By Selena Li, Engen Tham and Sumeet Chatterjee

HONG KONG/SHANGHAI (Reuters) -HSBC Holdings Plc is reviewing expenses and operational controls at its China digital wealth business Pinnacle, in a move that could result in layoffs and mark an abrupt reversal of the lender's ambition for the unit, several sources said.

As part of the review, the lender is looking at staff salary structures and probing whether suppliers inflated expenses, contributing to a sharp spike in costs that outpaced revenues, according to five sources familiar with the matter.

The review, which has not been previously reported, started a few months ago, the sources said, requesting anonymity because the conversations are confidential. The review could result in layoffs, two of the sources said.

The bank plans to complete the review by the end of this year, one of them said.

A spokesperson for the Asia-focussed lender declined to comment.

A downsizing of Pinnacle, which was launched in 2020 and sells insurance and fund products, would be a setback for Europe's largest lender by assets, which has doubled down on Asia while divesting from less-profitable businesses elsewhere.

Under its new CEO, Georges Elhedery, HSBC, which makes bulk of its revenues and profits in Asia, has been looking to rein in costs, with the bank bracing for revenue to take a hit as major central banks start cutting interest rates.

HSBC committed $6 billion for investments in Asia in 2021 - half of that earmarked for Hong Kong and mainland China, as it looked to expand market share in the world's second-fastest growing wealth market.

Pinnacle, through its reliance on digital, was meant to expand the bank's reach outside its limited physical branch presence in China.

Since 2020, the bank has injected $390 million into the two main operating legal entities of Pinnacle in China, a Reuters review of official business registration records shows.

The division employed at least 1,700 personal wealth planners as of June, the bank said, and the headcount was set to grow to 1,900 by the end of 2024. HSBC originally aimed to hire 3,000 wealth managers in China by 2025.

The Pinnacle review underscores the challenges HSBC faces in boosting revenue in China. The Greater China region, which includes Hong Kong and Taiwan, is the group's biggest income generator.

It is, however, the only market globally where HSBC's wealth and personal banking business, which Pinnacle is part of, is not profitable yet. In the first half of 2024, the unit reported $46 million in loss compared to $90 million in the year-ago period.