While HSBC Holdings plc HSBC has been shutting down branches and trimming pay packages due to pressure from investors to reduce costs and boost profits, the bank is now planning to repackage its loans into bonds and sell them to investors in the U.S. The news was first reported by Reuters.
The move will help HSBC improve investment banking profits along with shedding credit risk and arbitrage capital requirements. While the stringent regulations post-crisis have made keeping loans on the balance sheet costlier for the banks, originating assets from all over the world and repackaging as well as selling them will aid in lowering the amount of capital required to be set aside to cover potential losses.
HSBC is looking to repackage loans sold in Asia, Africa and the Middle East as bonds. Though the bank has mostly used an "originate and hold" approach to its loans, it has been moving towards the originate-to-distribute model as witnessed in the 12-month period up to April 2015, where it had distributed nearly half of the loans.
After the 2008 financial crisis, the originate-to-distribute model has contained some perverse incentives for banks to lend and quickly package those loans and transmit the credit risk to third party investors.
HSBC's U.S. unit provides retail banking, wealth management as well as investment banking services to clients. However, the division, which made a profit of $282 million in the first six months of 2015, has been under strain to improve profitability.
The bank has been focused on massive job cuts and cost-containment plans in order to boost profitability and overall efficiency. HSBC plans to hire in high-growth areas where it intends to expand. The company is set to “accelerate investments in Asia” and expand asset management and insurance operations, driven by “opportunities from emerging wealth in the region”.
HSBC also plans to boost profitability in Mexico and leverage the NAFTA strategic opportunity. Moreover, the company is expected to leverage its international network and undertake initiatives to deliver profits in the U.S.
At the same time, the company has set a goal to deliver above-GDP revenue growth from international markets, driven by enhanced investments in foreign exchange, payments and cash management, and global trade and receivables finance.
Also, HSBC may pull down shutters on the underperforming businesses in the U.S., Brazil, Turkey and Mexico. However, the bank plans to remain in the U.S. given the importance of dollar clearing for its trading business as well as providing access to U.S. companies.
Global major banks like Bank of America Corporation BAC, JPMorgan Chase & Co. JPM and Barclays PLC BCS have also taken defensive measures such as trimming jobs as well as closing/divesting non-core and unprofitable businesses to boost top-line growth amid stringent regulatory requirement and overall sluggish global economic growth.
Currently, HSBC carries a Zacks Rank #3 (Hold).
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