HSBC Contemplates Exit From U.S. Retail Banking

As retail banking performance continues to struggle in North America, HSBC is planning a complete shutdown in the U.S. Let’s read the complete story. 

HSBC is contemplating a complete exit from retail banking operations in the U.S. The decision is yet to be finalized. However, HSBC’s step comes at the backdrop of its dwindling business performance in North America. In the first three quarters of 2020, HSBC’s U.S. retail unit lost about $518Opens a new window million before taxes. The margin has spiked significantly as it amounted to $182 million in 2018 and $279 million last year. 

As the bank announced its third-quarter results last month, HSBC’s chief executive Noel Quinn promised to go “further and faster on cost and risk-weighted asset reduction programmes”, as it set aside about $7.7bn to withstand the potential loan losses that the bank suffered during the pandemic. Furthermore, the lender’s share price in 2020 continues to decline as it is down almost a third this year. 

The U.S. division of HSBC has been under serious pressure for quite some time now. The U.K. lender had made plausible efforts of making deeper savings in February 2020Opens a new window and strategically planned cost savings of about $4.5bn along with 35,000 job cuts. This plan was outlined as the interim profits plunged, and the bank said bad loans linked to the COVID-19 could reach $13 billion (£9.8 billion).

HSBC executives have been examining some drastic measures that can be taken by the bank to weather through the pandemic crisis as well as a prolonged period of ultra-low interest rates since May 2020.

According to two unnamed sources, a complete exit from the U.S. is not in sight at the moment. “The U.S. is an important marketplace,” one of the sources said, particularly for HSBC’s investment bank. The sources further added that the bank is also planning to grow its U.S. wealth management division.

About 80 branches have been shut down by HSBC this year. This means HSBC now has 150 branches on the east and west coast of America, along with a fraction of the branch network of JPMorgan and Bank of America. 

If the pullout plans are successful, it would mean that HSBC would end its 40-year brick-and-mortar presence on the U.S. soil. HSBC first entered the U.S. consumer market in the 1980s, when the London lender bought a controlling interest in Buffalo, New York-based Marine Midland Bank. In 2003, the bank suffered losses in billions as it acquired subprime mortgage lender Household International. This resulted in the bank paying misconduct penalties after the financial crisis. Another significant move came in 2011 when the bank sold off half of its branch network and a profitable $30bn credit card business. 

Since then, restoring the U.S. retail operation to sustainable profitability has been a talking point for most bank executives. However, it has been of no avail as the bank continues to slump in the U.S retail arena. This could be attributed to the fact that the bank lacked high-margin earnings from unsecured credit card lending and the not so profitable subscale wealth and branch network. 

Coming down to the present day scenario, the situation remains the same for HSBC. Some insiders argue that the division’s lack of scale makes it hard for the bank to turn round, especially considering the current pandemic-hit economic environment. 

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HSBC’s Plans Going Forward

HSBC’s senior management will be presenting its plans to the bank’s board in the coming weeks. It is highly likely that the management may suggest focusing on international clients, specifically Asian and Middle Eastern links, and playing down on clients with strict U.S. interests. This implies that clients with only domestic U.S. business will be de-emphasized as they are less profitable for HSBC and HSBC struggles to compete against larger Wall Street rivals like JPMorgan and Citigroup. In light of the above, the bank has reportedly cut $4 billion in risk-weighted U.S. assets through “client optimization” this year.

Another plan of action for the bank would be to propel a digital-only model that is essentially focused on clients with specific ties to China and India that readily target the profitable Asian market. According to a Financial Times source, the market is ‘crowded’. However, despite the crowded nature of the market, some investment banks have seen immense success in launching a digital-only presence given the current situation. Digital transactions have skyrocketed like never before. Marcus, a division of investment banking giant Goldman Sachs, reported $92 billionOpens a new window in customer deposits through July 2020 (second quarter), after just four years of its launch.

HSBC has captured the bulk of the Asian market as it makes more than half of its revenue and almost all of its profits in Asia. Considering the stronger Asian footprint, the bank announced in August that it aims to hire about 2,000 to 3,000 wealth planners from China in the coming four years.

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Offloading French Retail Operations

The U.S. is the second market that HSBC has weighed-up on exiting, as the bank already kicked off the sale of its French retail operations in January, as reported by Bloomberg at the time. The bank had sent an overview of its business to potential bidders, including Credit Agricole, BNP Paribas, and private-equity firms Cerberus and Apollo Global Management.

According to Reuters, Cerberus and a rival agreed upon buying HSBC’s French retail business arm for €1, provided the British bank was to invest €500 million into the business.

Currently, HSBC has not finalized the decision to exit its U.S. retail banking.  HSBC’s decision to pull out of the U.S. retail business could be taken in 2021. However, HSBC declined to comment over the timeframe for a decision. 

While HSBC is eyeing for a lighter presence across global retail business markets, it is not the only one to do so. Last month, BBVAOpens a new window , a Spanish lender, announced that it agreed to sell its U.S. banking arm to PNC. However, it continues to hold on to key assets — broker-dealer BBVA Securities and the bank’s New York branch, which will serve its corporate clients by providing corporate and investment banking services.

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In Conclusion

As HSBC mulls shutting its U.S. retail banking operations, the British bank is expected to compensate for the move by making stronger footholds in the Asian markets, with the availability of a large personnel base in Asian and Middle Eastern parts, in addition to lucrative retail operations associated with the region.

Do you think HSBC will be able to withstand the consequence of exiting the U.S. retail banking? Comment below or let us know on LinkedInOpens a new window , TwitterOpens a new window , or FacebookOpens a new window . We would love to hear from you!