HSBC to overhaul business model as third-quarter profit tumbles 35%

HONG KONG/LONDON (Reuters) – HSBC Holdings PLC HSBA.L on Tuesday signalled it would embark on a transformation of its business model, seeking to flip its main source of income from interest rates to fee-based businesses.

It also accelerated plans to shrink in size and will slash costs further than previously suggested.

The plans were unveiled as the bank posted a less-than-expected 35% drop in quarterly profit and flagged an easing in its provisions for bad loans, citing an expected improvement in the economic outlook for its main markets.

The change in approach marks one of the biggest long-term shifts in strategy to date from Europe’s biggest bank, which has long touted its ability to generate interest income from its more than $1.5 trillion in customer deposits.

But with interest rates worldwide now rock-bottom and even turning negative, the bank is struggling to charge more for loans to borrowers than it pays out to depositors and it warned that net interest income would remain under pressure.

Reported pretax profit for HSBC came in at $3.1 billion for the quarter ended Sept. 30, higher than the $2.07 billion average of analysts’ estimates compiled by the bank.

Its Hong Kong-listed shares rose over 5%.

Asia-focused HSBC said it expected losses from bad loans to be at the lower end of the $8 billion to $ 13 billion range it set out earlier this year.

“This latest guidance, which continues to be subject to a high degree of uncertainty due to Covid-19 and geopolitical tensions, assumes that the likelihood of further significant deterioration in the current economic outlook is low,” it said.

Faced with fewer options to bolster revenue growth, HSBC has been looking to reduce costs globally and in June resumed plans to cut around 35,000 jobs it had put on ice after the coronavirus outbreak.

Other measures in the lender’s global restructuring drive, unveiled in February, include the disposal of its French business, which it may have to sell at a big loss, Reuters reported last month.

HSBC also said it will accelerate the transformation of its U.S. business, where it has long struggled to compete with much bigger local players, and will provide an update at its 2020 full-year results in February.

Analysts and some investors have long urged the lender to dispose of its U.S. retail business entirely, and HSBC earlier this year said it was slashing its branch network in the world’s biggest economy.

HSBC, which in common with other British lenders stopped paying dividends earlier this year at the request of regulators, said it would communicate a revised dividend policy – also in February. Analysts and investors fear the lender could cut payouts in the long run.