HSBC Holdings reported disappointing financial results for the full year 2014, which resulted to a 17% decline of its stock price yesterday. Its CEO Stuart Gulliver is definitely under extreme pressure given the dismal performance and the scandals surrounding the bank.
Market observers noted Gulliver’s comment with the Financial Times regarding the problems confronting HSBC suggesting that the bank maybe too big to manage. According to him, he cannot monitor the activities of every employee in the bank.
Gulliver said, “It seems to me that we are holding large corporations to higher standards than the military, the church or civil service. Can I know what every one of 257,000 people is doing? Clearly I can’t. If you want to ask the question could it ever happen again — that is not reasonable.”
HSBC is embroiled with allegations that its Swiss banking unit helped wealthy customers including drug cartels and terrorists evade taxes and hide assets worth billions of dollars. .
In 2012, HSBC agreed to pay a penalty of $1.92 billion to settle the criminal charges filed by the DOJ for willfully failing to maintain an effective anti-money laundering program, failing to conduct due diligence on its foreign correspondent affiliates, violating the International Emergency Economic Powers Act (IEEPA), and the Trading with the Enemy Act (TWEA).
HSBC “still on a journey to simply”
The recent distasteful transactions of the bank prompted the British government to call for its breakup. During a conference call with investors, Gulliver emphasized the management is “still on a journey to simply” HSBC.
According to Gulliver, HSBC is still manageable under its current structure, but the bank plans to sell assets in Brazil, Turkey and the United States. Selling some of its assets could help reduce hard-to-track positions in its banking units in these countries.
Gulliver’s comments boosted the assumptions that the major financial institutions are simply “too big to manage.”
In 2013, the Harvard Business Review wrote, “The profound underlying question is whether these major financial institutions could have prevented the welter of business and related legal/accounting issues in the past and, more importantly, whether they can prevent such problems in the future…Are these huge major financial institutions not just too big to fail, their leaders “too big to jail” (as some critics charge), but also “too big to manage”?
Given the poor annual financial performance of HSBC, analysts demanded the bank to split its business, Macquarie Group analyst Ed Firth said, “The most obvious solution is to break the bank up, as the evidence suggests that the bank is too big to manage. HSBC still hasn’t learned its lesson in the years following the 2008 financial crisis, and is “more of a social menace than a social good.”
HSBC described as an “old-school conglomerate”
Alex Potter, an analyst at Mirabaud Securities LLP commented that HSBC’s annual financial results were disappointing with a combination of a hefty revenue miss and a cost base that seemed to be growing persistently.
The bank’s performance prompted Potter to describe it as an “old-school conglomerate with the regulatory landscape moving against it.” The analyst said, “We fear” the current situation of the bank.
Potter explained that “HSBC is far from a bad company, but evidences are increasingly pointing towards smaller and purer banks as better investment destinations.” According to him, HSBC is inexpensive and has yield support, but it appears unattractive based on his perception that it needs a more radical strategy and a re-base-and-rebuild event.