The new-look HSBC is beginning to emerge from the fog. Results for the first six months of 2013 showed the outlines of the slimmed-down lender that chief executive Stuart Gulliver first promised more than two years ago. But continued low interest rates and a softening in emerging markets are preventing a dramatic demonstration of the turnaround in HSBC's numbers.
For the first time in several years, HSBC produced interim figures that were largely free from restructuring charges and big regulatory fines. This, and the benefit of Mr. Gulliver's cost cutting, allowed HSBC to report higher underlying pretax profit in every region except Latin America. The investment bank performed well, helped by strong volumes in foreign exchange and debt capital markets as well as its willingness to lend to customers in support of deals. Even North America is back in the black after largely shaking off its disastrous subprime loans. Return on equity of 12 per cent was just inside HSBC's target range.
Mr. Gulliver can't declare "mission accomplished" just yet. There are further efficiency gains to be made, for example by getting rid of overlapping Internet banking systems in HSBC's retail and commercial banking operations. Those savings will help to offset the rising cost of compliance and regulation, as well as weaker growth in less developed markets. The bank may also face more fines, for example over manipulating Libor interbank rates.
But HSBC's fortunes rest largely on two factors beyond its direct control. The first is interest rates: the bank's large deposit base means that near-zero interest rates drag on its revenue. HSBC estimates that each 1 percentage point increase in global rates would add $1.2-billion (U.S.) to its pretax profit. It may not be the central scenario, but an orderly normalization of monetary policy amid global economic recovery would be a dream.
The countervailing nightmare is the slowdown in emerging markets. Bad debts are already rising in Mexico and Brazil. And if China's growth slows to less than the 7.4 per cent predicted by HSBC's economists, the bank's operations will feel the squeeze.
Such a cyclical slowdown wouldn't invalidate HSBC's long-term strategy. But HSBC's performance from here may have more to do with its external environment than Mr. Gulliver's surgery.