Fighting weight

HSBC's future growth will come at rivals' expense

HSBC's strategy of shrinking to greatness may have reached its limits. The banking group lifted pretax profit by nine per cent in 2013, even as its top line contracted. Future progress, however, will depend on finding new opportunities in what remains a relatively low-growth, low interest-rate world. That will have to come at the expense of rivals.

At first glance, HSBC once again did a good job of squeezing earnings growth out of a sluggish economy. However, much of the improvement in its bottom line was due to lower provisions for bad debts - which fell 25 per cent year-on-year - and reduced payments to UK customers to whom it sold dodgy products. The lack of more sustainable sources of growth helps explain the four per cent drop in HSBC's shares after the figures were released. The bank's decision to lift the dividend by just nine per cent, compared with a 13 per cent increase in earnings per share, suggests UK regulators are still fiddling with HSBC's capital models.

Chief Executive Stuart Gulliver hasn't called time on his strategy just yet: he has promised to carve another $2 to $3 billion from costs in the next few years. Nevertheless, the big gains from slimming down are in the past. The other big hope - an increase in interest rates, which would boost the profitability of HSBC's deposit-funded balance sheet - still looks some way off.

In the meantime, then, any growth will depend on taking market share. HSBC should be able to make inroads in the United Kingdom, where rivals like Royal Bank of Scotland and Barclays are still restructuring. Investment banking, where HSBC seems to have gained ground in fixed income trading, and is also persuading long-standing corporate clients to give it more corporate finance work, is another opportunity. HSBC's commercial banking unit, meanwhile, is expanding in Germany in an effort to take advantage of exporters' strong trade links with Asia.

Deeper turmoil in emerging markets, and any sustained slowdown in China, remain risks. HSBC's ability to defy the broader macroeconomic malaise will be the true test of Gulliver's promise to turn it into a smaller but more joined-up bank.