((Automated translation by Reuters, please see disclaimer https://bit.ly/rtrsauto)) by Sinead Cruise and Lawrence White
Rising costs at HSBC HSBA.L have reinforced growing investor concerns about how big banks manage expenses, putting executives under pressure to quickly tackle spending.
Although banks have seen their revenues swell in the high interest rate environment of recent years, rapidly rising costs are now starting to hamper them, consultants and shareholders said.
Recent results have shown that lenders are struggling with payroll, regulatory costs and accelerating investment plans.
HSBC announced on Wednesday a 6% increase in its costs in 2023, blaming its expenses on levies in the United States and Great Britain. Europe’s largest bank by assets also forecast a 5% increase in costs in 2024, after pledging to invest despite stubbornly high inflation.
A report published last year by consultants Oliver Wyman and investment bank Morgan Stanley highlighted the need for banks to avoid one-size-fits-all cost-cutting strategies, in order to make savings with minimal effect on revenues .
HSBC’s 2023 pre-tax profit jumped 78% to $30.3 billion, but missed consensus estimates due to an unexpected $3 billion writedown on its stake in the bank Chinese Bank of Communications.
Although a new $2 billion share buyback helped mitigate these effects, some fund managers expressed concern.
“Costs are clearly disappointing, with inflation and investment casting a shadow and posing a risk to earnings,” Hywel Franklin, head of European equities at Mirabaud Asset Management, told Reuters after HSBC’s results.
British bank Barclays set savings and cost-income ratio (CIR) targets on Tuesday which were not met for some investors.
Barclays BARC.L said it hoped to cut costs by around 2 billion pounds over the next three years and bring its operating ratio to a level “above 50” by 2026, from 63% at the end of 2023.
HSBC chief executive Noel Quinn said his bank was managing cost pressures better than the surprise overrun suggested, with its 2023 CIR cut to 48% last year from 64% in 2022.
Asset sales have also proven to be a useful cost management tool.
“We are selling costs worth a billion dollars,” Mr. Quinn said, highlighting sales of HSBC’s French and Canadian arms that have been made in recent weeks.
“We continue to try to offset investments in the business for growth and efficiency reasons with savings elsewhere,” Quinn added at a press conference.
Other European banks have also felt the pressure. Credit Agricole CAGR.PA this month reported a 15% year-on-year rise in underlying operating expenses in the fourth quarter, more than expected, and announced a further 8% increase. of its costs for 2024.
Deutsche Bank said on February 1 it would cut 3,500 positions as it tackles a 75% CIR and a 6% increase in non-interest fees for 2023.
REMUNERATION
Oliver Wyman and Morgan Stanley’s report says global banks could reshape their workforces to clarify roles and align pay, while corporate specialists should reduce regional footprints to prioritize resilient revenues to the recession.
With inflation continuing to weigh on their returns, some investors and analysts said bank executives needed to exercise restraint on share buybacks and compensation, awaiting further progress on deeper savings. broad and in the event of possible economic shocks.
“Share buybacks artificially inflate earnings per share, which can lead to unsustainable practices over quarterly periods,” Allen He, research director at FCLTGlobal, told Reuters in comments on companies in general .
Meanwhile, remuneration is seen as an increasingly important part of banks’ rising costs.
In a report published on February 8 (), shareholder advisory firm Glass Lewis said it would “carefully consider the strategic rationale for any rebalancing of bankers’ pay”, given the regulatory changes, which removed ceilings on premiums.
Mr. Quinn saw his total compensation double in 2023, from $5.6 million the previous year to $10.6 million, as long-term incentives related to his 2020 appointment began to vest, which boosted his variable compensation.
HSBC’s bonus pool increased from $3.4 billion in 2022 to $3.8 billion in 2023, reflecting improved performance, and the bank will launch a variable pay scheme for junior and senior executives means.
In contrast, at Barclays, the bonus pool fell by 3% in 2023 to £1.75 billion, and chief executive CS Venkatakrishnan saw his total remuneration fall from £5.2 million to £4.6 million pounds.
The Glass Lewis report said it “generally expects that increases in variable bonuses will be accompanied by an appropriate reduction in fixed compensation”, adding that the first bank to propose substantial changes could serve as a test decisive.
“If a pay review is well supported by shareholders, the interest of other banks could well be piqued.