Analysis | HSBC’s Promises Won’t Satisfy Ping An for Long

To counter these calls, Chief Executive Officer Noel Quinn gave new details about how its international, globe-straddling setup generates revenue that a broken up HSBC wouldn’t capture. More than $1 billion of its global banking and markets business in the first half was Asia-based activity from clients in the US and Europe. Nearly half of all this division’s nearly $8 billion in first-half revenue was from cross-border business. And in wealth and personal banking, international clients — those who have assets in more than one country — provide twice the revenue of domestic clients. A split of the group would likely sacrifice significant chunks of this activity.

Quinn also detailed more of the costs that a breakup would create: Extra capital and funding needs; duplication of technology and administrative expenses; a potential credit-rating downgrade and likely higher taxes.

Good news on current performance and the revenue boost from rising interest rates helped Quinn make his case. It comfortably beat revenue and profit forecasts and said that rising rates would lift net interest income by more than 16% this year and next year, which was also much better than expectations. He improved his pledge for return on tangible equity to 12% or more from 2023 onwards, up from the previous pledge of 10% for next year.

The stock rose 6% on this and the promise of a more certain dividend payout, which was one of Ping An’s main complaints. But nothing stands still in markets. For HSBC, the next question is: What’s next?

Most of its revenue gains this year and next are from rising interest rates. But that’s not an ongoing source of growth because rates won’t keep rising. Also, in terms of profitability, the 12%-plus return target looks great to European investors versus the 10%-plus promised by Barclays Plc or Deutsche Bank AG, for example, but investors in Asia are more likely to compare it to higher returns available locally.

HSBC management believes it can compete for more market share in commercial and retail business in places like the UK and China, but not Hong Kong where it already dominates. In global trade finance, it is already a leader but reckons it can win more share and in asset management and insurance it could do more deals to move closer to being a leading wealth manager in Asia.

It is steadily moving more of its capital into higher-returning businesses. Wealth and personal banking accounted for just over one-quarter of its equity at the end of 2021, and that will rise to more than one-third in the medium term. That’s a business that provides returns in the mid-teens, versus closer to 10% for commercial banking and global banking and markets. It is also still rebalancing toward Asia, which should see its share of group capital rise from 42% to 50% over the medium term. That region offers high-teens returns that are easily double North America and Europe, partly due to lower tax rates.

These arguments are well known to European and Asian investors – and can still be read as much as to justify a breakup as to maintain the status quo. There is also the bigger geopolitical question about how more polarized East-West relations in global politics might affect the future of international trade and capital flows. The simplistic answer is that growth rates will likely be lower than in the past. 

To be fair to HSBC, it wants to focus on hitting its 12% return target first, which would be its highest profitability in more than a decade. Ping An and other investors have been waiting a long time for even this improvement. HSBC will have to start putting some firmer numbers on where it goes next to really end the debate on its structure. Although if Ping An really wants to force change, it will have to be much more public about how and why, which, given questions about China Inc.’s involvement, could prove as uncomfortable for the activist as the target.

More From Bloomberg Opinion:

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• New HSBC Breakup Plan Is Still Deeply Unconvincing: Paul J. Davies

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.

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