HSBC – the Anomalous Bank

Blain’s Morning Porridge, 5^th May 2022: HSBC – the Anomalous Bank

“You are unlikely to find the World’s local bank on your high street these days..”

This Morning – Calls to break up HSBC to realise the value of its Asian franchise are a critical moment for the bank as it pays the costs of being too big, too bureaucratic and for the inability of management to spot its critical weakness…..

One of the recurrent themes within The Morning Porridge is the surprising pace of corporate evolution, and how quickly the narrative underlying corporates and industries can change. Sometimes it’s slow. Sometimes its fast. Sometimes it just takes a moment for a spark of intuition to ignite a fire, before the market realises just how the rug has been swept from beneath a leading corporate’s future.

I think such a moment just occurred for HSBC.

It’s been a while since I last wrote about HSBC. Back in 2020 I castigated the Home for Scottish Bank Clerks as hopelessly mired in financial bureaucracy, a collective of unimpressive financial franchises, trapped in dysfunctional relationships trying to please both China and the West. (If you are interested, you can read it here: The Tragedy of HSBC, or from 2019 HSBC – Time to Sell (when they dumped their CEO).)

Now HSBC is back in the news after Chinese Insurer Ping An called for the banking behemoth bank to be broken up. It begs some mighty questions about HSBC’s future. Generally, it would appear most other holders of the stock disagree. I am wondering why? To me it’s a critical moment for what was once the World’s largest bank.

What is HSBC’s core value proposition? Most commentators will cite the bank’s enormous revenues generated out of Hong Kong, and the 2/3rds of its profits made in Asia. It’s certainly not the quality of its antediluvian UK retail bank, its underperforming commercial and investment banking, its downscaled US banking, its diminishing footprint in Europe, or its unremarkable banking prowess in any of the 64 nations it’s planted its corporate logo on.

Ping An’s break-up call is not stupid. They realise HSBC is an anomaly. But not the one you think.

This is what I reckon happened… The Chinese Insurer would not have been happy the bank stopped paying dividends during Covid – but that’s not really the problem, and certainly not why they want it broken up. They wanted to be sure it would resume its future uninterrupted dividend stream – after all, as one of the largest, well-capitalised and profitable banks, why would that not be the case? If only the whole of HSBC was as profitable as Hong Kong…..

And that’s probably the moment Ping An must have had their lightbulb moment…..

Every large HSBC holder looks at the bank and chafes at why the rest of its global empire underperforms its Asian and Hong Kong base. They either regard Hong Kong as a backstop for an otherwise underperforming bank, or they look at it as the touchstone for a bright new future with performance enhanced around its’ Asian hub. Holders want returns and look to management to come up with strategies to build upon the Asian numbers.

Ah… that’s a problem.. Since the turn of the Millennium HSBC’s management has not been the not the most focused entity.

They spent the 2000’s trying to integrate a host of acquisitions across Europe and the ill-fated purchase of Household in the US. The bank survived the Global Financial Crisis of 2008, probably because the lacked the imagination to lose money the way other banks did! It then spent the whole of the 2010s in the regulatory sin-bin after management shockingly discovered sticking its’ Hexagon logo on the front door of Latin American banks didn’t stop fraud or money laundering. A decade was squandered running the bank to satisfy regulators.

And then they had the internal hurly burly of dissent between Chairman and CEO, sacking said CEO, appointing an interim CEO (but not confirming him), then confirming him.. and generally looking a little less than competent while dealing with calls from investors to stop wasting money on ill-fated ventures in Europe, North America and elsewhere, and focus on returns and the dividend. They finally decided on a pivot to Asia and to cut costs (and hence the already appalling quality of service) elsewhere. How imaginative of them….

HSBC’s nadir seemed to come in 2020 when it kowtowed to Beijing by pledging its support for China’s new Security Law in Hong Kong. From a social and governance perspective it looked likely to become hopelessly conflicted between the West and East. Perversely, that was seen by the market as a buy-signal, confirming HSBC had made the right decision to prioritise Asia and China, and to continue monetising its lucrative Hong Kong franchise.

Back to the present…

What Ping An have spotted has been hidden in clear sight for decades: HSBC’s problem is Hong Kong.

Today, HSBC remains massively important as the former colony’s premier retail bank, issuer of its currency (along with Standard Bank and Bank of China), and is, apparently, a financial crown jewel. Hong Kong is the fountainhead of HSBC’s success. What Ping An clearly see is that clock is ticking, and HSBC’s anomalous position as the leading bank in Hong Kong needs to be monetised before its’ value withers.

It’s a two fold problem:

• Hong Kong, once the great entrepot to Asia, is becoming just another Chinese city, albeit remaining an important one…. President Xi and his party aren’t particularly enthused at a relic of the opium wars remaining a dominant retail and bank its most internationally facing metropolis. (HSBC was founded by the proverbial Scottish bankers in 1865 and one of its main businesses was financing the opium trade.)
• As a Chinese city and port, in competition with many others, Hong Kong has limited future value as Asia’s financial hub – already the smart money has moved – and that’s makes HSBC’s much talked about (but seldom demonstrated) Asia commercial advantage also suspect. Whatever you think about HSBC’s much vaunted strength in Asia – outside of Hong Kong, its more and less complex than you might think.

And if Hong Kong becomes less relevant – then so is HSBC. This put’s Ping An’s call for a break up in perspective: realise a profit on its stake before it’s too late, with the benefit of removing a potential financial services rival from the Asian market.

Let me digress for a moment…

When I joined HSBC back in 2002 it called itself the World’s Local Bank. It had grand ambitions to expand businesses across Asia, North America and Europe so that each contributed 30% of its profits – the rest from MENA and Latin America. I was involved with Household – which seemed a great idea at the time, but subsequently… well proved a less than stellar acquisition. You live, and sometimes you learn.

HSBC was an interesting experience – but as an outsider I simply didn’t fit in. Don’t get me wrong – there were some brilliant and clever people there, but they were all institutionalised in the bank’s unique mindset. The board members I worked with were top notch, but absolutely stretched by its size, bureaucracy and the complexity of reporting and regulation. Most of the time I worked with a band of lovely, friendly and enthusiastic people who only knew the HSBC way of doing things – which appeared hopelessly inept to me after years working for US investment banks.

I have to say, while I was there I never really saw any signs that HSBC had any particular unique skill-set or range of contacts in Asia. I suspect that is even more true today – where nimbler investment banks and the more aggressive funds will be much more effective to access Asian capital markets and secure its lucrative wealth management markets.

I guess HSBC is just a good idea that’s time has come and gone…

Five Things to Read This Morning

FT – The Fed has no plan, Robert Armstrong

FT – Distressed debt levels double in US Corporate bond market

WSJ – US Stock Close Sharply Higher as Investors Digest Powell’s Comments

BBerg – Europe’s Economy is “De Facto Stagnating”; ECB’s Panetta Says

Garuniad – Shell profits soar to $9.1 bln amid calls for windfall tax

Out of time and back to the day job…

Bill Blain

Strategist – Shard Capital