As Gulliver Squirms, We Recall When HSBC Boasted About High Pay

John Studzinski and Stuart Gulliver want to break into the big leagues. Does HSBC really have the budget -- and the stomach -- to see them succeed?

HSBC Holdings has taken a public relations beating in recent days after its CEO, Stuart Gulliver, acknowledged that he had his bonuses paid in the early 2000s into a Swiss private bank account in the name of Panamanian shell company to keep the amounts hidden from his own colleagues. For a bank facing multiple investigations into allegations that its Swiss private banking subsidiary helped clients evade taxes, the disclosure was an embarrassment. But little more than a decade ago, HSBC was happy to boast about the high pay of its investment bankers -- including Gulliver -- because it wanted those staff to help it break into the bulge bracket of Wall Street powerhouses.

- International Editor Tom Buerkle


Making his annual earnings presentation on the 41st floor of HSBC Holdings’ lofty headquarters in London’s Canary Wharf financial district earlier this year, Sir John Bond was expounding the reasons for another record performance when he was asked about a small note in the back of the annual report. The question: Why did five employees -- all members of HSBC’s rapidly growing investment banking division -- merit the combined annual compensation of $60.8 million, far more than the chairman’s relatively modest $3.5 million?

“They’re probably more valuable to our shareholders than I am,” he replied.

Bond was being characteristically modest. Since taking over as chairman of HSBC seven years ago, he has shaken off the bank’s traditional Scottish conservatism to expand through a series of bold acquisitions, including those of Crédit Commercial de France, U.S. private banking group Republic New York Corp. and U.S. consumer lender Household International. His daring moves have transformed HSBC from a regional player into the world’s second-largest bank by market capitalization, the only global powerhouse with the scale and geographic breadth -- and, increasingly, the ambition -- to rival Citigroup. Were pay based strictly on contributions to the group, Bond would be in a league of his own.

That his compensation lags so in his own legendarily thrifty bank is testament to his latest -- and arguably boldest -- expansion bid yet. After years of indecisiveness, and sometimes disdain, toward investment banking, HSBC now wants to become a leading global force, challenging the likes of Citigroup; Goldman, Sachs & Co.; J.P. Morgan Chase & Co.; Morgan Stanley; and UBS. It’s a radical departure, strategically and culturally, for HSBC, which long eschewed the industry as too volatile compared with its core commercial and retail banking businesses and regarded investment bankers as hopelessly spendthrift.

Now Bond insists that the timing is right to target the industry. The bank’s global reach gives it a platform to compete, he contends, and clients are urging HSBC to provide better trading, underwriting and advisory services.

“I think there’s a huge opportunity for us to raise our game in this area,” says Bond.

True to his word, HSBC has been expanding aggressively over the past year. In April 2003, Bond tapped two men, former Morgan Stanley rainmaker John Studzinski and in-house trading supremo Stuart Gulliver, as co-CEOs of investment banking, to lead the way onto the playing field and build a securities and advisory business to compete with the bank’s global rivals. Studzinski has poached dozens of seasoned bankers from firms on Wall Street and in the City of London to create a global advisory team, while Gulliver has embarked on a wholesale revamping of HSBC’s U.S. and European securities trading operations, seeking to replicate the topflight franchise he fashioned in Asia in the ‘90s. Together the pair will spend some $440 million by the end of next year -- roughly 10 percent of their division’s profit before tax and goodwill amortization -- to bolster their ranks of traders and bankers. Their goal, apart from building numbers, is to overhaul quality. They have hired some 700 professionals this year -- and let go a similar number. Their ambition is to turn the laggard HSBC into one of the top five players in debt capital markets, derivatives and syndicated lending; and in the top five to ten in mergers and acquisitions. In time they aim to be a significant factor in equities as well.

“It’s potentially the last great, credible build of an investment bank as part of a global universal bank,” asserts Robin Osmond, a Morgan Stanley veteran recruited by Studzinski to head global investment banking at HSBC.

HSBC’s ambitions are commendable, but most close observers remain highly skeptical of the bank’s chances. It must come from far behind, and its record in the business is indifferent when it isn’t dismal; additionally, the competition is increasingly crowded and fierce. HSBC appears determined to build, not buy, its way, into the big leagues, but the field is littered with the broken dreams of banks that spent billions only to come up short.

“No history suggests it is possible to build a significant capital markets capability in the U.S. from scratch,” says Guy Moszkowski, a securities industry analyst at Merrill Lynch & Co. in New York. Snipes a senior Citigroup executive: “You’ve got to do something more radical than they’re doing. We learned that ourselves. Buying Schroders gave us leverage, gave us mass in Europe.”

Certainly, the effort marks a great change for HSBC, which missed or muffed building opportunities in the past. The bank largely ignored the investment banking business during the 1980s and ‘90s despite owning some of the building blocks of a serious franchise, including British securities brokerage James Capel & Co. and merchant bank Samuel Montagu. The freewheeling ways of investment bankers and their penchant for hawking any deal imaginable in search of fees was anathema to Bond’s predecessor, Sir William Purves, who personified the Scottish thriftiness and buttoned-down discipline of HSBC’s retail banking culture. “They turned a huge opportunity into a disaster,” says one former Capel executive. “They starved it of capital.”

The bank briefly considered a merger with Merrill Lynch when the two firms launched a short-lived $1 billion wealth management venture in 2000 but balked at the culture gap between the institutions and the upheaval a deal would generate, not least because of the vast pay discrepancy between HSBC and Merrill executives, bankers knowledgeable of the situation say.

HSBC’s subsequent attempts to integrate its building blocks earlier this decade under Stephen Green, now chief executive, proved dismal. Dozens of equity traders and analysts quit the bank in anger when Green eliminated bonuses in 2001 and 2002, after the stock market bubble popped and business cratered.

HSBC’s stated ambitions are all the more audacious because its leaders insist the bank will go it alone. Bond and Green all but rule out an acquisition as too pricey and disruptive, charging Gulliver and Studzinski with building the business by recruiting individual bankers and traders.

“We’ve been consistent in saying we will not buy,” Green tells Institutional Investor. “We don’t think we remotely need to. It’s a lot better value from the shareholders’ viewpoint to go out and buy 700 people than to buy a firm.”

Yet many industry observers believe it will take more than aggressive hiring for Studzinski and Gulliver to succeed. After all, Citigroup, which Studzinski consistently identifies as his intended rival, made no headway in investment banking until its 1998 merger with Travelers Group, which gave it Salomon Brothers and Smith Barney; the purchase of Schroders two years later bolstered Citigroup’s European base. European investment banking contenders also have spent billions acquiring Wall Street franchises, with Deutsche Bank buying Bankers Trust and UBS purchasing Dillon Read and PaineWebber; both banks are still well short of achieving their bulge-bracket ambitions. According to Thomson Financial, UBS ranked ninth in U.S. equity underwriting and M&A advisory in the first half of 2004 and seventh in debt. Alone among foreign banks, Credit Suisse, through its purchase of First Boston, has cracked the bulge bracket, and that shotgun marriage has been tumultuous, to say the least.

HSBC needs to develop a big U.S. presence to fulfill its global ambitions, but it lacks the name recognition and client relationships of its major rivals. The challenge is daunting. Consider Barclays Capital, the investment banking arm of the British bank that has brilliantly executed a buildup in recent years while targeting only the fixed-income market. The bank, which has moved into the top tier in the U.K. and Europe, has gone on an even bigger expansion binge over the past year, increasing its payroll by 1,400 people, or 25 percent, mainly to grow its U.S. business. The results so far? The firm captured 1.8 percent of the North American market for debt underwriting in the first half of this year, ranking it 15th, one place ahead of HSBC.

Can HSBC defy history -- and its own track record -- and succeed? The bank trails far behind its would-be rivals in the investment banking league tables, but senior executives insist that the group’s intrinsic strengths, as well as underlying trends in the industry, mean it can catch up.

Certainly, HSBC has tremendous clout, by virtue of its $1.15 trillion in assets and $169 billion in market capitalization, both of which rank behind only those of Citigroup. Such financial strength is a valuable asset at a time when banks increasingly must compete on the basis of their balance sheets and ability to commit capital.

HSBC also boasts an enviable client list of some 2,000 large corporations around the world. Most major companies have some dealings with the bank -- whether that means a standard loan facility, treasury or custody services or even a foreign exchange facility. HSBC hopes to win a bigger share of those clients’ business, particularly as companies rely more on capital markets than bank credit for finance.

“It’s the same blue-chip client list that a Citigroup, a Morgan Stanley or a Goldman Sachs has,” explains Studzinski. “You’re starting with a corporate bank, and you’re starting with 2,000 relationships. That client base is grossly underserved.”

HSBC says its strategy is already bearing fruit. Hutchison Whampoa, a Hong Kong-based conglomerate and longtime HSBC client, chose the bank to underwrite two dollar-denominated bond issues in the U.S. last year, including a $5 billion, three-tranche offering in November, and a E1 billion ($1.13 billion), 5.875 percent ten-year bond in Europe in July 2003. “HSBC has transformed itself quite substantially in both the scope of what they can do with us and the scale in which they can do it,” says Frank Sixt, Hutchison’s chief financial officer.

“Our confidence comes not from thinking that if we build something, people will come, but from the fact that we are responding to customer demand,” says HSBC chief financial officer Douglas Flint. “Corporations that are important to us are telling us they would like us to offer a broader product range.”

Rival bankers agree that the potential to leverage existing relationships is significant. As one senior London investment banker puts it, “No one’s not going to take a call from HSBC. The door is open to them.”

THE BANK BELIEVES THAT ITS brand name and reputation for probity give it an advantage at a time when many of its Wall Street competitors are dodging bullets from such regulators as New York State Attorney General Eliot Spitzer and the Securities and Exchange Commission over conflicts of interest and improper behavior. HSBC styles itself as a straight-shooting relationship bank with unblemished integrity. “Our core values are integrity and trust,” the bank said in a presentation of its investment banking strategy to investors last year. It is revamping its equity research business for the Spitzer era, eschewing buy and sell recommendations and focusing instead on fundamental research into long-term industry trends. “Clients want to work with a bank that isn’t up to its neck in ethical troubles,” says chairman Bond.

Industry insiders acknowledge HSBC’s strengths, but they doubt that Gulliver and Studzinski can muscle their way into the top tier without an acquisition. To begin with, almost every other investment bank is expanding, too, as the global economy and a recovery in capital markets activity fuel ambition in the industry. Bank of America is trying to use its balance sheet and client relationships to break into the top ranks of investment banks, and it is starting from a position well ahead of HSBC in the league tables; European houses such as Barclays Capital, Deutsche Bank and UBS are hiring aggressively to build their U.S. presence; Lehman Brothers and J.P. Morgan Chase are seeking to extend their franchises in areas like M&A; and bulge-bracket firms like Goldman Sachs and Morgan Stanley are replenishing their staffs after years of cutbacks.

“You have to create a culture from scratch,” one senior London investment banker says of HSBC’s effort. “All this is being done in an investment banking climate that is as competitive as I’ve ever seen it. They’re going to have to fight for every scrap they can get.”

Given this environment, the chief executive of another rival investment bank questions whether HSBC will truly have the stomach to shell out big salaries and bonuses to bankers and to accept the more-volatile nature of investment banking profits. “I don’t know if John Bond likes this business,” this banker says.

HSBC executives insist they are committed to building the business for the long term. Asked why the bank decided to target investment banking now, CEO Green replies quickly: “Whynot now? We’ve got a business of value to our clients, of strategic mass. We’ve got the competitive strength. People are wanting to talk to us because we’re in 76 different countries, and they know us as long-term, committed participants of the markets we are in.”

Some of the bank’s key customers are equally as assured of its resolve. “I’ve known John and Stephen and Stuart and, more recently, John Studzinski,” says Hutchison’s Sixt. “I’ve never seen these guys do anything that they weren’t serious about.”

Investors, meanwhile, appear relaxed about HSBC’s change of heart toward investment banking, but largely because the bank hasn’t given Gulliver and Studzinski a blank check. “What they’re doing is quite limited, quite controlled,” says Patrick Lemmens, a fund manager at ABN Amro Asset Management in Amsterdam. “It will be more of a fixed-income, capital markets house than a company that is going to be massively into M&A and equity origination.”

To be sure, HSBC is beginning its investment banking drive with more than a brand name and some high hopes. The bank’s corporate, investment banking and markets division, or CIBM, which was integrated under Green’s leadership from 1999 to 2003, ranks among the top five global players in foreign-exchange and metals trading and boasts an established debt trading and underwriting platform in Asia. CIBM generated one third of the group’s profits before taxes and goodwill amortization last year, a cool $4.4 billion. Profits rose 27 percent in the first half of 2004, to $2.8 billion.

A large portion of those profits derive from traditional lending activity rather than investment banking, though. Net interest income accounts for 40 percent of CIBM’s profits, and securities trading chips in another 20 percent. The bank generated a paltry $117 million in debt and equity underwriting fees in the first half, meanwhile, and $100 million in advisory fees, a fraction of its rivals’ activity. Citigroup reported investment banking fee income of $438 million from advisory, $555 million from equity underwriting and about $1 billion from debt underwriting. J.P. Morgan Chase took in $1.6 billion in investment banking fees in the first half, while UBS posted investment banking fees of Sf965 mil- lion ($762.4 million).

HSBC also lags well behind its rivals in the league tables. The bank ranked 14th in global debt capital markets underwriting in the first half of the year, according to Thomson Financial. That put it just ahead of ABN Amro and BNP Paribas but behind Royal Bank of Scotland, Banc of America Securities and Barclays Capital, other firms with aggressive growth ambitions. HSBC lead-managed $61.6 billion worth of deals, or 2.5 percent of the overall market, compared with top-ranked Citigroup’s $247 billion, or 9.9 percent. The bank ranked ninth in Europe, its strongest region, ahead of BNP Paribas, Goldman Sachs, Lehman Brothers, RBS and Merrill Lynch. It ranked 11th in Asia and a distant 16th in North America.

In mergers and acquisitions, HSBC was 26th globally in the same period, advising on 21 deals worth $11.2 billion. It came in 15th in Europe, where it was one of four banks advising France Télécom on its $4.1 billion purchase of a 29 percent minority stake in Internet service provider Wanadoo, but it ranked a lowly 31st in Asia and 45th in the U.S. Those performances leave HSBC a long way from its goal for 2006, which is to be among the top three to five advisers in Asia, top five to seven in Europe and top seven to ten in the U.S. The bank fared little better in equity capital markets, placing 19th globally with a 0.8 percent market share.

“We’re lower in the league tables than I think it makes sense for us to be, in particular in M&A,” Green acknowledges. “You’ve got to have a credible position in the tables.”

In addition to its low starting point, HSBC also suffered some self-inflicted wounds that damaged morale and continue to raise questions about its ability to fashion a topflight investment bank. When equity markets tanked in 2001 and 2002, the bank eliminated bonuses, prompting traders and analysts to flee. Even one HSBC executive privately acknowledges that “the equities business destroyed more brand value than anything you could possibly dream of in your worst nightmare.”

The bank set about rebuilding the business shortly thereafter. In 2002, Green put Gulliver in charge of global markets, moving him from Hong Kong to London. Then last year, Green, who had been head of CIBM, rose to chief executive, replacing the retiring Sir Keith Whitson, creating an opening for a bigger rethink. Studzinski had just announced his retirement as deputy chairman of Morgan Stanley International after 23 years at the firm, where he helped build its powerful European mergers business and developed close relationships with executives like Niall Fitzgerald, the former Unilever chairman and CEO, and BP CEO Sir John Browne. An inveterate networker who had known Bond for some years -- Morgan Stanley advised HSBC on its $10 billion purchase of Household International in 2002 -- Studzinski approached the chairman and persuaded him that the bank could exploit its existing corporate relationships by developing a serious advisory business.

“You’re sitting on a gold mine,” Bond recalls Studzinski saying. Studzinski says his own view of advisory work -- seeking to build long-term relationships and being willing to advise a client against doing a bad deal -- matched Bond’s desire to create a client-oriented investment bank. “If you trust people, relationships will stick with you for 15 to 20 years,” Studzinski explains. “That is a John Bond view of things.”

The hiring of the high-profile rainmaker in May 2003 gave an immediate taste of the culture clash that the investment banking push could bring. It was covered extensively by the British press; accompanying many of the articles was a photo of Green, Studzinski and Gulliver. Studzinski went to Bond’s office and jokingly asked whether he regretted the hiring. The chairman, who is notoriously modest and discreet about his private life, simply replied that when he read the morning papers, “as long as I don’t see HSBC’s name or my name, I’m happy.”

How happy has he been in recent months -- with HSBC’s name splashed everywhere as it pushes ahead? That’s hard to say, but the difference in style between the old and new HSBC strikes some rival bankers as potentially unsettling. Studzinski, as one former colleague puts it, “is quite different from Stephen Green. HSBC makes quite a virtue out of being straitlaced, wearing a hair shirt. That’s something you wouldn’t associate with flamboyant investment bankers.”

The two men charged with heading HSBC’s growth -- the American Studzinski and the Briton Gulliver -- are also a study in contrasts. Studs, as he is known, mixes with the great and the good on the job and after hours. He sits on the board of the Tate Gallery in London, sponsors young playwrights and composers and was made a knight of the Order of St. Gregory the Great by Pope John Paul II for helping to found a London homeless shelter. By contrast, Gulliver lives and breathes financial markets. The 45-year-old banker joined HSBC in 1980 after earning a law degree at Oxford University and rose steadily through the group’s treasury operations. His idea of a good night is delving into fixed-income reports until 1:00 a.m., one colleague jokes. But the two men insist that their skills are compatible and their commitment to teamwork total.

“I’m not hoping he will fail so I’ll get a bigger share of the bonus pool,” says Gulliver. “We’re joined at the hip. We’re both totally committed to winning.”

The two men also appear determined to change the bank’s culture, at least in their respective fiefdoms. They bristle at the bank’s reputation for thrift bordering on stinginess and shake their heads at past magazine articles extolling Bond for riding the London Underground to work (something he hasn’t done in years) and making sure that the lights at headquarters are turned off. They want the bank to focus more on revenue generation, not just cost control. As Gulliver puts it: “If you’ve got a business that’s worth $4.4 billion, can you spend a couple hundred million to hire investment bankers? I think so.”

GULLIVER HAS SHOWN THAT HSBC is willing to back capital markets’ growth. He has been hiring aggressively since taking over HSBC’s struggling Asian markets business in 1994. When he arrived in Hong Kong from Tokyo, where he had integrated the bank’s local treasury and capital markets businesses, he found chaos. Each trading desk, as well as each office within the region, was operating with virtual autonomy, a legacy of the bank’s commercial banking traditions whereby the country head was king.

“We had 19 dealing rooms in Asia, all of which were quoting dollar-mark,” Gulliver recalls. “There was no center of excellence. We could be simultaneously buying and selling across those dealing rooms.” The Asian market chief decided to centralize, concentrating the trading of major currencies as well as debt origination and structuring in Hong Kong and refocusing on local currencies and products.

The Asian debt crisis in 1997 and 1998 gave the bank an unexpected boost. Although many U.S. and European banks slashed their Asian operations in response, HSBC remained committed to what it considers one of its core markets. “The best thing that happened to us was the Asian crisis,” says Mark Bucknall, a Gulliver deputy who today is global head of debt advisory in London. “Everyone else -- the Wall Street banks, Deutsche -- they all said: ‘This is scary. Let’s get on a plane back to New York or Frankfurt.’ We stood there and made a price in Thai baht and Malaysian ringgit. That was the thing that really made the breakthrough.”

That commitment has paid off handsomely. Profits in the bank’s Asian markets business have grown at a 28 percent compound annual rate since 1994, and the bank, which was just 19th in foreign-exchange trading ten years ago, now ranks among the top five globally.

Replicating that success in the U.S. and Europe presents a much greater challenge. Gulliver began to focus on New York in 2002, beefing up the bank’s foreign-exchange, metals and government bond trading activities and expanding into interest rate and credit derivatives. The bank has hired 300 debt professionals there since 2001, the bulk of them last year. This year it is building teams in mortgage- and asset-backed securities. Gulliver wants HSBC to be a top-five player in those areas, which account for half of the big U.S. credit market. “We’re not going in there to be a bit player,” declares Joseph Petri, head of U.S. fixed income.

Petri is typical of the staff HSBC is recruiting. He joined the bank in 2000 after 14 years at Merrill Lynch, where he was head of institutional debt and equity sales. He says he was attracted by HSBC’s capital base, which he believes will give it the power to break into the bulge bracket, and by a culture that he insists is different from most Wall Street firms. “It’s not a real political atmosphere,” he says. “There’s a lot of teamwork. As trite as it sounds, it’s a very client-driven place.”

In Europe this year Gulliver and his crew are building debt teams focused on convertible bonds, asset-backed securities and leveraged finance. The bank already enjoys a healthy presence in government bonds through Crédit Commercial de France, the French subsidiary it acquired in 2001. Debt advisory head Bucknall aims to capture 5 percent of the European debt market this year (HSBC took 4.1 percent in the first half) and move into the top five in 2005. “This team has been very successful for the past ten years. The willpower to make this happen is evident,” he says.

The bank is making some headway. HSBC used its enhanced U.S. debt capabilities and its strong presence in Mexico, where it bought Grupo Financiero Bital in 2002, to win an underwriting mandate in June for a $1.5 billion floating-rate note for Petróleos Mexicanos. The bank paved the way to that mandate by helping to lead a $2.3 billion syndicated loan for the oil giant with dollar and peso tranches last December.

“It helped that they are becoming active in the local market here in Mexico,” explains Luis Rodríguez Malagón, deputy manager of capital markets at Pemex.

HSBC has also led bond issues for the financing arms of American International Group, General Electric Co. and Verizon Communications in the U.S. and won a mandate for a E5 billion bond issue from Greece this year. “We are unique because of our balance-sheet strength, our client relationships and our geographical depth,” asserts Samir Assaf, the bank’s head of liquid euro bonds. “If any client has to choose five banks, he will choose HSBC.”

Equities fit less naturally with HSBC’s commercial banking business than fixed income does, especially given the bank’s history of internal problems. Indeed, HSBC last fall considered pulling the plug on the business and pursuing a Barclays Capitalstyle strategy of pure fixed income but decided instead to rebuild its equity platform. As Studzinski puts it, “To not be able to talk about equity with clients would put us in a different business with a different growth prospect.”

HSBC’s board ruled out an acquisition as too risky and expensive and decided instead on a gradual five-year growth plan for equities. Gulliver and Studzinski started by paring the existing equity sales and trading staff to about 1,000 earlier this year from 1,500 a year ago, and they insist they will be selective in restaffing the area -- speaking in terms of hundreds, not thousands. That will still leave HSBC’s equities payroll significantly smaller than it was at the peak of the bull market. Then it totaled roughly 3,000, and the bank nonetheless ranked nowhere in global equities.

HSBC will launch a new equity research product this fall that will dispense with buy and sell recommendations and focus instead on fundamental research. At a macroeconomic level the research unit will play off the bank’s global reach to provide views on major strategic issues such as the dollar’s outlook, global trade imbalances and China’s growing impact on the world economy -- what global head of research Stephen King describes as “big themes that really matter to investors.” At an industry level the bank will cover about 900 companies globally, compared with 1,500 previously, focused on a handful of key sectors, including autos, banks, consumer goods, energy and utilities, health care, industrials, insurance, real estate, technology and telecommunications.

“We think we have a significant advantage building a new model that fits in with regulatory requirements and fits in with the perception that fund managers are fed up with me-too research,” says King, who also serves as the bank’s chief economist. He says buy and sell recommendations are “increasingly meaningless” at a time when hedge funds and long-only institutions have such widely varying needs and investment time horizons. In addition to macro and sectoral coverage, the bank intends to have a third team providing price-oriented research off the sales and trading desk to its target market of some 150 leading institutions around the world.

Mark Ramsay, global head of equities, says that this research will be tailored to specific customers. “We end up with each client getting a bespoke advisory function,” he says. “We deal with virtually all of these clients already in foreign exchange and fixed income. If we build the quality of product they require in equities, I don’t think we’ll have any problem. There is a place at the table for us.”

HSBC admits it will take longer to reach its goals in equities. Ramsay and King estimate they will need two years to build the research operation and another year to get the entire equity operation firing on all cylinders. The aim is to become one of the top five firms in sales and trading for global equities, but alone among the markets the bank is targeting, HSBC is setting no goals for equity underwriting. Still, Ramsay insists that regulatory changes designed to eliminate the abuses in research-led IPOs seen in the bull market will enable HSBC to win its share of underwriting as its sales and trading capabilities grow. “The game is moving in our favor,” he asserts.

Seeing is believing for investors, and so far most say that they see little evidence of HSBC’s commitment to equities. “There is no notable change there at all,” says Michael Hughes, chief investment officer at Baring Asset Management. “They’re not making inroads with us.” Others say HSBC has a long way to go to regain anything like the prominence Capel enjoyed in the ‘80s, when it boasted heavyweights like Keith Jones, now CEO at Morley Fund Management; Keith Skeoch, now CEO at Standard Life Investments; and Peter Chambers, CEO at Framlington Investment Management. “Sure, they’re repeopling, but I would argue they’re repeopling with lower talent,” says one former Capel executive. “I have no doubt Stuart will take HSBC to a position of excellence in fixed income. It’s a big, big stretch to shift that into the corporate space, into equities.”

The last main plank of HSBC’s growth plan is the lucrative but hard-to-crack area of M&A. In Studzinski the bank has found a strong candidate to build the business. He spent four years at Morgan Stanley in New York before moving to London in 1984 and building the firm into a perennial top-three player in European M&A.

The first thing Studzinski did after joining HSBC was recruit a couple of like-minded souls. Last October he hired global head of investment banking Osmond, a 15-year Morgan Stanley veteran with whom he worked in the late 1980s. Earlier this year he poached David Livingstone, a 16-year veteran of Goldman Sachs, to become head of European investment banking.

The motivation for both men was similar: They wanted to re-create the buzz, and achieve the satisfaction, of building a business from the ground up. They recall the excitement of helping Morgan and Goldman, respectively, break into the European M&A league tables in the ‘80s. “Whenever you won a piece of business, it was a huge home run,” says Osmond.

Under Studzinski’s guidance Osmond and Livingstone are putting together coverage teams to sell both corporate and investment banking products in ten main industries: chemicals, consumer goods, finance companies, financial institutions, health care, industrials, real estate, telecoms, transportation and utilities. They’ve hired 120 bankers over the past nine months, most poached from their main Wall Street and European rivals. Among the recent hires are Rupert Robson as global co-head of financial institutions and Robin Phillips as global head of transport, both from Citigroup; Scott Bell as global co-head of consumer goods, from Goldman Sachs; and Mark Bentley, global co-head of utilities, from J.P Morgan. Osmond and Livingstone want their bankers to sell a full array of products, from treasury services and loans to debt and equity underwriting and M&A advice.

“The market timing is right to create a global boutique,” says Studzinski. “Boutique means stealth. Lean and mean. Why do I need mass?” There may be 80 or so major telecom companies around the world, he says, but only ten or 15 are constantly active and need daily service from their investment bankers.

Studzinski says he is being careful not to promise more than he can deliver. HSBC can’t yet pretend to be able to handle on its own a transforming, cross-border merger like the $78 billion marriage of Sanofi-Synthélabo and Aventis earlier this year. (Almost everyone got a piece of the that one, with Morgan Stanley, Goldman Sachs, UBS, Citigroup and Rothschild advising Aventis and Merrill Lynch and BNP Paribas advising Sanofi. HSBC advised Total, the French oil company that owned 24.4 percent of Sanofi.)

“You’re going to ruin your relationships if you don’t execute well,” Studzinski says. He will have to begin making progress quickly if HSBC is to meet its ambitious target of being in the top five to ten M&A advisers globally. As Osmond puts it, “We need to show within three years some qualitative improvements in our dialogue with clients.”

The boutique approach sounds to some rivals like making the best of limited resources. CEO Green insists that the $440 million annual budget Gulliver and Studzinski have been given to build the business is final. “We won’t go beyond that, but we think we can do anything we need to do within that number,” he says. Studzinski may be merely biding his time, though. He says the bank should “never say never” about a possible investment banking acquisition. “All smart firms have to be open-minded if the market changes in 12 months’ time,” he declares.

Many of HSBC’s competitors doubt the bank can achieve its goals without acquiring. Lazard CEO Bruce Wasserstein has spent tens of millions hiring a raft of bankers over the past three years without seeing a corresponding leap in his firm’s M&A league table ranking. Studzinski is building from a much lower base. “It takes more than a few blokes from Goldman Sachs” to build an M&A business, says one competitor. Another rival says of Studzinski, “He’s hiring good people but not superstars.”

Even HSBC’s own executives seem to doubt the importance of M&A in the bank’s overall investment banking drive, given that capital markets already generate the bulk of profits. CFO Flint says that M&A advisory business is “an important element in cementing the overall relationship” with clients but adds that it will remain “significantly smaller” than the capital markets business in terms of revenues. Green says the investment bank will be tailored to the needs of HSBC’s clients. “It’s more relationship and less transactional,” he explains. “We should be in a position of advising them not to do something if it’s not in their interest. We should take a long-term view.”

Can HSBC pull off its bold investment banking bid? It faces an uphill climb to win market share from aggressive and well-entrenched rivals, and it will need deep pockets and plenty of patience to succeed.

Rivals doubt that Green in particular will give Studzinski and Gulliver the resources they need. He insists that HSBC is prepared to pay what it takes to build and sustain a top-notch capital markets business. “We’ve been running a markets business for ten years and compensated people in accordance with market compensation,” he says.

Some of the group’s investment bank-ers privately question how the board would react to a blowup that threatens to dent HSBC’s reputation for integrity, such as a lawsuit over an underwriting that goes sour. Citigroup set aside a whopping $4.9 billion in provisions in the second quarter of 2004 -- roughly a year’s investment banking profits -- to cover liabilities stemming from its underwriting of bonds issued by WorldCom. Would HSBC take such a hit without scaling back its growth effort?

Gulliver insists that the determination to succeed is there. “We make $4.4 billion, so we can absorb some mistakes. That’s a control issue, not a strategy issue,” he says. As evidence of the group’s commitment to investment banking, he points out that he and Studzinski were appointed to two of the 11 seats on HSBC’s management board in March. “No one’s going to pull the rug from under us,” Gulliver says confidently.

Studzinski dismisses the nay-saying of rivals as the self-interested talk of bankers fearful of the market share HSBC might steal if it gets its act together. “The last thing the investment banking world wants is another Citi,” he says. “Do clients want another Citi globally? Yes. Is there room for a duopoly? Certainly.”