and Europe. This has impaired the competitiveness of European banks, especially vis-à-vis US competitors. Meanwhile, interest rates, which have remained low for some time, are having a negative impact on profitability. And from a regulatory point of view, we are of course discussing the implementation of Basel III.

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How will this affect HSBC's capital requirements?

All in all, we expect the consequence of Basel III to be a small increase in the minimum requirement of around 5% of RWA across the wider Group Group so far.

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It doesn't sound like this will jeopardise the $2 billion share buyback announced at the end of September.

Indeed. We have been modelling the potential effects of Basel III for some time.

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It could have been worse, couldn't it?

Sure, we had our expectations. But now we first have to work our way through the regulations in detail to be able to determine the effects more precisely. And each jurisdiction needs to decide how to implement the reform. The complexity will come when the individual jurisdictions decide on the implementation.

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Before that, you don't want to pass judgement on the rulebook.

That's right.

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The EU proposal for the implementation of the Basel III Accord also provides for stricter requirements for EU branches of non-EU banks. Does this have consequences for the German business or is HSBC off the hook in this respect because of its European subsidiary in Paris?

Our German business not affected as it will be integrated into HSBC Continental Europe.

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What does the end of the Commerzbank project mean strategically for the HSBC Securities Services division, which had made considerable efforts to take on this major customer and is now looking through its fingers? Does the division now have to realign itself?

The business of the division is going well this year. The division is growing and we have invested in its technology. It is also very effective for us in terms of business mix. Commerzbank has made its decision, but the other components of the division continue to develop strongly. We like this business and see no reason to think about changes.

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Does HSBC demand compensation from Commerzbank?

I will not comment on this.

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Will HSBC do business with cryptocurrencies?

This is a topic of regular debate. Digital currencies come in three forms: there are central bank-backed digital currencies, stablecoins and virtual currencies. As far as virtual currencies are concerned, we are very conservative, we don't touch them. For all regulated financial institutions, the main risk here is the lack of transparency, because the counterparty remains opaque. As a bank with strong, trusted relationships with multiple Central Banks, a leading global payments bank and one of the world’s largest FX dealers, we engage with a range of Central Banks as they consider, or actively move towards, the implementation of Central Bank Digital Currencies.

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Because banks have to comply with regulations on money laundering prevention?

Exactly. It is difficult for all regulated financial institutions to comply with the know-your-customer regulations, for example. The regulatory framework is also divergent. China has banned them, while the US mainly regulates the relevant coin exchange venues. It is difficult for a global bank to navigate this landscape. Stablecoins are indeed something we are looking at. The concept of backing a digital currency with an asset naturally depends on who develops the stablecoin in question and what underpins it. There is a lot of development here and regulators are showing interest. We are following this closely and will adopt it depending on how it develops. But I think the real potential is in CBDCs. There is strong interest there from central banks. The Chinese have developed a pilot. The Americans are talking about the digital dollar. France also has a pilot. It is obvious that commercial banks want to play a role in this. So we are very much engaged with government agencies around the world and participating in various plans.

B?rsen-Zeitung, 25. November 2021