HSBC rationalisation - do they know it’s Christmas?

From Barclays to Mid-Med...then HSBC

If you're one of HSBC's shareholders, you are justified in being excited. Global pre-tax profit reached US$11.5 billion for the first half of 2011, while in Malta, the bank registered a staggering €83 million pre-tax profit.

Shareholders and the markets have lauded HSBC's group chief executive Stuart Gulliver for the results, who also looks like he's making good on his plan to cut costs and focus on growth markets.

But if you're one of HSBC's approximately 300,000 employees worldwide, it might be hard for you to join the celebration. Much of the cost savings in the company's strategy will come from shedding a total of 30,000 jobs before 2013 - 5,000 employees have already been laid off during the first half of 2011 - not counting jobs lost from selling or disposing of portions of the company.

While HSBC may be on track to slim down, it now has to handle the tricky situation of maintaining a productive workforce when plenty of its people are facing the chopping block.

The word is 'the Market' - an abstract reality that has earned itself a capital 'M' for its growing influence and power, on all and everything.

If the Greeks feared Zeus, today we fear the 'Markets' which, whether we like it or not, set the pace, mood, survival or elimination of a company or government.

So it's all about Markets! And the Markets seem to like it when big banks slim down. When HSBC announced its job-slashing plans along with an increase in profits last August, its share price rose by 5%.

Gulliver had said: "If  we're looking to take 10% out of the cost-base of the firm, it's not altogether surprising that's about 10% of the headcount of the firm."

The layoffs may please shareholders because they reflect action, but HSBC's situation creates tension between shareholders, cheering the job cuts as good business strategy, and employees who may be afraid of losing their jobs.

Cost-cutting looks great on a spreadsheet, but layoffs come at a significant cost to morale and productivity.

For the first six months of 2011, HSBC registered a global pre-tax profit of US$11.5 billion, but despite this result - which is 3% more than 2010 - it says it wants to save billions of dollars.

And indeed, there will be savings: HSBC will cut another 30,000 jobs by 2013 and exit operations in 20 countries. Together, the job cuts amount to about 10% of the bank's total workforce, although the company stressed it will also be recruiting staff by 2013.

The bank is reportedly in the early stages of a surprisingly radical rethink of its original strategy of planting its flag in almost every country of the world.

In future, the focus will be on growing its business in the world's faster-growing economies - notably, in the Asia-Pacific and Latin America.

Revenue for the first six months of 2011 was US$35.7 billion, with double-digit growth in Hong Kong, the rest of Asia Pacific and Latin America. However, US revenues fell.

The bank was profitable in all global regions, helped by a sharp reduction in charges due to bad loans, particularly in the US, which fell to US$5.3 billion from US$7.5 billion in 2010.

In the United Kingdom, pre-tax profits for the period were estimated to be in the region of GBP£843 million, an increase of 29%.

The bank was also cautious in its outlook for the coming months.

Besides the job cuts, the bank said it will be closing its retail banking operations in Russia and Poland and selling three insurance businesses as part of pre-announced plans to save up to $US3.5 billion by 2013.

Last August, it announced the sale of 195 US retail branches, primarily in New York, to First Niagara Bank for about US$1 billion.

With 30,000 job cuts around the world in the next three years, Maltese staff can only breathe a sigh of relief that there are no redundancies being announced, albeit voluntary early retirement schemes and reposting.

Spillover on Malta

Politely described as a drive to improve "organisational effectiveness against the background of difficult market conditions," HSBC (Malta) announced that it will be closing various branches across the island, and will embark on a restructuring programme that will involve voluntary early retirement schemes for a number of its staff.

Outgoing HSBC Bank (Malta) chief executive Alan Richards cited "increasingly challenging economic and market conditions in Europe" to justify the reorganisation, and added that "in order to ensure the bank maintains current levels of performance in the medium term, the board has approved a plan to deliver additional cost savings by the end of 2013".

Richards's statement came just a month after the banking group registered a pre-tax profit of €81 million for the financial year, and while dividends were generous for shareholders, the country has now come face-to-face with the reality of dealing with a conglomerate which employs almost the entire population of Malta worldwide, across 7,500 offices in 87 countries.

The capital it handles is said to be enough to keep the island of Malta going for the next 500 years.

HSBC had hinted at the branch closures and the early retirement schemes in its annual financial report last November, but reality hit home this week when the bank made it official to the media.

In a carefully worded statement, the bank made it clear that the restructuring

"will not involve staff compulsory redundancies, but through consultation with the Malta banking employees union (MUBE), employees may apply for the voluntary redundancy and early voluntary retirement schemes currently on offer".

MUBE president William Portelli said that his union is more than satisfied to note that there will be no 'forced redundancies'.

He claims that he holds what perhaps is the "best collective agreement with the most aggressive company in the world".

A renewed collective agreement signed last month obliges the bank to consult with MUBE on any plans for job shedding, which so far is not the case, and limited only to voluntary early retirement schemes.

But is Malta really an exception for HSBC?

Portelli is cautious in his reply: "What I can say is that over the years, MUBE has built a good relationship with HSBC, and we agreed to keep talking to each other in the best interest of the workers."

He wouldn't go into the merit of the bank's decision to reduce its footprint around the island because this is purely an operational issue for HSBC.

"My main concern are the employees," William Portelli insisted, adding that he will keep a constant eye on the restructuring process which the bank is set to embark on throughout the coming year.

HSBC has so far not said how many of its employees it wishes to attract with its early retirement schemes, but banking sources talk about 600, which make up almost half of its workforce in Malta.

Government has so far kept silent on the announcement, and questions sent to the finance ministry remained unanswered at the time of going to print.

What was discussed at Castille on 1 December - when new HSBC Malta CEO Mark Watkinson (who will be replacing Alan Richards as from 1 January) called on Prime Minister Lawrence Gonzi - remains unknown.

The visit was described as a "courtesy call" and the delegation was made up of HSBC Malta director Sonny Portelli, HSBC Continental Europe CEO Peter Boyles, and the outgoing CEO Alan Richards, who will be taking the post of HSBC CEO in Indonesia.

Bank of the Year

Recently named 'Bank of the Year in Malta' for 2011 by the Financial Times monthly publication The Banker, HSBC chief executive Alan Richards admits that his bank delivered a "strong performance across all businesses despite increasingly difficult market conditions".

But alas, despite the profits, the dividends and the performance, the rant continues about the negative expectations for 2012 due to increasing pressures on revenue and capital.

From fear of 2012, the bank's statement oddly goes back to "over the past year" to justify the closing of its branches and reduction in personnel for a registered "14% reduction in teller activity, which reflects a rapid change in customer behaviour".

By 15 February, HSBC will close down branches in Msida, Santa Venera, Naxxar and Attard. Branches in Manwel Dimech Street in Sliema and in Luqa will close down on 15 March.

Also as of 15 February, the Gozo-based agencies in Nadur and Xaghra will offer reduced service by appointment, while the HSBC branch on Campus at University will run on reduced service as of 30 June. Accounts held in these branches will be transferred to the nearest branches.

HSBC says it aims to complete an €11 million investment project to upgrade the rest of the branch network, while also improving the automated banking systems.

The bank says that it remains "committed" to ensure that customers will still be able to carry out transactions via ATMs and deposit machines, which will remain in place even where branches will close down, while in some cases, new ATMs and deposit machines will be installed in the locations previously used as branches or agencies.

Over the past year and a half, HSBC has refurbished and re-opened 10 branches in Buġibba, Ħamrun, Swieqi, Paola, Valletta Premier Centre, Żejtun, Mosta, Zurrieq, San Gwann and Birkirkara. The bank has also announced that it is installing next-generation ATMs across its network in Malta and Gozo for faster self-service transactions - an investment of more than €3 million in this new technology.

"A key initiative is the further optimisation of the branch network footprint. This in part reflects changing customer behaviour and the increasing popularity and convenience of HSBC's automated services," Richards said, adding that "Malta is an important market for HSBC and while closing a branch or reducing the range of services is not popular, the decisions are only taken after very careful consideration of customer activity, demographics and proximity to other branches".

HSBC says it will remain committed to an ongoing €11 million investment programme aimed at refurbishing and upgrading key branches and automated facilities.

Redundancy fears

Understandably, employees afraid of losing their jobs can be less efficient. Companies experiencing a major transition such as this one must handle it carefully, and make an effort to strengthen lines of communication.

The company needs to tell its employees why they've been spared, and how they fit within the company's refreshed vision. This can help alleviate any tensions around.

These negative side effects only add more weight to HSBC's challenges. But, in the meantime, the bank's stock jump could carry more long-term meaning for CEO Stuart Gulliver than it may seem.

According to an analysis of years of data from Fortune 500 companies, Kevin Hallock, director of the Institute for Compensation Studies at Cornell's School of Industrial and Labour Relations in London: "If you see a layoff and the market loved it, the CEO tends to stick around. If there's a negative reaction, the CEOs tend to turn over in the subsequent years. It's not a law of gravity, but on average, that tends to be true."

From Barclays to Mid-Med...then HSBC

In 1975 a Labour government under Prime Minister Dom Mintoff had nationalised Barclays Bank International's operations in Malta and renamed it Mid-Med Bank, exercising its option to purchase Barclays' remaining shareholding in Mid-Med in 1979.

In 1991 the Maltese government sold 33% of Mid-Med Bank to the public and in 1993 Mid-Med listed on Malta's stock exchange.

Mid-Med acquired 25% of Lohombus Bank, which specialises in housing finance, in 1995 along with the Investment Finance Bank in Malta. The bank gained a majority of Lohombus Bank in Malta when it acquired another 35% of the firm in 1996, the same year it established a representative office in London.

Mid-Med joined the HSBC Group in 1999, after Midland Bank became the first foreign bank to be granted an unlimited banking license in Malta, opening a branch in September 1996.

In 1999, Midland Bank acquired the government of Malta's 67.1% direct holding in Mid-Med, as well its 2.7% indirect holdings. Part of the agreement was that for the time being the bank would continue to be listed in the Maltese stock market and that Midland would not make a formal offer for the remainder of the shares but could buy if other shareholders chose to sell.

At the time, Mid-Med bank had 60 offices and branches, 1,800 staff and was the largest commercial bank in Malta.

When HSBC brought all its operations under a common name, Mid-Med became HSBC Malta Bank plc. HSBC absorbed Mid-Med's representative offices in Dubai, Milan, and Luxembourg into the HSBC offices in their respective countries but established a 'Malta Desk' in several of these countries. Lohombus Bank became HSBC Malta (Home Loans) Ltd.