Reference no: EM132232567

Case Study

HSBC in 2015: Complex Global Operations and Downsizing

Originally known as Hong Kong Shanghai Banking Corp., HSBC was founded in Hong Kong and Shanghai in 1865. During the past 150 years, HSBC grew by leaps and bounds and became one of the largest banks in the world. In 2014, HSBC had 6,300 offices in 75 countries and was headquartered in London, U.K. During the same year, HSBC was rated the second largest bank in the world with total assets of $2.68 trillion after Industrial and Commercial Bank of China ($2.95 trillion). Other top banks on the list included Deutsche Bank (Germany), Credit Agricole (France), BNP Paribas (Spain), Mitsubishi UFJ Financial (Japan), Barclays (U.K.), and Chase (U.S.).1 The pace of change and competition in the global banking industry is always dynamic and fierce. In emerging markets and developed countries, HSBC continued to be a visible brand name and dealt with the industry’s traditional retail sector, commercial banking, global banking, and global private banking. In 2014, HSBC’s market capitalization stood at $176.44 billion with revenues of $74.59 billion, and it employed 266,000 workers worldwide. No wonder HSBC’s operations remained in major parts of the world and its main revenues came from commercial banking, retail banking, wealth management, and private banking.

During the 2008 global financial crisis, HSBC did lose money but was not bailed out in Europe and Asia and remained a visible business entity in the banking industry.2 The financial crisis created havoc in the banking industry, which witnessed systematic distress as well as spillover effects.3 The crisis also affected HSBC, which ended up losing money and customers. Unlike American banks, HSBC’s operations were somewhat spared, but growth remained stagnant during this period. The bank closed its money-losing operations and sold a few assets. This was a major disruption in HSBC’s history and weakened the bank’s well-established business model. To deal with the 2008 financial crisis, HSBC embarked on a major reorganization that changed its strategy, corporate structure, and growth patterns. In 2011, HSBC trimmed its North American operations because of losses in the area of subprime lending.4 At the same time, HSBC started expanding in emerging markets of Asia. China was selected to be the bank’s major market for future growth. Other reorganization took place that aimed at mostly downsizing and trimming operations.

In February 2012, HSBC announced its financial results and said the bank had increased its net by 27 percent. This was clearly the result of HSBC’s 2010 restructuring plan, which was designed in the post-financial crisis period. Whereas HSBC trimmed its operations in North America, the bank’s Asian markets witnessed a good increase in revenues because of growth in emerging markets.5 Financial Times called HSBC “the world’s Asian bank.”6 No wonder HSBC planned a major expansion in China and announced increasing its share in China’s Bank of Communications. HSBC also expanded its branches in China from 110 locations to 800.7 This was a major part of the bank’s reorganization that was initiated by HSBC’s CEO Stuart Gulliver and his team from 2009 to 2010.8 Although competition was heightened because of the arrival of local and multinational banks,9 markets were available to financial institutions that carried efficient business models and networks. Because of its long history and operations, the bank’s restructuring initiatives resulted in tangible growth and expansion. In a special research report (“The World in 2050: Quantifying the Shift in the Global Economy”), Karen Ward, HSBC’s chief economist observed:

[Nineteen] of the 30 largest economies will be emerging economies; the emerging economies will collectively be bigger than the developed economies; Global growth will accelerate thanks to the contribution from the emerging economies…. Asia will continue demonstrating extremely strong growth rates and those with large population will overtake Western powerhouses.”

This clearly showed HSBC’s long-term ambitions in emerging markets of Asia where markets were available to banks that carried prudent policies and networks. Like other banks, HSBC expanded in financial services and became more efficient by providing online banking, accessibility of large-scale and real-time data, useful analytics, and other technologies on hand. This was helpful to HSBC when dealing with competitive markets. In 2012, Hoovers.com made the following statement that perfectly reflected HSBC’s diverse and archetypical operations in global business:

HSBC would be a real alphabet soup if the company’s name reflected its geographic diversity. One of the world’s largest banking groups by assets, HSBC Holdings owns subsidiaries throughout Europe, Hong Kong and the rest of the Asia/Pacific region, the Middle East and Africa, and the Americas.

Although HSBC had been known for its effective internationalization and growth, by March 2015, HSBC’s global operations had become more complex and puzzling. These issues had to be dealt with because of HSBC’s fast growth, diverse and complex organizational structure, and control systems in the post-financial crisis period. Robert Jenkins in Financial Times observed:

Is Europe’s biggest bank too big to manage? Or have its management and board simply not been up to the job? Politicians and pundits are pressing the issue. HSBC’s senior executives are ducking the question. Yes, they acknowledge, mistakes were made, controls were lax, practices were inappropriate and the organization’s structure was flawed. But it was not their fault and they are working hard to put things right.

Andrew Hill further added in Financial Times:

HSBC chief executive Stuart Gulliver declared this week that he could not possibly be accountable for the actions of all the staff employed by the bank. Does he have a point? … But HSBC’s difficulties still raise a worrying question: Have some companies become too big to manage?

The preceding problems that HSBC and other multinational banks encountered after 2012 made widespread headlines in the global media and brought negative publicity and criticism. In 2012, HSBC paid a fine of $1.92 billion to U.S. regulators. This was the result of corporate lapses, money laundering problems in Mexico, and lax operations and control. Moreover, in March 2015, it was disclosed that HSBC’s unit in Switzerland had been involved in tax evasion.14 In 2015, these and other developments forced HSBC to trim down its operations in emerging markets. Interestingly, HSBC’s model of “world’s local bank” did not work after 2008. In fact, in the coming years, HSBC may become “simpler and smaller” when seeking growth expansion in global markets.15 Martin Arnold and Patrick Jenkins in Financial Times predicted that HSBC will “shrink and simplify” . . . it is abandoning once-prized markets, has sold dozens of companies and shed thousands of jobs.”

Although the global banking industry is a major strategic industry in world business, it is unevenly regulated. Historically, the industry’s growth has been based on regions and country-specific strategies because of national developmental agendas, ideologies, and business growth. Banks may be global in their operations, but they thrive mostly because of national identities, networks, and financial resources. In conclusion, firms’ organizational structures, networks, and control and monitoring systems are always on the move because of the complexity of global markets and expansion. In the global banking industry, large-scale multinational banks thrive on strategic locations, networks, and customer service. The same areas can become complex and cumbersome when growth is sought in the presence of lax controls, weakened monitoring system, and haphazard corporate expansion.

Case Questions

1. How do you evaluate HSBC’s global reorganization after the 2008 global financial crisis, its position in 2015, and its current position?