London: HSBC Holdings Plc, founded in Hong Kong and promoted in ads as “the world’s local bank,” had an edge when lending went global. Now, after a costly adventure in the US, the 142 year old bank is scrambling to reclaim Asia.
In his first year as chairman, Stephen Green, has been preoccupied with HSBC’s biggest problem, US bad loans of $10.6 billion (Rs4,408 crore). Defaults on high-risk mortgages will likely result in the first profit decline at the London-based bank since 2002, analysts estimate. HSBC shares reached their lowest since October 2005 this week, falling 0.8% on 1March to 884 pence.
Green, a Church of England lay minister in his spare time, has fired top American managers, tightened loan requirements and embarked on a new growth strategy: retake emerging markets. When Green presents 2006 earnings on 5 March, analysts and investors want proof he has scrapped predecessor John Bond’s US strategy and moved the world’s third-largest bank back to its roots.
“HSBC should be allocating resources more aggressively to emerging markets, where the company made its name,” said Sandy Chen, an analyst at Panmure Gordon & Co., who has a “hold” rating on the stock. “The returns on invested capital are far greater in those markets.”
Euan Stirling, who helps manage $158 billion including HSBC shares at Standard Life Investments in Edinburgh, also wants to see strong growth in China and Latin America. “Management is certainly under pressure to deliver in those areas.”
Formerly known as Hong Kong & Shanghai Banking Corp., HSBC’s percentage of total assets in emerging markets including Hong Kong, China and South America has fallen as it made US acquisitions. Emerging-market assets dropped to 26% in the first half of 2006 from 37% in 2001, according to the bank.
“We are the largest banking organization in Asia by most measures, and we aim to remain so,” said HSBC spokesman Richard Lindsay. “We are growing our business as fast as we can.”
The bank, which has spent $5 billion on Chinese acquisitions since 2002, has an 8% stake in closely held Bank of Shanghai. HSBC also owns 19.9% of Ping An Insurance (Group) Co., China’s second-biggest insurer; and 19.9% of Bank of Communications Co., China’s fifth-biggest lender, which it purchased for 14.5 billion yuan (Rs8,288 crore) in 2004.
The bank, Hong Kong’s biggest lender, plans to incorporate in China and add branches as fast as regulators permit. In mainland China, first-half profit increased 74% to $280 million, compared with the overall profit gain of 18%.
The bank’s 36 branches “in the context of a market as large both geographically and economically as China is still pretty small,” Green said.
HSBC faces increasing competition from US and European lenders in China, where the economy grew 10.7% in 2006. The nation’s 1.3 billion people have an estimated $2 trillion of household savings, and demand for loans has grown about 15% annually since 2002.
When Citigroup Inc., the biggest US bank, announced a $3.1 billion deal in November to take control of Guangdong Development Bank, it was the first overseas financial services company to manage a Chinese bank. The same week, HSBC told investors its US bad loans rose in the third quarter.
London-based Standard Chartered Plc, with only a fifth of HSBC’s market value of 102.4 billion pounds (Rs8,85,918), may soon have more branches in China. Standard Chartered, whose shares have fallen 7% this year, plans to have 40 branches there in 2007.
Far from emerging markets, HSBC’s biggest acquisition was the $15.5 billion takeover in 2003 of Household International, based in Prospect Heights, Illinois.
The last time profit declined at HSBC was the first half of 2002, according to data compiled by Bloomberg. HSBC gets almost 30% of profit in the US, 29% in Europe, and the remaining 41% in Asia and emerging markets. Asia contributes about 20% of Citigroup’s profit, and two-thirds at Standard Chartered.
Pretax profit in Brazil, HSBC’s biggest South American market in the first half of the year, gained 36% to 251 million pounds. HSBC paid $1.8 billion in November for Grupo Banistmo SA, Panama’s largest bank, to enter five Latin America countries. In India, pretax profit doubled to 215 million pounds.
HSBC says it plans to develop retail operations in Russia and eastern Europe and last year opened branches in Poland, the Czech Republic and Slovakia.
HSBC could have been more aggressive in eastern Europe, said David Dodds, an investment analyst at SVM Asset Management in London. “They could have moved into the key central European markets earlier. They have missed it there,” said Dodds.
Analysts also have criticized the company’s expansion into investment banking, the unit where Green worked from 1992 to 1998.
“There’s not a clear strategy for outsiders to see,” Framlington’s Peirson said. “You need to feel they are in it for the long term.”
HSBC’s mergers advisory unit ranked 13th in global takeovers last year, working on $264.6 billion of deals, up from 19th in 2005, Bloomberg data show. It ranked 10th for global bond underwriters in 2006, up from 14th five years earlier.
“They need to decide the importance of services from strategic and defense aspects so that they don’t blow another hole in the cost base,” said Antony Broadbent, an analyst at Sanford C Bernstein in London. “It looks like they have cut short the investment program and their aspirations to be a global investment bank.”
HSBC’s dividend yield of 4.7%, almost twice the average for European banks, hasn’t been enough to lure investors. The stock, the worst performer among Britain’s big banks, declined 10% from a year ago. That compares with a 5.3% gain in the 184 member Bloomberg World Banks Index.