HSBC, Where’s the Love?

From the early 1990s through the early noughties, HSBC conducted customer research in Hong Kong to compare and contrast its perceived position and performance in the city against a range of peers. The research was driven by a concern that the reversion of sovereignty to China in 1997 would enable Bank of China to displace HSBC as the dominant financial institution in Hong Kong.

The research was abandoned when the results proved boringly reassuring. Consistently around 90 per cent of those polled regarded HSBC as the leading bank, even if customer service was not its strong point; subsidiary Hang Seng Bank usually came out on top in the warm and cuddly stakes. But despite complaints about the length of queues in HSBC branches, the bank was respected, if not loved. It was a great local institution.

Since the financial crisis of 2008/2009 and the subsequent revelation of various misdeeds, money laundering, bad sales practices, dodgy private banking, for example, the reputation of HSBC has suffered. It can be argued that HSBC is not unique in the obloquy it has endured. True. It is an industry-wide phenomenon. It can also be argued that most of the problems occurred in markets far distant from Hong Kong. Also true.

However, HSBC’s dominant position in Hong Kong, a colonial relic, could not be recreated in the 21st century. Concerns have increased about monopolies and the potential for market abuse. In these circumstances, intelligent self-interest suggests that HSBC should conform to higher standards in order to protect its core market. But this requirement applies internationally, not just in Asia. Customers do not see companies as an agglomeration of silos. They see them as monoliths. Bad practices anywhere affect perceptions of the whole. HSBC has been seriously damaged, everywhere.

As the board articulates its strategy and seeks to improve the bank’s performance, it is impossible not to have some sympathy for its members, given the challenges confronting them. HSBC’s pivot to China has coincided with concerns about the scale of Chinese debt, weakening growth and the ability of Beijing to implement reforms to facilitate future development. Warren Buffett remains a long-term optimist but the immediate outlook remains unclear.

Despite these serious concerns, China will continue to be a huge economy offering opportunities to foreign companies, including banks, to make money for their shareholders. The question for HSBC is whether its past claims to unique expertise and connections in China, and the benefits these alleged attributes confer, remain valid in 2016. Does HSBC have a particular advantage in Chinese markets? And if the answer is negative, what are the implications for HSBC strategy?

First, a contextual point. The financial crisis of 2008/2009 undermined in China, as elsewhere, faith in the expertise and integrity of international financial institutions. HSBC, as noted above, is not exempt.
Secondly, HSBC is a foreign bank with colonial roots, enjoying a major source of income from the restive Chinese territory of Hong Kong, where Western influences are increasingly distrusted by Beijing.

Thirdly, despite its claim to Asian roots and expertise, HSBC remains headquartered in London, with the Group CEO retaining the title of Chairman of the Asian subsidiary.

HSBC is not loved in Beijing.

This suggests HSBC shareholders are unlikely to derive returns from the China pivot augmented by the Group’s claim to a unique position and expertise. HSBC is just another foreign bank. Supercharged returns from Asia to offset the Group’s shrinking profile in the rest of the world are not going happen.

The obvious answer to this problem, from the point of view of shareholders, is to sell HSBC to a Chinese bank. This would give the acquirer a highly lucrative franchise in Hong Kong, far greater standing and opportunities in China than those available to the current management, and a network of branches around Asia.

The immediate objection to this plan is simple: if acquiring HSBC is so attractive, why has nobody made a bid?

To which the obvious answer is that no sensible investor would wish to acquire HSBC while it is still encumbered by a US-imposed monitor with a large supporting staff. Nor is the moment opportune while slow progress is being made with disposals – Brazil gone, Turkey unsold – and the board is engaged in further reducing risk-weighted assets.

It has been suggested previously that the optimum solution for shareholders would be to spin-off the Asian business, the Hongkong and Shanghai Banking Corporation, to shareholders. This, the board appears loath to do, for the moment. Instead, they are reducing the size of the Group while seeking to rationalize its scattered and Byzantine structure. The test of success for this piecemeal approach will be the moment a Chinese institution shows interest in acquiring the business.

For those of us with a sentimental attachment to HSBC and the values it once represented, its sale to a Chinese institution would be an occasion for sadness. Yet, for a colonial bank in a post-colonial world this would represent its logical evolution. HSBC failed as ‘The World’s Local Bank’, it never being established that the world was in need of such an institution, while the execution was disastrous. If HSBC’s future lies in China then let the Chinese own and manage it. It will make HSBC’s shareholders happy and, possibly, restore a little faith in the Group’s board. And that is the best they can look for in a post-colonial world.

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