As tensions rise between East and West, will HSBC tear itself apart? | HSBC

Ohen Mark Tucker arrived as the new chairman of HSBC on a cloudy day in London in October 2017, he was ready for a challenge. The former insurance boss was the first foreigner to lead the bank, now 157, which was in the midst of intense upheaval. HSBC was cutting its investment bank, selling underperforming businesses and cutting thousands of jobs as it tried to adjust to the post-financial crisis era.

While Tucker was well equipped to guide the lender through this turbulent time, he must now wrestle with a far bigger existential question: Should the bank be broken up?

He is used to dealing with such decisions: as head of insurer Prudential in the late 2000s, he resisted calls to separate weaker UK businesses from its more lucrative Asian businesses, which accounted for more half of the profits of the new activities.

Yet his resistance there ultimately proved futile. Prudential ended up going their separate ways — albeit nearly a decade after Tucker’s departure.

A similar dilemma now faces him at HSBC, after its biggest investor, 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 started the Hongkong and Shanghai Banking Corporation in 1865. But the bank’s successes have largely reflected the rise of globalisation, having splashed the cash on a series of acquisitions since the 1970s – including Britain’s Midland Bank in 1992 – as international business boomed.

During the financial crisis of 2008 – by which time HSBC had a presence in 86 countries and had long since moved its headquarters to London – the bank’s traditional home markets still accounted for the bulk of its profits. “It was a strange situation in which the bank made most of its money in territories where it was originally located before the global push abroad,” said David Kynaston, historian and author of The Lion Awakens: A Modern History of HSBC. Subsequent pressure from shareholders to capitalize on its strengths led to backtracking on some of these projects.

Before publicly pushing for a breakup, Ping An had privately asked HSBC to pull out of draining assets in the west, refocus on Asia and embark on a cost-cutting plan to cut excesses. .

Mark Tucker, seated, gesturing as he speaks on stage during a briefing or presentation
Mark Tucker must calm the growing discontent of HSBC’s biggest investor in China over the loss of dividends in the pandemic – something mandated thousands of miles away in London. Photograph: Xinhua/Alamy

“Over the past 15 years or so there’s been a pretty significant rollback,” Kynaston said, noting HSBC’s recent decision to exit its retail banks in the U.S. and France, and the reduction in its footprint from 86 to 64 countries since the financial crisis. crisis.

The financial arguments for pruning its global network have since been amplified in the debate over a breakup. Ping An expressed disappointment with the return on investment, having seen the dividend canceled during the first UK lockdown, and restored to just 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 professional trainee footballer and die-hard Chelsea FC fan. Tucker faced and helped oust chief executive John Flint, who had been in the job for less than two years, in August 2019, before unleashing a more ambitious cost-cutting program – involving approximately 35,000 job cuts – under Flint’s replacement, Noel Quinn.

Ping An’s calls for a split added fuel to an already burning fire. HSBC’s role straddling east and west has been eroded by an increasingly polarized political climate and a wave of protectionism that has been supercharged by Donald Trump’s trade war with China and gained traction during the pandemic.

Most notably, HSBC has struggled to cope with pressure from Washington and London on the one hand, 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 tight grip on HSBC, even though it makes most of its profits in Asia, has ruffled its investor base.

HSBC management has consistently defended itself against political pressure to take sides in the Hong Kong crackdown, and internally the bank’s position is supported, with some believing its greatest benefit is to provide a platform for navigate such geopolitics and ultimately allow money to flow across borders, regardless of regimes.

Turning back on its international ambitions would also have serious consequences beyond the bank’s balance sheet. About 9% of global trade-related funds pass through its infrastructure, and a disruption would add further friction at a time when the world is still recovering from the pandemic, feeling the ripple effects of war in Ukraine and battling the rise inflation that has put pressure on supply chains.

George Osborne when he was Chancellor outside the door of 11 Downing Street
The banking sector surcharge, introduced by George Osborne, netted HSBC’s Treasury £800m in 2019. Photograph: Kirsty Wigglesworth/AP

“HSBC supports customers, businesses and institutions in key capital and trade centers around the world,” the bank said in a statement. “This network is evident in our leading global franchises in retail banking, wealth management and wholesale banking. The most important thing for management to focus on is to continue to generate higher returns, as we have done with great success, despite the Covid-19 disruptions.

Geopolitics and trade aside, UK 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 separating HSBC’s Asian operations would likely leave UK retail banking untouched, the Treasury’s profits from the UK bank tax would plummet. 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 UK public purse.

In 2019, HSBC paid a further $988m (£800m) to the Treasury as a result of the bank levy, more than six times the $154m it paid that year under UK corporation tax. Current chancellor Rishi Sunak may have taken that income for granted when he announced plans to cut the bank levy from 8% to 3% from 2023.

The Treasury declined to comment, saying any decision was a business matter for HSBC.

However, it is the UK’s grip on HSBC’s finances that appears to have fueled Ping An’s calls for a split.

Ping An – which is China’s most valuable listed insurer – first declared a 5% stake in the lender in December 2017, at a time when HSBC shares were trading at 706p on average, and the bank was paying 51 cents per share in dividends. The investment was strategic for Ping An, which took the shareholding through a life insurance arm that relies on dividend income to offset long-term liabilities.

But in 2020, the world had changed. As regulators feared the worst at the start of the pandemic, UK banks struck a deal with the Bank of England to cut nearly £8bn in dividends, ensuring lenders had a sufficient capital cushion. solid for any economic blows that may result.

The announcement, which forced HSBC to renege on its promises to pay its shareholders $4.2 billion, disturbed investors and reignited debates on the structure of HSBC: a less lucrative European jurisdiction could have dictated major financial decisions to a bank that drew about two-thirds of its profits from an entirely different continent.

But Ping An hung on. In September 2020, she gave HSBC a vote of confidence by increasing her stake to 8% and becoming its largest shareholder – amid the political row over the bank’s support for the law’s extension to Hong Kong. China’s controversial security issue.

The resulting calm was short-lived. Ping An faced further frustration when HSBC restored its dividend to just half the previous rate after the Bank of England lifted restrictions last year.

HSBC executives met regularly with their largest shareholder in the months that followed, although talks grew tense at the start of the new year. It is understood that they felt blindsided by Ping An’s call for a split, having never been officially informed that the investor was calling for an outright split.

It has been suggested that Ping An’s decision to air his grievances via the press is the result of pressure from his own faltering fortunes. On the same day its breakup demands were made 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 continued effects of the pandemic were creating a more “complex, serious and uncertain” environment for its global business.

Some have also speculated that the insurance arm may consider selling its stake in HSBC to free up cash and find a more lucrative home for its investment.

In the meantime, HSBC executives are expected to hold firm as they speak with the insurer later this month.

HSBC said: “We believe we have the right strategy and are focused on executing it. Implementing this strategy is the fastest way to generate higher returns and maximize shareholder value. »

Yet while Tucker may be able to put out that fire, the debate over HSBC’s future is not going away.

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