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This Friday, Michael Geoghegan, chief executive of HSBC, will face investors at the annual meeting of the world’s fourth largest bank after spending exactly a year in the post.
Much has happened in his first year as chief executive and not all of it has been good.
HSBC may have reported $22.1bn pre-tax profits in 2006 but its shares have been among the most underperforming European bank stocks and HSBC was forced to issue its first profits warning this year.
The problems were triggered by HSBC’s US consumer finance arm, which lends to customers with patchy credit histories. Rising defaults at the division forced bad-debt provisions to jump by $2.17bn to $11bn.
The problems have been highly embarrassing for Mr Geoghegan, 52, a hard-driving executive who has worked at HSBC for 33 years, and for Stephen Green, who stepped up from chief executive to chairman.
The two men, who run HSBC as a double act, had been in their new roles for just a few months when the difficulties emerged.
The issues stem from HSBC’s botched integration of Household, the US consumer finance business it bought in 2003 for $15bn under then chairman Sir John Bond.
HSBC failed to install its own management to run the operation and to integrate Household properly with HSBC.
Problems started when Household started buying up large amounts of risky subprime mortgages in late 2005 and 2006 in the mistaken belief that, with its statistical modelling systems, it would be better able to assess and underwrite risks than other lenders.
However, as interest rates rose in the US and US house prices started to fall, many US borrowers who had relied on rising house prices to allow them to refinance their loans were caught out and started to default on their debts.
The problems at Household raised eyebrows among investors who were accustomed to the disciplined culture and management of HSBC.
It was also the first big challenge for Mr Geoghegan, a tough executive who is seen to have the ability to get things done. Most of his 33 years at the bank have been spent outside the UK, culminating in seven years in Brazil.
In early 2004, he was brought in as chief executive to shake up the UK retail bank, which HSBC regarded as having too high a cost-income ratio compared with its peers. Mr Geoghegan determined to drive through robust changes in cost-cutting, which angered trade union Amicus.
Mr Geoghegan dealt with the problems at Household in typical hands-on style. He lost little time in cleaning up the US operations by changing the management team and curtailing the sale of certain mortgage products.
At the bank’s results in March he said: “I have indicated the buck stops with me and you have my commitment to solve it. The US team cannot do it overnight – it will probably take two or three years to work this out.”
Mr Green runs HSBC with Mr Geoghegan and has said that the chairman is responsible for strategy and corporate governance, while Mr Geoghegan leads HSBC’s management team to implement the bank’s strategy.
Investors do not blame Mr Geoghegan for the problems in Household as he was heading operations in Brazil when the decision was made to buy and integrate the division back in 2003.
Ultimately, shareholders can question whether some responsibility for the problems should be shared by Stephen Green, who was HSBC’s chief executive at the time, and Douglas Flint, who is still finance director.
However, the losses at Household have weighed on HSBC’s share price as investors questioned the quality of the bank’s risk controls as well as its ability to integrate acquisitions and keep a close watch on its far-flung global network.
The Household problems have also exacerbated concerns among investors that HSBC may have taken its eye off the ball in recent years to focus on mature markets such as the US instead of expanding its attractive franchise in emerging markets such as Latin America and Asia.
Indeed, HSBC’s share price, which used to trade at a premium to UK banks because of its exposure to fast-growing emerging markets like Asia, is now trading more or less in line with the UK bank sector average – on a forward price-to-earning ratio of about 12 times.
Mr Geoghegan and Mr Green have stressed their focus on emerging markets, pointing out that half of HSBC’s profits come from Asia, Latin America and the Middle East and these will be the main focus of future investments.
But their challenge is to convince investors that the problems in the US are now behind them and that HSBC is focused firmly on emerging markets.
Already there are some signs that investor sentiment is starting to change. For example, Saudi billionaire Maan Abdulwahed al-Sanea recently spent about £3bn building a 3.11 per cent stake in HSBC.
It is understood that he plans to be a long-term shareholder and believes that the recent fall in HSBC’s share price represented a buying opportunity.
But, given the difficulties this year, the mood at HSBC’s annual meeting at the Barbican centre in London is likely to be far more sombre than a year ago, when Sir John Bond bowed out of HSBC to a standing ovation from shareholders.