July 2017 www.euromoney.com

Volume 48, Number 579

WORLD’S BEST How Gulliver fixed HSBC for the future World’s best bank

2 Reprinted from July 2017 Copyright© Euromoney magazine www.euromoney.com WORLD’S BEST BANK How Gulliver fixed HSBC for the future As ’s time as chief executive of HSBC runs down, the moment has come to acknowledge his achievement in managing the remarkable transformation of one of the world’s biggest, most complex . Once a diffuse portfolio of unconnected banking franchises, it now starts to look much more like the jewel it should be: a properly managed network that can serve customers and reward shareholders by handling global trade and capital flows

By: Peter Lee Illustration: Matthew Hollings

ne day next year, Stuart Gulliver will leave his office billion to $7 billion of annual cost saves, even after investing at the for the last time and no longer be an employee of rate of over $1 billion each year since 2014 in new safeguards against HSBC. How will he feel? financial crime. “I’ll be sad,” he tells Euromoney. “But I will be In 2012 the bank had 1,200 full time employees in compliance. proud.” Today it has 8,300, accounting for 3% of its entire staff. OGulliver has devoted his entire working life to HSBC. At the age of Meanwhile, the total number of full-time employees has fallen, 58, he feels it is time to hand the baton of leadership to someone else. from around 300,000 in 2011 to just above 235,000 today. That successor will benefit enormously from the legacy that Gulliver HSBC, which did not take a penny in state aid during the financial and his long-time colleague as chairman, , leave behind. crisis and which has always been conservatively funded as well as Over the last six and a half years, under their leadership HSBC has strongly capitalized, has bolstered these signature strengths to new gone through a fundamental restructuring. heights. That transformation has been under-appreciated and in some quar- It may have struggled to deliver its target 10% return on equity to ters barely noticed. The headline numbers certainly do not tell the shareholders (although it reported a 9% return on tangible equity in story. Gulliver became chief executive in 2011. In the financial year the most recent quarter), but as well as being a low-risk bank it has before that, HSBC’s share price was around 700p, its return on equity always been a profitable one, in every quarter. 9.5%, and its underlying profits a little over $18 billion – and the While other large global banks that were saved by taxpayers, and banking industry was still feeling the full force of the financial crisis. many that were not, cut or suspended dividends in recent years, The share price, return on equity and underlying profits are largely HSBC maintained its own. It has paid out $56 billion of dividends the same today. since 2011 – more even than JPMorgan – while retaining sufficient Here instead are the numbers to focus on. Since 2011, HSBC has earnings to boost its common equity tier-1 ratio to 14.3% and its shed $290 billion of risk-weighted assets, the equivalent of a bank the leverage ratio to 5.5%. And since 2011, it has generated $20 billion in size of Standard Chartered. It has exited 97 businesses and folded its shareholders’ equity from retained earnings. tents in 20 countries, continuing to serve customers in 68 countries It has managed all this even though the very low ratio of today, down from 88 at the peak. A balance sheet that reached nearly advances to customer deposits – now at 68% and which the bank $2.7 trillion in 2013 had come down to $1.9 trillion at the end of once talked of possibly capping at around 80% – which frees it from 2016. liquidity risk and shows it as still the destination of choice for cus- This is not some half-baked attempt at shrinking to grow. It is a tomers to protect their savings, has become a drag on returns. bank which, in the years preceding this restructuring, had managed to When interest rates stood at 3%, HSBC’s $1.3 trillion of depos- add $4 billion of annual costs with no revenue growth, that is finally its might bring in around $5 billion of revenue. Recently they have getting a grip on its biggest financial problem, while at the same time brought in next to nothing. The bank has been flying with one large controlling the defining threat to its continued existence: being used revenue engine shut down. by criminals, tax evaders and worse. Gulliver, Flint and their colleagues have achieved all of this under Having set itself a target to cut annual operating expenses by the cloud of a US deferred prosecution agreement (DPA) stemming between $4.5 billion and $5 billion, it is on target to achieve $6 from a period before they took control. The DPA has had an impact www.euromoney.com Copyright ©Euromoney magazine Reprinted from July 2017 3 World’s best bank

It remains to be seen how students of the bank’s history will eventually judge him, but it strikes Euromoney that much of Gulliver’s time at the very top will have been spent sorting out a mess of other people’s mak- ing: a banking group that had grown into a series of franchises, growing costs faster than revenues, with disjointed processes and systems that made it vulnerable to internal and external bad actors using it to avoid tax and move the proceeds of crime. And that he will probably never get the credit for what he did. How does he feel about that? “The way I rationalize it is that I am priv- ileged to have the stewardship of HSBC for seven or eight years. I may have joined this bank when I was 21 years old, but I didn’t found it. My family don’t own a big stake in it. I pick up the hand I am dealt and have to play those cards to the best of my ability. My task is to pass HSBC on to my successor “This job needed doing and it fell to my generation of leaders to transform in better shape than when I took it on. And I will be doing that, just as Mike Geoghegan HSBC. I never lost my resolve that we were going about things in the right handed it on in better shape to me than way. I’ve given my life to this company. I know its DNA” when he became CEO,” says Gulliver. Does he in any way regret taking on the Stuart Gulliver job? not just on morale, but also on the bank’s As that transformation now moves “If I had known that the job was going ability to win new business. towards fruition, as the underlying earnings to be this tough, I would still have taken Most importantly, Gulliver has trans- power of core businesses re-emerges, as it because this job needed doing and it fell formed the way this global bank is run. What investors regain faith in the value of the to my generation of leaders to transform was once a federation of 88 separate country franchise, as its customers give HSBC more HSBC. I never lost my resolve that we were businesses has become a much more coherent business, as the bank repositions for growth going about things in the right way. I’ve entity, with four global business groups, 11 in Asia and sticks to its mission of financing given my life to this company. I know its properly resourced support functions and cross-border capital flows and trade in a DNA. I know that 99% of people coming five regional divisions reporting to the chief more protectionist world, HSBC is in a great to work every day at HSBC come to do the executive and to the holding company board. place. right things by their customers and their

Strong capital generation with industry leading dividends Dividends are a big part of total shareholder returns

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nnoned rter bln sare bbak n eb ’ tro 0.4 oleted n r bln Source: HSBC 4 Reprinted from July 2017 Copyright© Euromoney magazine www.euromoney.com “The way I rationalize it is that “When you look around the I am privileged to have the banking industry and consider stewardship of HSBC for seven its history, there are examples of or eight years. I may have joined chief executives who remained this bank when I was 21 years in situ far too long, after all the old, but I didn’t found it. My potential replacements among family don’t own a big stake in The wit and wisdom their own generation had left it. I pick up the hand I am dealt of Stuart Gulliver and they became rather isolated, and have to play those cards to semi-deified figures, with people the best of my ability” 10 to 15 years younger reporting “The chief financial officer of to them that want the top job The HongKong and Shanghai but don’t dare to challenge the “I imagined that running the Banking Corporation Limited incumbent on any decision” whole firm would be just like this, did not, in reality, report to the only much bigger and so presum- chief financial officer of HSBC ably even more fun. It turned out “There were places where the Holdings. He used to report to slightly differently” bank had grown to 17 layers of the chairman of The HongKong management. There were manag- and Shanghai Banking Corpora- ers who had no one reporting to “I want to work until I am 75 to tion Limited and periodically them. And there were managers 80, because I think the best way submit financial information that basically reported to them- to stay healthy is to stay busy. as necessary to the bank’s 100% selves. Their appraisals were I can hardly run HSBC for 28 shareholder” always fantastic” years”

colleagues. I have had some frustrations that a crescendo in 2012 with the US Senate that HSBC was headed in the right direction, we didn’t get much recognition for it. But I Permanent Subcommittee on Investigations’ with a management team capable of deliver- knew that I could transform HSBC without report, that we had not understood that we ing,” says Flint. stalling it.” were not being run to acceptable standards The management matrix dominated by Why? “Because I was sort of the ‘insider in many places around the world.” geography, which had served HSBC so well outsider,’” says Gulliver. “I had spent most of Flint, the former group chief financial for so long, had left too much up to local my career in global banking and markets.” officer, became chairman of HSBC at the end subsidiaries. “The bank required more cen- of 2010 and has worked well with Gulliver, tral control to analyze data that might reveal who became chief executive a couple of bad actors and needed root and branch ON THE BRIGHT JUNE DAY IN months later. While Gulliver transformed the reform to achieve that,” says Flint. “It helped when Euromoney sits down with running of the bank, the calm, considered that we did not have to redefine HSBC’s core Gulliver, who has been at HSBC for 37 and reassuringly Scottish-sounding chairman mission, which has always been – and con- years, to discuss the shape of one of the engaged in the public policy debate about tinues to be – to finance cross-border and small handful of truly global banks still the role of banks and bank regulation. cross-regional trade and capital flows.” left standing, his sense of history appears HSBC was hit by a series of reputational HSBC remains a global , attenuated. He tells Euromoney: “I believe setbacks even after the senate report and the one of a dwindling number. It has three that what the group management board has DPA, including revelations that its private main business divisions: a commercial bank achieved in the last six years is the biggest bank in had helped tax evaders (CMB) handling trade finance, cash manage- restructuring in HSBC’s 150-year history.” in the mid 2000s. It even got a prominent ment and payments for corporate customers It may sound a slightly grandiose claim. mention in the Panama papers. and lending to them; a global banking and The business mix, after all, is still largely “The important thing is that the executive markets business (GBM) intermediating the same as when Gulliver took over. But management team committed to fix what equity, rates and credit for investors, arrang- the model for running it needed profound needed to be fixed and got on with that, ing debt and equity finance for issuers and change. bringing in new people with new talents advising on M&A; and a retail and wealth Gulliver had a ready and steady ally in without diluting the character of that leader- management division with high-street busi- Flint, who says: “For me the low point in my ship team. For the board, for regulators and nesses in 36 countries, most notably the UK, time here was the realization, which reached policymakers, the key was to be comfortable Hong Kong and Mexico. www.euromoney.com Copyright ©Euromoney magazine Reprinted from July 2017 5 World’s best bank

diffuse portfolio of banking franchises like a passive investor, with just a handful of staff in the central legal and financing depart- ments, rather than a fully engaged command centre exercising strategic and operational control. “The chief financial officer of The Hong- Kong and Shanghai Banking Corporation Limited did not, in reality, report to the chief financial officer of HSBC Holdings,” says Gulliver. “He used to report to the chairman of The HongKong and Shanghai Banking Corporation Limited and periodically sub- mit financial information as necessary to the bank’s 100% shareholder.” It was a structure born in the bank’s early decades – when a smart chap might be sent to run the bank in Malaysia, receiving letters from head office every three or four months

Gulliver with Chinese premier Li Keqiang: In retail banking, HSBC is now making its big play in China’s Pearl River Delta, by packet steamer. It was like something out seeking to expand from its base in Hong Kong into a market of 45 million Cantonese speakers with per capita GDP of Joseph Conrad. And it had survived too roughly where it was in Hong Kong 25 years ago long. It also has a , a much smaller economies of scale and each implementing Today, the group leadership team is much global business and one that at times must global standards for financial crime risk expanded, with 80% of group general man- seem more trouble than it is worth. management.” agers being new appointments since 2011. So, what, Euromoney wonders, is the sin- This is no longer the same institution Gulliver’s aim has been to keep his direct gle biggest and toughest change Gulliver and a large number of career HSBC bankers reports – four business, five regional and his management team has had to make? had sought to make their way in. “There then the function heads – focused together “The biggest transformation has been was considerable internal resistance to that on a shared mission of transforming the moving HSBC from a loose federation of change,” Gulliver agrees. “But what I have bank. They all know what each other gets stand-alone businesses in which the country tried to do with the 18-person group manag- paid. It is in a fairly tight range; the only heads were ‘kings’, operating their own ing board that reports to me, is not so much outlier being the head of global banking and franchises, their own IT systems, their disempower the countries, as to empower markets, reflecting the different pay levels of own processes for account and credit-card the global businesses and the global func- that particular business. handling, their own internet and digital tions, such as risk, operations and technol- If the country heads do not report directly channels,” says Gulliver, “to a group of four ogy, legal, financial crime compliance and to the group CEO, they each report to a truly global businesses, each consistently so on.” regional head who does report to Gulliver. overseen and properly controlled from the The HSBC Holding company at the top Samir Assaf, chief executive of global centre, with far fewer systems, much greater of the group structure used to sit above this banking and markets at HSBC, says: “It’s important to recognize that the country Key achievements over the last year heads still have a very important role. Their Good progress on RWA reductions, capital management and cost discipline job is not only to ensure compliance with global standards on financial crime and to Group RWAs Group CET1 ratio Adj. group operating expenses work with local regulators, but absolutely to +2.4pp execute also the whole strategy by building +1% -23% relationships with companies. “You need business people as country heads, and today it is likely that the country

bln head will come from one of the global busi-

bln nesses, either GBM or CMB.”

GULLIVER JOINED THE BANK IN 1980 ’ ’ ’ ’ ’ ’ as a member of its famous group of interna- Source: HSBC tional officers, ready to go anywhere in the 6 Reprinted from July 2017 Copyright© Euromoney magazine www.euromoney.com world and take on any job at short notice, imagined that running the whole firm would to create the impression of scarcity in an eq- often living in bachelor messes where they be just like this, only much bigger and so uity capital markets deal, but rather steeped developed a keen esprit de corps. presumably even more fun. in short-term money market interest rates He worked his way up in treasury and “It turned out slightly differently,” Gul- and currency movements. capital markets in and London, with liver admits. While long-serving CEO William Purves stints in the Middle East and Malaysia, He at least came into the top job equipped was a remote figure, whom Gulliver hugely before rising to run the Asian and treasury with a full understanding of the bank. respects but with whom he had little contact, capital markets desks from Hong Kong in Working in treasury made him familiar he learned in the dealing room at the feet the mid 1990s. It was an extraordinarily with the underlying flows derived from a of John Gray, the man who wrote the book happy time. “It was such fun that I almost commercial bank handling cash for custom- on balance-sheet management at HSBC, ran into work every morning,” Gulliver ers, the foreign exchange needs thrown off on conservation of liquidity and managing recalls. by their trade payments and receivables, as deposits always ahead of and who The bank kept throwing more businesses well as with managing the bank’s own mis- played a key role in the currency board that at him to run – including bonds and equities match between surplus deposits and delayed pegged the Hong Kong dollar. – and for the first time it dawned on him redeployment into funded loan assets. Euromoney first came to know Gulliver that he might one day rise to the very top. “I He did not grow up understanding how in the 1990s in Hong Kong when report- ing on the Asian crisis. In the first frantic weeks after the devaluation of the Thai GBM benefits from early adoption of global approach baht, as markets sank into dysfunction and the much-heralded Asian miracle appeared HSBC bankers have never in 2016, even though it re- still comparatively new. to implode, Gulliver traded the bank’s and had the reputation of ruth- mains sub-scale in the US. But Assaf has no doubts. customers’ risk positions through stress that less, hard-driving Wall Street- The division benefits from “In future, I think it is vital no one had seen before. ers. One source tells the having been run as a global that we continue with this On Friday evenings in those hectic weeks, story of a recent financing business before the present cultural change,” he says. traders would often gather to swap war sto- for a large emerging market group chief executive was By the first quarter ries in the tiny Captain’s Bar at the Manda- client, a long-standing appointed in 2011. of 2017, return on risk rin Oriental hotel. Gulliver always showed, customer of HSBC, on which “Stuart Gulliver had al- weighted assets inside GBM stood with his schooner, usually with an the bulge-bracket investment ready begun to run markets was running at 2.25%. But ironic smile and a pithy joke. He nodded banks swooped. Said client as a global business in 2003 there is much work still to sympathetically as Euromoney rehearsed the told HSBC it would happily and 2004, a process that do before HSBC fully deliv- end-of-the-world anguish of the bankers we leave a minor syndicate role accelerated for all of global ers on the promises it gave had interviewed that week. “That’s right,” he to the house bank. banking and markets after to shareholders in 2015. assured us, “we’re all going to be much bet- For once HSBC declined 2006, with strategy driven And while its bankers will ter people for having lived through this.” such an offer, even while the from the centre, including never go full Wall Street, What he was there to do, of course, was coverage bankers fretted judgements on people and they might have to become not to console Euromoney but rather to send how the client would react. remuneration,” says Samir a little more pugnacious in an important message to the markets. This It reacted by giving them a Assaf, chief executive of their efforts to make their may be tough and unpleasant, but while lead left position. The global global banking and markets. global network pay. the chief trader of HSBC, a more important banking and market division “I think we have done “We are not yet where we institution than the Hong Kong Monetary is just starting to perform. well. The fact that our trade want to be with regards to Authority itself, can still come for a beer, it is While its peers among the finance business has stayed profitability and a consistent not the end of the world. big US and European banks steady even as global trade return on equity at or above The smart sources were already tipping saw corporate and invest- volumes declined, to pick 10%,” says Assaf. “But this Gulliver back then to head the whole bank ment banking revenues on just one example, is remark- is a bank where a 1% rise in one day, calling him one of the smartest average remain flat from able. Our FX proposition for interest rates could bring in bankers of his generation. It was in the years 2014 or shrink, they have corporates is also remark- $2.5 billion of revenue. And up to this point that he had first conceived grown at a compound able, as is our debt capital even if that does not happen, the same ambition. Sadly however, decisions annual rate of 4.8% inside markets proposition.” you will see us become a above him were now being taken that would GBM at HSBC. And its For other businesses, little more competitive in mean his time at the top would be devoted share of global corporate such as the commercial loan usage. We want to to clearing up. and bank, operating as a global promote more agility and Gulliver soon gained experience and in- revenues has improved business only began in entrepreneurial spirit into the sight into running a global business, as head from 6.3% in 2014 to 7.5% 2011, so the culture of it is business.” of markets for the whole group in the first years after the Asian crisis, later as sole head www.euromoney.com Copyright ©Euromoney magazine Reprinted from July 2017 7 World’s best bank

of global and banking markets after his higher-ups had insisted on the toe- Gulliver trims and refocuses retail but sticks with wealth curling experiment of him co-heading the division with ex- Euromoney challenges Stuart share within sight of the fourth cial arrangements overnight investment banker John Studzinski, Gulliver over his active man- largest bank. without giving them a chance who was brought in amid huge fanfare agement of the HSBC portfolio And overseeing a diffuse to find alternative providers. to build an M&A business… and who and why he has not exited re- portfolio has not stopped By last year, there were almost soon left. tail banking in more countries, Gulliver running retail banking no original Safra clients left It was that time in charge of run- given that retail banking is a according to certain common and the right thing to do was ning HSBC’s then only truly global scale business, which HSBC global standards. HSBC has write off acquisition goodwill business that made Gulliver the in- lacks everywhere outside Hong discontinued over 1,000 prod- to reflect that. sider outsider. Kong and the UK. ucts previously sold through Why bother continuing Now in London as the sub-prime Although it may have a shot the branch network since with when it crisis broke, his team was able to at retail banking on an indus- 2011 and it stopped paying has been such a source of re-run the entire playbook that had trial scale in Mexico, it cannot branch staff commissions reputational risk, while contrib- kept HSBC safe during the Asian claim that in many of the other based on sales everywhere in uting less than 5% of group crisis – get very liquid, very quickly; 30-odd countries in which the world in 2013. revenues? pull in lines; be vigilant of anyone it still operates retail banks: “That had some very “If you deal with the com- trying suddenly to fully draw down Australia, France, Canada, the interesting impacts in different panies of wealthy tycoons as half-forgotten commitments in US, India, Malaysia, Singa- countries,” says Gulliver. “In HSBC does and you don’t obscure geographies or businesses. A pore, the UAE and the rest. Hong Kong, we didn’t miss a also have a private bank that battle-tested team kept it safe, despite “They may make a modest beat. We are the aspirational can help manage their per- the losses at Household, the dithering contribution to profit in their employer, and local manag- sonal wealth when they crys- of the Bank of England and HSBC’s own right, but their key contri- ers easily convinced staff that tallize it through a sale, say, or own unwise steps into conduits and bution comes in asset and liabil- they would be paid fairly on a an IPO, then rival global banks structured investment vehicles, which ity management by gathering mixed scorecard. In Brazil, our and investment banks that it could at least preserve and fund on deposit funding. This is a bank revenues initially collapsed. do offer ultra-high net-worth balance sheet when some other banks that always thinks: ‘Deposits Sales commission is part of the private banking will take that cut theirs loose after the asset-backed first, then loans,’” says Gulliver. culture and we were the only business and try and reverse commercial paper market froze. “We need the retail banking bank that stopped paying it.” down into the corporate busi- As CEO, Gulliver arrived deter- business in India or Malaysia or It was not a hard decision ness,” says Gulliver. “So, in mined to move the whole bank away the US because it brings in the to sell out of Brazil in retail. part, private banking acts as a from the franchise model with the funding the commercial bank HSBC simply did not have defensive play to protect those country head as king as soon as he needs to support local currency the scale to compete with corporate relationships.” could. “Internally, we had a reputation loans without ever relying on the top four or five banks in While it has kept private for being very strict on cost control,” the wholesale markets, which the country. Its network there banking and retail banking he recalls, “and yet we had a very high we have seen, can close at any offered far more value to its in some countries where it cost base.” Gulliver used to joke in in- time, at short notice and for eventual buyer, fourth-ranked lacks scale, Gulliver has not vestor presentations about the limits of unpredictable periods.” Bradesco. hesitated to sell businesses expense savings that could be achieved Most of these are also, Selling when the real was at that no longer fit the portfolio from further restricting the number of crucially, nations that rely on a low, however, imposed a hit through lack of connection to shirts and socks HSBC bankers could and promote trade – the tradi- on HSBC’s reported earn- the rest of the network. HSBC put through the hotel laundry on busi- tional starting point of many of ings in 2016, as did goodwill sold its US cards business ness trips. HSBC’s financial relationships. write offs on Republic Na- and its upstate New York It went down well with HSBC In retail banking, HSBC is tional Bank, the private bank branches and has looked for bankers, though probably over the now making its big play in the founded by Syrian billionaire buyers of its bank in Turkey. heads of some more earnest buy-side Pearl River Delta, seeking to Edmond Safra and sold to For a company sweating analysts wondering if this laundry expand from its base in Hong HSBC in 1999. under a deferred prosecu- thing was an accrual item they should Kong into a market of 45 mil- Republic had quite a col- tion agreement with the US somehow integrate into their earnings lion Cantonese speakers with ourful client base and HSBC Department of Justice, one models. per capita GDP roughly where began work on that as soon can readily appreciate its “It is only now, running businesses it was in Hong Kong 25 years as Gulliver took over in 2011 reasons for exiting countries as single global verticals, that you can ago. It is also expanding in but found it could not just exit such as Iraq, Pakistan and negotiate your procurement in ways Mexico, where it has market people’s trusts and finan- Kazakhstan. that derive full economies of scale,” 8 Reprinted from July 2017 Copyright© Euromoney magazine www.euromoney.com Gulliver says. “We used to have countless separate contracts with IT companies, with the people managing our properties, with every supplier in fact.” It was not just inefficient though. Costs ran out of control because the industrial logic had been lost. Meetings with institutional investors were, he recalls, not easy at first. “You need- ed to book about two days to explain the bank,” Gulliver says, “because it had become a higgledy-piggledy collection of businesses. I would be saying: ‘Well in Argentina we do a lot of car loans and also lend to very large companies. Then in the US, we make a lot of sub-prime loans to people.’ And investors would be asking: ‘What are the common themes? Where are the systems synergies? Where are the risk synergies? What is the logic? You could see them thinking: ‘No “ The banking industry needs unique digital identifiers for everyone wonder this thing trades at a conglomerate engaging with banks; a mandatory, comprehensive and robust register discount.’” , as group chairman from 1998 of beneficial ownership that is open to scrutiny; a way to share public when Purves finally retired, and Stephen and private data” Green, as CEO, along with the board of HSBC, decided in the wake of the Asian Douglas Flint financial crisis that this famously emerging- market focused bank, which had always Asia, its traditional home. This probably York. And most notoriously of all, House- run itself conservatively on the basis that in seemed like a shrewd continuation of the hold International, justifying the latter on many of the Asian countries where it oper- strategy to hedge against the handover of the eye-raising grounds that the sub-prime ated no sovereign or would Hong Kong to China in 1997 by buying lender brought it both welcome exposure be big enough to bail it out if it got into in the UK in 1992 and mak- to the US, as well as invaluable expertise trouble, needed more exposure to developed ing London its global headquarters. in lending to residents of US trailer parks markets and a more balanced exposure to HSBC became an acquisition machine, that the bank could deploy in Asia and the emerging markets. hoovering up banks like Credit Commercial Middle East – where it in fact banked the It sought to reduce its dependence on de France, Republic National Bank of New ruling families of the Middle East and Hong Kong’s tycoons. This was a big mistake. It was the earn- Transformation since 2011 ings warning from Household at the end of Six filter review led to 98 disposals and exits 2006 that signalled the start of a far larger

stons panic than the Asian financial crisis, the sub- ransatons sosals and ets prime debacle that cost HSBC shareholders heavily, led to the launch of a £12.5 billion onsderaton ($15.8 billion) rights issue in 2009, and that bln it might have avoided. In the years after the Asian crisis, HSBC ank o erda ank kono ards and grew from a bank with 136,000 staff and retal seres ane eret lods ral ren reonal state a $472 billion balance sheet, to close to elet erbank ndstral ank banks branes transatons n n oo n n 330,000 staff and a $2.4 trillion balance onore ard anaa tal etrs ards ortolo ter at ndstral ank sheet by the time the sub-prime crisis hit. oseold ansto ral Even now, just looking at those figures, ber o strate 35 48 24 4 thinking of a conservatively run bank grow- transatons annoned 9 20 23 98 ing its balance sheet five times over in a decade requires a double take. Source: HSBC There are a few examples of good buys, www.euromoney.com Copyright ©Euromoney magazine Reprinted from July 2017 9 World’s best bank

coal face keep doing a good job for cli- ents, to convince shareholders that there was more value to be had in getting the network to work together than in break- ing it up, and to assure regulators that it was not too complex to be managed. For much of his time as chief executive, a sword of Damocles has hung over him in the DPA with the US Department of Justice, after the $1.9 billion fine at the end of 2012 to settle the laundering of money for Mexican drug dealers and for dealing with other sanctioned entities. If it were ever to lose its licences to clear dollars as a US bank, that would be game over for HSBC in its current form. Everybody who works there knows that, not least the chief executive, who also knows that the very global network that is its defining differentiator puts HSBC at risk. It needs to operate in a perma- “The biggest transformation has been moving HSBC from a loose federation nent state of heightened alert. A terrorist looking to move money of stand-alone businesses in which the country heads were ‘kings’, operating from the Middle East, say, to fund an their own franchises” outrage in the US or Europe, is more likely to use a global bank to do it than Stuart Gulliver the local community bank or building society in the target country. of course: CCF for one, which gives it GULLIVER CAN BE VERY This is where the joke about managers a banking entity in France and now a entertaining company. He talks through writing their own appraisals stops being hedge against a post-Brexit loss of pass- the de-layering of management at HSBC funny. Its experiences in Mexico show porting for UK-based bankers selling to with a sardonic smile forever tugging how HSBC’s old structure allowed em- European clients. at the edge of his mouth. The plan, he ployees who did not share its governing Ping An proved to be a smart finan- says, was that “there should never be principles of, for want of a better phrase, cial investment. HSBC did almost no more than eight layers of management British decency, to avoid detection or business with it and Gulliver sold it off between me and the most junior revenue oversight. Such bad actors tend not to during the so-called ‘six-filter review’ producer, and each manager should have self-report. of the business portfolio because it had at least eight people reporting to them.” “The deferred prosecution agreement no strategic connection to the rest of What he found was “there were places hugely hurt the self-esteem of every the group. But at least that crystallized where the bank had grown to 17 layers single person at HSBC,” says Gulliver. substantial value. of management. There were manag- “People became almost embarrassed to However, many of these now look ers who had no one reporting to them. be associated with the bank, and our like the wrong acquisitions made at the And there were managers that basically staff were ashamed, in particular when wrong time and for the wrong price. reported to themselves.” asked by their families about the organi- Worse than that, and unlike the bet- He pauses to let that one sink in. zation they worked for. ter US bank consolidators rolling up “Their appraisals were always fantastic.” “By the time the results of the US Sen- regional banks across the country in the It has not all been jolly though. It has ate Permanent Subcommittee on Inves- 1990s, such as Banc One, HSBC simply often been more like trench warfare. tigations were reported, we had already did not have the people, the bed-rock Fixing a bank is less fun than address- exited a number of high-risk countries. systems or the know-how even to at- ing its strategic challenges – or at least We have striven relentlessly to instil new tempt post-acquisition integration. diverting attention away from them – global standards for fighting financial The world’s local bank – a marketing with a supposedly visionary M&A deal crime. Although we absolutely deserved slogan that Gulliver swiftly dispatched or even a break up. it, working with a monitor has been – had become, in fact, a good descrip- Gulliver’s task has been to transform tough and made customer acquisition tion of where HSBC had gone wrong. the running of HSBC while staff at the difficult. People are extremely concerned 10 Reprinted from July 2017 Copyright© Euromoney magazine www.euromoney.com about doing anything that might raise even approach to assessing the strategic fit of new either on IT or the linked issue of financial the slightest risk of breaching the DPA. acquisitions to the existing HSBC portfolio. crime standards. “The good news,” Gulliver says, “is Applied to the putative acquisition of Ned- “For all industries providing critical pub- that by better serving our existing clients, bank in South Africa from Old Mutual, this lic infrastructure as banks do, the nightmare we now have the chance to transfer rising led HSBC to walk away from that deal in is that systems fail and deny customer access revenues direct to the bottom line at limited 2010. Refined into the so-called ‘six filters’, or even worse become corrupted and have additional cost.” it then backstopped the 97 disposals and amounts extracted,” says Flint. “We are do- There is no point feeling sorry for your- country exits Gulliver has overseen since ing everything we can conceive of to ensure self. The buying spree HSBC went on after 2011, a process now mostly complete. our systems are strong and that we can 1998, to pivot away from Asia and increase Management still had to deliver on the respond robustly if there is a problem. The exposure to developed markets, had taken it notion first sketched out by Gulliver’s prede- conundrum for the whole banking industry, from employing 136,000 people in 1998 to cessor as chief executive, Geoghegan, to join however, is that when systems were much 330,000 in 2007. It had already diluted its up the group into one HSBC. more siloed, in the days before they were famous culture. “The first thing we had to do was switch designed for greater customer interaction, The three key challenges – to get a grip to running global businesses,” says Gulliver. they were probably more robust and secure on financial crime risk, to improve returns “Then we said: ‘This group now processes than now when customers want to transact for shareholders and to demonstrate to credit cards in three ways, not 300. And at the touch of a smartphone screen. regulators that HSBC is not too big or too sorry, no you can’t customize that for your “That is why HSBC set up a tech advisory complex to manage – all pointed HSBC in country.’ Then we lifted that processing into board this year to advise us on whether we the same direction. The deferred prosecution the lowest-cost place to do it.” are on the right track, how we benchmark agreement just added urgency. Gulliver appointed Andy Maguire, a against our industry and what technology former Lloyds banker and managing partner challenges may be looming in the years at Boston Consulting, as chief operating ahead.” SOME INVESTORS HAVE officer of HSBC in 2014 to take charge of Similarly, imposing effective group-wide criticized HSBC for not pressing home its operations and IT. financial crime standards is a never-ending advantage in having a good financial crisis “I was giving so much business to Andy’s task. by picking up stricken rivals on the cheap team at Boston Consulting that I decided it “You can’t just put a ribbon round the and expanding market share. It still lacks made more sense just to hire him,” Gulliver box and say: ‘Job done. As long as we scale in the biggest investment banking and says. “With common processes set around carry on doing this, we will be safe,’” says capital markets fee pool of all: the US. Did it the globe, operations and IT have been the Flint. “Bad actors will seek new ways to miss the chance to buy, say, Morgan Stanley? biggest single source of cost savings. Andy disguise payments, and while our ability to The truth is that HSBC was already strug- has done a fantastic job, and one which analyze large quantities of data, search for gling to cope with a litany of purchases it regulators, who had previously struggled to suspicious patterns and go out and identify made in the years before the crisis. attach precise responsibilities to executives wrong-doing is now much greater, we can In the run-up to becoming chief execu- within HSBC, have also appreciated.” only search our own data. Bad actors will tive, Gulliver had urged a more systematic It does not do, however, to declare victory often break up transactions across multiple parties and jurisdictions. The banking industry needs unique digital identifiers for Stable and recurring revenue with low volatility everyone engaging with banks; a manda- Quarterly GBM revenue tory, comprehensive and robust register of beneficial ownership that is open to ent dren lal nldn redt and ndn alaton adstents table rerrn scrutiny; a way to share public and private otal reene eldn redt and ndn alaton adstents data; then a way to apply to all this human c.30% revenue otal tes reene intelligence that understands how bad ac- arterl aerae ates redt tors think. rnal nestents table “Individual banks and the entire system ter reene reene arterl aerae still have much work to do.” c.70% revenue endn lobal ldt as nnt lobal trade SOME QUESTIONS CONTINUE TO DOG reeables nane senior management, and probably will do ertes seres so for Gulliver and Flint’s successors. For example, should HSBC deploy that excess of deposit funding more aggressively into Source: HSBC higher-risk assets through the period of www.euromoney.com Copyright ©Euromoney magazine Reprinted from July 2017 11 World’s best bank

low loan growth and suppressed rates, or wait for normalization in the term value of money to boost returns? “People have criticized us for keeping ad- vances too low and deposits too high,” says Gulliver. “When we could only park them in the UK for zero at the Bank of England and so set deposits rates at zero, custom- ers still gave us more because they saw that as an indication of strength. But I won’t turn deposits away. I don’t ever want to tell customers: ‘We don’t want your money this week: come back next week, we might want the whole of it then.’” 2016, after And having fought to survive the Asian taking ac- crisis and the sub-prime crisis, the bank’s counting hits top management is in no mood to listen to for writing outsiders urging a relaxation of underwrit- off goodwill ing standards. Its loan impairment charges on the pri- have stayed low, at around 0.4% of total vate banking loans last year, against 1.2% on average for operations of peer global banks. Republic Na- It has recently begun to grow loan vol- tional Bank umes modestly, notably in commercial bank- it acquired in this category has shown a compound ing in Hong Kong and the UK. But more back in 1999, on currency translation effects annual growth rate of 8% since 2014, while than any other large bank Euromoney can from selling its Brazilian retail businesses to the number using it for just one has fallen at think of, HSBC is geared to benefit if rates Bradesco and on adjustments to the value -6% compound. continue to rise in the US, as the Fed sug- of its own debt as HSBC’s credit spreads There is also a bit of a moat around this gests, and to pick up in response to robust improved. But these are the necessary con- business. Half of GBM’s revenues come European growth. tinuing costs that obscure the culmination of from clients that deal with it in four or more While HSBC still lives in the shadow of a hugely impressive restructuring. regions of the world. Having quit countries the DPA, bank regulators are now sufficient- Beneath the headline numbers, good that do not trade much, that operate closed ly comfortable with HSBC’s exposure to things are happening. economies or raise concerns about financial operational, credit and market risk to allow Take, for example, the global banking crime risk, HSBC’s slightly shrunken net- it to return capital to shareholders. and markets division, essentially the corpo- work across Asia, Europe, Middle East and Last year marked HSBC’s first share buy- rate and investment bank of HSBC. Invest- Africa, North America and Latin America back since its foundation in 1865. The stock ment banking earnings across the industry still covers 90% of world trade and capital price had sunk as low as £4.30 in mid 2016, are notoriously volatile and, as such, rightly flows. with short-sellers converging amid continu- valued at a discount by investors. But 70% Only Citi competes at this breadth; ing concerns about a hard landing in China of HSBC’s GBM revenues are derived from maybe BNP Paribas; JPMorgan and Bank of after the currency and stock market falls of managing clients’ global liquidity and cash America, not so much. That is a big chunk 2015 and worries over sustainability of the management, from financing their trade of revenues simply not available for most of dividend. and receivables, and from FX: all business- the world’s other big banks. Today, the share price stands at £6.88, es in which it ranks in the top three in the Gulliver’s restructuring efforts have been with the stock trading roughly at book world. This transaction banking revenue focused on preserving this network, the value, indeed at a premium of 1.2 times has been very stable, even while the 30% bank’s historic legacy as the trade financier tangible book value per share. derived from event businesses, like M&A of the British empire, what insiders some- Taking a 10-year view of the volatility and equity capital markets, as well as from times refer to in shorthand as “1865 and all of pre-tax profit, investors see stability at trading in equities, credit and rates, has that”. HSBC, with a range of 0.9 times, compared fluctuated. Resisting calls to break up what had to 3.6 times on average across a group HSBC bankers have learned to cross sell. begun to look like an unmanageable con- of global peers including Citi, JPMorgan, Two thirds of GBM clients use it for more glomerate was vital. Gulliver has fought Standard Chartered, BNP Paribas, Deutsche than four products; one quarter use it for six to reset investor expectations for HSBC to Bank and Santander. or more, which has a big multiplier effect on emphasize the value of the network coming The bank reported weak numbers for revenues. And the number of GBM clients through most obviously in market share 12 Reprinted from July 2017 Copyright© Euromoney magazine www.euromoney.com Gulliver’s key lieutenants: Clockwise from top left; , chief executive, global commercial banking; , chief executive, retail banking and ; Samir Assaf, chief executive, global banking and markets; Iain Mackay, group finance director; Peter Boyles, chief executive, private banking; Andy Maguire, group chief operating officer

pensation to the long-term success of the companies they run,” he says. Recent experience at HSBC and many other banks shows bad actions can remain hidden for a very long time before they, and their consequences, finally emerge. So, to the final question, which has to be: with the bank in good shape, why leave now? Gulliver will, after all, only be 59 in 2018. “I want to work until I am 75 to 80, be- cause I think the best way to stay healthy is nected portfolio to stay busy, and I would like to find what of businesses, next by the time I am 60,” says Gulliver. even after “It will certainly be in financial services, investing heav- probably working across Asia, the Middle ily in financial East and maybe Europe where my contacts crime standards are best. But I can’t see myself working at and the digital another large, publicly listed bank having transformation already done that here. It will probably be of the group. something that involves private capital.” That share Hanging around does not make sense buyback shows to Gulliver. “I can hardly run HSBC for 28 the bank using years. I told the board when I was appointed “I have tried to surround myself every lever at its disposal on capital manage- CEO that I saw it as a five- to eight-year ment. Supposedly trapped capital in the US job, and it will be seven years at the start of with the smartest people I can has started to dividend its way back to the 2018. find. There’s an element of holding company. “When you look around the banking rough and tumble on the group The stock is now a core component of the industry and consider its history, there are management board. People income portfolios of many active real money examples of chief executives who remained managers as well as of the trackers. in situ far too long, after all the potential certainly challenge me” replacements among their own generation had left and they became rather isolated, Stuart Gulliver GULLIVER WILL LEAVE HSBC SOME semi-deified figures, with people 10 to 15 time in 2018: early in the year, presumably, years younger reporting to them that want if the incoming chairman from AIA, Mark the top job but don’t dare to challenge the gains, profits and returns in CMB and GBM, Tucker, and the board appoint an internal incumbent on any decision. and to imply that any break up now would candidate to succeed him; later in the year if “There is a danger that unchallenged likely come at a discount rather than a the next chief executive comes from outside leadership becomes narcissistic. And that’s premium. HSBC. when bad decisions get made. I have tried There is much work still to do. HSBC It is Gulliver’s choice to leave, following to surround myself with the smartest people confirmed a 10% return on equity target Flint who departs as chairman at the end of I can find. There’s an element of rough and back in 2015, modelled on a CET1 ratio September this year. tumble on the group management board. of 12% to 13%. That is a return that the As a board director of HSBC, Gulliver People certainly challenge me.” group has not met, while running a CET1 of will have some limited say in the succession Euromoney might argue that that sense 14.3% with no clarity yet on final regulatory process. He refuses point blank to be drawn of stewardship is more likely to be keenly requirements for the size and composition of on whether it should be an external or inter- felt among the internal candidates to replace the capital stack. nal candidate, but he will be taking a close Gulliver. But it is no call of anyone but the The bank will not reach the 2017 profit- interest. Much of his wealth will be tied up board. ability target for the US laid out in 2015, but in HSBC stock for up to seven years after his And perhaps even more important than has made progress there and in Mexico. And time at the top is over. picking the right individual is making sure it is ahead of most of the big 2015 promises “It’s entirely appropriate that stock the next person in the chief executive’s office on risk-weighted assets and cost reduction, compensation should be structured only to does not try to make a mark by squandering looking set to leave 2017 with the same cost pay out years after senior executives leave this transformation on ambitious, ill-judged base as 2014, on a more logical and con- because this aligns senior executives’ com- and capital destructive acquisitions. www.euromoney.com Copyright ©Euromoney magazine Reprinted from July 2017 13