HSBC U.S. Chief's Global Strategy Relies on Help from Affiliates

The new chief executive of HSBC's U.S. business has been given clear marching orders: the days of being the global bank's problem child are over.

Merely polishing the unit's tarnished reputation among U.S. regulators and customers will not satisfy Patrick Burke's bosses at the London-based HSBC Group, who have ordered the U.S. unit to strengthen its lagging financial performance without slowing efforts to fix the compliance problems that have dogged it for much of the past decade.

Burke, who last November replaced Irene Dorner as CEO of HSBC USA, plans to reposition the U.S. bank to focus on multinational commercial clients, taking advantage of the parent company's globe-spanning network of affiliates. Domestic consumer lending is no longer the major driver of growth — now the bank wants to take advantage of the United States' central position in global trade.

"The United States has the largest concentration of companies that operate internationally. And our advantage is that HSBC is a global organization, so we have an ability to serve those clients almost everywhere they are," Burke said.

The strategy marks a departure from his predecessor's agenda. Dorner, an outspoken Brit who was well regarded throughout the industry, took over in 2010 with a mandate to reform the unit's compliance culture and restore its reputation. Many — including Burke — have praised her performance. Burke's plan is less a new strategy than a "course correction" from Dorner's regime, he said.

Burke's job may be even tougher than Dorner's. He has to continue her efforts to restore the U.S. bank's reputation while also making it a financial success. Stuart Gulliver, the CEO of HSBC's global business, said in June that "we have to restructure the U.S." because "the returns aren't acceptable."

Scratching Each Other's Backs

The U.S. business takes up a disproportionately large part of the parent company's balance sheet. HSBC North America held 17.7% of the group's total risk-weighted assets but earned just 5.1% of its profit through the first six months of the year.

Burke argued that is not the full story, however. The U.S. bank generates a lot of business for non-U.S. affiliates because its clients often work with its sister units when they expand abroad.

That revenue originates with the U.S. bank but does not appear on its balance sheet. Burke wants more foreign business to boomerang to the U.S.

"We want to make sure we have more activities coming from non-U.S. clients as they want to invest in the United States," he said. "Much like we do very well sending clients to our affiliates, we want our affiliates to send them to us."

HSBC has established "CEO corridors" to improve coordination among the heads of its businesses worldwide. That means Burke and his team are in frequent contact with the leaders of other HSBC affiliates about the company's multinational clients and how they can serve them in all the countries those clients do business.

Burke's resume may make him seem, on the surface at least, a surprising choice to lead the U.S. unit's turn toward international commercial banking. His most recent roles were in domestic consumer lending, though he has also held senior roles in HSBC's U.K. and Canadian banks.

Burke, 53, joined the bank through Household Finance, the subprime consumer lender that HSBC acquired — with disastrous results — in 2003. He later ran HSBC's credit card business, which was eventually sold to Capital One. In 2010 he was named CEO of HSBC Finance, with responsibility for winding down the former Household consumer-lending business.

Having front-row seats to the Household acquisition — a deal that former HSBC Group head Michael Geoghegan later said was a mistake -- helped Burke better understand what HSBC does well, and what it should try to avoid.

"The acquisition of Household was very much a domestic U.S. play that had no international connectivity," Burke said. "There was nowhere to plug it in."

Burke worked closely with Gulliver winding down that business, and they found they had similar ideas about the U.S. bank's strengths and weaknesses. When Dorner told headquarters she planned to retire, Gulliver asked Burke to take over.

International connectivity is one of the two big competitive advantages Burke sees for HSBC's U.S. bank. The international network is the "real gem" inside the company and "the fundamental advantage of what we can do in the United States," Burke said.

Burke is encouraged by the early results of the strategic shift. The North American unit's revenue increased through the first six months from a year earlier, with commercial revenue up 10%, he said. Overall, however, North America's profit last quarter fell about 10%, to $931 million, mostly due to higher costs.

Making Lemonade from Lemons

The other potential advantage he sees — and a somewhat surprising one — is compliance, which HSBC has invested in heavily following its record-setting settlement with U.S. authorities in 2012 for sanctions and money laundering violations. The company is more than two years into a five-year deferred prosecution agreement with the Justice Department, and has more than doubled its compliance staff in the past five years.

The idea is not simply to reform the compliance culture — which the settlement monitor said this year was still a problem, despite progress — but to make HSBC "the leading bank at fighting financial crime," a phrase Burke often uses to describe the company's ambitions.

After becoming CEO in 2011, Gulliver announced a "global standards" policy under which the strictest regulatory rules anywhere in the company's footprint get applied to every regional market. These reforms will give the bank a competitive boost over time, Burke said.

"Ultimately I think — and I am convinced this is true — this will become an advantage that HSBC will have in the industry, as our global standards take root," he said.

The idea that compliance can be an advantage for HSBC "may seem counterintuitive," Burke acknowledged. But "the reality is none of our clients want our bank to be associated with people that are bad actors, and nobody here wants to be associated with that either," he said.

Shuffling the Lineup

Burke's first order of business on becoming CEO was bringing on a new management team. The U.S. bank had often had many foreign nationals in senior roles, whose tenures in the states tended to be short. Burke wants to put more Americans in top positions, and keep them there for longer, to bring more strategic stability to the organization.

In addition to hiring hundreds of bankers to expand its commercial lending, Burke brought in two former JPMorgan Chase bankers to lead key businesses: Wyatt Crowell as head of commercial banking and Pablo Sanchez to head retail banking and wealth management.

Compliance issues spurred another important change to Burke's team. Patrick Nolan, former head of North American global banking and markets, was demoted after the independent monitor for the DOJ settlement called him out for resisting the compliance push. Nolan was replaced by Thierry Roland, former London-based head of balance sheet management.

Cutting Here, Adding There

With the team in place, Burke's focus is turning to efficiency. HSBC set a target of shaving $350 million from the U.S. bank's expenses over the next two years, and the idea is to take those savings and redeploy them into growing business lines to keep the company's cost base at around the 2014 figure of $4 billion, Burke said.

Burke plans to slim down the back-office expenses by sending support jobs from New York City to lower-cost locations in Buffalo and Chicago, while replacing old and expensive tech infrastructure. Headcount in North American was down about 2% at June 30 from a year earlier, to 20,338.

The bank will reduce some branch square footage but does not plan large-scale closures, and Burke said he actually wants to increase retail investment in hubs of international commerce. It has 232 domestic branches, clustered around seven major cities: New York, Los Angeles, San Francisco, Houston, Chicago, Miami and Seattle.

Investing in U.S. retail may rankle analysts who see the branch network as a drag on profitability, but Burke thinks the network is key to the universal-banking model, as well as a source of cheap and stable funding. Customer accounts grew 7% at the end of June from a year earlier, and deposits are up as well.

Spending on compliance, meanwhile, is nearing its peak. Yet the cascade of negative press around HSBC's global business — not only its AML failures but allegations of tax evasion in the Swiss bank, rate rigging and other problems — seems likely to continue. Gulliver said earlier this year that further conduct charges were "almost inevitable."

Burke said the negative press does not distract him. His focus is on "what I can control" rather than on the headlines, he said.

"What I can actually do is make our organization stronger," he said. "I think if I just stay focused on that I'll arrive at the place where I'll get at the correct balance of what people are saying about it."