HSBC Turning Scale and Complexity into Competitive Advantage
1. Turning Scale and Complexity
into
Competitive Advantage
Douglas Flint
Group Finance Director
UBS 2006 Global Financial Services Conference
2. 2UBS 2006 Global Financial Services Conference
Forward-looking statements
This presentation and subsequent discussion may contain certain forward-
looking statements with respect to the financial condition, results of operations
and business of the Group. These forward-looking statements represent the
Group’s expectations or beliefs concerning future events and involve known and
unknown risks and uncertainty that could cause actual results, performance or
events to differ materially from those expressed or implied in such statements.
Additional detailed information concerning important factors that could cause
actual results to differ materially is available in our Annual Report.
3. 3UBS 2006 Global Financial Services Conference
HSBC financial framework
$bn
Tier 1 Capital (as at 31Dec05) 74
Net income attributable to
ordinary shareholders (2005) 15
Dividend payout 50 - 60%
Scrip dividend impact 15 - 40% (of dividends)
Available to fund organic growth and
acquisitions goodwill 50 - 60% (of net income)
4. 4UBS 2006 Global Financial Services Conference
HSBC – record of growth
Dividends per Share / Earnings per Share
0
20
40
60
80
100
120
140
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
DPS EPS
UK GAAP (excl goodwill amortisation) IFRS
US cents
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Fundamental strategic thinking
• A bank is a ‘leveraged’ play on the underlying economy, therefore the key challenge is to:
– Select the better performing economies
– Attract the most valuable clients in our chosen economies
• HSBC aims to produce a blend of earnings from:
– Developed mature-growth economies
– Developing higher-growth economies (considered on a risk-adjusted basis)
• Leveraging our internationality provides revenue generating and cost saving opportunities
– Leveraging through our local presence the increasing trade and other links between
developed and developing economies
– Transferring skills and best practice
– Managing resources globally
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HSBC’s ‘Broadbrush’ 25-year scenario
• Key economic areas will be:
– NAFTA
– Greater China
• 50% of the increase in world demand will come from developing
countries such as:
– China, India, Mexico and Brazil
• Major opportunities within the diaspora of:
– Chinese, Hispanic, Indian and many other expatriate communities
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Denotes significant acquisition in the last 10 years
HSBC – Profit before tax by Main Country - 2005
US$4-5bn US$500m – 1bn US$100m – 500m US$50 – 100m
United States
Hong Kong
United Kingdom
Mexico
France
Canada
Brazil
Mainland China
Singapore
Switzerland
Malaysia
UAE
India
Saudi Arabia
Argentina
Turkey
Germany
Bermuda
Indonesia
Malta
South Korea
Australia
Thailand
Taiwan
Rep. of Ireland
Egypt
Qatar
Personal Financial
Services
Commercial
Banking
Consumer
Finance
Corporate, Investment
Banking & Markets
Private
Banking
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Longer term the recycling of capital through New York or
London will diminish
- ‘South-North’ and ‘South-South’ investment flows increasingly important
0% 10% 20% 30% 40% 50% 60% 70%
US
China
Japan
Australia
India
Source: UNCTAD FDI Prospects 2005Source: UNCTAD FDI Prospects 2005
0%
20%
40%
60%
80%
100%
China
India
US
Russia
Brazil
Mexico
Germany
UK
Thailand
Canada
Most attractive business locations for trans-national
corporations 2005-06
Source: UNCTAD FDI Prospects 2005Source: HSBC, CEIC
Chinese outward direct investment
Expected sources of FDI Latin America 2005-06 Expected sources of FDI Asia-Pacific 2005-06
0
2,000
4,000
6,000
8,000
1991 1993 1995 1997 1999 2001 2003 2005
USDm
0% 10% 20% 30% 40% 50% 60% 70% 80%
US
Spain
Brazil
China
Canada
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And scale allows us to think long term:
Positioning for growth in China – patient money
investment
Date Cost (US$m) Market value
(US$m)
2001 62
2002-5
2004
2004-5
Not listed
Not listed208
1.8bn 3.8bn
6bn2.2bn
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China ambitions
are multi faceted
Top-tier clients
Mass-market
consumers
Credit cards
Insurance
Corporate &
Investment Banking
Asset Management
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Framework for capital allocation
• Can we get scale?
• Have we comparative advantage and will it last?
• How consumptive of technology resource is it?
• How distracting will it be for existing management?
• How does the market value this business?
• Can we migrate the learning if successful?
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Advantages of scale in the management
of costs
• Global resourcing
• Common technology
• Shared experience
• Centralised IT support, and
• Centralised purchasing
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Cyberjaya, M alaysia : Projected Capacity Utilisation at Dec 2006 - 148 %
0
500
1000
1500
2000
2500
0:30
1:30
2:30
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4:30
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19:30
20:30
21:30
22:30
23:30
Tim e in GM T
Headcount Available Desk Capacity
UK Day Shift
AP D ay Shift
US Day Shift
H yderabad I : Projected Capacity Utilisation at Dec 2006 - 169 %
0
200
400
600
800
1000
1200
1400
1600
0:30
1:30
2:30
3:30
4:30
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21:30
22:30
23:30
Tim e in GM T
US Day Shift
AP D ay Shift
UK Day Shift
Note : w here headcount exceeds available desks,
this reflects shift cross over w ithin the hour
Cyberjaya, M alaysia : Projected Capacity Utilisation at Dec 2006 - 148 %
0
500
1000
1500
2000
2500
0:30
1:30
2:30
3:30
4:30
5:30
6:30
7:30
8:30
9:30
10:30
11:30
12:30
13:30
14:30
15:30
16:30
17:30
18:30
19:30
20:30
21:30
22:30
23:30
Tim e in GM T
Headcount Available Desk Capacity
UK Day Shift
AP D ay Shift
US Day Shift
H yderabad I : Projected Capacity Utilisation at Dec 2006 - 169 %
0
200
400
600
800
1000
1200
1400
1600
0:30
1:30
2:30
3:30
4:30
5:30
6:30
7:30
8:30
9:30
10:30
11:30
12:30
13:30
14:30
15:30
16:30
17:30
18:30
19:30
20:30
21:30
22:30
23:30
Tim e in GM T
US Day Shift
AP D ay Shift
UK Day Shift
Note : w here headcount exceeds available desks,
this reflects shift cross over w ithin the hour
Global resourcing –
leveraging our international framework
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HSBC is monetizing its size in IT
• Size in itself only provides purchasing economy of scale
• HSBC has invested significantly to move up the maturity curve to
monetize our scale and provide unparalleled global services
• We are in the second year of deriving value from our Global Systems,
with the majority of the benefit to come in 2006 – 2010
• We have 82 Global Platforms
• Development force is almost completely in-house and over 40% done
in “high skill, lower cost” environments (India, China, Brazil)
• The ability to quickly move into new markets at attractive price points
is demonstrated by our global platforms in Consumer Finance and
Direct Banking
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Geographical &
Physical
Consolidation
Standardize applications used across the business
Standardize business processes
Standardize Back office
Globalisation of customer base
Multiple applications on a single partitioned server
Replace many low end servers with one high-end server
Enable ‘follow the sun’ support
Elimination of excess overheads and fixed costs
Aggregation of demand, leverage economies of scale.
Aggregation of demand, leverage economies of scale.
IT Drivers of Efficiencies with Scale
Equipment/tools
Standardization
Application
Consolidation
Best Practice and
Architecture
simplification
Increased purchasing leverage and Global best pricing
Advantages of skills transfer and Training
Advantages of skills transfer and Training
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Common global network infrastructure permitting
any connection to any Group destination
- Global utility irrespective of corporate affiliation
- Top quartile of comparable network cost & availability
- Internal uniformity & ease of interconnect
- Traffic based tariffing by destination
Annual capacity increase 70% over last 3 years
179 Group corporate users
57% p.a increase in traffic
26% increase in billable devices (1H05) to 106K
Voice and Data network rates reduced for 16
consecutive years
Large Purchase Economies of scale
Diverse
HSBC Group Global Network
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HSBC Group Data Processing Facilities
Chicago, Illinois
Buffalo, New York
NYC/New Jersey
Toluca, Mexico
Midlands, UK
Hong Kong
London, UK
Paris, France
Geneva, Switzerland
Curitiba, Brasil
Turkey
Processing 15 billion financial transactions annually
- 13 billion are now performed completely electronically
- Supporting over 700 million customer calls per annum
Processing Capability:
- 94 billion mainframe instructions per second
- 24,000 servers in the enterprise
- 285,000 desktops sharing a common image by year end
- 4 petabytes of electronic storage (equivalent to 1,000 billion pages
of text).
- 7 million e-mail messages every day
- Group/Regional Processing Facilities
- Local Processing facilities
- Investment Banking and Markets faciliies
18. 18UBS 2006 Global Financial Services Conference
HSBC Global Transaction Banking
“[transaction services] businesses have certain attractive
attributes to investors: they are diversified and fee-based; the
bank serves the role of intermediary rather than principal; and
they are scale intensive, (these businesses) …have
substantial operating leverage” - Bernstein (2005)“
3 May 2006
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The Benefit of Scale
HSBC formed the Global Transaction Banking division - grouping scale processing
businesses ( Payments, Trade and Security Services ) in 2003
Global focus has allowed Transformation by synchronised / optimised Business Model, IT
infrastructure and Process Quality change programs :
– Transformation of delivery by efficient and systematic transition of manual processing to offshore
“centres of excellence” for Trade, Payments and Securities Services which deliver :
– High quality & low cost processing, and
– Value added / differentiating capability and services that would not be possible to deliver
economically in sub-scale onshore locations.
– Prioritised IT infrastructure investment that balances need to deliver new product enhancement with
need to
– rationalise architecture to support future growth
– to efficiently address global investment to address regulatory requirement
– Enhance and deliver consistently high quality client experience across the network
– Systematic & Continuous Quality Improvement (CQI) effort across the network and business lines by
– Best Practice identification, transfer and adoption
– Embedding of 6Sigma, LEAN and CQI techniques through cost effective training and
mentoring by small team of specialist global practitioners.
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The Cash Management business is
consolidating
0
20
40
60
80
100
1 2 HSBC 4 5 6 7
0
20
40
60
80
100
1 HSBC 3 4 5 6 7
2002 2005% %
Euromoney Poll: Which ICMs do you use most? (Global category)
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Leveraging the Group skills: three examples
Mexico
• Internationality of Group key to ensuring success of acquisition
– Influx of Group talent
– Tightened controls (compliance and internal audit)
– Installed new systems (treasury, branches, trade services and credit card)
• Leverage Mexico’s ATM capabilities – location selection, direct sales
channel, charity donations.
Rolling out the consumer finance model
• Marketing skills Asia
• Sophisticated analytics Mexico
• Scaleable systems Brazil
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In Global Markets we have rolled out our
Asian financing model with great success
• Hub and spoke management
complemented by in-country
coverage expertise
• Strong local distribution coupled with
global emerging markets platform
provides optimal execution for issuers
In Latin America
In the Middle East and North Africa In Central and Eastern Europe
Mandates at bookrunner or equivalent
0 0
0
10
20
30
2002 2003 2004 2005
Mandates - Bonds Mandates - Loans
0
0
10
20
30
40
2002 2003 2004 2005
Mandates - Bonds Mandates - Loans
00
0
10
20
2002 2003 2004 2005
Mandates - Bonds Mandates - Loans
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Is there a conflict in balancing competing
demands for capital and other resources
while seeking to retain corporate character?
• Tone from the top
• Collective Management
• Rotation of senior management
• Training at all levels
• Reward mechanisms
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Distribution remains the key competitive
advantage – and therefore highlights the
importance of the brand
Sydney
Auckland
Wellington
Christchurch
Brisbane
Perth
Adelaide
Melbourne
Jakarta
Bandung
Semarang
Surabaya
Manila
Medan
Kuala
Lumpur
Singapore
Bandar Seri Begawan
Kota Kinabalu
Kuching
Labuan
Bangkok
Taipei
Hong KongMacau
Guangzhou
Hanoi
Shenzhen
Ho Chi
Minh City
Colombo
Mumbai
Trivandrum
New Delhi
Bangalore
Chennai
Kolkata
Visakhapatnam
Chengdu
Chongqing
Dhaka
Muttrah
Salalah
Dubai
Karachi
MuscatJeddah
Riyadh
Dammam
Manama
Tehran
Doha
Abu Dhabi
Beirut
AmmanCairo
Alexandria
Ramallah
Nicosia
Tel Aviv
Wuhan
Qingdao
Tianjin
Beijing
Osaka
Tokyo
Xiamen
Shanghai
Dalian
Pusan
Seoul
Almaty
Istanbul
Moscow
Valletta
Yerevan
BaghdadAthens
Bratislavia
Warsaw
Prague
Zurich
Frankfurt
Stockholm
Rome
Milan
LuganoMonaco
Madrid
GenevaParis
Channel Islands
Cardiff
Valencia
Barcelona
Birmingham
Dublin
Kuwait City
Luxembourg
Isle of Man
Leeds
Manchester
Edinburgh
London
Düsseldorf
Brussels
Amsterdam
Port Louis (Mauritius)
Durban
Johannesburg
Cape Town
Santiago
Salta
Manaus
Córdoba
San Juan
Mendoza
Neuquén
Resistencia
Tucumán
Bahía Blanca
Buenos Aires
La Plata
Pergamino
Porto Alegre
Montevideo
Mar del Plata
Curitiba
Corrientes
Posadas
Santa Fé
Punta del Este
Paraná
São Paulo
Campo Grande
Brasília
Ribeirão Preto
Salvador
Recife
Fortaleza
Belém
Rio de Janeiro
Belo Horizonte
Nassau
Cayman
Islands
Colón
Panama City
Caracas
Miami
New York City
Chicago
Houston
Dallas
Vancouver
Calgary
Saskatoon
Winnipeg
Seattle Portland
San Francisco
Los Angeles
Boston
Glastonbury
Philadelphia
Fredericton
St John’sQuébec
Montréal
Bermuda
Ottawa
Washington
Mexico City
Monterrey
Beverly Hills
Buffalo
Toronto
Tigard
Salinas
San Diego
Tijuana
Torreón
Guadalajara
Puebla
Acapulco
Veracruz
CancúnMérida
Brandon
Jacksonville
Las Vegas Chesapeake
Virginia Beach
Atlanta
Lewisville
Prospect Heights
Kansas City
Sioux Falls
New Castle
Bridgewater
Algiers
Tripoli
Belfast
Budapest
Ankara
Adana
Izmir
Malé (Maldives)
Pune
Chandigarh
Hyderabad
Ahmedabad
Cebu City
Cook Islands
Tortola (British Virgin Islands)
Penang
Chittagong
Suzhou
Inchon
Daegu
Daejon
HSBC Group international network
25. 25UBS 2006 Global Financial Services Conference
What is our unique point of view on the
world?
In a world where homogeneity and standardisation
dominate, we are building our business in the belief
that different people from different cultures and
different walks of life create value.
We believe that it is the combination of different
people, and the fusion of different ideas, that
provides the essential fuel for progress and success.
26. 26UBS 2006 Global Financial Services Conference
What does this position
demand of each and every one
of us?
To provide people from different cultures
and different walks of life with the
financial support that helps them to live
the life that best reflects who they are and
what they want to achieve.
