LONDON, (Reuters Breakingviews) - HSBC Chief Executive John Flint has received an anonymous letter, purportedly sent by “extremely concerned” employees of the investment banking division, criticising the unit’s credibility and accusing it of offering “rewards for persistent failure”. Breakingviews imagines his reply.

Dear disgusted investment bankers,

I am writing in response to your anonymous letter dated Aug. 25th entitled “Global Banking & Markets: Rewards for Persistent Failure” in which you take aim at the ineptness of our investment bank in general and our advisory business in particular.

First, let me deal with your claim to be “whistleblowing on incompetence”. That’s not what the hotline is for, otherwise everyone would call it all the time. Second, while I am not going to comment on individuals, let me address your claim that we have become an industry laughing stock.

OK, so you have a point. As of August, HSBC ranked 48th globally in M&A advisory fees, according to Thomson Reuters data, behind those Masters of the Universe at Ernst & Young. But if you look at total investment banking fees – including the bond and equity offerings that help pay your still obscenely high salaries - we ranked 11th last year. That puts us fourth in Europe, and ahead of UBS and BNP Paribas.

You’re right that advising on deals should complement the lending and treasury services we already provide to corporate clients, especially in Asia. Unfortunately, our track record is poor. Twice in the past 15 years, HSBC has tried to build up its investment banking division, first under John Studzinski and then by hiring Mathew Westerman from Goldman Sachs. Both expansions – how can I put this gently? – did not have any lasting positive effect.

Even if we doubled our M&A fees overnight, we would only just pip Wells Fargo to 22nd place in the league tables. More importantly, our shareholders wouldn’t thank us. They rightly worry that investment banking earnings are volatile and subject to large and sudden losses. Even supposed rainmakers don’t add much value when you’ve paid their bonuses and expenses. Look at the top two banks in European M&A last year: Credit Suisse and Barclays. The former trades at its tangible book value per share and the latter at a 30 percent discount. In case you need reminding, HSBC is on a multiple of 1.3 times.

The investment banking landscape is littered with the casualties of overambitious expansion - Deutsche Bank, anyone? So, if you think I’m going to risk my long-term targets by recruiting some more bloated egos to make you feel better, think again.

And if you keep complaining, I’ll send Ewen Stevenson, our new Finance Director, down to your floor. He’s joining us from Royal Bank of Scotland, whose policy towards investment bankers was brutal but simple: it fired them all.

Yours sincerely,

John

P.S. Good luck with your interviews at Jefferies

CONTEXT NEWS

- HSBC is formally examining an anonymous letter sent to Chairman Mark Tucker and Chief Executive John Flint criticising “rewards for persistent failure” in its investment bank.

- The letter’s authors, who claim to be employees of HSBC’s investment bank, wrote: “Unlike any other bank, there is no proper and effective route to provide upward feedback: hence this memo, which is whistleblowing on incompetence.”

- The memo, a copy of which has been seen by Reuters Breakingviews, claims that morale in HSBC’s Global Banking and Markets division has been hit by a wave of senior departures including Matthew Westerman, the Goldman Sachs veteran who was hired to expand the business in 2016 but who left the following year.

- HSBC said it was “proud” of its global banking business and senior leadership.

(Editing by Peter Thal Larsen and Bob Cervi)

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