Michael Geoghegan on how HSBC beat the crash

The low-profile HSBC boss talks exclusively to MT about how his bank survived the financial crisis.

by Chris Blackhurst
Last Updated: 09 Oct 2013

This autumn, on the day after his 56th birthday, Michael Geoghegan will be in Buenos Aires. In the space of the next 24 hours, he will visit Sao Paulo and Mexico City. Then come Vancouver and New York. In all, he will go to 16 countries on his regular global staff road-show as HSBC chief executive. He will finish up with presentations in Birmingham and at the Odeon Leicester Square.

In some places, he will address as many as 7,000 employees at one go. At each stop, Geoghegan will speak unscripted, without notes, and take questions from the floor - on anything. If he can't answer, he commits to having the information ready for when he touches down at his next destination and relaying it back to his previous audience.

Nothing is allowed to interrupt his regal progress. Last year, Lehmans crashed in the middle of his tour - he carried on regardless. Does he lose track of where he is? 'Sometimes, it's true, I don't know where I am,' he says, laughing. Then he's serious: 'You know, by the seventh session, I will have heard the same issues being aired and I will have obtained a medical check-up on the health of the company.'

He doesn't need to do this - modern technology means he can address all his employees from London - but Geoghegan reckons to spend 70% of each year travelling. He loses count of how many HSBC workers he meets personally, but it runs into several tens of thousands.

If this is what it takes to keep a bank out of state ownership these days, no wonder so many of HSBC's rivals didn't make it. It's a punishing schedule, but one that pays great dividends. 'Nothing beats hearing things from the coalface. It's amazing, even in different countries, how often the same subject will come up. When it does, you know that's what people are worried about, that's where a problem may lie.'

Listening to Geoghegan, you quickly start to get a feel for how it was that HSBC managed to avoid the worst of the banking crisis and didn't have to go cap-in-hand for extra cash to the taxpayer. He's speaking soon after his bank unveiled profits for the first six months of 2009 of £3bn. Although only half the figure for the same period in 2008, the results are in marked contrast to the dismal numbers posted by most other banks. So resilient was HSBC that, back in April when most of its rivals were in dire straits, it confidently went to shareholders and asked them for £12.5bn to bolster its balance sheet. They coughed up with ne'er a murmur.

Geoghegan sits at the top of the largest non-state-owned bank in the world, with only chairman Stephen Green above him. HSBC is rated the world's most valuable banking brand. It's the biggest bank in the emerging markets, largest international bank in the Middle East, in the top three in Latin America (a position it achieved in just a decade), and among the leading three in the world for private banking.

HSBC was named '2009 Global Bank of the Year' by Euromoney, the respected financial publisher. The accolade is all the more remarkable, given that in early 2007, HSBC was the first major bank to warn on its US losses. Its Household subsidiary was slap-bang in the sub-prime market, extending loans and mortgages to low-income families. They started defaulting, and HSBC headquarters in London sounded the alarm to the market.

Today, from his large corner office on the topmost floor of HSBC's 42-storey tower at Canary Wharf, Geoghegan oversees a company that has £750bn under management and employs nearly 350,000 people worldwide.

One wall of his room is dominated by a huge flat screen. It shows the bank's current performance in all areas of its business. At a touch, Geoghegan can ascertain, for instance, how many new premier current accounts were opened and closed today, or the number of emergency calls from customers. He can make country and yearly comparisons and he can do it for any aspect of the company's myriad activities. The amount of information is mind- boggling, and updated every second of the day.

There are family pictures - Geoghegan is married to Jania, they have two sons and live in Weybridge, Surrey - and other bits of memorabilia, but nothing showy. The place smacks of orderliness and a focus on the job in hand.

Despite his prominence, Geoghegan keeps a low profile - this is a rare interview. He went to school in Windsor and Ireland, and has been with HSBC pretty much ever since, having joined the bank in 1973. At 19, he was offered the choice of a place at University College, Dublin or a job in the international division of HSBC. 'I took the latter,' he says with a chuckle, clearly not one to spend years in academia.

He spent 12 years in North and South America for the group, eight in Asia, seven in the Middle East and three in Europe. He established HSBC in Brazil and received the CBE for his contribution to UK business interests there. He speaks Portuguese and Spanish.

He is also almost entirely unlike Green. The HSBC chairman is quiet and studious; the chief executive, by contrast, is a fast talker who fires from the hip. Whereas Green is ex-McKinsey and joined the bank on the planning side, Geoghegan has worked his way up, spending most of his career at the sharp, retail end. Could the contrasting styles be a factor in HSBC's success? Perhaps, says one colleague, who describes them as 'a bit soft cop, hard cop'.

Geoghegan's reputation internally is as a tough but fair manager who sets clear goals. Decisive and quick-thinking, he can also be short-tempered and impatient. The differences between the two top execs ensure that there is no question of the bank allowing a personality cult to develop, as has beset some rivals.

Geoghegan is often referred to as 'a banker's banker', meaning he puts great store in long-term customer relationships, loyalty, solidity, traditional methods and values. When HSBC found that there was a growing number of sub-prime loan defaults in its US business in late 2006, it confronted it head-on. 'That's how we behave,' Geoghegan says, recalling those dark days. 'We told the market, we gave a profits warning. We said the outlook was bad. Then we stopped giving new mortgages in the US. It has taken three years to bring it under control.' He adds pointedly: 'What struck me at the time was that nobody else was taking that view.'

While HSBC was getting to grips with Household's travails, the bank's chief couldn't believe what he was witnessing elsewhere. 'The autumn of '06 and beginning of '07 saw everything become very aggressive ...' He could have added 'and simply mad', but doesn't. 'We sold this building,' he says, gesturing around him, 'on a less than 4% yield, less than the cost of money. It didn't seem to make sense to me.'

There were further unsettling signs of trouble, not least the fact that he and his colleagues were coming across individuals at other banks who appeared to have carte blanche. 'We saw relationship managers with the ability to lend $1bn.' He shakes his head: 'We told the industry, but it would not listen.'

But listening closely were Geoghegan's own staff. 'We told our guys: "Look very carefully at what you're doing." While we were struggling with the US, we were determined something was not going to bite us somewhere else.'

John Studzinski, HSBC's former investment banking head, said of HSBC that it's a bank 'where the apple doesn't fall far from the tree where risk is concerned'. It's that adherence to sound banking practice that set HSBC apart.

'Some banks forgot the fundamentals,' says Geoghegan, 'which is that you take care of deposits, then you lend.'

Asked what makes HSBC so different, he cites four factors. 'The first is historical. From the moment the Hong Kong and Shanghai Banking Corporation was founded in 1865, the bank always knew it would be bigger than Hong Kong. So it never had a bank of last resort, it always had to be careful. Ever since I joined when I was 19, you've had to have an asset/deposit ratio of less than 100% - you can only lend when you've got enough deposits.'

Second, you can never have too much capital. 'You've always got to have a high capital ratio.' And third, 'the balance sheet is only a snapshot at one time - it's no substitute for knowing your customers'. Fourth: 'There is nothing wrong with being wrong, but there is if you don't tell others they are wrong. We encourage everyone to always tell it how it is.'

Currently, HSBC has an asset/deposit ratio of 79%, 'which tells you that 21% of the money doesn't make a return for us'. By industry standards of only a few months ago, this would have looked very conservative - but he maintains that this is how it should be. 'No bank should have an asset/deposit ratio of over 100%.'

At Royal Bank of Scotland, the newly installed CEO, Stephen Hester, has pledged to bring down its asset/deposit ratio of 156% to 100%. Says Geoghegan: 'If you behave like RBS did, it means that every morning you're depending on the interbank markets waking up and still liking your name. I wouldn't run the company with a ratio of over 90% - if I did, I would be very concerned.'

Unlike its rivals, HSBC has not wholeheartedly embraced the investment banking route. It tried to set up its own equivalent of Barclays Capital under Studzinski, but that experiment was soon knocked on the head. 'The concept wasn't wrong,' says Geoghegan, 'but we found we couldn't be everywhere at any one time.'

It made more sense for HSBC 'to go back to fundamentals, to be a relationship banker. We were emerging markets-led, where markets are very business-focused. We said we would only lend with our balance sheet - we wouldn't borrow to lend, and would stay with customers.'

The Barclays Capital model, he says, is too volatile for HSBC. 'It's the number one business in Barclays and is 30% of its profits before tax. That wouldn't do for us. We've got commercial banking, personal banking, private banking, insurance ... nothing dominates. You can have banks that are over-reliant on one thing and it's not as easy to pull the management team together. Here, Stephen looks after the main group board and I run the group management board, which is comprised of guys who all contribute £2bn of business each.'

'They are very different types of culture - investment banking and retail banking.' HSBC shares are able to trade on much higher multiples, he says, 'because people believe our earnings are sustainable. We've got 10,000 branches in 85 countries and more than 100 million customers - that's very hard to replicate.'

There have been demands from analysts and an activist investor, fund manager Knight Vinke, that HSBC ditch its underperforming US Household subsidiary. Such talk is anathema to the CEO. 'If we walked away from a business, there would forever be speculation about us - that we would not honour our guarantees. And you can't do that in banking - you never walk away from your depositor.'

The bank is structured with a holding company at the peak, then local subsidiaries below. Each has its own board, capital requirements and dividend policies. 'We say that at HSBC, capital drips down and dividends come up.'

This helps clarity and enables a straightforward view of how the various businesses are doing around the world. To do it any other way, he maintains, would be 'too blurred. It's much easier for us to analyse our balance sheet. We couldn't stand it, for example, if our operations in North America were being funded by Europe.' That kind of operational discipline has been all too rare in the industry in recent years.

The firm does cling to its advertising slogan: 'the world's local bank'. Says Geoghegan: 'Locally based country managers are all-powerful - they're more powerful in their country than the person running the product line from London. If I'm asked to rule between a product manager in London and the country manager, I will always support the country manager, because they know their market best.'

His bank may have escaped the worst of the credit crunch, but Geoghegan and his fellow senior executives have not been immune from criticism over their pay and bonuses - he is the bank's highest-paid director with a salary of over £1m. Last year, he waived his bonus, but thinks that the outcry over bankers' rewards has got out of hand. 'I do think the criticism is overdone. We're already seeing good graduates not wanting to go into financial services.'

What about the argument that banks are too greedy, that they should put more money back into the community? 'There are a large number of people in the City who help people without talking about it. And, on the corporate side, there is a fine balance to be struck. Remember, we're owned by our shareholders. Ultimately, they decide how much to give.'

More and more, potential recruits are asking about CSR and corporate philanthropy at interview, he says - how much HSBC spends on it, and is it enough? 'But you can argue that there never is a right amount.'

Too many people, he maintains, came to rely on 'too much instant gratification', so that bankers are being attacked, for instance, for not helping first-time property buyers. There's an element of putting the cart before the horse here, says Geoghegan. 'What happened to people getting a job and saving enough for a deposit? It all seemed to go away, and it should come back. The industry needs to adapt, but society also needs to adapt.'

It's easily forgotten, he says, that 'banks can only lend, it's people that borrow. I'm surprised by politicians who say the economic downturn is because of too much lending by banks. It's also because of too much borrowing.'

There's no doubt that some bankers became far too arrogant. He insists that won't occur at HSBC, not on his watch - and beyond too. 'We've a very connected culture here.'

He adds, enigmatically: 'If someone doesn't get the culture, they don't seem to survive.' But most do stay - the average length of service with the bank of those on his group management board, he says, is 28 years. 'So we're well used to dealing with crises,' he smiles.

On the way out, he stops by the screen on the wall. He treats it almost as an object of wonder, like a small boy revelling in what his brilliant toy can do. He puts a finger on a line of data. Instantly, another page comes up. He presses again, then another.

He's loving it, taking in the micro-detail. He may be head of a giant global corporation, with an office on the top floor of a huge bank building, but Geoghegan has his ear close to the ground. He wouldn't have it any other way.

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