Giant global bank to restructure with job cuts, geographical division
When we reported that HSBC had taken a hit from its exposure to Hong Kong’s troubled commercial mortgage market a month ago, we also revealed that major shareholder Ping An insurance was pressurising the global lender to look at a more Asian focus. Couple that with CEO Georges Elhedery’s attempt to slash hundreds of millions in costs and jobs, and it may be no great surprise that the bank has just announced some significant changes.
HSBC has just announced that it will be undergoing a significant restructuring following a dramatic surge in loan defaults within its Hong Kong commercial real estate portfolio, underscoring the impact of economic challenges in the region. The lender’s exposure to “credit impaired” commercial loans in Hong Kong skyrocketed from $576 million to $3.2 billion over the first half of this year, marking a jump of more than 500%. This sharp rise has highlighted the risks HSBC faces from a downturn in the property sector of the Chinese territory, where it holds a large share of its real estate portfolio.
Read more: HSBC to slash senior jobs
Hong Kong’s commercial real estate market has taken a significant hit, with office rents falling by more than 35% since 2020, according to Cushman & Wakefield. The agency went on to say that even though mainland China’s real estate market may have hit bottom – there is still more room for a fall in Hong Kong.
As of June, according to Financial Times figures, Hong Kong accounted for 45% of HSBC’s global credit-impaired commercial real estate loans, up from just 13% six months prior. HSBC's total lending in global commercial real estate stood at $79 billion, with 9% of that made up of impaired loans in Hong Kong. Many of the defaults were driven by borrowers breaching loan terms, such as failing to meet payment schedules or missing non-financial targets like agreed loan-to-value ratios.
Elhedery, who assumed the role of HSBC’s chief executive in September, acknowledged the challenges on a recent analyst call but emphasised that the bank remains optimistic about the future. “The loans were ‘all performing’ even though ‘a large number’ were classed as credit impaired,” he said, adding that some borrowers had requested payment deferrals to manage debt serviceability issues.
One potential adjustment might place Surendra Rosha, co-CEO of HSBC's Asia-Pacific operations, in charge of both the commercial and global banking units. Another option could have Patrick George, the global head of markets and securities, overseeing the markets business. Rosha, who began his career at HSBC as a trainee in 1991, has already held several senior positions, including CEO of the bank’s India operations.
The turbulence in Hong Kong reflects wider economic pressures. Tough Covid-19 policies led to an exodus of foreign workers, and Beijing’s national security crackdown has dampened investor confidence, particularly from international businesses. Rising interest rates have further burdened borrowers at a time when demand for office and retail space remains low.
In response to the financial stress and recognising geopolitical tensions between East and West, HSBC has announced a significant overhaul of its operations, aiming to split its structure along regional lines to better manage risk. The reorganisation will divide the bank into four units: standalone businesses in Hong Kong and the UK, a corporate and institutional banking division, and an international wealth and premier banking unit.
“The new structure will result in a simpler, more dynamic, and agile organisation,” Elhedery explained. The changes, set to take effect on January 1, come amid calls from shareholders, including Chinese insurer Ping An, to separate HSBC’s Asian operations from the rest of the bank.
HSBC's broader strategy to cope with declining profits also includes cost cutting, as lower interest rates begin to impact the bank’s revenue. While HSBC has benefited in recent years from elevated rates, the current trend of rate reductions could threaten its bottom line. The bank hopes to reduce duplication and enhance efficiency, which is crucial for a bank with 214,000 employees globally – a number still 7% above its target.
The east-west restructuring reflects broader de-risking strategies employed by Western businesses looking to shield themselves from rising geopolitical tensions between China and the West. HSBC, which generates the majority of its profits in Asia despite being headquartered in London, faces competing demands from regulators in both regions.
Under the new plan, the bank will trim its top management by a third, reducing the executive committee from 18 members to a 12-member operating committee. This move is part of a broader cost-cutting initiative targeting $300 million in savings. HSBC also named Pam Kaur, its chief risk and compliance officer, as the new chief financial officer, replacing Elhedery following his promotion to CEO.
“Job cuts, further disposals and organisation streamlining are all potential options on the table,” said Bloomberg Intelligence analyst Tomasz Noetzel, “The new CEO may need to dial up focus on cost cuts as there is little or no room to bolster revenue in declining rates environment.”
Under its previous CEO, Neil Quinn, the giant bank has trimmed around 50,000 jobs over the last decade.
Elhedery expressed confidence in the long-term outlook for Hong Kong’s real estate market. "We are comfortable and confident in the medium-to-long-term outlook,” he said, noting that collateral coverage remains strong despite falling property valuations. HSBC hopes the market will benefit from potential interest rate cuts, which could ease financial pressures on borrowers and support a recovery in the commercial real estate sector.
