HSBC job cuts: Why laying off, is paying off for Britain's Biggest Bank

After waves of speculation and media reports hovering over HSBC this week, the largest bank in Europe has finally confirmed that it is cutting another 2200 jobs in the UK, in line with a previously announced global cost cutting programme.

HSBC says that 3,100 posts are being closed but due to new roles being created, a selection of staff will be redeployed in other positions, meaning a net 2,217 staff will be leaving.

The UK headcount slash falls in line with the planned global job cull of 30,000 people by 2013, which is worth 10 percent of HSBC's total workforce, as it seeks to save $3.5bn worth of costs ahead of a raft of global banking regulation changes.

Today's announcement will affect less than 5 percent of its UK workforce and will primarily be across retail banking, head office functions and various other areas.

Elsewhere, domestic media reports from India have said that up to 750 employees, from assistant manager to vice president level, are being shown the door at HSBC India's Hyderabad and Pune offices.

In August 2011, HSBC CEO Stuart Gulliver revealed that the bank was looking to streamline the group, despite half-year pre-tax profits of $11.5bn, in order to be fully prepared for future costs that will inevitably result from regulation changes.

"Redesigning, not shrinkage"

The brutal round of cuts has meant that almost 7,000 jobs were axed at HSBC last year, adding to the 2,000 so far shed this year. That leaves 21,000 more to go by 2013 if Gulliver's plans are to be kept on target.

Through shedding jobs in territories that HSBC feels it lacks in scale, such as Brazil, Hong Kong and Canada, it has seemingly done the trick - at least by the harsh judgement of recent financial results.

HSBC made a profit of $3.5bn through its British businesses last year, up from $2.4bn in 2010.

Gulliver enthused earlier this year that HSBC is still looking at adding 15,000 jobs to the global workforce in fast growing markets as "this is a redesigning of the group, not a shrinkage."

"It's to get ourselves on the front foot," he added in a statement earlier this year.

The European sovereign debt crisis woes and losses, dismal economic and growth data and a stagnant market across the Western hemisphere has undoubtedly meant that banks have had pare back losses in any way they can.

Investment banks have shed over 80,000 jobs in the UK since 2008 and RBS, which is 83 percent owned by the taxpayer and Lloyds, which is 40 percent owned by the state, cut 25,000 and 32,000 jobs respectively during the same period.

Overall European banking figures cuts a similar shape.

Shortly before the alleged rogue trading scandal broke in August 2011, Switzerland's largest bank UBS revealed it would cut 3,500 jobs from its investment bank, while Barclays announced the elimination of 2,000 posts and Credit Suisse announced 2,000 job cuts to follow. ING revealed it would axe 2,700 positions following the dire fallout on it Greek debt losses.

However, HSBC has been tipped as the "best out of the bunch" after for fiscal 2011 year for HSBC, pre-tax profit grew 15 percent to $21.87bn from $19.04bn a year ago, although some of this was following the benefit of favorable fair value movements on own debt

The now infamous 30,000 HSBC job cut plan suggests a reactionary movement to market sentiment but in fact, it is actually a good sign of preparation for the undoubtedly high cost of regulation.

Rising cost of regulation

The $3.5bn that HSBC aims to save from cost cutting measures couldn't come at a better time as over the next few years there will be a raft of global regulatory changes and capital requirements that will mean banks need more cash on their balance sheets and a nest egg to pay for all those regulatory changes.

In December 2011, data provider Thomson Reuters revealed that more than 14,000 changes to regulation had been announced around the world by officials in the 12 months ending in November, a 15 percent increase. The research also revealed that, on average, 60 regulatory changes are announced every working day.

Infrastructure changes and capital requirements naturally borne out of substantial overhauls to current legislation will come at a cost. These substantial changes include higher capital requirements from Basel III, the consequence of the Vickers' Report on ring-fencing retail and investment banks, Solvency II, mandatory central counterparty (CCP) clearing for all over-the-counter (OTC) derivatives operations - to name but a few. The Dodd-Frank Act will also mean substantial changes to the banking sector's entire business model.

"It is clear from the above that the industry will continue to bear a heavy burden of both time commitment and cost as it works with policymakers to finalise the regulatory reforms, including addressing the many inconsistencies within and extraterritorial dimensions of national rule-making," said Douglas Flint, HSBC Chairman, in the group's annual report. "We are committed to all necessary constructive dialogue and support to speed the finalisation of these remaining issues."

A benchmark study, 'The cumulative impact on the global economy of changes in the financial regulatory framework', by the Institute of International Finance (IIF), which hails Josef Ackermann as one of its directors, estimated that banks in the leading industrial economies will require $1.3tn worth of additional capital by 2015, in order to meet demands from regulatory changes.

So if banks are to survive the raft of regulatory changes and impending costs to implement them, significant headcount reduction is the first and more logical way to buoy up business in the meantime.