Will HSBC be torn apart as East-West tensions rise? | HSBC


WWhen Mark Tucker arrived as HSBC’s new chairman on a cloudy London day in October 2017, he was prepared for a challenge. The former head of insurance was the first outsider at the helm of the now 157-year-old bank, which was in the midst of a phase of intense upheaval. HSBC trimmed its investment bank, sold underperforming companies and cut thousands of jobs as it tried to adjust to the post-financial crisis.

While Tucker was well-equipped to guide the lender through this period of turbulence, he now faces a far larger existential question — should the bank be broken up?

He has form in dealing with such decisions: as head of insurer Prudential, he resisted calls in the late 2000s for a divest of its weaker UK business from its more lucrative Asian operations, which accounted for more than half of its new business profits.

But his resistance there ultimately proved futile. Prudential eventually split — albeit nearly a decade after Tucker’s departure.

He now faces a similar dilemma at HSBC after its largest investor, Chinese insurance group Ping An, renewed calls for the bank’s profitable Asian business to be divested from the lender’s other activities.

HSBC’s Scottish founder, Sir Thomas Sutherland, when he founded the Hongkong and Shanghai Banking Corporation in 1865, envisioned a Hong Kong-based lender that would finance trade between Europe and Asia since the 1970s – including a series of acquisitions the British Midland Bank in 1992 – when international business was booming.

Up until the 2008 financial crisis, by which time HSBC was present in 86 countries and had long since moved its headquarters to London, the bank was still making most of its profits from its traditional home markets. “It was an odd situation, with the bank making most of its money in areas where it had originally been before the global push abroad,” said David Kynaston, the historian and author of The Lion Wakes: A Modern History by HSBC. Subsequent pressure from shareholders to capitalize on its strengths led to some of these projects being withdrawn.

Before publicly pushing for a split, Ping An had privately urged HSBC to pull out of its money-stealing assets in the West, refocus on Asia and embark on a cost-cutting program to trim excess.

Mark Tucker must calm the growing dissatisfaction of HSBC’s largest investor in China over losing dividends during the pandemic – something mandated thousands of miles away in London. Photo: Xinhua/Alamy

“There’s been a pretty big rudder decline in the last 15 or so years,” Kynaston said, citing HSBC’s recent decision to exit its retail banks in the US and France and the reduction of its footprint from 86 countries to 64 since the financial crisis .

The financial case for pruning his global network has since escalated into a debate about a split. Ping An has expressed disappointment with the return on its investment after the dividend was scrapped during the UK’s first lockdown and reinstated at just half what it was before the pandemic.

Some have suggested that any shareholder vote to split HSBC’s Asian and Western businesses would also be a referendum on the bank’s strategy under Tucker, a former budding professional footballer and die-hard Chelsea FC fan. Tucker clashed with chief executive John Flint in August 2019 and helped oust him, who served less than two years before unleashing a more ambitious cost-cutting agenda — which included the loss of about 35,000 jobs — under Flint’s replacement. Noël Quinn.

Ping An’s calls for a breakup have added fuel to an already burning fire. HSBC’s role between East and West has been undermined by an increasingly polarized political climate and a wave of protectionism, charged by Donald Trump’s trade war with China, which has gained further traction during the pandemic.

Most notably, HSBC is struggling to withstand pressure from Washington and London on the one hand and Beijing on the other after the bank controversially accepted China’s authoritarian crackdown on Hong Kong democracy in 2020 of its profits in Asia has roiled its investor base.

HSBC’s leadership has consistently defended itself against political pressure to engage in the Hong Kong crackdown, and internally there is support for the bank’s position, with some believing its greatest asset is providing a platform for navigating such To provide geopolitics and ultimately allow money to flow across borders, independent of regimes.

Backtracking on international ambitions would have serious repercussions beyond the bank’s balance sheet. About 9% of the funds linked to world trade pass through its infrastructure and a disconnect would come at a time when the world is still recovering from the pandemic, feeling the effects of the war in Ukraine and with rising inflation has been struggling, causing further tensions has put pressure on supply chains.

George Osborne outside 11 Downing Street when he was Chancellor
The banking sector surcharge introduced by George Osborne brought the Treasury £800m from HSBC in 2019. Photo: Kirsty Wigglesworth/AP

“HSBC supports customers, companies and institutions in major capital and commercial hubs around the world,” the bank said in a statement. “This network is manifested in our leading global franchises in retail, wealth and wholesale banking. The most important thing management needs to focus on is continuing to deliver higher returns, as we have done very successfully despite the disruptions caused by Covid-19.”

Geopolitics and trade aside, UK politicians also have a financial interest in keeping HSBC together. The Treasury will be aware of the potential losses associated with a break-up: while the spin-off of HSBC’s Asia operations would likely leave the UK retail bank intact, the UK bank levy would sap Treasury revenues. The banking sector surcharge, first levied 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 global lenders like Standard Chartered and HSBC contribute more to the British Treasury.

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

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

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

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

But by 2020 the world had changed. As regulators feared the worst in the early days of the pandemic, UK banks agreed with the Bank of England to pay nearly £8 billion in dividends.

The announcement, which meant HSBC backed its promises to pay £4.2bn of its profits from an entirely different continent.

But Ping An persevered. In September 2020, it gave HSBC a vote of confidence as it increased its stake to 8% and became its largest shareholder – amid political rows over the bank’s support for China’s controversial security law, which will be extended to Hong Kong.

The resulting calm was short-lived. Ping An faced further frustration when HSBC set its dividend at half what it had been after the Bank of England lifted restrictions last year.

HSBC executives met regularly with their largest shareholder in the months that followed, although discussions turned tense at the turn of the year. It’s understood that they felt caught off guard by Ping An’s call for a breakup, as they were never officially informed that the investor was requesting a full breakup.

It has been suggested that Ping An’s decision to air his grievances through the press is the result of pressure from his own faltering fortune. On the same day its windup calls were released, the company reported a 24% fall in first-quarter profits to 20.6 billion yuan (£2.5 billion), which it attributed to market volatility. It also warned that the ongoing impact of the pandemic would create a “more complex, severe and uncertain” environment for its global business.

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

Meanwhile, HSBC executives are expected to hold their own when they speak to the insurer later this month.

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

But while Tucker might be able to put out that fire, the debate over HSBC’s future isn’t going to go away.


Comments are closed.