HSBC's bankers and traders had a pretty good third quarter. The bank announced today that third quarter profit before tax in its global banking and markets division (GBM) was up 13% on 2020 and that for the nine months of 2021 as a whole, profits were up 24%.
This might sound disappointing compared to the numbers coming out of U.S. banks, but HSBC's bankers and traders are operating in an environment of cost-cutting and reduced capital allocations. Across the bank as a whole, HSBC has so far cut just $2.6bn of the $4.5bn of costs it wants to cut by 2022 and the cuts seem painful to make. - The $2.6bn of cost reductions cost HSBC $3.1bn to achieve.
Risk weighted assets allocated to global banking and markets are also being pruned; HSBC blamed the "strategic reduction of the capital deployed to G10 long-term rates derivatives market-making" for a 45% drop in its fixed income sales and trading revenues, excluding FX, in the third quarter. Meanwhile, its equities sales and trading revenues boomed and are now the bigger revenue line, something that would have been unthinkable a few years ago.
The other element of HSBC's new strategy is, of course, its pivot to Asia. As the bank keeps a continued hold on costs, there are signs that its London salespeople and traders are having their pay squeezed while their Hong Kong counterparts are not. - In the first three quarters of 2021, compensation spending at HSBC's global banking and markets division in London rose by just 6%; in Hong Kong it was up 11%. This might be tolerable if the bank's Hong Kong salespeople and traders made more money (and indeed there's plenty of talk of the strength of Asian equities trading revenues in third quarter), but Asian GBM profits are down 17% so far this year, while the London business has returned to profit after a loss in 2020.
HSBC has a habit of accruing bonuses increases in the fourth quarter and so may yet make amends, but with $1.9bn of cost reductions still to be found across the bank, HSBC's London traders probably shouldn't get too excited about the prospect of higher bonuses this year. This is particularly the case if they have the misfortune to work in fixed income.
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