Keith Mullin

Why was anyone surprised by HSBC’s announcement the other day that it is exiting equity capital markets and M&A advisory in Europe and Asia but maintaining a presence in the Middle East and Asia? Investment banks entering, leaving, re-entering, reorganising, cutting, expanding, or tweaking their positions in product segments and/or geographies is and has always been standard practice.

From my perspective, HSBC’s decision had an air of ‘so what?’ and ‘about time’. For a number of reasons.

First, because there’s a new CEO in situ. Georges Elhedery has vigorously – some would say brutally – taken the axe to headcount since he took office last September. He’s also redrawn the group’s organisational structure. ‘New broom syndrome’ tends to go hand in hand with change as new bosses set about making their mark, doubtless supported by external strategy consultants, for whom a new boss with cash on the hip is invariably a ‘kerching’ moment.

With Elhedery’s background as a rates trader, you’d imagine that the trader vs advisory rivalry that typically resides within investment banks added some zest to any zeal he might have had to scale back in advisory areas that are non-core, barely profitable or loss making.

Second, the world’s local bank has never really been very good at ECM or M&A. It’s always been an also-ran, albeit ( and to be fair ) with some reasonably good years ( but mainly mediocre ones ). Financial advisory-led businesses have never really been a core part of the organisation’s DNA and today they represent a small fraction of the group’s revenue profile.

The bank’s ECM and M&A marketing pitches as displayed on its website say all of the right things. For ECM: “we develop and manage tailored capital-raising solutions to suit your needs”. For M&A: “By leveraging our global network, we can provide you with relevant and up-to-date market intelligence necessary to help deliver your M&A ambitions wherever they take you”. The problem is it wasn’t doing any of those things in sufficient volume in enough geographies with enough clients to make maintaining a global presence worth the cost.

Third, the much-vaunted pivot to Asia and the opportunity to be a scale player in places it can make a difference while generating reasonable returns.

No reputational damage

So will HSBC suffer any reputational damage from its decision to quit businesses it’s not very good at and which don’t make any money? Hardly. Too many investment banks spend far too long hanging onto businesses that are loss-making or break-even because they fear that not being seen to be global full-product players is a losing ticket or they think they will lose face in the eyes of clients and other stakeholders.

Alternatively, they live in the vain hope that unloved and unprofitable businesses may come into their own in some future market or business cycle, so they allow them to continue functioning somewhere in the internal Twilight Zone while the staff associated with them play busy and gratefully take the pay cheques, ever fearful that the axe could be about to fall. Getting out is tough for sure, but it’s the right thing to do.

Executive changes and reorganisations are never, ever, forever. Nor should they be. Times change, client priorities change hence perceptions of winning formulas need to change. Business strategies are and can only ever be roadmaps today to expected profit opportunities tomorrow, but a tomorrow based on what you know today. They’re not a science.

Think of all of the adventurer CEOs at the helm of so many banks in recent decades who have had a tilt at building global integrated full-service investment banks or first-in-class global product factories.

Setbacks

Of course, hell-for-leather bids for global domination come with high stakes. Just ask Christian Sewing. Deutsche Bank’s CEO had to put on a brave face when presenting group results the other day as the numbers had something it’s hard to hide from: a 92% decline in fourth quarter 2024 profits relative to the same period of 2023.

Sewing must be battle hardened by now since he’s spent all of his almost seven years as CEO in full-on restructuring and salvage-what-you-can mode as he and the board try to steer Deutsche Bank firmly away from anxious moments of existential crisis towards a sustainably profitable future. The group has made tremendous progress in reaching some of its key milestones but progress is rarely linear.

Hence Sewing’s comments in recent days that getting out of certain businesses could be on the cards alongside an updated strategy. It’s a classic ploy to buy time in order to persuade any investors, analysts and media still not convinced that you can sustainably hit your cost and revenue targets by their due dates.

The only thing I find surprising in the way the change narrative in investment banking is evaluated by the analyst community and reported by the media is the amount of open-mouthed shock-horror that gets expressed. Change is perennial. Expect the unexpected.