The writer is global head of research at Autonomous, a research brokerage
HSBC shares rallied this week on news that its largest shareholder, Chinese insurer Ping An, has increased its stake in the global bank. Such is the gloom surrounding the lender that any indication of institutional support — especially from China — comes as a welcome relief.
Even so, HSBC faces an uncomfortable reality: the total market value of the group, known as HSBC Holdings, is lower than the tangible book value of The Hongkong and Shanghai Banking Corporation, HSBC’s founding entity, which now houses its Asian businesses. The market is in effect saying that HSBC is worthless outside Asia.
Many European banks are trading at below the implied sum of their parts, but this still must sting. Since the mid-1970s, HSBC has pursued a global strategy, using the extraordinary profitability of its Hong Kong base to fund growth abroad. The driving force behind this expansion was initially Michael Sandberg, who chaired the bank from 1977 to 1986. Sandberg wanted to build a global bank with major assets in Asia, North America and Europe, which he termed his “three-legged stool” strategy.
In terms of capital allocation, the three-legged stool is still standing: 42 per cent of capital is allocated to Asia; 19 per cent to the Americas; and 39 per cent to Europe, the Middle East and Africa. But in terms of profit generation, the stool is distinctly wobbly: Asia is massively dominant. It delivered 84 per cent of profits in 2019, against 10 per cent from the Americas and just 6 per cent from Emea.
The bank’s shareholders and staff have also changed. This year HSBC shares have been more heavily traded in Hong Kong than in London for the first time since the late 1990s. The holders of 55 per cent of HSBC shares are now registered in Hong Kong. Management has also changed: in the early 1980s, 98 per cent of HSBC’s senior management was British; now it is 36 per cent.
Profits, shareholders and management are all moving east. So what is to stop HSBC from upping sticks and returning its domicile to Hong Kong? The lender considered such a move in 2015.
One formidable obstacle is the existence of about $130bn of debt that could be “bailed in” during a crisis. HSBC’s debt refers to the Bank of England as the lead regulator and shifting control to Hong Kong would be difficult and expensive. Tax would further complicate things — even before the political challenges are considered.
That said, UK regulators would probably not oppose a move to Hong Kong. The BoE has historically been ambivalent toward HSBC and opposed its bid for Royal Bank of Scotland in the 1980s. More recently, the 2008 crisis laid bare concerns that UK taxpayers are responsible for two banks, HSBC and Standard Chartered, whose combined assets represent more than 130 per cent of UK gross domestic product and do relatively little business in the country. The BoE might be happy to export that risk.
A redomicile is, however, not necessary. Refocusing the group could be achieved through a restructuring. The main barrier to this appears to be the institutional desire to hold on to the fiction that the three-legged stool can endure. HSBC wants to be seen as an international bank with business in Hong Kong, not a Hong Kong bank with business internationally.
This could change. HSBC shares are down 60 per cent since early 2018. Given that dire performance, management might well decide that the best option is to cut back to the original core. Chairman Mark Tucker and chief executive Noel Quinn have already announced that they will redeploy $100bn of risk weighted assets, moving capital away from lower performing businesses, and more is expected to be announced next year.
Shareholders may well push management to focus even more on the Hong Kong unit that generates most of the cash needed to pay HSBC’s much cherished dividend.
But politics might also intervene to make a break-up of the group necessary. Investors are petrified that HSBC Holdings might be included on China’s proposed list of “unreliable entities”. In that case, separating the group into two businesses might be the only way to preserve HSBC’s dominant position in Hong Kong banking.
In 1979, HSBC sold its controlling interest in Hutchison Whampoa to local entrepreneur Li Ka-shing. The sale has been described as “the beginning of the end of British commercial dominance” — and HSBC facilitated it by lending Mr Li the money to buy the bank out. Now HSBC faces a similar choice between a future in Asia and its legacy as a British institution. History suggests the bank will choose Asia.