For the past 30 years HSBC has been trying to run away from Hong Kong. Tens of billions of US dollars and much destroyed value later, the mission is definitely not accomplished. HSBC remains a major international institution and, in some respects, an exceptional one but still dominated by Asia, a region in which HSBC is perceived to enjoy a competitive advantage and which contributed 83.5 per cent of group profit in 2015
US giants such as, say, J. P. Morgan Chase, enjoy huge domestic markets that are the heart of their businesses. HSBC is an orphan everywhere. Headquartered in London since 1991, it is 9,000 kilometres from Hong Kong, the site of the regional head office of the Group in Asia. If you were designing an international bank from scratch you would not start from here.
Further, the role and title of Chairman of the Hongkong and Shanghai Banking Corporation (the legal name of HSBC’s Asian subsidiary) was assumed by then Group CEO, Michael Geoghegan, in 2010 as he planned to move his office from London to Hong Kong, to be closer to the core of the Group’s businesses. The move never happened but the title remains with his London-based successor Stuart Gulliver. The Asian business is thereby deprived of an important leader of its business.
The absence of a regionally based chairman is all the more surprising as the principal feature of the Group’s evolving international strategy is the so-called pivot to China.
As HSBC seeks to implement this strategy it faces five challenges:
- Head office’s need to manage other group businesses while dealing with the penalties, litigation and management changes occasioned by past group misconduct.
- Insufficient personnel in head office with the relevant skills and knowledge to closely manage Asia, leading to doubtful decisions or bottlenecks when those with appropriate sign-off authority are occupied with other matters.
- The significant change in attitude to HSBC in Hong Kong and Asia. The crisis of 2008/2009 generally undermined respect for Western financial institutions. HSBC’s share price performance has spooked local investors. In 1991 HSBC was a highly regarded, ethical and conservatively run local bank. Now it is large foreign bank with frequently criticized service performance.
- Regionally, local banks have become stronger and thus more effective competitors.
- Local banks, lacking the tight control of HSBC’s US appointed monitor and expanded compliance cadre, are able to do deals and service customers that HSBC cannot touch.
As mentioned in an earlier post, Will HSBC ever see its ‘glory days’ again?, HSBC’s universal and international banking strategy is neither wholly clear nor convincing. Just which are the core businesses? What, for example, does the Group intend to do with the shrinking private bank?
Nor is there any clarity around the identity of critical international markets. Consider, for one moment, Turkey. Up for sale, then retained to service international customers because no satisfactory offer had been received; Hürriyet Daily News article on subject. How many of the 19 countries lumped together in the accounts are there because the Group is loath to close but unable to sell them?
The outlook is not encouraging: maybe interest rates will pick up and improve performance; emerging markets must finally emerge from current gloom; Europe may sort itself out and then 2017 or 2018 will have to be better. Meanwhile, amid declining profitability, questions are being raised about the sustainability of the dividend, a major attraction for shareholders.
Perhaps it is time seriously to consider breaking the Group up by spinning off the Hongkong and Shanghai Banking Corporation to shareholders. This is not a new idea. It has been the subject of discreet discussions in corners of HSBC for years. Apparently, head office has also looked at it and decided it would destroy value. Nonetheless, it remains appealing.
It would create an entity that both shareholders and analysts could easily value and understand. It would focus directors and management on the challenges and opportunities facing the bank, including the uncertainties and opportunities of the internationalisation of the RMB. It would mark the return of HSBC to its core markets, without the baggage of recent years.
Undoubtedly, such a move would tear the heart out of the Group. The remaining entities would lack coherence or serious strategic purpose. But that underlines the importance of building on what is good and disposing of the rest.
Ultimately, the question for the board and shareholders is simply this: is an international bank, burdened with demands for increased capital on the grounds it is too big to fail, struggling with legacy issues, enhanced regulatory supervision and declining profits, ever again going to offer the returns investors seek. HSBC should seriously consider a return to its roots.