Life is getting harder and harder for Europe’s largest lender as it tries desperately to continue bridging two worlds — the West and China — that increasingly appear to be on collision course.
The world’s eighth biggest bank by assets, HSBC could soon have little choice but to break up into at least two parts — one serving its largest market, Asia, and the other serving the UK, mainland Europe, the US and its other Western outposts. This comes after Ping An, China’s largest insurance firm and HSBC’s largest shareholder, called for the lender to break up its Western and Asian operations, underscoring HSBC’s increasingly untenable position as a UK-based megabank predominantly serving customers in Hong Kong and mainland China.
The writing has been on the wall for some time as HSBC has tried — and failed — to keep policymakers in both China and the West on its side. Following the collapse of Chinese real estate developer Evergrande, in late 2021, there was a heightened risk that the ensuing economic and geopolitical fallout could end up splattering all over HSBC, Europe’s largest bank by market cap and preferred lender of choice to money-launderers, tax-evaders, narco traficantes and Islamist terrorists alike.
As I noted in a piece in September, titled “HSBC Bet the Bank on China, Now It’s Paying the Price”, the lender’s asset management arm was among the largest foreign holders of Evergrande debt. And foreign debt holders are increasingly looking like the bag holders of Evergrande’s collapse. HSBC also had, at last count, a far-from-insignificant $21.3 billion of exposure to China’s struggling real estate sector.
But HSBC’s problems in China extend far beyond its exposure to Evergrande and the Chinese real estate market. HSBC’s biggest problem, as I noted in the September article, is arguably political, or to be more precise geopolitical. As tensions rise between China (including its special administrative region Hong Kong) and the United States (and by extension the United Kingdom, where HSBC is headquartered), it is going to get more and more difficult for HSBC (and other Western banks and companies with a large market presence in China) to keep both sides of the escalating economic war between Beijing and Washington happy.
China Makes First Move
China, it appears, has made the first move. Peter Ma, the chairman of Ping An, which holds 8.2% of HSBC’s shares according to Market Screener, called on the UK-based lender to split its Asian and western operations, in what would be the largest corporate restructuring in HSBC’s 157-year history. An article on Bloomberg said it would be “the most dramatic split in banking history”, which is not as hyperbolic as it may sound considering that such a restructuring would involve splitting Europe’s largest bank into two entities occupying the polar extremes of the continental landmass of Eurasia.
The bad news for HSBC is that the bank’s second top-ten shareholder, which according to Market Screener is the Pennsylvania-based asset manager Vanguard Group, also seems to like the idea, telling the FT: “For HSBC, it is existential. They are not in a tenable structure. You would not create this institution from scratch.”
Founded in 1865 as the Hong Kong and Shanghai Banking Corp on the back of fortunes made in Britain’s opium trade (as a fascinating article by Le Monde Diplomatique recounts), HSBC is first and foremost an Asian bank, albeit one run largely by white men with British accents. The main reason why HSBC is headquartered in the UK was so that the bank could buy Midland Bank in the run up to Hong Kong’s 1997 return to China.
Reversal of Fortunes
Ironically, HSBC used to be the largest shareholder of Ping An before the latter’s Hong Kong IPO in 2004, at one point holding 20% of the Chinese insurance firm. Ping An is now the world’s most valuable insurance brand, with 225 million retail customers, and the 10th most valuable company in China, with a market cap of $116 billion, just $10 billion less than HSBC’s. But Ping An is not just an insurance firm, having recently expanded into many areas of financial services, including banking, as well as healthcare, auto services and “smart city services.”
In a recent private memo, Ping An listed a litany of issues at HSBC, from underwhelming returns to swelling costs. The firm, like many Asian investors small and large, was particularly peeved at the bank’s decision, taken under pressure from the Bank of England, to scrap its dividend payout in 2020. It was the first time the bank had taken cancelled dividends in almost three-quarters of a century.
But it is also perfectly plausible that China’s government had something to do with Ping An’s shock suggestion. After all, despite its long history of influence on Hong Kong, HSBC is now a lot more dependent on China and Hong Kong than vice versa. Moreover, the economic war between the US and China continues to escalate. Reports, at least in Western media, suggest Beijing is increasingly concerned that it, too, could face a similar barrage of sanctions to those unleashed against Russia…
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