HSBC Holdings made a clear and compelling case for hanging on to its Asian business when its biggest shareholder, Ping An Insurance Group, started calling for a break-up of the London- and Hong Kong-listed bank last year. But ahead of a likely fractious shareholder meeting on May 5, the lender has muddied the waters.
Ping An wants the bank to spin off or partially list its Asian business in Hong Kong to win the higher valuation that it reckons local investors would award a regional business. HSBC has argued that a split would increase costs and cause a loss of revenue from global corporate and wealth customers. The bank also said it was already shifting its balance sheet-focus towards Asia.
Things could come to a head on May 5 at HSBC’s annual investor gathering in London when shareholders vote on whether the bank should commit to structural reforms, after a resolution was added to the agenda by an activist investor who claims support from Ping An. With the worst timing possible, HSBC’s defence against this campaign lost some clarity in May 2’s first-quarter results.
One-time gains
The main chunk of HSBC’s US$8.6 billion ($11.5 billion) in revenue growth — to a total of US$20.2 billion for the quarter — was US$3.6 billion in one-time gains from two businesses in Europe: first, a US$2.1 billion reversal of some impairments on its French consumer bank, which were made when it agreed to a sale of the unit in 2021 that now looks likely to fall apart; and second, a US$1.5 billion gain booked on its purchase of Silicon Valley Bank’s (SVB) UK arm in March after its US parent failed.
The French issue is not entirely HSBC’s fault. The deal is teetering because interest rate increases have hurt the fair value of assets in the business in a way that would force the buyer, Promontoria MMB SAS, a bank owned by Cerberus Capital Management, to plough in more capital. There are obvious parallels here with the problems behind America’s ongoing regional bank crisis. The managements of both buyer and seller should perhaps have been more alive to the interest-rate risks involved.
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The SVB UK deal, clinched over a weekend of negotiations with British government and regulators, was touted by CEO Noel Quinn as a way to accelerate the bank’s growth plans. SVB UK is tiny in the context of HSBC’s balance sheet, which makes that a very unlikely sounding claim, but at the same time its location looks like a distraction from the bank’s Asia pivot.
SVB UK added US$7.3 billion in loans to HSBC’s balance sheet this quarter, less than one-third of the amount added by its reconsolidation of the French consumer business. It also added US$9.6 billion in risk-weighted assets, which is just 1% of the group’s total and half the amount added last year just by changes in currency valuations.
Quinn said the first stage of taking SVB UK global was to hire 40 bankers in the US — which, at the risk of stating the obvious, is not Asia. But also it is not clear what buying a small UK lender contributes to HSBC’s ability to win technology clients in a highly competitive US market.
Tilting the balance sheet
Regardless of how fanciful these plans might be, HSBC’s reconsolidation of its French unit and the addition of SVB UK will tilt the focus of its balance sheet away from Asia and back towards Europe. The bank has a long-term target that its Asia business will account for 50% of its tangible equity: It had got to 47% at the end of last year, up from 42% at the end of 2021. It did not disclose how far back the pendulum had swung after the first quarter.
Quinn needs to address these backwards steps and make his case clearly again at the May 5 meeting. He is not helped by the way relations between the bank and its largest shareholder appear to have broken down entirely and entered a kind of cold war. Both issued lengthy statements last month criticising the other. HSBC said that after a string of high-level meetings and written correspondence, the two had agreed to disagree over strategy, which does not sound great. Ping An responded that HSBC was close-minded and said it had refused to engage verbally.
Behind all these distractions, HSBC’s underlying first-quarter results were sturdy enough: Loans and deposits were down versus a year ago excluding additions of France and SVB UK, but quarterly net interest income was up 47% due to higher interest rates. The bank also followed through on promises to return capital by announcing a US$2 billion share buyback, and a first-quarter dividend for the first time since 2019.
Cash payouts might help quash some dissent and HSBC’s UK-based shareholders are likely to be kept happy. The questions and demands from its Asian investors won’t go away soon, however. HSBC won’t help itself by simply calling the discussion closed. — Bloomberg Opinion
