HSBC's US retail exit makes sense but is unlikely to impact bottom line

HSBC Holdings PLC's withdrawal from mass market retail banking in the U.S. represents a logical step in the U.K.-based group's strategy, analysts said, but data suggests it is unlikely to significantly affect its performance.

The bank will sell 90 of its 148 U.S. branches in several transactions and turn 20 to 25 locations into international wealth centers. Between 35 and 40 residual branches not subject to sale or repurposing will be shuttered, the lender announced May 26.

HSBC is a British bank with a strong international presence, particularly in Asia, and analysts said exiting the business aligns with its strategy of focusing on international banking and wealth management and pivoting away from underperforming activities.

"When you look at the return on capital that they have been generating from their U.S. business as a whole, for the retail business it doesn't really stack up for shareholders," Numis analyst Tom Rayner said. The plan does not come as a "massive surprise" as it has been "fairly clear" that the business was noncore, he said.

HSBC's U.S. business posted a €226 million net loss in 2020 and accounted for 9.10% of the group's net operating income, according to S&P Global Market Intelligence data.

The U.S. commercial banking business generated just 2.03% of the group's 2020 net operating income. The business contributed even less in previous years, accounting for 1.89% and 1.82% of group net operating income in 2018 and 2019, respectively.

"From a financial point of view, I don't think U.S. retail is strategic. They need to be in the U.S., they need to have access to U.S. investors and U.S. corporate clients who want to do business in Asia, but their global banking and markets operation is more critical to their overall strategy," Rayner said.

HSBC CEO Noel Quinn in a statement announcing the exit admitted that the bank "lacked the scale to compete" in the U.S.

With the repurposed branches, Quinn said the bank's remaining U.S. operations would "focus on our competitive strengths, connecting our global wholesale and wealth management clients to other markets around the world."

HSBC said it will book $100 million of pretax costs related to the exit, after which it does not expect to generate a significant gain or loss.

"It seems a sensible transaction, very orderly. I think it reflects very well on the management at HSBC for the way they have executed it," said Omar Keenan, an analyst with Credit Suisse.

Several foreign lenders have either left the U.S. market or have considered an exit, including Spanish lender Banco Bilbao Vizcaya Argentaria SA, which in late 2020 agreed to off-load its U.S. assets to The PNC Financial Services Group Inc. Earlier in 2021, it was reported that Bank Leumi le- Israel B.M. was considering the sale of its U.S. business. Stateside operations accounted for almost 6% of the Israeli bank's 2020 net income.

HSBC is also planning to sell its retail bank in France. But that exit will likely be more challenging than withdrawing from the U.S. "I think it's quite separate from its situation in France, where the profitability is quite a bit worse," Keenan said.

Analysts have said a sale of the French retail business would give the buyer a valuable client base and a chance, if a smaller bank snaps it up, to build scale in niche markets such as wealth management. In March, Reuters reported that HSBC was in final negotiations with private equity firm Cerberus Capital Management LP over a sale of the French business that would see HSBC contribute about €500 million toward restructuring.

Keenan and Rayner both agree that the French exit would largely be unaffected by the U.S. transactions.

"[The] company has been very upfront that they expect to make a loss on sale when they exit France. I don't think there is a read-across from the U.S. to France, other than the management is clearly working very hard at it," Keenan said.