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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a managing director at Frontline Analysts and the author of ‘The Unaccountability Machine’
HSBC’s involvement in the investment banking industry has, over the years, been oddly reminiscent of the American sporting public’s relationship with Major League Soccer.
Every four years or so, there is a spike in enthusiasm. This is followed by a burst of investment, and aggressive hiring of stars from elsewhere, sometimes a few years past their prime. And then the results are mediocre and interest slowly dissipates. You can almost tell the age of a London banker by asking about their memories of HSBC investment banking. Do you remember when it was called James Capel? Do you remember when John “Studs” Studzinski came over from Morgan Stanley? Do you remember the hire of former Goldman banker Matthew Westerman?”
Now HSBC’s new chief executive, Georges Elhedery, seems to be heeding one of the tried and tested lessons of investment banking: like heading a football, if you are not absolutely committed to the play, you are much better off not trying at all.
The trouble is that bankers can always detect uncertainty, and that leads to a kind of negative spiral. If employees think you’re not in it for the long term, they demand “danger money” to work for you. If you have people on big basic salaries or guaranteed bonuses, they’re under less pressure to generate business. That can translate into reduced profitability or losses, which inevitably leads to the job cuts that justify the market perception of your franchise.
The best investment banking franchises are marked out by their willingness to tolerate short-term pain for long-term gain. They know that you can’t get stable earnings out of a cyclical industry. More importantly, they know that investment banking is a people business, in which the value is generated from long-term relationships and very hard work. If you make the kind of demands of people that a really strong investment bank does, you can’t then use redundancies to manage quarterly earnings forecasts.
So there’s no point cutting a little bit to try to make a cost target. If you’re going to shut an investment banking business down, you shut it down. So HSBC will no longer do M&A advisory or equity capital markets in Europe or North America — and without those businesses, it’s unlikely that it will keep equities sales and trading either. By giving up on global ambitions, Elhedery aims to concentrate capital and resources on the profitable franchises in Asia.
Unfortunately, this brings another industry truism into relief. And that is that it’s very difficult for a bank to be happy or well-managed when its most profitable business unit is geographically or functionally separated from the head office. It breeds resentment on both sides. Historically, the Asian bankers have felt as if they were paying all the bills for underperformers elsewhere, while the American and European bankers felt that they were being patronised by people who had been gifted a leading position in an uncompetitive market. At times, both sides may have been right.
A situation like this tends to create a breeding ground for internal politics, and to proliferate unwieldy co-head structures that have more to do with soothing internal tensions than managing a business. Getting rid of these has also been a priority for Elhedery since he took over, but it’s easier said than done. If you just dismantle the structures while leaving the underlying issues that created them, they will spring back like the co-heads of a hydra.
In other words, taming HSBC is going to involve making some decisions that have been avoided for decades. Either this is a global bank with a particularly strong franchise in greater China, or it is a Chinese bank with global operations. When one puts it as baldly as that, it’s not hard to see why past CEOs have preferred to maintain constructive ambiguity, even at the cost of paying a few more regional heads and their entourages.
Even with that problem addressed, there is a final truth of banking that is not easily escaped: it’s very difficult indeed to know where the value is really generated. In a business where all the bank’s capital is at risk everywhere at once, and where people work together in ways that don’t always correspond neatly to an organisation chart, profitability is always a guess and an assumption rather than a hard fact. Many banks have found out, a little too late, that the business they cut provided essential services to one that they kept, or that customers paid for one product but truly valued another part of the relationship.
Some things are big because they are complicated. Some things are complicated because they are big. HSBC, unfortunately for the man who has to run it, is still both.
