HSBC strains reach breaking point

As a financial expression of globalisation, the Hongkong and Shanghai Banking Corporation has had a long history stretching back to its founding by a Scot in 1865. And as recently as seven years ago, the core of its model — financing China’s business activities with the world — looked smarter than ever.

Remember The Plough at Cadsden? That’s the pub where then UK prime minister David Cameron supped ale with Xi Jinping, a couple of days after the Chinese president had told British parliamentarians that the UK and China had formed an “interdependent community of entwined interests”.

Today though, those interests are rapidly untwining. Xi is turning increasingly authoritarian at home and hostile towards the west. And HSBC’s business model is gratingly out of kilter in a generally fracturing world. Tensions between Hong Kong and London — HSBC’s twin bases — are particularly acute.

Last week, a row between HSBC and its largest shareholder, Chinese insurance group Ping An, spilled into the public arena after Michael Huang, chair of the insurer’s asset management unit, told the Financial Times the bank should break itself up and be “far more aggressive” in its cost-cutting.

The extraordinary dust-up, brewing in private for several years, according to people close to the bank, first came to light in the spring when it emerged that Ping An had told HSBC management they should pursue a break-up. HSBC has largely sat on its hands in the interim, fuelling growing frustration at Ping An.

“The global finance model that once dominated and shaped the global financial industry in the last century is no longer competitive,” Huang told the Financial Times. “Just divesting a few small markets or businesses” would not be enough to address the challenges. He urged the bank to “adopt an open attitude by studying the relevant suggestions carefully and prudently [ . . .] rather than attempting to simply bypass and reject them”. Ouch.

So why the outburst? In part, it reflects irritation with HSBC’s relatively weak performance, and its perceived slowness in addressing it. It has long been an inescapable fact that the group’s profitability outside Hong Kong, greater China and Asia more broadly is a drag. The region generates close to 70 per cent of group profits.

The tipping point in the relationship between HSBC and its biggest shareholder was the cessation of dividend payments in 2020, when UK regulators banned banks from making shareholder distributions, given fears over the impact of the Covid pandemic on the financial sector.

Ping An itself, with an HSBC stake of close to 9 per cent, would normally expect to generate close to $1bn a year from the bank’s dividend payout. But the bank also alienated swaths of its customers in Hong Kong, many of whom are small investors who rely on the bank’s dividends for retirement income. The notion that the regulator of a former colonial power should have dictated such a policy was anathema in the region.

Adding to all of the above are the geopolitical tensions. A key flashpoint for Beijing occurred in 2018, when the bank provided information to US prosecutors on Huawei’s chief financial officer, Meng Wanzhou, who was arrested in 2018. UK and US politicians, conversely, were highly critical of HSBC executives who expressed support for Hong Kong’s controversial national security law. And then there is the pivotal role of Ping An itself. Its roots in the 1980s lie in state-owned companies and its dominant investor today is the Chearavanont family, which has long been close to the Chinese Communist party.

Where does HSBC go from here? The bank is wisely beginning to prepare for the next generation of leadership. But the surprise appointment of a new London-based finance director as part of chief executive succession planning peeved Ping An, which has been pressing for more senior staff to move to Hong Kong.

The pace of cost-cutting and divestments of units that do not mesh well with the Asian franchise (Canada is currently on the block) has been slow. An obvious step would be to spin off the group’s already ringfenced UK business. Ping An reckons freeing the Asian business from the shackles of the rest of the world could bolster HSBC’s value by a quarter, and release $8bn of capital because regulators would require fewer buffers as it would be no longer “globally systemic”. It is time for HSBC to accept the uncomfortable conclusion of its biggest shareholder: its days as the banking embodiment of globalisation are over.

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