I have been a fan of HSBC (LSE: HSBA) as an investment for some time. As well as a strong dividend, my position has been led by a planned restructuring that would see the bank focus its assets and capital in its Asian business. The Covid-19 crisis and lockdown unfortunately caused this to be halted.
However, today news emerged that HSBC’s board is pushing for the restructuring plan to be reinstated. Not only that, but for even more drastic measurers to be taken. Personally, I think this is likely to be a good thing.
More of a good thing
The major outline of HSBC’s restructuring plan was effectively to focus more of its resources in Asia, its historical home. This would include job cuts for what many see as an overinflated workforce. It would also involve closing down its more inefficient operations in the US and parts of Europe.
For me this makes sense. I am a proponent of the Pareto Principle, which says 80% of results often come from just 20% of the inputs. Focusing resources on those 20% of inputs can yield disproportionate benefits. In the case of HSBC, this seems exactly the intention.
According to reports, HSBC’s board is now pushing for an even more ruthless attitude to its weaker operations. The suggestion is that those arms that may have been given the benefit of the doubt will now be cut. It has also been suggested that this may include a sale of its US business entirely, as well as its retail network in France.
Though it is wrong to suggest that if a small amount of something is good, more of it must be better, in this case I think that may be the case. Being harsh and undergoing dramatic change to weather bad times can lead to a lean, efficient business that will benefit disproportionately in the good times.
HSBC’s problems
One major problem HSBC faces at the moment, along with other lenders, is the potential for bankruptcies hitting their books. Lockdown will almost certainly bring about a wave of businesses collapsing – many of which will have borrowed money from HSBC.
At this point, nobody knows how bad this will be. Last month HSBC made a $3bn provision for these bad loans, hurting its quarterly results. Even more worrying, CFO Ewen Stevenson warned of “deep, severe recession events”.
The other major concerns I have with HSBC as an investment now is the suspension of its dividend. For me its high yield was always a major selling point. I think it is a sensible decision to suspend the dividend at the moment, but with a dramatic restructuring likely to take a year or so (not to mention those “recession events”), I worry about when and at what level it will be reinstated.
That said, I don’t think these problems are insurmountable by any means, which could make HSBC’s currently low share price a bargain.
