HSBC Holdings PLC has cut costs more quickly than anticipated as part of its transformation plan, though a redeployment of capital in Asia has been slowed by COVID-19.
In the first two years of its three-year cost-reduction program, HSBC achieved savings of $3.3 billion; the bank now expects to exceed its overall target of between $5 billion and $5.5 billion, it said when reporting 2021 full-year results.
CEO Noel Quinn said HSBC is confident it can retain control of costs even in the face of rising inflation resulting in higher interest rates.
"I am absolutely determined we won't go back to the days when rising interest rates loosened our grip on costs," Quinn told analysts on an investor call. "We're also planning a further $2 billion of cost takeout this year as part of that transformation program and another $0.5 billion the year after that."
Quinn said this would allow the bank to sharply increase its investment in digitalization up to 21% of operating expenses in 2025, from 19% in 2021. The bank's cost base should be flat for 2022, the CEO said.
HSBC wants the upcoming likely interest rate curve to flow into returns rather than into costs, he said.
Changing costs model
Changes made as a result of the pandemic had a considerable effect on costs, the bank said. Travel and entertainment costs were about $400 million pre-pandemic but were $60 million in 2021, and they will be capped at 50% of pre-pandemic costs in future. HSBC said it had so far completed about half of its plan to exit 40% of its non-branch-based commercial real estate.
HSBC's transformation plan involves shifting capital from the west to Asia and the Middle East in search of better returns. The bank has pulled out of the retail banking market in the U.S. and is selling its French retail banking operations in a process due to complete next year.
Though the bank has successfully reduced risk-weighted assets by $104 billion as a result of its program, boosting operations in the East had been affected by the pandemic, CFO Ewen Stevenson said.
"What we've seen over the past couple of years is a very successful execution of the first part, i.e., $100 billion-odd reduction in RWAs, but the redeployment in the East has been slowed down as a result of COVID-19," he said. "We do think the redeployment rate will now pick up as the Asian economies progressively come out of COVID-19."
Quinn said HSBC expects to reach a return on tangible equity, a measure of profitability, of at least 10% in 2023, up from 8.3% in 2021. This is a year earlier than previously indicated.
Expected credit losses
The bank reported a net charge of $450 million for expected credit losses in the fourth quarter, including Stage 2 charges primarily related to commercial real estate in mainland China, which is booked in Hong Kong.
"There has been some positive sentiment since the year-end; we expect this to ease the current tight liquidity for the sector," said Stevenson.
He said expected credit losses were expected to normalize toward 30 basis points of average loans in 2022.
