Despite calls from an activist investor for widespread
strategic reform – even a possible break-up – HSBC remains
committed to growing its huge global franchise, although it will
now sell underperforming parts of its business. Emerging markets,
insurance and the mass affluent segment remain priorities, writes
William Cain.
Whether spooked by activist investor Eric Vinke or not, HSBC has
made a significant change of tack. HSBC group chairman Stephen
Green has said he will now take a tough line on underperforming
operations as the bank targets further growth. In a strategy update
given at the end of November, Green said he wants the bank to earn
60 percent of its profits from emerging markets, compared to 51
percent in the first half of 2007.
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In particular, the bank, Europe’s biggest, will target the
fast-growing South American, Middle East and Asia-Pacific regions
and cut back in areas where return on capital is low. Green also
ruled out additional acquisitions in the US or in Western
Europe.
He said: “What I hope you will see us demonstrate over time is a
pretty tough-minded attitude. If there are areas of business which
are not earning a good enough return on capital and we cannot see a
way of improving on it, then we will follow through the logic of
that.”
Strategy update
The strategy update will raise questions over the
future of the bank’s French retail banking arm, valued at around $4
billion, which could be sold. The 780-branch operation will be
reviewed by the bank, along with other underperforming businesses,
which could include operations in Malta, Canada, Australia and
Bermuda – but the bank stated it was not considering any exit from
the US market, where it has suffered $3.5 billion in subprime
write-downs.
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By GlobalDataHSBC spokesman Neil Brazil told RBI that reports of a sale
of the French operation were “pure speculation”, but would not rule
out disposals of underperforming businesses. He said: “At the last
results presentation, there was a figure mentioned of 7 percent
market share, where if we felt we could not deliver or exceed that,
then we would look closely at those markets.
“I think France has been a good business for us. It has given us a
good equity derivative platform. It’s a very robust French
commercial bank and has allowed us to introduce new products and
direct channels. It has been a successful acquisition for us. I
don’t think it’s fair to say it has a bleak future. I’m not going
to speculate on specific countries, but we will look to restructure
those businesses that are not performing.”
A report by investment bank Keefe, Bruyette & Woods (KBW)
published on 12 November said it expected HSBC to write off another
$12 billion by the end of 2009, adding that it was expecting growth
in the US for the remainder of 2007 to be flat. KBW said it did see
double-digit growth in Europe, strong growth in Hong Kong and
robust growth in the rest of Asia.
There was no reference to activist investor Eric Vinke by Green
during the update, who has been a vocal critic of the bank’s
strategy this year, although the bank did admit some
mistakes.
Green said diversification had not worked for the bank as well as
he would have liked, although the focus on emerging markets and a
harder line on underperforming assets will look to address that
issue.
The wide-ranging review of the company pointed to what Green
described as three “mega trends” that would affect the global
business landscape over the next ten years:
• emerging markets are on course to make up one-half of world gross
national product (GNP) in ten years, compared to 35 percent ten
years ago and 40 percent today;
• world trade is growing more quickly than world GNP; and
• there is a fundamental demographic change, not just in developed
but also developing economies, with a higher proportion of people
living beyond 60, particularly in China and India.
Green said: “With local customers, efficiencies can be created with
global scale. I refer in particular to SMEs and the mass market
personal financial segments. We are positioned for the next wave of
global growth. With the rise of Asia and the Middle East, you are
creating new capital markets, no longer just centred on London and
New York. The centre of gravity is shifting and we are well
positioned to take advantage of that shift.”
Improving its share of business and profits coming from emerging
markets will require different approaches in different
regions.
In countries where HSBC already has a significant presence and the
banking sector is relatively mature, such as Panama and Mexico, it
wants to strengthen market share by, for example, exploiting the
internet and other distribution channels.
In countries such as Turkey, Brazil and Indonesia, where there is a
more limited HSBC presence and a less mature banking sector, HSBC
will implement an ‘invest to grow’ strategy. The bank will focus
more of its resources on these regions to promote organic growth,
as well as growth through acquisitions.
The bank is currently in the process of expanding its South
American franchise and received approval in October to establish a
retail branch network in Peru (see RBI 580). It will open
ten retail branches in the capital Lima and is aiming to open
another 30 or so over the next two to three years.
South American expansion
HSBC has grown its South American operations over the past decade
from ten offices to a regional network of more than 4,000. The
continent accounted for 8 percent of total group profit before tax
in 2006.
In India, Vietnam and China, where HSBC’s presence is more limited,
banking maturity is lower and there are regulatory issues to
overcome, it has adopted a ‘position for future’ strategy. Green
said this would position the bank well if regulation on foreign
companies operating in these countries were relaxed.
The bank will work on developing its consumer finance, cards and
direct banking businesses in these countries.
In China, the bank wants to increase its branch network from 53
outlets in 16 cities now to 85 outlets in 20 cities by 2008. It
will also increase the number of wealth management centres in the
country from 38 to 70 and increase staff numbers from 4,600 to
6,600.
HSBC spokesman Brazil added: “The main new thing which came out of
the strategy update was that we will be moving towards a 60-40
[profit] split from developing markets. I don’t think we’ve been
quite so bold as that before. We’re looking to be more aggressive
in emerging markets. The 60 percent aim is a medium-term view. Our
chairman was hesitant to put a time frame on it and that’s
understandable.”
In more mature banking environments, such as the UK and Hong Kong,
Green said the bank would concentrate on areas where it had scale.
In the UK, the bank has a strong market share in current accounts,
at 15 percent, and in credit cards, at 12 percent. HSBC has an
attractive demographic base in the UK, with a relatively high
percentage of customers in the young and high-income
brackets.
The bank said the institution’s strong brand and ability to operate
across a range of countries were important factors.
Green said: “We have opportunities for growth in [the UK]. We would
not score ourselves ten out of ten – I think there are things we
can do to strengthen our position. It will provide opportunities
for growth in a market that is highly profitable, even if we think
profitability will weaken somewhat given systemic changes occurring
in this market.”
Insurance and the mass affluent
In terms of its global strategy, Green said HSBC would target
wealth management clients and growth in its insurance business to
catch up with its already strong base in current accounts.
The bank launched its Premier mass affluent service in 35 countries
earlier this year (see RBI 578) and it has been working
hard on its insurance business, as it increases the percentage
contribution insurance makes to group profits from 10 percent to 20
percent over the next five years (see RBI
582).
Last month HSBC acquired 50 percent of South Korea’s Hana Life for
KRW53 billion ($58 million), the latest in a string of deals in the
Asian insurance sector. It has made recent – and rapid – insurance
acquisitions or strategic stake investments in India, China,
Vietnam and Taiwan.
On 27 September, HSBC received approval from China’s insurance
regulator to form a joint venture insurance company, the first bank
to receive such approval. A few days earlier, the group had
announced it was setting up a greenfield insurance business in
Taiwan; on 13 September, it said it had entered into an agreement
to acquire a 10 percent stake in Vietnam’s leading insurance and
financial services group, Vietnam Insurance (Bao Viet), for VND4.12
trillion ($255 million).
Green said the bank’s strongest asset in its retail business was
global scale and local knowledge – the HSBC brand is the 23rd most
recognised in the world – which would help it improve profitability
in emerging markets.
Green said: “We will invest primarily in the fast-growing emerging
markets going forwards, as we reshape our business. When we look at
the developed markets we will build on those parts of the customer
base which have international connectivity. Lastly, we will
continue to ensure we are a strong bank in terms of capital and
balance sheet.”
