HSBC’s Sale Of Lebanese Unit To Brom Bank Another Step Towards Leaner Operating Structure

HSBC (NYSE:HSBC) has inked an agreement to sell its operations in Lebanon to Blom Bank in what comes as the latest move by the diversified banking giant to improve profitability by shrinking its global footprint. ^[1] The Lebanese operations are a part of HSBC Bank Middle East Limited and provide retail and corporate banking services in the country through roughly 200 employees in 3 branches. ^[2] Although financial details about the deal have not been disclosed, reports released in July peg the value of the deal at $90-100 million. ^[3]

HSBC’s Lebanese unit is a very small part of its global business. To put things in perspective, the unit held $953 million in total assets at the end of Q2 2016 – less than 0.04% of the $2.6 trillion in total assets for HSBC Group. But the sale is yet another step towards achieving the larger goals of reducing risk-weighed assets (RWAs) and cutting costs which the bank laid out in its reorganization plan last June (see A Detailed Look At HSBC’s Large-Scale Reorganization Plan).

We do not expect the sale to materially impact our $37 price estimate for HSBC’s stock. This price target is roughly 5% below the current market price.

See our full analysis for HSBC

In early June, HSBC announced sweeping organization-wide changes aimed at aligning its business model towards more profitable opportunities while also adapting itself to the stricter global regulatory environment. ^[4] The move was in response to stalling returns for the bank’s geographically diversified business model, while a string of high-profile lawsuits and regulatory probes hurt investor confidence. The key goals of the shake-up were to attain a return of equity figure of 10%, to reduce annual recurring costs by as much as $5 billion and to ensure a faster growth in revenues compared to expenses by the end of 2017. The road-map laid out by HSBC to achieve these goals involved reducing RWAs by at least 25% and cutting total headcount by about 20%, while increasing investments in high-growth avenues across the Asia-Pacific region.

Since then, HSBC has made notable progress towards achieving these goals. The bank has cut RWAs by around $240 billion (currency-adjusted) since the plan was announced – more than 80% of the planned $290 billion reduction targeted by the end of 2017. The bank has also reduced its total workforce from 266,000 at the end of 2014 to under 235,000 now. Coupled with other cost savings measures has helped annual recurring costs shrink by $2.8 billion – only about 56% of the targeted $5 billion cost reduction.

This is where small steps like the disposal of the Lebanese banking unit come in. The Lebanese banking market has seen many major global banking giants shut shop over recent years due to strong competition from local players. Standard Chartered, ABN Amro, Credit Lyonnais and BNP Paribas have all pulled out of Lebanon, as costs from a small presence in the country outweighed poor revenue opportunities. ((HSBC’s departure from Lebanon closes a compelling account, The National, Aug 1 2016)) HSBC’s move to sell off the operations is most likely a result of losses for the division over recent years, and the sale should have a small positive impact on margins for the overall retail business.

HSBC Bank Middle East Limited, which houses the Lebanese unit, reported $41.5 billion in total assets at the end of Q2 2016. Loans to customers was $23.6 billion – or just under 60% of the total asset base. Assuming a similar loan-to-total asset ratio for the Lebanese unit, the sale will reduce HSBC’s total loan base by about 60% of $953 million, which is roughly $550 million. As you can see in the chart below, this has negligible impact on HSBC’s overall business as its operations in Asia Pacific and MENA (Middle East and North Africa) regions have more than $125 billion in outstanding loans.

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1. BLOM BANK signs agreement to acquire HSBC Bank Middle East limited – Lebanon, BLOM BANK Press Releases, Nov 16 2016 [↩]
2. HSBC in Lebanon, HSBC Lebanon Website [↩]
3. BLOM in talks to buy local arm of HSBC. Deal is expected to close at $90-$100 million, Lebanon Business News, Jul 25 2016 [↩]
4. Investor Update 2015, HSBC Website, Jun 9 2015 [↩]