In fact, HSBC had answered the breakup question before Ping An raised it, revealing more details about how much of its Asian revenue comes from Western customers. Many of them would be less able or less willing to work with a standalone HSBC East.
Ping An and other shareholders are frustrated with the bank’s valuation and the lagging share price, especially over the past two years. Previously, it traded at a premium to most European peers and its projected book value. Now it trades at a 30% discount to its book value, although it still outperforms its peers.
But look at how HSBC has traded in recent years, and you can quickly see that its actions are driven more by the economy and interest rates than politics. Equity valuations rose sharply in 2017 and 2018 as President Donald Trump escalated trade war rhetoric, but US rates were rising. They fell in 2015-2016 when Chinese growth and financial markets were under pressure; again in the second half of 2019, when fears of a global slowdown grew and US interest rates were cut; and, most painfully, since the Covid-19 pandemic brought global trade to a screeching halt.
HSBC has been caught in a fierce geopolitical crossfire, damaging its reputation in both hemispheres – from its stance on Hong Kong’s draconian security laws, to its apparent role in the 2018 arrest of the chief financial officer of the Chinese company Huawei Technologies Co. in Canada, for example. Of course, if the schism worsens between Western countries and China, HSBC may suffer. So far, this has apparently not led customers to rethink their banking arrangement.
The way of thinking about HSBC is in three main blocks: A UK retail bank which has a strong position in UK current accounts and mortgages; a Hong Kong retail and commercial bank that dominates its home market and is the gateway to China; and finally a trade-focused global business and investment bank. UK and Hong Kong retail banks are separate entities with little overlap or relevance to each other, so the question is whether the global business could live without one. or the other.
The Hong Kong and Asian businesses are often seen as producing bigger profits and higher returns than the rest of HSBC. It is partly an illusion.
In February, during its annual results, HSBC revealed that half of its banking and global markets revenue accounted for in the east came from HSBC customers in the west. This is happening because the bank is gaining large multinationals as customers in North America and Western Europe with lending, cash and home custody services, which require funding and capital in those markets but produce low profits. These clients then use HSBC for hedging, trade finance and other higher yielding products in Asian markets.
These higher Asian-based profits are also taxed at generally lower rates than in the West. HSBC insists that products are sold where they are used and that it does not arbitrate tax rates. Nevertheless, the result is that HSBC West has a large balance sheet which produces low profits compared to HSBC East. This persists despite the bank’s strategy in recent years of abandoning Western clients who don’t do much business in Asia.
If the bank tried to split up so that most of the group was based in Asia and could escape Western capital requirements, regulatory scrutiny and, of course, politics, it would lose most likely this multinational activity. Why? Big Western companies probably won’t want their money, securities or data held in a Chinese-dominated and regulated bank. BNP Paribas SA, Citigroup Inc. and JPMorgan Chase & Co., which are competing for similar deals, would be the likely winners as multinationals flock to them.
It illustrates why Prudential Plc’s split between 2019 and 2021 into UK, Asian and US businesses is a bad model for HSBC. Prudential’s three businesses sell to different people in their respective markets, and there are no products that overlap geographies. The only reason it took so long to think about listing Prudential’s Asian arm at the higher valuation it might attract in Hong Kong is because for years it relied on Prudential’s capital base UK to back the policies it was selling. (1) Only when revenues from Asia could cover its costs could it issue its own capital and begin to seriously consider a spinoff.
Mark Tucker, chairman of HSBC, was chief executive of Prudential when the Asian company was still in its growth phase and knows business. He also knows the founder and chairman of Ping An, Peter Ma, well for many years and must have clearly pointed out this difference.
The other split option would be to sell the Hong Kong bank alone hoping for a higher valuation there. That might not mean HSBC West is losing its multinational customers, but it would likely mean significantly lower profits or greater risk-taking in Hong Kong: the bank would have to find something to do with the roughly $550 billion in liquidity of its customers.
China’s slow but steady encroachment on Hong Kong could eventually prove too uncomfortable for Western multinationals fearing their data security as much as anything else. HSBC can’t curb China’s political ambitions, but splitting the bank would most likely make it lose customers and profits faster.
Ping An wanted to start this conversation about HSBC, perhaps just to draw investors’ attention to the value they are missing. But that risks only worrying shareholders, Western regulators and big clients about the bank’s increasingly China-dominated future.
More from Bloomberg Opinion:
• Hong Kong brain drain causes real pain: Matthew Brooker
• Investors upset Deutsche Bank and Credit Suisse: Paul J. Davies
• Good luck sanctioning China’s 4,762 small giants: Shuli Ren
(1) For insurance enthusiasts, Prudential Hong Kong was founded on excess capital trapped in Prudential’s UK profit fund
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He previously worked for the Wall Street Journal and the Financial Times.
More stories like this are available at bloomberg.com/opinion