HSBC: Cost-Cutting Win or Strategic Mistake

HSBC's decision to shut down parts of its investment banking division has divided opinions. On one hand, investors are cheering the move as a disciplined shift toward profitability. On the other, HSBC may be exiting just as U.S. capital markets enter a boom cycle, potentially missing a major opportunity.

With its stock up 11.5% YTD after a 20% rise in 2024, the market seems to approve. But is this truly a well-calculated retreat, or is HSBC giving up on global ambitions in favor of regional survival?

A Profitable Business or a Costly Distraction?

HSBC has never been a dominant player in U.S. or European investment banking. Unlike Goldman Sachs or JPMorgan, it never built a strong deal pipeline or an advisory franchise that could compete at scale.

• While HSBC's investment banking operations generated revenue, its costs—high salaries, compliance burdens, and operational expenses—often outweighed the benefits.
• The bank expanded aggressively through acquisitions in the 1990s and early 2000s but struggled with integration and execution.
• Even after decades of effort, HSBC’s market share in U.S. and European equity capital markets and M&A advisory remained small.

The bottom line? HSBC's investment banking unit was not a key profit driver, making its closure a logical move—at least on paper.

Short-Term Gains, Long-Term Risks

1. Valuation Gap: A Fixable Problem?

A key reason for HSBC’s restructuring is its undervaluation relative to U.S. peers. Despite posting an impressive 19.3% return on tangible equity (ROTE) in 2024, HSBC trades at just 1.04x price-to-book, while Morgan Stanley, with a slightly lower 18.8% ROTE, trades at 2.16x price-to-book.

CEO Georges Elhedery hopes that shifting focus to core strengths—wealth management, trade finance, and Asian markets—will narrow this valuation gap. Investors seem to believe him, but the real test will be whether HSBC can grow without the capital markets business.

2. Exposure to Asia: Smart Pivot or Overconcentration?

HSBC is now doubling down on Asia, especially China and Hong Kong. While this aligns with its historical strengths, it also creates major risks:

• China's regulation:HSBC has already begun scaling back its digital wealth management platform and credit card business in China, hinting at deeper challenges.
• Geopolitical pressure: U.S.-China tensions continue to create uncertainty for foreign banks operating in both regions. HSBC’s decision to retreat from the U.S. could be more about risk mitigation than efficiency.
• Limited diversification: By cutting investment banking in the West, HSBC loses a potential counterbalance if Asia’s growth slows.

3. Missing the U.S. Markets

The timing of HSBC’s exit is questionable. As Trump’s deregulatory agenda fuels expectations of a capital markets surge, HSBC is shutting down its M and A and equity teams — exactly the businesses that might thrive in a more favorable regulatory environment.

If IPOs and M and A activity pick up sharply in 2025, HSBC’s decision will look shortsighted. It wouldn’t be the first time a company made deep cuts only to miss out on the next growth cycle.

HSBC Bottom Line Is

HSBC’s exit from investment banking is being framed as a cost-cutting success, but the reality is more complex. Yes, the bank is refocusing on profitability. But it’s also abandoning an entire segment just as conditions might turn in its favor.

If China’s economy remains strong, HSBC’s Asia-first strategy could pay off. But if the U.S. investment banking boom materializes without them, HSBC might find itself locked out of a global recovery—a high price to pay for short-term efficiency gains.

February 19 earnings will be the first real test.