Slash and earn

HSBC: HSBC is proving a slow ship to turn. In May, chief executive Stuart Gulliver set out a strategy for the giant lender that required it to hit a return on equity target of 12-15 per cent. Getting there involves top-line growth and cutting costs. HSBC's interim results suggest that, for the time being, the emphasis will be on the latter.

First-half return on equity was 12.3 per cent, implying that Gulliver has already hit his target. But that doesn't factor in tougher Basel III capital rules.

If the new regime was already fully in place, HSBC's ROE would have been just 10.2 per cent, implying that it needs $4 billion to $5 billion more in annual pre-tax profit to hit its goal.

Organic growth looks tough in the current environment: first-half net operating income of $35.7 billion was flat year-on-year. While the trading slowdown in fixed income hit HSBC's investment bank less than some of its peers, bad debts remain stubbornly high and pre-tax profit in Europe was hit by euro zone woes.

Until global interest rates start to tick up, HSBC's bucket load of deposits will remain a drag on earnings.

Back in May, Gulliver was cagey about how he planned to achieve $2.5 billion to 3.5 billion of cuts. Now he is being more explicit: HSBC has already cut 5,000 jobs so far this year, and will slash another 25,000 posts - 8 per cent of its current global workforce - by 2013.

That may look extreme. But Gulliver needs something meatier than trimming the paperclip budget to hit his other key target of reducing costs to between 48 and 52 percent of total income. The ratio has fallen for three quarters, suggesting that HSBC is making some progress. But wage inflation, especially in emerging markets, meant the first-half figure of 57.5 percent was still higher than a year ago.

Even after a 5 percent jump on Aug 1, HSBC shares trade at little more than book value. For the bank's valuation to improve further, Gulliver will need to show more evidence that he is delivering on his promises.