Is China trying to break up HSBC?

Mark Tucker was under pressure earlier. The chairman of HSBC was a professional and ambitious footballer in his youth and is now honing his defensive skills to defend Britain’s biggest bank break.

Last week, China’s insurance giant Ping An, the bank’s largest shareholder, invited Tucker to a “discussion” on structuring a vast empire that spans 64 countries and employs 230,000 people.

Today, the City of London is fascinated by the bank’s plight as bankers, analysts and investors last week assessed the merits of the HSBC split, bringing the bank to the case by inviting Goldman Sachs as an adviser to its to strengthen defense, according to the Sunday Times.

The giant is headquartered in London and is listed on the stock market, but it made two-thirds of last year’s $ 18.9 billion profit in Asia. This is a debate that has been raging for decades, but one that, according to the newspaper, has been unleashed by the Chinese insurance company, an unlikely source of incitement.

long term partner

China’s Ping An is not one of the active investors that has chased the boards of other big companies like GlaxoSmithKline or Aviva, but it is a long-term partner of HSBC, with a 9 per cent stake worth £ 9.2 billion . Sterling ($ 11.3 billion).

The role of “Ping An” also provoked additional intrigue, as “Shenzhen” in the south of China owns a five percent stake in its shares, leading to speculation that his motives were motivated by the communist state, which means Tucker, a Briton who has spent the most of his career in Hong Kong.He now has questions about the bank’s performance since Ma (Mingzhi), a Chinese businessman who served as president of Ping An Insurance China in the late 1980s took over, a rapidly reforming economic period in China.

Ma (67 years old) managed to turn Ping An into one of the largest companies in China with a market value of shares comparable to that of HSBC, about 100 billion pounds ($ 123.3 billion), and therefore it goes with both the bank and the company well. With their bonds, the bank also owns 10 percent of Ping An for 20 years.

The Chinese insurance giant’s call for a debate was revealed by the Sunday Times last week, raising questions about whether Ping An has a credible plan for the bank, and the timing of the debate is also in question.

And when Ping An started increasing its stake in September 2020, it appeared to have placed a minimum stake of around 280 pence, now closer to 500 pence, and analysts believe HSBC is about to start raising its dividend from The rise in interest rates in Britain and America, however, has nevertheless raised the main question, what are the pros and cons of secession?

Positive

HSBC Holdings did not reach its target for return on equity, a key measure of the bank’s performance, of 8.3 percent, below its already reduced target of 10 percent, which helped dispel the controversy sparked by Chinese company Ping An is, to unleash. The bank’s shares have fallen by a third since Tucker took over as chairman in October 2017.

It is also believed that Ping An was furious when HSBC forced the Bank of England’s regulators to cancel dividends in the early stages of the Covid-19 crisis, depriving it of returns from its policyholders.

“Investors are interested in discussing the structure of HSBC,” said Manos Costello, head of research at the specialist research firm Autonomies.

Tucker may accept the arguments for radical change. After all, he is the first outsider to head the bank, and up to this point the bank founded by Scottish Thomas Sutherland in Hong Kong in 1865 has traditionally been promoted from within its ranks, and Tucker was deliberately appointed from outside to satisfy investors in the UK who did not agree to raise the level of insiders.

The position of Chairman is supposed to be non-executive, although it is difficult in practice at HSBC, given the global nature of the company.

Noel Quinn has been the group’s CEO since February 2020, when Tucker brutally rejected his first choice, John Flint, just 18 months later.

Tucker also has a hand in founding companies, and became prominent in the city when he managed the American insurance and retirement giant Prudential for four years from 2005, and was then appointed to the difficult Asian American Insurance company, AIG. , in Hong Kong, and he was credited with a successful AIE IPO of $ 20.5 billion in 2010.

The British-born Tucker describes himself as a native of Hong Kong, and while currently spending most of his time in America, he is caught up in Asian financing practices.

Dismantling in five entities

With no details from Ping An on how to break up HSBC, banking analysts were arranging their own accounts last week, and Costello updated an analysis from September 2020 asking for a focus on Asia, where it is its accounts place for “The sum of the shares” has a value of $ 206 billion for the bank, double its current stock market valuation.

Costello focuses in his analysis of the future of the bank’s disintegration into five entities, which are the major Asian operations, the UK business, other international operations, the Saudi business and the Global Transaction Bank.

He says he will ask HSBC to hold less capital if it is a smaller bank, and at the moment it is considered strategically important for the global economy as it is classified as a global comprehensive bank, which is the acquisition of additional capital required. and it was one of the ideas that emerged from Banking Crisis When banks were considered “too big to fail” and had to be sponsored by taxpayers, it might be safer to break down the bank into smaller pieces, as analysts estimate has, it can save $ 12 billion in capital.

At a time when central banks are also requiring borrowers to draw up “living wills”, which require them to determine how to break themselves up should they come close to collapse, this could in theory be a legitimate blueprint for the bank’s disintegration provided.

The British bank has been asked to repel its UK operations with a new head office in Birmingham, and rumors are circulating that this company, which includes its central bank and UK mortgage operations, could disappear, and the division could also help the bank addressing what a senior source from the city said it was “a growing feeling that companies may have to choose whether they are big in the US or big in China”.

Here, HSBC became embroiled in tensions between West and East, and became embroiled in the US extradition battle over Huawei to Ming Wanzhou, amid allegations that he had misled the authorities about his relationship with a US sanctions company.

Last year, the bank approved national security laws for Hong Kong, at a time when geopolitical tensions are also mounting as a result of Russia’s war in Ukraine.

Tensions can also be visible between the bank’s former and current employees, as former Hong Kong chief communications officer in Hong Kong David Hall wrote to the Financial Times last week: “It’s time to listen to Ping An, the separation should not be difficult do not be. ” “.

Negative

However, Costello’s seemingly convincing figures can also see the negative aspects of HSBC’s disintegration. The research titled “Separation is hard” has spoken of many obstacles to this separation and its exclusion.

One of Costello’s concerns is how the bank will handle its contingent reserve debt, known as the Minimum Requirements for Own Funds and Qualifying Liabilities (MREL). This $ 130 billion debt has been issued from London and is subject to highly complex regulations by the Bank of England, and could be a major barrier to secession.

Costello said Ping An allegedly understood the problems with the “minimum requirements for own funds and qualifying liabilities” and had a solution. “If they have a logical, workable solution, we need to know,” he added.

Analysts also wonder how much value the bank could lose if it could not leverage its global weight. Jason Napier, bank analyst at UBS, noted that although HSBC reports that two-thirds of its profits come from Asia, not all of this business is actually for Asian customers.

To highlight its global interdependence, the bank last year published data showing that 50 percent of its banking revenue discussed in the East comes from Western customers.

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collapse danger

Analysts at Barclays have estimated that up to $ 4 billion in revenue runs the risk of collapsing, potentially depriving any independent Asian bank of revenue, according to regulatory calculations of how much capital HSBC should have. The bank is more globally connected than any other bank. bank in the world, and even bigger than the two American giants “City” and “JP Morgan.”

Critics also question whether a separate bank in Asia could actually be more vulnerable to geopolitical tensions, because America would consider it a Chinese bank and impose sanctions as it would not be if it remained part of a London bank headquartered . “Betting on a porcelain shop at the moment would sound crazy,” said one of the city’s top sources.

Despite Tucker’s role as an outsider, he is said to be determined not to respond to calls for layoffs, and the bank last did a major overhaul of its business in 2015 when it considered moving to its headquarters to Hong Kong, and focused mainly on location. of the office rather than restoring the entire structure.And many at the time thought the then CEO, Stuart Gulliver, would be willing to move to Hong Kong if possible.

At the time, the government welcomed this move ahead of the Brexit referendum and saw it as a vote of confidence in Britain, but the division of “HSBC” could be interpreted in the opposite way, it does not mean the bank is out of their hands, and may need to speed up a plan The restructuring started by Quinn has sold much of the American business and some European operations in parts of France and Greece. Cowen can now get calls to leave his operations in Canada or Mexico, and one senior banker said they would “have to come up with a radical plan”.

As they internalized Ping An’s intervention last week, analysts may see some support for the share price. “Investors can benefit if shareholder pressure forces management to deliver better returns by cutting back on parts of the company,” Jefferies analysts said.

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