Restoring trust the biggest test for global banks: HSBC

London headquartered banking major HSBC saw profits double in calendar year 2010. Analysts, however, are concerned about the banks 6% growth in costs and its downward revision of its return on equity targets. Then again, Asia continues to drive growth for HSBC and the banks Indian operations itself saw its best performance ever last year and it will be a large contributor to revenues.

HSBC group chairman Douglas Flint told CNBC-TV18's Shereen Bhan that if subsidiarisation is the right step into entering India they would take it as and when the opportunity arises.

He also quelled rumours that the banking major is not looking at moving its headquarters out of London. According to him, London is the most attractive destination to be headquartered in. "It is a leading financial sector and the cluster effect of so many financial companies being there is a huge benefit," he says.

Flint said that the number one challenge that faces the global banking business is reestablishing trust and to get everyone on the same agenda.

Below is a verbatim transcript of his exclusive interview on CNBC-TV18. For the complete interview watch the accompanying video.

Q: Let me start by asking you about the growth aspects for HSBC. You have just announced your calendar year results and net profit is actually doubled but concerns on the lower guidance as far as return on equity is concerned as well as increase in costs. Costs I understand have gone up by about 6% year on year. So (a) do you anticipate the kind of growth that you have seen in 2010 to carry forward into 2011 and then I will get to the cost question.

A: Some of the performances in 2010 was a rebound particularly as the bad debt situation around the world got a great deal better as we came out of the acute phase of the financial crisis. I think we see more certainty as we look ahead as to the shape of the economies in which we are operating.

I think long term and indeed in the medium term the opportunity for growth is so very good for HSBC. We are lucky and indeed partly designed it that way that we are exposed to and operating in some of the most attractive economies in the world in terms of growth. Connecting those economies is very much what we plan to do. We did reduce our guidance on long term returns because I think that's a reflection of the additional conflicts of the regulatory changes going to require us to hold.

Q: Is it just on account of the Basel III requirements because analysts don't seem to be convinced that it's just on account of the Basel III requirements that you have reduced your guidance?

A: It's the Basel III guidance which is going to require us to hold a great deal more capital than historically. Also I think that some of the areas of profitability that existed in the past turned out to be unattractive in terms of risk profile and therefore the business model where I think the simpler it was for the industry as a whole, and weren't a big part of that kind of activity. But even for us a little bit simpler and therefore the returns will be less available than they were historically.

Q: But you do anticipate the growth momentum to continue, the kind of growth that we saw in 2010 to continue in 2011 or perhaps even better that?

A: We certainly hope to put our capital to work in the economies we can get the best return and find the best growth.

Q: Let me talk to you about cost because costs have gone up 8% year on year. Net of one time expenses, they are up 6% year on year. While I know that the bank has said that this is on account of revenue enhancing you have also acknowledged the fact that cost efficiency at these levels is unacceptable and that you will need to soak this out over the next two to three years. What's really going on as far as the costs are concerned and explain to me this business of revenue enhancing on account of the kind of cost increase that you are seeing?

A: The revenue enhancing bit is that we put a lot of money in particularly in our wholesale business, global banking and markets. We put a lot of money into building platforms for E-Commerce and building out prime services as well as just expanding our capabilities in some of our core product areas. Inevitably there is a lag between investing and systems architecture, testing it, recruiting the people, parallel running and actually getting the revenues building up.

So in due course through 2011-2012, the revenues that those costs in architecture were designed to attract will come through. That's the plan. On top of that, around the world we have seen high inflation in Asia and in Latin America, less so in the US and Europe and there has been increased cost in the whole regulatory change preparation.

Q: So you anticipate cost to stay at these levels and you anticipate them coming down only over the next two to three years?

A: I think that we have to recognize there is a great likelihood that interest rates stayed lower for longer than we had anticipated, maybe a year or so back. And therefore the revenue growth maybe less quick in many markets to recover. So we have to be very efficient in our costs. What we would be looking at is areas where there may be some duplication where we can do things simpler, more efficiently and find a way to moderate the cost efficiency rate back down to our target range of 48% to 52% which will take a couple of years.

Q: I want to talk to you about Asia because Asia is clearly the growth driver as far as HSBC is concerned, you have been able to do almost 21% in terms of return on equity in Asia. What is the picture looking like for 2011 in terms of Asia and India specifically?

A: Usually it's very good, India looks very good. We have got terrific organic opportunity because trade flows into and around the region are strong, consumer confidence is strong, the credit environment is good, we are well funded and having an excessive of deposits and therefore there are no constraints to our growth in Asia and there is a tremendous amount of infrastructure investment going on around the region.

There would be a particular case in point that gives us opportunities to connect in many cases they equipment suppliers in Europe and America to the installations that are being done in India and elsewhere and benefit from two sides of the trade. Our performance in India in the last year was our best ever, and we are excited about the opportunity to expand from here.

Q: Let me talk to you about the regulatory landscape because the central bank at this point in time has put forth a discussion paper on foreign banks and their presence in India as opposed to going the brand licencing route perhaps to the subsidiary route we understand that this would perhaps bring a certain restrictions, a cap for repatriation for instance for more regulation? Where do you currently stand on this discussion paper?

A: We are excited by it. It's a great opportunity to contribute to the debate. We are studying in detail. We are having discussions on it and nothing is barred for us from the point of view of anything which gives us the opportunity to have meaningful prices and it is something we would consider very carefully.

Q: So a subsidiary route would mean a more meaningful presence for HSBC in India?

A: If given the opportunity we would be very happy to invest it.

Q: Just a word on India and Indian operations because we expect or the government expects the Indian economy to grow between 8.75 and 9.25%, the government is also embarked with pretty aggressive fiscal consolidation growth map on being in the fiscal deficit down about 4.6%, inflation continues to be a key course for concern, how are you looking at growth in India and in the Indian economy at this point in time?

A: We think the growth for the economy which you just said and we think that we are also able to structure our operation to grow a bit faster than the growth in the economy. So that's one of the reasons that we are very excited about building the infrastructure that we have in India.

Q: Let me put India aside now and tell me about what's going around in the UK. You have been concerned about the banking tax and that's gone up additionally by 2.5 billion pounds and that has forced you to perhaps consider relocating from London. I understand that there is a thaw in that relationship because the government seems to be rearing around to the view that you cannot heap revenge on the banking sector. Has there been a change of heart as far as relocating out of London is concerned?

A: We never said we are going to relocate out of London.

Q: You said it was getting difficult to do business there?

A: What we said was that the levy because of the price to our global balance sheet and therefore, not just the domestic UK balance sheet, effectively, is an additional cost of having an international multinational group headquartered there.

Q: And it does away with your global competitive advantage?

A: It impacts it. Increasingly, shareholders are asking us that you can now quantify the additional costs of being headquartered where you are and what are the benefits. But the benefits are huge. London has over decades created a dominant position in foreign exchange, in derivatives and servicing the funds industry.

It is a leading financial sector and the cluster effect of so many financial companies being there is a huge benefit. Every three years, we do a formal evaluation that if you are landing from Mars, where would you put an international financial group and London has continued to be the most attractive location.

Q: So there is a thaw in the relationship with you and the government in the UK?

A: We are articulating what the social purpose of banking was in establishing, the banks were in this end and a whole bunch of other things. It did help the relationship and I believe the relationship would move forward much more on a looking forward basis rather than looking back and we welcome that.

Q: Do you think there has been a change of heart as far as the UK government is concerned. This entire business of not keeping revenge on the banking sector, do you think there has been a stand down on the part of the UK government as well?

A:  We understand the public anger with what happened in the UK and as well as the countries where the taxpayers were required to support a couple of financial institutions. We generally understand the difficulties. But it is really important that the economy grows. It is really important that the system functions. And it is really important that the banks and the government work together to meet the objectives of society as a whole which is to have a functional financial system in the given economy and we and the government have a shared objective in that area and we want to play our role.

Q: Let me talk to you about opportunities now and I understand that one of the opportunities globally that HSBC is looking at it is specifically in emerging markets is work management. In India, some would say that the regulatory issues around work management are under developed. We got an unfortunate incident with Citi a short while ago. How big is the work management opportunity, work management in India and what's the team in India telling you about the regulatory landscapes around wealth management?

A: There is a huge opportunity for us in India. I think we are one of the largest distributors of mutual funds in India and equity investment. So we are very excited about that opportunity. I think the opportunity is huge right across the board because more and more people are having to take more responsibility for their long term savings, for their pension provision.

The demographics of the emerging markets are very much around more wealth activities as people contemplate a retirement at some point. So the demographics of the world and the fact that public provision and the corporate provision for retirement are going to be less in the future. I think this is a financial need.

Q: Have you gotten feedback about the incident that took place in Citi in India? Are you internally within HSBC here in India strengthening your internal regulatory system on account of what happened?

A: When anything of any kind of regulatory problem happens anywhere in the world we get as much information as we can on that sector and we say, could we have prevented this if that happens with us, and have we got the best possible protection firms, something happens within the organization. So we try and learn from that and so we would have done all kind of dissection and analysis.