The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Liam Proud

LONDON, Feb 19 (Reuters Breakingviews) - How fast should an Asia-focused bank grow? There’s no right answer, but the long-term number probably ought to be higher than the 3% compound annual revenue increase that analysts are pencilling in for $200 billion HSBC HSBA.L between 2025 and 2027. New CEO Georges Elhedery announced a broadly sensible strategy for the lender on Wednesday, while implicitly acknowledging that the growth question is partly out of his hands. It makes a further valuation boost unlikely.

The centrepiece of Elhedery’s announcement was a $1.5 billion annual cost-cut target by 2027, helped by closing bits of its U.S. and European investment bank. The move makes sense, but costs aren’t the main problem for HSBC investors anymore.

Expenses will on average eat up roughly half of revenue over the next three years, analysts reckon, putting Elhedery’s group in the middle of the pack among its self-selected peer group. The implication is that bloat and inefficiency are no longer the chronic issues they once were at HSBC.

Instead, the most conspicuous problem area is growth. Analysts’ expectations for a 3% compound annual revenue increase from 2025 to 2027, based on Visible Alpha consensus data, compares with 5% on average for peers like DBS DBSM.SI, Standard Chartered STAN.L, Citigroup C.N, Barclays BARC.L and Oversea-Chinese Banking Corporation OCBC.SI. HSBC’s figure is the lowest of the 12-member group.

Elhedery on Wednesday offered relatively little that would change investors’ perceptions in this regard. He wants to hire more Asian private bankers, for example. But the whole HSBC wealth division is just 11% of revenue, meaning even Elhedery’s double-digit target growth rate in this business won’t move the group-wide figure much.

More than 80% of the lender’s top line comes from either wholesale transaction banking or net interest income, which is the revenue HSBC gets from loans and securities minus the interest it pays on deposits and debt. The transaction-banking business is hard to grow because Elhedery has inherited such a high market share of trade finance and cross-border payments processing. And on interest income, the problem is that central banks are cutting rather than hiking, squeezing lenders’ margins.

Elhedery’s limited growth options will keep his valuation in check. HSBC is worth 1.2 times expected 2025 tangible book value, Visible Alpha data shows, which is roughly in line with the average of its key global rivals. Elhedery might in theory hope for more since his “mid-teens” return on tangible equity target is above the average 13% forecast for the same peers over the next three years. His issue is that investors tend to assign a premium to growth, and for now HSBC has relatively little of that to offer.

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CONTEXT NEWS

HSBC on February 19 announced $1.5 billion of annual cost cuts and said it was targeting a “mid-teens” return on tangible equity between 2025 and 2027, after excluding one-off items like restructuring charges.

Analysts were expecting a roughly 14% return for those three years, according to forecasts gathered by Visible Alpha before the bank released its new targets.

The London-listed, Asia-focused lender wants to boost its fee income in the wealth business at a “double-digit” compound annual growth rate over the next three to five years. Its targeted loan growth is for a “mid-single digit” annual growth rate.

HSBC’s UK-listed shares were up 0.6% to 903 pence as of 0945 GMT on February 19.

(Editing by George Hay and Aditya Srivastav)

((For previous columns by the author, Reuters customers can click on PROUD/liam.proud@thomsonreuters.com))