How have HSBC's upcoming cost cutting moves affected thestock? And how might they continue to do so in the future?
Executive Summary
HSBC Holdings PLC is implementing significant cost-cuttingmeasures to maintain profitability in a challenging economic environment. Keyhighlights include:
- Slowing down hiring and encouraging staff to reduce travel expenses
- Anticipating lower interest rates, which could reduce bank profits
- Considering removal of layers of middle management
- Aiming to exceed overall cost reduction target of $5 billion to $5.5 billion
- Focusing on digitalization and reallocating capital from the West to Asia and the Middle East
- Stock performance: 27.12% return over the past 12 months, slightly underperforming the S&P 500
The success of these measures will be crucial formaintaining profitability, investor confidence, and stock performance in theface of ongoing economic challenges.
How HSBC's Upcoming Cost-Cutting Moves Affect the Stockand Future Prospects
HSBC Holdings PLC (ticker: HSBC) has been implementing aseries of cost-cutting measures aimed at maintaining profitability amidst achallenging economic environment. These efforts are driven by several factors,including the anticipation of interest rate cuts, rising operational costs, andthe need to remain competitive. This article examines the interconnectedimpacts of these measures on HSBC's stock performance and future outlook.
Current Cost-Cutting Measures
HSBC has initiated several cost-cutting strategies to manageexpenses effectively. According to a recent report from Yahoo Finance dated two days ago, HSBC is slowing downhiring and encouraging staff to reduce expenses by holding multiple clientmeetings per day to minimize travel costs. These measures primarily targetnon-client-facing roles, ensuring that customer service remains unaffected.
This initiative is part of a broader effort to manage costsin anticipation of lower interest rates, which could reduce bank profits.HSBC's decision to slow down hiring aligns with its strategy to streamlineoperations and control rising expenses, as highlighted by PYMNTS.com on July 2, 2024.
Impact on Profitability
Despite achieving a record pretax profit of $30.3 billion in2023, driven by higher interest rates, HSBC's profit declined in the firstquarter of 2024, with further declines expected in the second quarter. Thebank's investment banking arm has been particularly affected by a global slumpin dealmaking and capital markets activity, exacerbated by China's sluggisheconomic recovery from the COVID-19 pandemic.
The anticipated lower interest rates pose a significantchallenge to HSBC's profitability. As interest rates decrease, the bank's netinterest margin (NIM) is likely to be compressed, reducing overall revenue. Thebank's ability to manage costs effectively will be crucial in mitigating theimpact of lower interest rates on profitability.
Future Cost-Cutting Plans
Incoming CEO Georges Elhedery is considering plans to removelayers of middle management, which could further streamline operations andreduce costs. HSBC has a history of successful cost-cutting initiatives, havingachieved savings of $3.3 billion in the first two years of its three-yearcost-reduction program and aiming to exceed its overall target of $5 billion to$5.5 billion.
According to Reuters on December 1, 2022, HSBC identified an additional$1.7 billion in costs that can be stripped out next year. This aggressiveapproach to cost management underscores the bank's commitment to maintainingprofitability amidst challenging market conditions.
Investor Sentiment and Stock Impact
Rising costs and the anticipation of lower interest rateshave raised concerns among investors. Despite strong revenues in recent years,fast-rising costs are beginning to pinch, affecting investor sentiment. Thebank's ability to manage costs effectively will be crucial in maintaininginvestor confidence and supporting the stock price.
The interconnected impact of these cost-cutting measures onHSBC's stock performance can be seen in its recent performance metrics. Overthe past 12 months, HSBC's stock has returned 27.12%, compared to a 29.02%return for the S&P 500 benchmark. The bank's one-year Sharpe ratio standsat 1.03, compared to 1.91 for the benchmark, indicating a moderate level ofrisk relative to its returns.
Strategic Adjustments
In addition to cost-cutting measures, HSBC is focusing ondigitalization and has planned to increase its investment in this area to 21%of operating expenses by 2025. This shift towards digitalization aims to reducecosts and improve efficiency, aligning with the bank's broader strategy toenhance profitability amidst challenging market conditions.
Furthermore, HSBC is reallocating capital from the West toAsia and the Middle East in search of better returns. This strategic adjustmentcould impact the bank's cost structure and profitability, as highlighted by Investors Chronicle six days ago. By shifting capital toregions with higher growth potential, HSBC aims to enhance its overallfinancial performance.
Comparison with Rivals
HSBC's cost-cutting measures can be compared with similarefforts by its rivals:
1. Barclays: Barclays has also set cost-cuttingtargets, aiming to shave around £2 billion off its costs over the next threeyears and lower its cost-income ratio (CIR) to the "high-50s" by2026.
2. Deutsche Bank: Deutsche Bank is cutting 3,500roles to tackle its high CIR and rising non-interest expenses, indicating abroader industry trend towards cost management.
3. Credit Agricole: Credit Agricole reported asignificant jump in underlying operating expenses and flagged further costincreases for 2024, highlighting the industry-wide challenge of managing costs.
Conclusion
HSBC's cost-cutting measures are aimed at mitigating theimpact of anticipated lower interest rates and rising costs. The success ofthese measures will be critical in maintaining profitability and supporting thestock price. However, ongoing challenges such as the global slump in dealmakingand economic recovery in China will continue to influence investor sentimentand the stock's performance.
In summary, while HSBC's cost-cutting initiatives areessential for managing expenses and maintaining profitability, their impact onthe stock will depend on the bank's ability to navigate broader economicchallenges and execute its strategic adjustments effectively.
This document was created by Daizy using institutional-gradedata and in collaboration with several external Large Language Models. Allcalculations were performed by the Daizy LLM Analytics Service. The contents ofthis document do not constitute investment, tax, or legal advice, and Daizy(Vesti.ai Ltd) is not authorized to give any advice. [Please refer to our terms of use.]
