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Company Focus – HSBC banking on Asia – 11-10-19

Company Focus – HSBC banking on Asia

Banking group HSBC has hit the headlines this week with the news that it could be slashing 10,000 workers from its 238,000-strong payroll. The cost-cutting plan is reportedly the first major move from interim CEO, Noel Quinn, who replaced John Flint in August. The news, first reported by the Financial Times, caused shares to dip slightly on Monday but prices have since recovered and are standing at 600.32p at the time of writing. Like many of its rival banks, HSBC is facing turbulent times due to Brexit uncertainty and depressed interest rates and reducing its cost base has been a priority for some time. In fact, previous CEO, John Flint was ousted for not making job cuts or implementing changes quickly enough so its unsurprising that Mr Quinn is keen to make his mark on this issue.

So, are these job cuts, which will come on the back of 4700 redundancies announced in August, likely to get HSBC back in the black? Should investors be banking on a turnaround and snapping up stock?

It’s reported that many of the cuts will come from some of the weaker European parts of the banking group, and HSBC will renew its focus in faster-growing Asian markets. Speculation is mounting that HSBC’s French retail bank will be sold off which could account from some of the cuts if staff leave. HSBC has always had a strong Asian focus, some of its first branches were opened there and a large proportion of its modern business is based in the region – in fact its latest results showed that Asia generated 80% of the bank’s profits.  Some analysts have compared investing in HSBC to investing in Chinese growth, and while the notion is only speculative, the group’s Asian roots may provide a way to negate some of the potential challenges of a no-deal Brexit – it has been reported previously that the bank would consider being domiciled in Hong Kong.

Opinions on the impact of potential job cuts are currently divided– from an investor’s perspective there are the obvious cost savings benefits. Some have also suggested that the move is positive because it demonstrates that Mr Quinn has no intention of being passive and is not afraid to make big, bold decisions. Not everyone is convinced though – some feel there have been ‘many false dawns’ where cost-cutting and HSBC are concerned. Pessimism about slowing interest rates and faltering growth in the Asian region has prompted analysts at Citibank to issue a ‘sell’ rating for HSBC’s stock. Others are more optimistic though, suggesting that HSBC’s price-to-earnings ratio of around 10.5 makes it undervalued. It is true that while the growth economy for Asia has been downgraded, it is still in pretty good shape compared to Europe and so the bank’s focus on this region has the potential to pay dividends. With some predicting a good long-term investment outlook for the bank, is it still be a worthy deposit?

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