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HSBC Exits South Korean Retail Banking

MTU SMFG

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HSBC Holdings plc is exiting from its retail banking and wealth management businesses in South Korea. This comprises the closure of 10 banking units, subject to regulatory approval. The company, however, intends to retain the comparatively profitable global banking and markets unit for catering to client needs.

Let's dig a little deeper to find out the reasons for this divesture.

Dominance of Local Banks in South Korea

South Korea, one of the most prominent emerging G-20 economies, unfortunately did not add to HSBC’s success. Since the inception of this wing in 1998, attempts to restructure and enhance South Korean retail banking remained as a subscale, inefficient business for the company.

Foreign banks find it difficult to establish in the fiercely competitive South Korean market, which is largely dominated by local banks. Standard Chartered PLC faced a similar plight of failed operations in South Korea, due to decreasing profitability and rising debt.

Notably, KDB Financial Group, a government owned banking group in South Korea, wanted to acquire HSBC’s South Korean Unit. However, negotiations failed as KDB did not agree to retain all the present employees after the merger.

Cost Saving Measures

The latest winding down announcement is part of HSBC’s global strategic review to reduce costs and will reduce 230 employees. These staff may choose to accept a redundancy package or work with the bank till the winding down is complete.

Notably, HSBC has exited 52 businesses globally since May 2011, going by its global review plan. Further, on May 15, 2013, Stuart Gulliver, Chief Executive Officer (CEO) of HSBC, announced cost saving measures of $3.0 billion, which includes 14000 jobs cuts. Since Gulliver became the CEO, there have been 46,000 job cuts worldwide – resulting in annual cost savings of $4.0 billion.

Our Viewpoint

HSBC is striving to boost its profitability in the challenging market environment by disposing economically unprofitable business units. The company now intends to primarily focus on mature economies such as the U.S., Germany, France and emerging economies including China, Indonesia and Brazil. Moreover, it seeks to strengthen its home operations in the U.K. and Hong Kong.

We expect HSBC’s new cost saving initiatives, diversified revenue sources, strong capital position and meaningful capital deployment activities to boost investors’ confidence in the company. Nevertheless, weak revenue growth in its mature markets, the Eurozone crisis, litigation costs and regulatory restrictions remain matters of concern.

Currently, HSBC carries a Zacks Rank #3 (Hold). Some better performing foreign banks include Mitsubishi UFJ Financial Group, Inc. (MTU - Analyst Report) and Sumitomo Mitsui Financial Group Inc. (SMFG - Snapshot Report), both holding a Zacks Rank #1 (Strong Buy).

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