HomeBusinessAs tensions rise between east and west, will HSBC be torn apart?
As tensions rise between east and west, will HSBC be torn apart?
May 7, 2022
When Mark Tucker arrived as HSBC’s new chairman on a cloudy London day in October 2017, he was prepared for a challenge. The former insurance boss was the first outsider to lead the now 157-year-old bank, which was in the middle of a period of intense upheaval. HSBC was slimming down its investment bank, selling poorly performing businesses and slashing thousands of jobs as it tried to adapt to the post-financial-crisis era.
While Tucker was well equipped to guide the lender through that period of turmoil, he must now wrestle with a far bigger existential question – should the bank be broken up?
He has form on handling such decisions: as head of insurer Prudential in the late 2000s, he withstood calls for splitting the weaker UK business away from its more lucrative Asian operations, which made up more than half of profits from new business.
Yet his resistance there ultimately proved futile. Prudential eventually did split – albeit nearly a decade after Tucker’s departure.
A similar dilemma now faces him at HSBC, after its largest investor, the Chinese insurance group Ping An, revived calls to separate the bank’s profitable Asian business from the rest of the lender’s operations.
HSBC’s Scottish founder, Sir Thomas Sutherland, envisioned a Hong Kong-based lender that would finance trade between Europe and Asia when he launched the Hongkong and Shanghai Banking Corporation in 1865. But the bank’s successes have largely mirrored the rise of globalisation, having splashed cash on a string of acquisitions since the 1970s – including Britain’s Midland Bank in 1992 – as international business boomed.
By the 2008 financial crisis – by which time HSBC had a presence in 86 countries and had long since shifted its headquarters to London – the bank’s traditional home markets still accounted for most of its profits. “It was strange situation in which the bank was making most of its money in territories it had originally been in before the global push abroad,” said David Kynaston, the historian and author of The Lion Wakes: A Modern History of HSBC. Subsequent shareholder pressure to capitalise on its strengths meant backtracking on some of those projects.
Before publicly pushing for a breakup, Ping An had privately called for HSBC to get out of money-draining assets in the west, refocus on Asia, and embark on a cost-cutting scheme to trim excesses.
“Over the last 15 years or so, there’s been quite a significant rowing back,” Kynaston said, noting HSBC’s recent decision to ditch its retail banks in the US and France, and the shrinking of its footprint from 86 to 64 countries since the financial crisis.
The financial arguments for pruning its global network have since been amplified into debate over a breakup. Ping An has expressed disappointment at the return on its investment, having seen the dividend cancelled during the first UK lockdown, and reinstated at only half the level seen before the pandemic.
Some have suggested that any shareholder vote on a split of HSBC’s Asian and western operations would also be a referendum on the bank’s strategy under Tucker, a former trainee professional footballer and diehard Chelsea FC fan. Tucker clashed with, and had a hand in ousting, chief executive John Flint, who had been in post less than two years, in August 2019, before triggering a more ambitious cost-cutting agenda – involving about 35,000 job losses – under Flint’s replacement, Noel Quinn.
Ping An’s calls for a split have added fuel to an already burning fire. HSBC’s role straddling east and west has been eroded by an increasingly polarised political climate and a wave of protectionism that was turbocharged by Donald Trump’s trade war with China and has gained further traction during the pandemic.
Most notably, HSBC has struggled to navigate pressures from Washington and London on one side, and Beijing on the other, after the bank controversially accepted China’s authoritarian crackdown on democracy in Hong Kong in 2020. Meanwhile, the fact that UK and US regulators have a hold over HSBC even though it makes most of its profits in Asia has ruffled feathers across its investor base.
HSBC’s leadership has consistently defended itself against political pressure to take a side in the crackdown in Hong Kong, and internally there is support for the bank’s position, with some believing its single biggest advantage is in providing a platform for navigating such geopolitics, and ultimately allowing money to flow across borders regardless of regimes.
Rowing back on its international ambitions would also have severe consequences beyond the bank’s balance sheet. About 9% of funds linked to global trade run through its infrastructure, and a breakup would add further friction at a time when the world is still recovering from the pandemic, feeling the ripple effects of the war in Ukraine, and wrestling with rising inflation that has put pressure on supply chains.
“HSBC supports customers, corporates and institutions across key capital and trade hubs around the world,” the bank said in a statement. “This network manifests itself in our leading global franchises across retail, wealth and wholesale banking. The most important thing for management to focus on is continuing to drive higher returns, as we have done very successfully, despite the disruptions of Covid-19.”
Geopolitics and trade aside, British politicians also have a financial interest in keeping HSBC together. The Treasury will be acutely aware of the potential losses associated with a breakup: while hiving off HSBC’s Asia operations would probably leave the UK retail bank intact, the exchequer’s earnings through the UK bank levy would plunge. The banking sector surcharge, first imposed by former chancellor George Osborne in the wake of the financial crisis, taxes UK-headquartered banks on their global balance sheets rather than their local operations, ensuring that global lenders such as Standard Chartered and HSBC contribute more heavily to the British public purse.
In 2019, HSBC paid an extra $988m (£800m) to the Treasury as a result of the bank levy, more than six times the $154m it paid that year in UK corporation tax. The current chancellor, Rishi Sunak, may have been taken that income for granted when he announced plans to slash the bank levy from 8% to 3% from 2023.
The Treasury declined to comment, saying any decision was a commercial matter for HSBC.
However, it is the UK’s grip on HSBC’s finances that seems to have fuelled Ping An’s calls for a split.
Ping An – which is China’s most valuable publicly listed insurer – first declared a 5% stake in the lender in December 2017, at a time when HSBC’s shares were trading at 706p on average, and the bank was paying 51 cents a share in dividends. The investment was strategic for Ping An, which took on the shareholding through a life insurance arm that relies on dividend income to offset long-term liabilities.
But by 2020, the world had changed. With regulators fearing the worst in the early days of the pandemic, UK banks reached an agreement with the Bank of England to scrap nearly £8bn in dividends, ensuring that lenders had a strong enough capital cushion for whatever economic blows might ensue.
The announcement, which meant HSBC would have to backtrack on promises to pay $4.2bn to shareholders, disturbed investors and reignited debates about HSBC’s structure: a less lucrative European jurisdiction had been able to dictate major financial decisions to a bank that drew about two-thirds of its profits from a different continent entirely.
But Ping An hung on. In September 2020, it gave HSBC a vote of confidence when it raised its stake to 8% and become its largest shareholder – right in the middle of the political row over the bank’s support for China’s controversial security law being extended to Hong Kong.
The resulting calm was shortlived. Ping An faced further frustration when HSBC reinstated its dividend at just half the previous rate after the Bank of England lifted restrictions last year.
HSBC executives met their largest shareholder regularly in the months that followed, though discussions turned tense at the turn of the new year. It is understood that they felt blindsided by Ping An’s call for a breakup, having never been given official notice that the investor was calling for an outright split.
It has been suggested that Ping An’s decision to air its grievances via the press is a result of pressures over its own faltering fortunes. On the same day its breakup demands went public, it reported a 24% drop in first-quarter profits to 20.6bn yuan (£2.5bn), which it blamed on market volatility. It also warned that the ongoing effects of the pandemic were creating a more “complex, severe, and uncertain” environment for its global business.
Some have also speculated that the insurance arm may be considering selling its stake in HSBC to release some cash and find a more lucrative home for its investment.