LONDON – HSBC announced on Wednesday that it would end its money-losing US retail business, which Wall Street analysts received with lukewarm applause.
Europe’s largest bank in terms of assets will be selling some parts of its mass market business and winding up others to draw attention to its largest market – Asia.
In a statement on Thursday, Goldman Sachs bank analysts reiterated that HSBC’s lack of scalability in US retail banking is the main reason for the low profitability and high cost-to-income ratio in the US.
“We therefore view the announced measures as positive, as they represent a small step towards a potentially more focused, simpler and more profitable HSBC group,” said analysts Martin Leitgeb, Andreas Scheriau and Gurpreet Singh Sahi.
After battling the big domestic players in the US and some parts of Europe, the UK lender has been looking to get out of its less profitable activities for some time.
Although HSBC is letting go of most residential and small business clients, it will maintain a low physical presence in the US to serve its richest international clients.
The group will leave 90 of its 148 branches, which comprise a small network of 20-25 physical locations that are being recalibrated as international asset centers. The remaining branches will be closed.
Goldman analysts noted that while the financial impact of the transactions in the broader corporate context is negligible and no further details have been released on the profitability of US assets and private banking after the exit, the outlook is more positive.
“We see scope for improved profitability as the branch’s footprint has been reduced by over 80% while credit will only decrease by 13% (all others equal),” they said, continuing their buy rating on HSBC stock.
Key downside risks that Goldman highlighted included weaker macro trends such as pandemic setbacks, limited progress in restructuring the bank, escalating geopolitical tensions, increased competition and “delays in optimizing capital efficiency within the group”.
Citizens Bank and Cathay Bank, subsidiaries of Citizens Financial Group and Cathay General Corp., have agreed to buy HSBC’s businesses on the east and west coasts respectively.
The deal would represent much of HSBC’s 850,000 customer relationships sold, mostly customers with balances under $ 75,000. However, Bank of America found that a 2% deposit bonus on sales is “low” compared to the industry average, reflecting the high cost structure of the business. “
“The number of remaining customers is small, but the dominant part of US retail deposits. The customer base is active internationally or in line with HSBC’s wealth management ambitions,” said BofA bank analysts Alastair Ryan and Rohith Chandra-Rajan in one Announcement on Thursday.
BofA estimates full year revenue loss at $ 200 million and a $ 250 million reduction in recurring costs for its US wealth and personal banking businesses.
“Given the large excess of deposits in this business – as in the rest of the group – better dollar rates would likely make matters a lot better,” they added, calling the latest move “small steps.”
The BofA found that HSBC is heavily exposed to global interest rates due to its “world-leading deposit base” and predicted that while the bank currently has a “cost / income problem”, the situation would “mechanically improve” should the bank Market a three year Fed implying fund rate materialize.
“However, we note that the group is pursuing a relatively costly wealth management expansion that would put additional cost / income pressure in the short term,” added Ryan and Chandra-Rajan, reiterating their “neutral” rating on the stock and maintaining it £ 4.80 ($ 6.80) per share price target.
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