Now that HSBC has pulled the plug on mass-market U.S. retail banking, its stateside efforts will focus largely on managing the wealth of clients who travel internationally.
The near-term goal: to capture more business from globe-trotting clients in the affluent and high net worth segments, in an effort to simplify its U.S. operations and improve the London-based company’s lagging returns.
But how well it will work remains to be seen. Wealth management is a key growth strategy at banks of all sizes, partly because it generates noninterest income in a persistently low interest rate environment. The highly competitive segment that HSBC is targeting is dominated by the likes of UBS, Credit Suisse, Morgan Stanley and Bank of America.
While HSBC’s retreat “indicates the clear strategy to serve customers with international needs, leveraging the strength of its international franchise, particularly in trade financing,” the U.S. market for wealth management is “very competitive” with “very strong players,” Maria Rivas, a London-based analyst at DBRS Morningstar, said in an email.
“So we [think] HSBC still faces challenges in successfully executing its strategy in the U.S.,” she said.
HSBC, which is not exiting the U.S. wholesale banking business, is betting that its global presence will give it a leg up in the race to attract and retain wealth management clients.
The $3 trillion-asset company is already one of the largest wealth managers in the world with $1.6 trillion in assets under management. It touts easy-to-use services such as a single view of all HSBC accounts from home or abroad, the ability to move money between HSBC accounts in different countries, the availability of mortgages to foreigners who don’t have U.S. credit scores and the ability to open an account before the client even gets off the plane.
“Being one of the largest players in the world does help set the stage for who we are, and the brand that comes along with that is central,” said Tara Latini, head of U.S. wealth and personal banking since April 1. “That’s where we can play to our strengths because no one has the capabilities we have.”
The pivot by HSBC, which entered the U.S. retail banking market in 1980 when it acquired a controlling stake in Marine Midland Bank in Buffalo, New York, is not unexpected.
In February 2020, HSBC ditched its then-eight-month-old U.S. branch expansion strategy as part of a plan to focus on higher-growth markets in Asia, then eight months later decided to accelerate its cost-cutting plan in the U.S. Speculation rose in December 2020 about a possible sale of the far-flung U.S. branch network, which includes branches on the East and West coasts.
Three months ago the company said it was still thinking about “organic and inorganic options” for the U.S. retail unit. This week it said it would sell 90 of its current 148 branches — 80 to Citizens Financial Group in Providence, Rhode Island and 10 to Cathay Bank in Los Angeles — and close another 35 to 40. The pullback means that HSBC will end relationships with all customers whose account balances are below $75,000 and all small-business clients with annual revenues under $5 million.
At the same time, HSBC will turn between 20 and 25 remaining branches into international wealth centers that will serve some 300,000 globally connected affluent and high net worth customers.
The first order of business will be to deepen relationships with HSBC’s existing clients in those segments. In 2020, approximately $15 billion flowed into the U.S. from HSBC clients in other parts of the world, but HSBC captured just 25% of it, according to Latini, who ran the firm’s wealth and personal banking unit in Malaysia before starting in her new role.
“We’re not even capturing inflows of our own customer base, so that’s priority No. 1 before I go externally,” Latini said. “For me I want to focus on the quality of the existing customer base and make sure that 25% of $15 billion gets up to a higher number.”
Banks’ level of interest in wealth management comes down to two factors: how much they have to spend to earn a profit, and how long their customers stick around, said analyst Chris Marinac of Janney Montgomery Scott.
Like HSBC, other banks are keenly focused on building up their wealth management divisions. JPMorgan Chase, the largest U.S. bank by assets, is on the hunt for asset management firms, while big bank rival Citigroup is doubling down on wealth across its global footprint.
“It tends to be a higher-margin business, first off, and it tends to be sticky,” Marinac said. “That’s why people like wealth management. Over the long run you have markets that tend to behave within some band of reason, and then you’re collecting fees on that, and it’s just more stable over time.”
HSBC’s long history in international banking and wealth management works in its favor, even as it faces a growing list of competitors, according to Greg McBride, chief financial analyst at Bankrate.com.
“They’re not having to learn new tricks here,” McBride said. “It’s more about doubling down on what’s been their competitive advantage and their specialty. Obviously the challenge going forward is growth, but I think that’s where the global interconnectedness of their business really comes into play.”
Some analysts were less than optimistic about HSBC’s strategy. Joseph Dickerson at Jefferies said that getting out of mass-market U.S. retail banking should help streamline the company and reduce its costs, but he noted that the Citizens and Cathay transactions are very small given HSBC’s size, and argued that investors are likely to want to see additional steps.
After the branches are sold or closed, HSBC will still have $55 billion of loans and $109 billion of deposits across its U.S. businesses, including its wholesale banking unit, Dickerson said in an email. That represents 0.5% market share of loans and 0.7% market share of deposits, he added.
“Their market position is very low and such business is unlikely to be meaningful to [the company’s] economics, in addition to there being little fungibility with other geographies,” Dickerson said.
While international banking and wealth management have been core parts of HSBC’s strategy in the U.S., the company was “trying to do too many things” and couldn’t stand out in the market, HSBC’s Latini said.
“Like any major change, there’s always execution risk,” she said. “But I think we have the right plan in place and the right team to do this. And I don’t see any gaps there.”