Chief of HSBC set to wage war on costs

The group revealed a $440m (£268.7m) bill to cover payment protection insurance compensation, much lower than its rivals, as banks add up the cost of the mis-selling scandal which has dogged the sector.

Banks have scrapped a legal fight on the issue, which could leave the industry with a bill of more than £9bn. Lloyds Banking Group last week revealed it has set aside £3.2bn to repay customers mis-sold the insurance.

HSBC was also hit by weaker trading in Europe and the United States, which sent pre-tax profits down to $4.91bn (£3bn) in the quarter to the end of March, from $5.71bn this time last year.

Stuart Gulliver is due to unveil a major strategy review tomorrow which is expected to include some disposals and a crackdown on HSBC’s cost base.

Reports claim branch closures are under consideration, as well as potential job cuts among middle management.

The PPI provision, along with markedly higher staff costs in investment banking, lifted the ratio of costs to revenue to 60.9 per cent from 55 per cent in the previous quarter. Underlying costs were up seven per cent from a year ago.

Cutting costs will be a key part of a drastic revival plan by Mr Gulliver, but he warned it will take time to get costs below the 52 per cent he wants.

“It (will take) two to three years, it’s hard to call it earlier than that. This is a large firm, it will take a couple of years,” he said.

Shares in the group, which owns Yorkshire-based phone and internet bank First Direct, closed down 3.5p at 648.2p, a 0.5 per cent drop.

Underlying profits fell to $5.5bn (£3.35bn) from $6.1bn, although the figures were boosted by charges for bad debts falling 37 per cent to a five-year low of $2.4bn (£1.5bn).

Profits improved in wealth management and retail banking, but staff costs rose in its fast growing emerging markets in the Far East while global banking and markets profits were lower.

In Europe, lower trading activity and the PPI charge sent profits tumbling 65 per cent from $1.86bn to $652m, while US profits fell by 60 per cent.

HSBC said it accepted the British Bankers’ Association’s decision to drop its legal action on PPI because the bank was the “least affected and had little chance of winning on appeal”.

HSBC’s provision is also much lower than the £1bn earmarked by Barclays. Mr Gulliver said that was because it stopped writing PPI business in 2007 rather than any indication it will be tough on claimants.

The PPI scandal saw millions of customers mis-sold insurance for loans, despite many being ineligible or unable to claim on the policy.

“Banks must now get on with handling all PPI complaints and paying redress where appropriate,” said the City watchdog the Financial Services Author- ity.

Mr Gulliver’s shake-up is expected to slash costs by at least $2bn annually, potentially seeing it pull back from some of the 87 countries it is in.

He needs to take action to get return on equity (RoE) into his 12 to 15 per cent target range.

Mr Gulliver said profitability this year should improve on the 9.5 per cent in 2011, but expects it to take two or three years to improve to over 12 per cent.

Analysts said there are plenty of low-return areas the bank can target, such as European and North American retail banking, and businesses in Latin America and Asia.

It took a $67m charge to cover restructuring charges in Latin America and said there will be more charges as it reshapes.

It also took a $400m charge in the United States due to a slower-than-expected recovery in house prices and a delay in expected cashflows due to a moratorium on foreclosures late last year.

“We know where the issues are, they are primarily in Europe, and banks’ expenses don’t turn around on a dime,” said Gareth Hunt, analyst at Investec stockbrokers.

Delay over HQ review

HSBC chief executive Stuart Gulliver said a review into the location of the bank’s headquarters will be delayed until the final quarter of this year, after a key report is released on the UK banking industry.

The Independent Commission on Banking is due to report in September.

“We genuinely would like to stay in the UK,” said Stuart Gulliver, but added a UK bank levy will cost it $600m this year, two-thirds of which is a tax on its overseas assets.

The bank insists it has not yet decided whether to move, despite reports claiming it plans to move to Hong Kong.