HSBC LOOKS BACK TO ITS ROOTS IN ASIA. BRITAIN’S BIGGEST BANK HAS HAD A TURBULENT TIME WITH ITS US BUSINESS, BUT IT NOW SEES EMERGING MARKETS AS LEADING ITS GROWTH.
By Sean Farrell
The Independent/UK
Published: 31 July 2007
It is a cruel irony that as the world has woken up to the huge
potential of emerging markets in Asia, HSBC – whose roots in Asia go
back to the 19th Century – has been trying to shore up its reputation
against problems in the US, the world’s most advanced economy.
HSBC tried yesterday to draw a line under the most turbulent period in
its recent history by ramming home the message that emerging markets
are leading the bank’s growth. Britain’s biggest bank announced
record pre-tax profit, up 13 per cent to $14.2bn (£7.0bn) for the
first half of 2007, beating analysts’ estimates, despite a $1.3bn
profit drop in North America.
The bulk of the profit rise came from Hong Kong and elsewhere in
the Asia-Pacific region, where HSBC opened its first branches in
1865. "Our roots lie in emerging markets… We will invest organically
and by acquisition in developing markets," says its chief executive
Mike Geoghegan.
HSBC started life in 1865 as Hongkong and Shanghai Banking Corporation
and was based in Hong Kong until 1992, when it bought Midland Bank in
the UK as part of a diversification spree that helped turn it into
the world’s third-biggest bank. After Midland, HSBC bought banks
in Germany, France and the US to increase its exposure to developed
economies.
HSBC is trying to reclaim its crown as investors’ favourite bank
for Asian and emerging markets, which have been overshadowed by its
expansion into the racy market for US customers with poor credit
records. This move paid off at first but the bank was hit by bad
debts last year as defaults on mortgages rose with interest rates
The $14.8bn purchase in 2003 of the US sub-prime lender Household
International by its former chairman Sir John Bond made the bank
evenly balanced between Asia, Europe and the Americas, but HSBC
has lost some of its traditional premium to the UK bank sector as
Household’s problems have grown and investors have questioned whether
HSBC is still a play on Asia’s booming growth.
"I think they have missed out on some opportunities to grow organically
or through acquisition in Asia," says Oriel Securities analyst Mike
Trippitt.
"It’s not just that they have not made enough investment in Asia,
but they have switched that investment into the US. They are trying
to restore that balance and make it clear that they are not going to
ignore the heart of the business."
The explosion in Household’s bad debts came at a bad time for HSBC,
just months after the new leadership of Mr Geoghegan and chairman
Stephen Green took over after Sir John’s departure in May 2006.
After HSBC issued its first ever profit warning, alerting the market
to the scale of Household’s problems, Michael Taylor, the retiring
head of equities at Threadneedle Investments, spoke for many when
he asked why HSBC was involved with "trailer park" loans when it had
opportunities for growth in Asia.
Analysts say some of HSBC’s emerging markets premium has disappeared
to its long-time smaller UK rival Standard Chartered, which makes
almost all its profit in Asia, Africa and the Middle East. Standard
Chartered beat HSBC to buy South Korea’s Korea First Bank in 2005.
"HSBC were a bit too conservative," Mr Trippitt says. "Standard
Chartered’s recent results in Korea haven’t been outstanding but it
was a missed opportunity."
Mr Green points to growth in China, India and Indonesia as examples
of the bank’s continuing investment in emerging markets. HSBC is the
biggest international bank in China, where profit grew 69 per cent
in the first half to $473m. The bank plans to open more than 30 new
branches by the end of the year to capitalise on China’s liberalisation
of retail financial services.
Mr Green also highlights the bank’s Latin American operation, which
has grown from about 10 branches a decade ago to 4,000 today after the
bank spent $5bn on acquisitions. Mr Green says HSBC is not interested
in joining the battle between Royal Bank of Scotland and Barclays to
buy Dutch bank ABN Amro but he indicated HSBC would be interested in
"the jewel in the crown", ABN’s Latin American business, though he
said it was unlikely to become available.
Mr Green and Mr Geoghegan talk about "joining up" HSBC to offer
services between markets and finance increasing trade flows between
emerging markets.
"This is not just a PR thing; it is about the power of the franchise,"
Mr Green says.
In addition to Asian and Latin American markets, the bank singled out
Poland, the Czech Republic, Armenia, Kazakhstan and a new operation
in Georgia for investment.
HSBC fired the management of Household in February and installed its
own man at the top of the business, with Mr Geoghegan taking personal
responsibility for sorting out the mess. He says that as a result
of reducing the bank’s exposure to risky mortgage loans bought from
other banks, the US impairment allowances were unchanged at $2.1bn
in the first half.
Mr Geoghegan also says the bank faces a challenging environment
in Britain due to competition and regulatory issues. The bank paid
out $236m in the first half to UK customers reclaiming unauthorised
overdraft fees. With pressures in its two biggest western markets,
it is no wonder HSBC is now playing up its emerging markets potential.
"The opportunities are certainly there," says Collins Stewart analyst
Alex Potter. "Through all the turmoil of Household, the parts of the
business that have consistently outperformed expectations have been
in Asia. As other elements are under pressure, it is in management’s
interest to focus investors on these businesses."
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