Is HSBC’s new direction the right one?

If you had a taste for conspiracy theories, you might think it had been planned from the start. At HSBC, the headlines over the past fortnight have been dominated by an almighty row over the reshuffling of the board. Michael Geoghegan, its chief executive officer, left in a huff after the bank declined to elevate him to the chairmanship: that role was taken instead by the finance director Douglas Flint. Meanwhile, Stuart Gulliver, who ran its investment banking unit, replaced Geoghegan as CEO.

The row prompted a debate on whether CEOs should be allowed to become chairmen – traditionally the case at HSBC, even though the corporate governance lobby disapproves. And it sparked a discussion about the apparent chaos on the board. But the row over the chairmanship is just a distraction. Here’s what shareholders should really be worried about. The elevation of Gulliver to the CEO’s job suggests that investment banking is rising in importance within HSBC. That is surely a mistake. Europe’s biggest bank should be focusing on building up its core retail banking unit – not on making itself a bigger player in investment banking. That is what Royal Bank of Scotland did under Sir Fred Goodwin. And it’s unlikely to work out much better for HSBC than it did for RBS.

The chairman’s role at HSBC is certainly not a ceremonial post. It’s the chairman’s job to maintain relations with the financial markets and shareholders. He needs to keep the bank connected to politicians. And he has to keep an eye on the chief executive. It’s a full-time job. But that said, he is hardly crucial to the success of the business. The chairman isn’t in the engine room, and he isn’t controlling the day-to-day decisions. Whether Geoghegan got the job or not doesn’t matter very much. Some other candidate could do it just as competently.

It’s the CEO who counts. And it was Gulliver’s appointment that should have sparked a far more serious debate. That is not to disparage the man himself. He is by all accounts a serious, talented executive. He has worked at HSBC since 1980. His investment banking unit has been a huge success in the past few years. It doubled its profits between 2005 and 2009 to become the biggest single contributor to HSBC’s profits. Revenue doubled at the division, from $11bn in 2005 to more than $21bn last year. Operating income rose to more than $10bn from less than $5bn only four years ago. That is an impressive record.

A decade ago, HSBC was practically non-existent in investment banking. It was hardly even a player. Now it is a serious force. It has paid plenty of money to beef up its expertise, but it hasn’t paid crazy money, and hasn’t taken on too much risk. Considering how easily retail banks make a mess of investment banking, that is all to its credit.

And yet, the men who made HSBC one of the biggest banks in the world were primarily retail rather than investment bankers. Sir Willie Purves, who turned it from a regional, colonial bank into a global force by overseeing the takeover of the Midland Bank in Britain was a career retail banker. Sir John Bond, who as CEO – then chairman of the bank from 1993 to 2006 – cemented its position as a global financial giant was, likewise, primarily a retail banker, who knew the branch network backwards.

There are only three companies with the chance to become a global force in retail banking. Citigroup of the US is one, but its ventures outside of North America have yet to prove a huge success. Spain’s Santander is another. But it remains to be seen whether it can survive the meltdown of the Spanish property market. HSBC is the bank in pole position. It has huge strengths in China and the rest of Asia. It has a big presence in the UK, which serves as a launch pad into the rest of Europe. It is big in the Middle East, and is growing in South America. In an industry that remains nationally fragmented and is ripe for consolidation, it has the best brand, the best spread of assets, and, most importantly, a better chance than any of its peers of creating the first genuinely global retail bank.

The temptation for big banks is to follow what might be called the ‘Goodwin’ strategy: create as big a retail bank as you can, then use the strength of the balance sheet, a result of your millions of retail customers, to create a profitable trading, wholesale and investment banking unit. Sometimes it works. At Barclays, the strength of the retail business has allowed Barclays Capital to become a major player in investment banking – and its boss Bob Diamond has been rewarded with the CEO’s job. But it can end in catastrophe, as RBS demonstrates.

No one is suggesting that this is about to happen at HSBC. Gulliver is a smart and successful banker. But the risk is that his appointment marks the ascent of the investment bank over the retail arm. That, surely, would be missing the real opportunity. There are plenty of successful investment banks in the world. There is only one bank with the opportunity to become a global retail bank – HSBC. The concern about the boardroom reshuffle must be that it is losing sight of that. And over the medium-term, that is surely a lot more worrying for shareholders than who is or isn’t the chairman.


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