US-China rivalry hinders a struggling HSBC



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HSBC has suffered an absolutely torrid few months. As it gears up to announce what are likely to be a rocky set of interim results at 5am London time (12 noon Hong Kong) on Monday August 3, it’s worth pausing to sum up the level of the trouble it’s in – and why its future is not all bleak.

HSBC’s problems come in three forms: financial, structural and reputational.

Let’s start with the first of them. Covid will hit and hurt all banks, be it now or later. On July 29, Barclays booked a pre-tax profit of £1.3 billion ($1.7 billion) for the first half of the year, against £3 billion a year ago.

The £3.7 billion in provisions it set aside in the first half to cover bad loans, should rise to £5.79 billion for the full year.

HSBC’s problems are no less stark.

Ronit Ghose, global head of banks research at Citi, tips HSBC to post a 7% year-on-year fall in second-quarter net interest income on Monday, August 3, with pre-tax profit declining 32% year on year to $4.2 billion.

It would not be a shock to see them announce a downsizing of their US retail operations on Monday – and perhaps a downsizing or sale of operations in other markets

 -Ronit Ghose, Citi

He points the finger at emergency rate cuts announced in March by the Federal Reserve and the Bank of England, and warns of “more to follow” in the third quarter.

The structural challenge is curious and meandering.

The bank was formed and forged in China and later became Asia’s global bank, then spent decades “trying to diversify globally at tremendous cost and with mixed results”, notes one analyst.

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Noel Quinn, HSBC

HSBC bought Buffalo-based Marine Midland Bank in 1980 and Britain’s Midland Bank in 1993, upon which it moved its headquarters to London from Hong Kong. Then came its ill-fated 2003 acquisition of Household, a US lender to people with poor credit history.

Since then, notes Citi’s Ghose, it has spent “eight or nine years trying to pivot back to Asia, since Stuart Gulliver took over as CEO”.

That eastward reorientation has only accelerated under the leadership of Noel Quinn – who replaced Gulliver’s short-lived successor John Flint as chief executive in March 2020 – and chairman Mark Tucker.

Working plan

A month before Tucker belatedly broadcast Quinn’s permanent status, HSBC unveiled its latest strategy shift. More than $100 billion in risk-weighted assets will be deployed by 2022, mainly to the benefit of Asian and Middle Eastern markets. It aims to cut adjusted costs by $31 billion over the same period.

Can it work – or is more radical action needed? Will the CEO surprise and hearten those agitating for more radical surgery, and pivot harder and faster toward Asia?

“It would not be a shock to see them announce a downsizing of their US retail operations on Monday – and perhaps a downsizing or sale of operations in other markets,” says Ghose. “France and Mexico are the obvious ones.”

Even if it does, its pathway to higher profits in Asia isn’t clearly defined.

Hong Kong accounted for two-thirds of Asia-wide profits in 2019. The city where the Hongkong and Shanghai Bank first opened its doors in 1865 will remain its bedrock – though its financial grip on the former UK colony has loosened in recent years.

HSBC’s share of the local loan market remained pretty static at around 14% between 2010 and 2018. Over the same period, the combined market share of all mainland lenders jumped from 28.4% to 39.5%.

The same is true in the fight for customer deposits, with HSBC steadily losing local market share to Beijing’s big players.

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Elsewhere in Asia, it’s a mixed bag. Its mainland presence continues to grow, but away from its stronghold in southern China, notably in the big markets of south Asia and southeast Asia, it is undeniably a financial minnow.

Tarred and feathered

Which brings us to the third and final point. In recent months, HSBC’s reputation has been put through the shredder.

Not because it has acted poorly, or failed to act decisively during Covid. Quite the opposite: when Euromoney handed out our awards for excellence in leadership during the pandemic, HSBC’s Asia team were among the garlanded recipients.

The problem it faces is one that’s almost completely beyond its control. HSBC is caught – literally – between the world’s two superpowers, neither of which is happy with it.

In China, HSBC has been tarred and feathered by officials who blame it for the 2018 arrest of Meng Wanzhou, chief financial officer of Huawei and daughter of Ren Zhengfei, the Shenzhen-based telecom group’s founder.

When the Global Times newspaper, a mouthpiece of the Party,accused it of “fabricating” facts and “maliciously framing” Meng, who is accused of breaching US sanctions on Iran and Syria, HSBC took to WeChat to tell the Chinese public it had no hostility to either her or Huawei.

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Peter Wong, HSBC

Not good enough, some said, noting that when Beijing imposed a controversial new security law in Hong Kong, HSBC reacted at first by saying nothing at all.

When it finally came out in favour of the new rules, it was criticised by US secretary of state Mike Pompeo, who accused it of a “corporate kowtow”, and by Aviva Investors, which owns a 0.46% stake in the bank.

The visual on June 3 of HSBC’s Asia-Pacific chief executive Peter Wong publicly signing a petition supporting Beijing’s actions merely poured more fuel on the fire.

Options

So where does HSBC go from here?

It is hard not to feel sympathy, even for such a vast, valuable and profitable financial institution. The systemically important lender has been in tough spots before, but never one quite as politically parlous as this.

“The bank is in a quite wrenching position,” says a Hong Kong based adviser to wealthy Chinese families, many of whom own shares in it. “It’s hard to exaggerate the number of directions the pressure is coming from.”

The bank is in a quite wrenching position. It’s hard to exaggerate the number of directions the pressure is coming from

 -A Hong Kong based adviser

Though it might feel internally like it has been blindfolded and set in front of a firing squad. HSBC has options.

It could forge ahead with a yet more radical shake-up, possibly involving the sale of additional Western operations and assets – keep an eye out for that on Monday.

Some believe it should move its primary listing back to Hong Kong, noting that while the bank is headquartered in London, it makes most of its profits in Asia. That would surely please ordinary Hong Kong investors irked at the bank’s Covid-informed decision to cancel all dividend payments in 2020.

It could pursue a third listing in Shanghai, or even consider splitting itself in two, to create a Hong Kong-China lender and a global rump.

Just as all of these actions make some logical sense, there are good reasons to pursue none of them.

If HSBC moves its primary listing to Hong Kong, and if Sino-US relations continue to worsen, it risks being labelled a Chinese lender and potentially being unable to clear transactions in dollars. While a worst-case scenario, it is part of its thinking.

A mainland listing is possible. HSBC has explored the option before, most recently in 2018, when it flirted with the idea of being the first foreign firm to sell Chinese depositary receipts.

But that is unlikely in the current environment, with Beijing for now intent on convincing a host of leading mainland firms to delist their shares in New York and re-list in Shanghai or Hong Kong.

Splitting up the bank would be favoured by almost no one.

HSBC’s Chinese clients bank with it because it plugs them into the global financial grid. In turn, the world needs it because it’s so deeply embedded in Hong Kong and, to a lesser extent, the mainland. Cut the cord and it withers.

Stuck

The best bet, the wealth adviser says, is for HSBC to “just hunker down and hope that all of this blows over, and that Hong Kong can somehow continue to grow and keep it afloat. That’s the best thing it can do, and really all it can do.”

HSBC can take some comfort from knowing that, first, the US is aware that any punitive action against the bank would erode Hong Kong’s role in the global financial system, which no one wants; and, second, that the blowback in China is being amped up on social media – but not by those in political and financial power.

It might be cold comfort, and it may be no fun being stuck in the middle, but HSBC can do nothing about the situation but be stoic and dig in.

This is where it is.



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