What next for HSBC after preventing Ping An from carving up Hong Kong’s largest bank, quelling shareholder revolt?
- HSBC’s Asia operations are ‘motoring’ as lender looks to future growth from its biggest revenue driver, CEO Noel Quinn says
- Bank recently prevailed in a shareholder vote that sought to force its management to split the Asian arm
The London-based bank’s management argued that its core strategy centred around its international network, driven by its strength in growth markets in Asia, and said a spin-off of the Asian business suggested by some shareholders would be too costly and not drive higher returns.
“We have spent the last three years transforming the Asia business, fine-tuning the portfolio and investing in technology to provide an integrated international offering for our customers, and ultimately generating strong returns for our shareholders,” HSBC CEO Noel Quinn said as part of an investor and analyst seminar in Hong Kong and in Singapore in late May. “All parts of HSBC Asia are now motoring.
“We have proved that our globally interconnected offering is needed and valued now more than ever before.”
It also hurt many Hong Kong pensioners who had come to rely on the regular payments to supplement their income.
“HSBC should treat Hong Kong shareholders better as many Hong Kong people have supported the bank for decades,” Stephen Hui Chiu-chung, chairman and CEO of Luk Fook Financial Services, said. “The bank should invest more in Asia and Hong Kong.”
Amid those challenges and ongoing tensions with some shareholders, the outlook has started to turn more positive for HSBC in recent months.
The reopening of China’s economy also is expected to boost global growth – and trade between the East and West, a sweet spot for HSBC, the largest foreign bank by assets in the mainland.
“We continue to like Asia where we see potential for premium growth as China emerges from lockdowns,” Keefe, Bruyette and Woods analysts Perlie Mong and Edward Firth said in a May 17 research note.
“HSBC is well-positioned for a more demanding global economic environment given its low gearing to credit and strong deposit franchise.”
Another positive for HSBC: China’s property sector appears to be stabilising after years of stress among debt-laden developers.
“While homebuyers may have lingering concerns over home affordability, project incompletion risk and defaults by developers, we believe the risk of a further sales decline from the trough in the second half of 2022 is low,” said Kelly Chen, a Moody’s Investors Service senior analyst, in a May 15 research note upgrading its outlook for the nation’s property sector from negative to stable.
“This is because of the more favourable policy and operating environment that will support sales.”
In the first quarter, HSBC took a US$62 million charge related to credit quality adjustments in its China commercial real estate portfolio and reported no defaults during the period as conditions improved in the sector.
By comparison, the prior year’s quarter included US$410 million in provisions related to its Chinese commercial real estate loan portfolio and its exposure to Russia.
HSBC said in May that it now has an ambition of achieving at least 12 per cent return on tangible equity (ROTE) for 2023 and beyond. Excluding one-time items, its ROTE was 19.3 per cent in the first quarter.
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However, Ping An has argued that much of the bank’s improved performance in the past year has stemmed from the rapid rise in interest rates, rather than underlying improvements in HSBC’s operations.
Even with Ping An’s concerns, investors appear to be betting on HSBC’s potential for future growth.
HSBC’s shares in Hong Kong were trading just below its 52-week high on Friday and is near its highest level since January 2020. The bank’s shares hit a 25-year low at one point during its dividend suspension in 2020.
Despite the improved outlook, there is more to do as HSBC places an even greater emphasis on Asia under Quinn.
As part of its strategic plan three years ago, Quinn said the bank would shift more capital from underperforming markets and businesses in the West to Asia, including investing US$6 billion in its wealth management and wholesale banking operations in Asia over a five-year period.
Quinn has said the bank still believes it is right to sell the business, but is keeping shareholders’ interests in mind as it seeks to negotiate revised terms with Cerberus Capital Management-backed My Money Group.
The Canadian sale is important, as HSBC said it is considering returning a portion of the excess capital from the sale to investors through a special dividend of 21 US cents a share in the first half of next year.
The bank is expected to complete the Greece and Russia sales in the first half of this year and is conducting reviews of as many as another dozen smaller markets, which it could exit. Reuters first reported the smaller markets review last week. HSBC operates in 62 countries and territories globally.
At the same time, the bank faces the challenge of integrating several new businesses that could be key to its future growth.
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The bank reported a provisional gain of US$1.5 billion from the acquisition as part of its first-quarter results.
If approved, HSBC will take full control of HSBC Jintrust Fund Management and have greater access to China’s US$3.8 trillion fund management market, Reuters reported last month, citing sources.
However, HSBC may not be out of the woods with some of its Hong Kong shareholders, despite prevailing in the vote at its May 5 annual general meeting.
Ken Lui Yu-kin, the leader of the minority shareholder body “Spin Off HSBC Asia Concern Group”, said he plans to bring resolutions at next year’s annual meeting, including seeking to move HSBC’s headquarters to Hong Kong and to nominate a “Hong Kong heavyweight” as a director to represent the city’s shareholder base.
“Our mission is achieved. Our lobbying and the two proposals at the AGM have forced the management of HSBC to do more to improve the share prices and performance,” Lui, a property and stock investor, told the Post.
“What I want to see is if the bank listens more to the voice of Hong Kong-based shareholders and improves its corporate governance and business performance further,” he said.
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Louis Tse Ming-kwong, managing director at Wealthy Securities, said he wishes shareholders and HSBC’s management could put aside their differences.
“The minority shareholders and Ping An Insurance have made their points very clear to the management of HSBC,” Tse said. “If they keep arguing with the management, that will affect the image of the bank, which may affect its share price and the shareholders will suffer as a result.”
“While the shareholders may have their own thinking, they should trust the management, who are professionals, to run the daily businesses of the bank,” he said.
Mrs Mak, a Hong Kong shareholder since the 1980s who asked only to be identified by her surname, said she appreciated that the bank’s management has responded to concerns raised by shareholders in recent months.
“While they decided not to split up the business, they have introduced many new measures to improve the operations and development of the bank,” she said.
“It would be impossible for the management to satisfy every shareholder, but at least they are trying to communicate with the shareholders.”