Banking

Banks Fund Hiring by Slashing Jobs


At first it looked as if HSBC Holdings was just another bank planning layoffs. Yet the Aug. 1 announcement that it would eliminate 30,000 jobs by the end of 2013 cited an unusual rationale for the cuts: rising salaries. In particular, the intensifying battle for talent in places such as China and Brazil has pushed up wages and made it costlier to compete. For HSBC (HBC), Europe’s largest bank, one answer is to free up money to keep hiring in fast-growing markets by firing thousands of workers everywhere else.

HSBC has already shed 5,000 of the 30,000 it plans to cut. The layoffs, which will eliminate 10 percent of its workforce, come at a time when rivals also are trimming their payrolls. On Aug. 2, Barclays (BCS) said it would cut 3,000 jobs this year. Credit Suisse Group, Bank of America (BAC), UBS (UBS), Goldman Sachs (GS), and Morgan Stanley (MS) are reducing head count as well, though they all continue to hire in fast-growth areas such as emerging markets. Most have blamed the cutbacks on sluggish markets and new regulations that may curb profits even as they reduce risk. Efforts to clamp down on outsized bonuses, especially in the U.K., have also prompted banks such as HSBC to boost base salaries, which makes it costlier to support underperformers in tough times.

At the same time, banks see ever-expanding opportunities in emerging economies, whether it’s providing credit to newly affluent consumers or helping companies tap the capital markets. There is increasing competition for people with the requisite skills to fill the new jobs in retail and investment banking. Peter Wong, HSBC’s Asia-Pacific chief executive, cites the war for talent as his biggest concern, saying the bank’s turnover rates in the region already hover around 18 percent. “There is a general lack of talent,” says Wong. The result is that HSBC has to pay more and hire more to compensate for what Wong calls “the volatility.”

Of course, talent shortages in emerging markets are nothing new. What has changed is the cost of doing business. Brazil, for instance, has seen its currency gain about 20 percent against the dollar and slightly less against the euro over the past two years, which for U.S. and European banks boosts the cost of hires at the same time as it crimps revenues from local operations.

The problem is especially acute in China. Xinge Zhao, a finance professor at Shanghai’s China Europe International Business School, notes that finance industry salaries doubled from 2005 to 2010. “I don’t think HSBC is unique,” says Zhao.

Maybe not, but the scale of its challenges may be greater. Although based in London, HSBC’s roots and many of its critical investments are in China. (It began as the Hong Kong and Shanghai Banking Corp., opening its first branch in Hong Kong in 1865.) Hong Kong alone made up 27 percent of the bank’s $11.5 billion in pretax profits in the first half. Overall, Asia accounted for almost 60 percent of pretax profits, up from 53 percent from the same period last year. At the same time, though, HSBC’s overall costs have climbed to almost 58 percent of revenue from 51 percent a year earlier—which is higher than the 48 percent to 52 percent target range set by the bank’s management.

HSBC Chief Executive Officer Stuart Gulliver has set a goal of reducing costs by up to $3.5 billion over the next two years. He’s put a priority on shrinking back-office operations, which add to overhead but not profits. On Aug. 1, Gulliver said the bank’s job cuts will affect “support staff where we believe we have created an unnecessary bureaucracy in this firm over a number of years.”

The layoffs may extend to emerging markets. Almost two-thirds of the 14,000 people HSBC employs in China work in global processing centers, where wages, though lower than in developed markets, are rising fast.

Gulliver says HSBC will stick to plans to add as many as 5,000 jobs a year in fast-growing markets. But the new hires will be in divisions that contribute to the bottom line. Analysts say the obvious target for cost-cutting remains developed markets such as the U.S. and Europe. As Dominic Chan, a Hong Kong-based banking analyst at BNP Paribas, says: “For international banks the story should be cutting staff in the West while adding people here in Asia.”

That’s what many of them seem poised to do. In the U.S., layoffs in the financial services sector were up 18.5 percent in the first half of 2011, according to global outplacement consultancy Challenger, Gray & Christmas. European banks have slashed 230,000 jobs since the start of the financial crisis in 2007, according to Bloomberg data. “HSBC needs to keep their costs under control,” says Neil Smith, a banking analyst at WestLB in London. After all, its bankers know all too well that doing business in Latin America and China isn’t getting cheaper any time soon.

The bottom line: Banks are paring staff in Europe and the U.S. so they can keep hiring in emerging markets.

With Stephanie Tong, Howard Mustoe, and Gavin Finch
Brady_190
Brady is a senior editor for Bloomberg Businessweek in New York.

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