Job losses always offer something of a moral issue for investors. On the one hand, there is a human cost to the decision, while on the other hand, reducing costs for a company, particularly if those costs are overinflated, is usually a good thing for the shares.
Once again we find ourselves in this situation after news today that up to 10,000 jobs could be at risk at HSBC Holdings (LSE: HSBA) as part of a cost-cutting effort reportedly being implemented by interim CEO Noel Quinn.
The people problem
With an estimated head count of 238,000 people, the salary cost for HSBC has always been one of its largest overheads. According to the FT, company insiders suggest this is something they have “known for years that we need to do something about”.
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An official announcement is expected in HSBC’s upcoming Q3 results later this month and the move comes as many investment banks, including Barclays, Citigroup and Deutsche Bank, are all following a similar tack.
Any job losses from HSBC are expected to be in addition to the 4,700 redundancies recently announced, and are expected to come predominantly from high-paid roles.
The Pareto Principle
Anyone who is familiar with the Pareto Principle, or 80/20 rule, will know that, in essence, it states that the majority of benefits or costs usually come from a minority of sources. You could argue therefore, that to maximise benefits, you should concentrate efforts on those minority areas that bring the biggest bang for your buck.
HSBC may be intending to do just that with these latest job cuts. Only last week I wrote that investing in HSBC can be a good proxy for investing in China, thanks to its large presence and revenue gained in the region. According to reports about today’s news, HSBC insiders are asking “why we have so many people in Europe when we’ve got double-digit returns in parts of Asia”. It is a fair question.
There has already been speculation that because of the uncertain environment for banking in London (Brexit and low interest rates mainly), HSBC may consider moving its head office to Hong Kong. Any reduction in headcount for the UK business may mean focusing on Asia in earnest.
Good for investors
This may, of course, be a sensible option. Looking at today’s news, I think job cuts benefit HSBC investors in three main ways. Firstly and most obviously, there are direct cost savings. Though this may take a year or so to go through, it could help the bottom line in a big way.
Secondly, it is a good indication that interim CEO Noel Quinn is not intending to be a passive placeholder, and more importantly, is willing to make tough decisions — always a good sign in a company’s leadership.
Finally, depending on the distribution of the job cuts, a further concentration on Asia as a business base, perhaps coupled with a deleveraging away from the US (where HSBC has never seen great success), could be a move for the firm that will pay dividends for many years to come.
