I was on Bloomberg a couple of weeks ago, when they brought me in to ask about what in the world is happening to HSBC. (My staff and I get regularly invited by the regional various TV and radio stations with business coverage to comment on specifics in the industry. I go on the air only when it involves a macro development, like the global banks, China, India, trends in general. Other of my staff speak on their area of specialisation, whether it is Japan /Korea, China, Southeast Asia, Australia, Risk Management, annual results etc etc).
I told the erudite Bernard Lo, who sits in Bloomberg Hong Kong, that HSBC could be described as suffering from “multiple organ complications”. At the leadership level, Steven Green, the group chairman has been recently talking gibberish to the Financial Times about sharing power with the CEO, parallel responsibilities and so on. When a chairman starts talking incoherently in that way, just know that there is some kind of power problems inside the boardroom, or in this case, the management table. This is uncharacteristic at HSBC because whatever the internal problems, at the top it has always been a gentlemen’s club of deferent British managers, all grateful for careers in a very successful global organisation and they always had their way of sorting things out.
At the organic business level, they seem to have made an expensive misstep in their core territories over the past two years or so. Both in HK and the UK, HSBC has appeared to have lost all sense of profitability. I made this judgement from their last year’s numbers that they were sacrificing ROA for market share in the mortgage markets, while Hang Seng Bank (also a subsidiary) and Bank of East Asia were picking up the profitable customers. Now, why would the largest, single most dominant player in the market do that? I suspect that they went for market share competition in the UK as well, and it is going to be very hard to turn around a large asset book into a profitable one. There again, maybe they did not go for marketshare, but they had trouble managing their margins in these two very competitive markets – which is a treasury problem. So, something’s wrong in the boiler room of this bank.
In investment banking, they just keep being rudderless, with the wrong people coming in and out of the organisation. While all other investment banks are declaring record breaking performance, HSBC is the only one out of the club, because they don’t have leadership in this business at the moment. I sympathize with them, because they want to use traditional commercial banking sense and yet build a business in investment banking, which is a very different ball game. At first, they did not want to pay the high salaries for top-notch investment bankers. Then when they did get to paying their head of investment banking more than the CEO, they selected a series of wrong candidates. Investment bankers are mercenaries, and to beat them at that game, you have to be one yourself. But it is a learning process and I am sure they will find the right formula eventually, but not in the next two years, and it will show in their books.
The big one coming up, is the possible implosion probably already taking place in Household, their US sub-prime mortgage business, which I suspect is bleeding. A week before Christmas, when I was in HK talking to Mike Green, as the PR girl brought me through the building, I just kept running into or hearing about several other senior people all getting set to move to the US in a hurry. Something is happening here, I said to myself, for several senior people to dash off to the US in a hurry all at once in the week before Christmas. Only firemen do that! I think the Americans who run Household have lost their way, and it is not the icon of sub-prime lending in the US market that it was when John Bond bought it, and the Brits have to move in and put in very strong risk management measures to bring back order into the business.
So, let’s see the annual results next months. I want to see that all my suspicions above will be represented in the numbers and as we know, numbers never lie.
Similarly, I have been editing some of the comments of my colleagues on Standard Chartered Bank. I think Mervyn Davies has been getting used to the “London Life” too much. Same thing happened to Rana Talwar before him. It is NOT possible to run a business that is essentially East Asian, as Standard Chartered is, living in London. London does things to these well heeled folks representing respectable names. It makes them comfortable. It makes them enjoy the high life, and then it makes them disconnected from the reality of their business way out there in the Faaaaaarrrrrrr East.
I don’t like it that Mervyn has been appointing people from outside the bank to be his lieutenants in London and then depending on the generals in the field to give him the numbers he is looking for. He has already lost one of his best generals, KK Tan, to GE Money and by that created a new competitor. Not wise. Others might leave eventually. A few months ago, I ran into Mike Denoma, head of the global retail business on a flight to HK and I asked him candidly if he thought he was ready for CEO-ship (of any bank, not just StanChart), and he said, “yeah, sure!” StandChart has few high grade people like Mike who are not going to sit around and be Mervyn’s henchmen in the fields while the emperor is building an alternative relity in London.
3. IT in financial services
Incidentally, I will be giving an important speech to IT vendors who want to sell to the financial services community this Thursday (18 January), I think. The details are in:
I will be stating what is happening in the financial services industry today and where the opportunities will be going forward. I will be going much further than what you may be hearing from others who will tell you “margins are compressed” basic stuff. The changes taking place in the industry are fundamental and I will be sharing for the first time the impact of commoditisation in the financial services industry.
Now, having said that, we must congratulate the financial services industry that it has genuinely incorporated risk management capabilities to price and design products that customers really need.
Then I will discuss what is happening in the IT world. I think we need to take a serious look at what is becoming of the IBMs and the HPs of the world, how they are losing their way because of a desire to move into services, but ending up having to sell hardware in any case. The implications of the internal disarray within these organisations have not been discussed in public but must be, because that in itself is determining what and how their partners and IT companies in general will be able to succeed in the financial services industry.
So, if you are in town, get an invite from the SITF by clicking through the website above and come tell me what you think about my views.