After months of dropping ominous hints about the fate of its U.S. unit, the leadership of HSBC Holdings ultimately decided to keep it mostly intact.
Europe's largest bank announced a major overhaul on Tuesday that will include selling its operations in Brazil and Turkey, eliminating as many as 50,000 jobs through layoffs and divestitures, rebranding in the U.K. and turning its focus back to its core markets in Asia.
Changes are coming to the U.S. market, too, but they will be more muted. The $185 billion-asset HSBC USA will refocus on multinational commercial clients and further slim down its consumer business, which has become far less important in recent years. Its U.S. retail network, which many analysts consider a major drain, will remain more or less as is, though some branches will be cut.
Three months ago, HSBC Holdings Chief Executive Stuart Gulliver said the U.S. bank needed to become more profitable or face "extreme solutions."
On Tuesday, Gulliver spent more time justifying the decision to keep the U.S. unit intact than threatening severe reforms. The U.S. is "absolutely critical" and serves as a "flywheel" for HSBC's activities around the world, he said.
The size of the U.S. economy, the number of multinationals based in America and the dollar's status as reserve currency all make it necessary for HSBC to have a U.S. presence, but a U.S. presence that is focused abroad and "not about us doing domestic business," he said.
Yet HSBC also plans to keep its U.S. retail and wealth-management business which some analysts and investors have called for it to sell or greatly shrink. Gulliver touted the low-cost funding that U.S. retail banking provides and its importance for serving wealthier, cosmopolitan clients.
He also argued that a bank of HSBC's scale essentially has little choice but to keep its U.S retail network.
"It may sound like an odd thing to say, but if you're running a universal banking model, you're running a universal banking model," Gulliver said. "If you pick and choose which customer groups you're working with in particular countries, you're not running a universal banking model."
Anticipation had been high for months about HSBC's overhaul plan, which was unveiled at the bank's annual investor day. The details fell short of the major restructuring that some analysts had predicted, and the company's shares on the New York Stock Exchange had dropped nearly 1% by late afternoon.
The plan is an ambitious mixture of shrinkage and growth aimed at cutting back less profitable business lines and redeploying the money in growing sectors like Asia. By 2017, HSBC plans to hit a return on equity of more than 10%, cut its costs by as much as $5 billion and reduce risk-weighted assets by about $290 billion.
Analysts generally approved of the targets, but wondered whether HSBC can deliver. The goals are "quite dependent on achieving strong revenue growth," a group of Barclays analysts wrote. Keefe, Bruyette & Woods analysts wrote that they were "somewhat skeptical" that the bank can hit its cost savings and return more cash to shareholders while also growing organically at the target rate.
The success or failure will depend in large part on North America, where HSBC plans to improve profitability by focusing on cross-border business in Canada, Mexico and the U.S.
"We obviously will need to turn the U.S. operation around," said Gulliver, and the turnaround will come "in the context of [the North American Free Trade Agreement]."
It hopes to increase its revenue from trade along the NAFTA corridor from $250 million to as much as $450 million by the end of 2017, a company slideshow shows.
HSBC executives stressed that the U.S. bank is crucial to overall revenue in ways that do not always show up on the U.S. bank's earnings statement. Clients headquartered in the U.S. provide revenue to other HSBC country segments as they do business abroad, said Pat Burke, CEO for HSBC North America. Ninety percent of U.S commercial clients do business in three or more countries, according to an HSBC presentation released Tuesday.
The U.S. unit is a "significant fountain of value to the rest of the group," Burke said.
Still, HSBC plans to try to make it more profitable in its own right. HSBC plans to cut as much as $350 million in spending at the U.S. unit over the next two years.
However, due in part to rising compliance costs, these cuts would mean just holding total expenses at the 2014 level of $3.4 billion.
It plans to reach these cost savings by reducing branch square footage, completing the switch to a new core-banking system and sending support jobs either offshore or away from high-cost locations like New York City, to lower-cost areas like Chicago and Buffalo, Burke said.
He conceded that the U.S. retail network is currently a net drag on profitability, but he said that "we can do better." Funding through the retail network is cheaper than wholesale funding, and the company would not want to be completely reliant on wholesale funding during a period of tumult, Burke said.
The U.S. unit will also continue its pivot away from consumer toward commercial lending a shift that has been in progress for several years. Consumer loans made up just 25% of HSBC USA's loan book at the end of 2014, down from 40% at the end of 2010.
Burke announced Tuesday plans to sell a further $10 billion from its portfolio of U.S. consumer loans and mortgages over the next two to three years. That portfolio was about $23 billion as of the end of March, the company said. The money will be invested in commercial-banking activities or maybe paid out to the parent company as a dividend, Burke said.