East-West relations are a growing problem for HSBC Holdings, the bank with feet planted equally in each hemisphere.
US-China tensions have steadily ramped up, but while geopolitical discord threatens HSBC’s business, splitting the bank into a version of HSBC East and HSBC West — as its largest shareholder, Shenzhen, China-based Ping An Insurance (Group), has proposed — is no solution. It would only add costs or destroy revenue.
HSBC had answered the break-up question before Ping An raised it, by revealing more detail about how much of its Asian revenue comes from Western clients. Many of them would be less able or willing to work with a standalone HSBC East.
Ping An and other shareholders are frustrated with the bank’s valuation and lagging stock price, especially in the past couple of years. While it used to trade at a premium to most European peers and its forecast book value, it now trades at a 30 percent discount to book value, although it remains at a premium to its peers.
However, a look at how HSBC has traded over the past few years shows that its shares have been governed more by economics and interest rates than by politics. The shares’ valuation showed robust growth in 2017 and 2018 when then-US president Donald Trump was ramping up the trade-war rhetoric, but US rates were heading higher. They fell in 2015 and 2016 when Chinese growth and financial markets were under pressure; again in the second half of 2019, when fears grew of a global slowdown and US interest rates were being cut; and, most painfully, since the COVID-19 pandemic brought global trade to a sudden halt.
HSBC has been caught in some heavy geopolitical crossfire, hurting its reputation in both hemispheres — over its stance on Hong Kong’s National Security Law and, for example, its apparent role in the 2018 arrest of Huawei Technologies chief financial officer Meng Wanzhou (孟晚舟) in Canada. For sure, if the schism gets worse between Western nations and China, HSBC is likely to suffer. For now, it has not apparently led customers to rethink their banking arrangement.
The way to think about HSBC is in three main blocks: A UK retail bank that has a strong position in British current accounts and mortgages; a Hong Kong retail and commercial bank that dominates its home market and is the gateway to China; and a global, trade-led corporate and investment bank. The UK and Hong Kong retail banks are separate entities with little overlap or relevance to each other, so the question is whether the global business could live without one or the other.
The Hong Kong and Asia businesses are often held up as producing greater profits and higher returns than the rest of HSBC. That is partly an illusion.
Back in February at its full-year results, HSBC revealed that half of its global banking and markets revenue booked in the East was derived from HSBC customers in the West. This happens because the bank wins large multinational companies as clients in North America and Western Europe with loans, treasury and custody services at home, which require funding and capital in those markets, but produce low profits. These clients then use HSBC for hedging, trade finance and other higher-return products in Asian markets.
These higher Asia-based profits also get taxed at lower rates typically than they would in the West. HSBC insists the products are sold where they are used and that it is not arbitraging tax rates. Nevertheless, the upshot is that HSBC West has a big balance sheet that produces weak-looking profits compared with HSBC East. This persists despite the bank’s strategy of ditching Western clients that do not do much Asian business.
If the bank tried to split so that the bulk of the group was based in Asia and it could escape Western capital requirements, regulatory supervision and, of course, politics, then it would very likely lose this multinational business. Why? Large Western companies probably would not want their cash, securities or data held in a China-dominated and regulated bank. BNP Paribas, Citigroup and JPMorgan Chase, which compete for similar business, would be the likely winners as multinationals flocked to them instead.
That illustrates why the breakup of Prudential between 2019 and last year into UK, Asia and US businesses is a bad model for HSBC. Prudential’s three businesses sell to different people in their respective markets, and there are no products that straddle geographies. The only reason it took so long to think about listing Prudential’s Asian arm at the higher valuation it could attract in Hong Kong was that for years it relied on the capital base of Prudential UK to back the policies it sold. It was only when Asia’s income could cover its costs that it could issue its own capital and start to seriously consider a spin-off.
HSBC chairman Mark Tucker was chief executive officer of Prudential while the Asian business was still in its growth phase and knows the businesses. He has also known Ping An founder and chairman Peter Ma (馬明哲) for many years and must have pointed out this difference to him.
The other option to split would be to sell the Hong Kong bank on its own, hoping for a higher valuation there. This might not mean that HSBC West would lose its multinational customers, but it would likely mean significantly lower profits, or more risk-taking in Hong Kong: The bank would have to find something to do with the US$550 billion in customers’ cash. China’s slow but steady encroachment over Hong Kong could eventually prove too uncomfortable for Western multinationals fearing the security of their data as much as anything else. HSBC cannot hold back China’s political ambitions, but splitting the bank would likely see it lose customers and profits more quickly.
Ping An wanted to start this conversation about HSBC possibly just to focus investors on the value they are missing, but it risks only making shareholders, Western regulators and big customers fret about the bank’s increasingly China-dominated future.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He previously worked for the Wall Street Journal and the Financial Times.
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