The battle for Asia’s preeminent financial institution will be fought with the Federal Reserve providing ammunition — to both sides. Just how much profit each can squeeze out of US monetary tightening could end up deciding if Hong Kong’s biggest bank, HSBC Holdings PLC, stays whole and dominant. Or if Singapore’s largest lender, DBS Group Holdings Ltd, gets a shot at staging an upset.
Rising interest rates are shoring up net interest margins for banks everywhere. For the June quarter, Singapore’s DBS on Thursday reported a better-than-expected 7 percent jump from a year earlier in net income to S$1.82 billion (US$1.32 billion), with CEO Piyush Gupta garnering a return on equity of 13.4 percent.
Noel Quinn, his counterpart at HSBC, is only targeting a 12 percent-plus return on tangible equity by next year. While that would be the best performance for the London-headquartered lender since 2011, it might not be enough to quell demands by its largest shareholder, Ping An Insurance Group Co, to split off the Asian operations.
The call is finding increasing support among Hong Kong’s mom-and-pop shareholders, who are upset with dividends that are just half what they were in 2018 — after they were scrapped for a year under UK regulatory instructions in 2020 when the COVID-19 pandemic hit. Any breakup of the bank would put at risk the US$1.1 billion of first-half revenue that came from global banking and markets clients in Europe and the US, but was booked in Asia.
Not only is this amount a chunky 14 percent of the division, it has grown twice as fast as the overall pie, Quinn said, which is why it is important for him to hit next year’s target of US$37 billion in net interest income, up from US$26.5 billion last year.
Practically the entire increase is expected to come from margin improvements. HSBC needs the Fed’s help to earn more, reinstate its quarterly dividend and raise the payout ratio to 50 percent to pacify investors.
DBS could also benefit from higher rates, but Gupta has one added advantage. His home market of Singapore — especially the buoyant property market — is less at risk from higher interest burdens on homebuyers. Hong Kong’s real-estate sentiment is much weaker, while exposure to commercial real estate of Chinese developers is a big threat to lenders.
In other words, the relative fortunes of HSBC and DBS might come down to what the global interest-rate cycle does to the two rival Asian financial centers that have powered their rise.
“Credit charges are most likely to swell for the Hong Kong banks we cover” in the second half of this year, Bloomberg Intelligence analyst Francis Chan said.
With the Hong Kong economy headed for its third contraction in four years, mortgage demand and wealth-management fees could disappoint, even as higher interest rates lead to markdowns on insurance and bond portfolios.
“Weaker-than-expected growth in lending and non-interest income might offset our optimistic assumptions for margins,” Chan said.
DBS, too, has exposure to Hong Kong and China, and its wealth management fees also slumped in the first half of this year because of subdued markets, but it has a sizeable loan-loss cushion. More importantly, it is likely to be a net gainer from being the No. 1 bank in Singapore.
When it comes to drawing in capital, talent and trade, the city-state’s rapid post-pandemic reopening has placed it at a far more advantageous position than its rival. Even before COVID-19, Hong Kong and HSBC found themselves in the crossfire of the US-China trade war. Now it is the Chinese special administrative region’s isolationist travel restrictions that are forcing it to abdicate its historical role as a global financial center. This shift alone could be powerful enough to alter the pecking order of Asian banking.
Does DBS need a footprint outside Asia to challenge HSBC, which is almost six times bigger by total assets? Not really, especially if the latter capitulates to pressure from Ping An and decides to deglobalize and split up.
DBS is bulking up within the region. Citigroup Inc’s exit from retail operations in Asia outside Singapore and Hong Kong has already given Gupta the keys to the Taiwan consumer bank he wanted to buy.
When the integration is complete, a greater China loan book approaching US$100 billion would give the Singaporean lender significant heft in North Asia, complementing its already solid presence in Southeast Asia and India.
Still, it is possible that aggressive Fed action could spoil the party for HSBC and DBS. Gupta’s post-earnings presentation was cautious. His base case is for US interest rates to peak at 3.5 percent to 4 percent, tempering inflation and causing a mild recession. Ripple effects on Asia can likely be contained, he said, with manageable depreciation in local currencies.
Those assumptions are all up for grabs — as is the contest for Asia’s banking supremacy.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. He previously worked for Reuters, the Straits Times and Bloomberg News. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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