In an effort to improve overall efficiency, HSBC Holdings plc (HBC) announced a second round of cost saving initiatives. The new cost saving program will start from 2014 and run for 3 years.
HSBC plans to slash $3 billion in costs in 3 years. Notably, it has already achieved cost savings of $4 billion (the target was $3.0 billion) since 2011 through divestiture/winding down of the majority of 52 non-core businesses that were announced. The further reduction in expenses will come through more closure or sale of non-core operations.
HSBC’s employee number that was approximately 300,000 in 2011, has decreased to 260,000 and will further fall by 6,000 once the announced cuts and divestitures get completed in the subsequent months. Under the new cost savings plan, the workforce will plummet by another 14,000 by the end of 2016.
Despite over-achieving cost savings, HSBC was not able to meet its core efficiency ratio goal. Consequently, the company changed core efficiency ratio target to the mid-50% range from the prior guidance of 48–52% range.
Notably, HSBC anticipates both revenues and risk-weighted assets to grow 8–9% annually. It also remains focused on high-growth emerging markets, while expecting about 90–95% of pre-tax profits from growth in core countries.
HSBC reiterated its ROE and dividend payout ratios, while meaningfully deploying capital through resuming share repurchase activity in 2014 (subject to shareholders’ as well as regulatory approvals). The company expects to achieve ROE in the range of 12–15% and will maintain a dividend payout ratio of 40–60%.
The primary intention of management to buyback shares is to partly offset the impact of scrip dividend. In 2012, HSBC paid $8.3 billion or nearly 55.4% of its earnings as dividends. Out of this, about $2 billion were in shares. At present, the company is less interested in making any significant acquisitions.
HSBC also revised its Tier 1 common equity ratio target to more than 10% under Basel III. Previously, the company had set a target in the range of 9.5–10.5%.
Since the financial crisis, cutting costs and reducing jobs have become a way for companies to remain profitable. Moreover, with regulators’ requirement of keeping more capital and shareholders demanding more dividends, banks across the globe are facing increasing difficulty in boosting revenues.
Many other global banks including Bank of America Corporation (BAC), JPMorgan Chase & Co. (JPM) and Citigroup, Inc. (C) are resorting to job cuts and other cost saving measures to maintain profitability.
Currently, HSBC carries a Zacks Rank #3 (Hold).
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