Eyebrows were raised when Barclays chief executive Jes Staley declared last month that “low interest rates are on one level a blessing”. Some long-suffering Barclays shareholders were surprised to hear the chief executive look on the bright side of the main cause of banking’s woes since the financial crisis.
To be fair to Staley, he was speaking in the broader context of COVID-19 and the vast borrowing which governments and companies have leaned on to stagger through the pandemic.
He’s right, too. Cheap debt allowed Rishi Sunak and his international peers to keep economies in induced catatonia for months.
It is low-cost borrowing that gives business a fighting chance of recovery whenever the pathogen fades. At the moment, low interest rates are on balance a good thing for almost everyone. Banks and their shareholders are some of the few exceptions, however.
While they have a clear interest in saving the economy, for them historically low interest rates (now locked in for as long as anyone sensibly dares to forecast) mean historically low returns on lending. Negative base rates are now a real possibility that will only compound the pressure on banks. The carnage of coronavirus also means plenty of loans will not even be paid back.
At less than £1 a share, Barclays has lost getting on for half its stock market value this year. Barclays continues to be assailed by the activist investor Ed Bramson over the performance of its investment bank and Staley’s damaging relationship with Jeffrey Epstein, the subject of an ongoing regulatory investigation.
Yet, amazingly, it could be worse. Staley does not seem the type to brood on his problems, but if he is ever tempted by despair, he should console himself in the knowledge that at least he is not running HSBC.
On Friday, shares in Europe’s biggest bank slumped to 304 pence, below the nadir they reached during the financial crisis in 2009, and to their lowest level since 1998. Chief executive Noel Quinn and chairman Mark Tucker face a situation that the market has priced as worse for HSBC than a potential collapse of the global financial system.
Everywhere you look at HSBC, there are massive challenges. Many are industry standard.
It, of course, operates under the same “blessing” of historically low interest rates as Barclays. Likewise, the coming – and partly unavoidable – wave of business failures triggered by coronavirus means HSBC is also going to be forced to write off billions in bad loans. Last month, Quinn signalled that the figure for this year alone could be as high as £10 billion ($17.7 billion).
The unpredictability of the man in the White House and his battle with Beijing are stoking real fears that a new round of sanctions could cut HSBC off from the dollar.
Against this grim backdrop, the bank is attempting major restructuring and cost cutting in a bid to preserve what returns are available.
An accelerated programme of 35,000 job cuts from a global workforce of 235,000 is inevitably undermining morale at a time of crisis.
Yet it seems all but certain that further pain is in the works. HSBC’s friends in the Barclays research team suggest Quinn will need to make a total of nearly 100,000 redundancies to meet his target of returns on equity of between 10 per cent and 12 per cent by 2022. What state HSBC morale might be in by then is anyone’s guess. For Quinn, appointed permanently in March after an odd trial period that fuelled speculation Tucker would have rather not, it is a daunting task.
Some of the changes will be overdue. Like most big banks, HSBC’s computer infrastructure requires serious investment and updating after successive managements opted to make do and mend. Technologies such as the software-as-a-service approach of Salesforce and others now offer banks a tempting shortcut to digital efficiency. Taking it in the coronavirus economy will be fraught with risks, but again, they will not be particular to HSBC.
Instead, the special worries that have sent the bank lower than during the financial crisis are Donald Trump and China. The unpredictability of the man in the White House and his battle with Beijing are stoking real fears that a new round of sanctions could cut HSBC off from the dollar. There are plenty of reasons to take this seriously. China’s human rights abuses in Xinjiang and erosion of liberties in Hong Kong continue apparently unchecked by the sanctions the US has slapped on officials.
Meanwhile, HSBC has faced direct criticism for its activities in China from US secretary of state Mike Pompeo, including the dismal spectacle of executives publicly backing the oppression of Hong Kong.
A tempestuous presidential election must raise the chances of Trump lashing out at Beijing, as the Chinese viral video craze TikTok is discovering, with the decision to ban it from US app stores.
Americans are affected, just as they would be by sanctions targeting HSBC, but the White House presses ahead anyway.
The full consequences of sanctions on HSBC are hard to predict, but our lead story this week reveals that the threat is such that the bank and London authorities are now trying.
It is fair to say sanctions on HSBC could, in extremis, undermine its stability unless contingency plans are in place.
Those involved insist the chances of disaster for HSBC remain small and they are surely correct.
Yet it is intolerable that the institution finds itself in this position with seemingly nothing to say about how it might extricate itself or look after the interests of its shareholders.
Regardless of what happens in the US in November, the tense new atmosphere between the West and China will not blow over. If they are to tackle the rest of HSBC’s considerable challenges together, Quinn and Tucker need a better plan than keeping quiet.
Source: Thanks smh.com