HSBC Makes U.S. Banks Look Fat and Lazy

NEW YORK ( TheStreet) -- HSBC ( HBC) is already firing on all cylinders as the company continues its remarkable turnaround, but the company on Wednesday announced plans to maintain its already impressive efficiency ratio.

HSBC CEO Stuart Gulliver said in a press release that "we have announced the closure or disposal of 52 non-strategic or underperforming businesses since the beginning of 2011, achieved US$4bn of annualized sustainable cost savings and generated double-digit loan growth in 15 priority markets. HSBC is now simpler, easier to manage and ready to take advantage of growth opportunities."

As part of the company's "unchanged" strategy, HSBC is aiming for an additional $2 billion to $3 billion in annual cost savings.

HSBC, headquartered in London, is the world's second largest bank, with $2.7 trillion in total assets as of March 31. The company on May 7 reported first-quarter earnings of $8.434 billion, increasing from $4.322 billion during the first quarter of 2012. The bank's first-quarter return on average equity (ROE) was a solid 14.9%, improving from 6.4% a year earlier.

A major component of the bank's turnaround has been a reduction in its exposure to the U.S. market, including the sale last year of roughly 200 branches in upstate New York to First Niagara Financial Group ( FNFG) and other banks, and also selling its entire U.S. credit card portfolio to Capital One Financial ( COF).

HSBC's long term goal is to continue focusing on building its business in countries with high GDP growth, while maintaining ROE in a range of 12% to 15%.

The company's first-quarter underlying cost efficiency ratio was an impressive 53.2%, improving from 56.9% a year earlier. The efficiency ratio is, essentially, the number of pennies of overhead expense incurred for each dollar of revenue. Lower is better.

While these are not necessarily fair comparisons, here's how efficiency ratios stacked up for the "big four" U.S. banks during the first quarter:
  • Bank of America (BAC) reported a first-quarter efficiency ratio of 76.57, improving from 85.13 in the first quarter of 2012. As housing prices in the United States continue to recover, and as the company keeps working through its problem loans, repossessed property and mortgage repurchase demands, its efficiency ratio should improve significantly over the next two years.
  • Citigroup (C) reported a first-quarter efficiency ratio of 61%, improving from 63% a year earlier. With the continued wind-down of Citi Holdings and the massive cost-cutting program announced in December, Citigroup's efficiency ratio should continue to improve.
  • Wells Fargo (WFC) reported an efficiency ratio of 58.3%, for the first quarter, improving from 60.1% a year earlier.
  • JPMorgan Chase's (JPM) first-quarter efficiency ratio was 62.66, increasing from 59.77 a year earlier, according to Thomson Reuters Bank Insight.

In its presentation on Wednesday, HSBC outlined some areas that presented clear opportunities for cost savings. For example, the company has 1,100 facilities management vendors. The company recently contracted a single vendor to manage all of its facilities.

Other targets for efficiency improvements include HSBC's management reports, which currently number over 4,000, and the bank's "57 versions of Personal Internet Banking and 46 versions of Business Internet Banking."

HSBC aims for a reduction employee headcount from 261,000 at the end of 2012 to a range of 240,000 to 250,000 by the end of 2016.

The company aims to keep its efficiency ratio in in "the mid 50s" as it works toward its growth goals, as well as "progressive dividends and share buybacks." The shares already yield over 4%.

HSBC's American Depositary Shares were up 1% in morning trading, t $57.42.

HBC Chart HBC data by YCharts

Interested in more on HSBC? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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