HSBC enters the Dragons’ Den

This year’s half-year results for HSBC (HSBA) will probably be remembered for the efforts of chief executive Noel Quinn to head off the separation of the bank into European and Asian divisions, as demanded by its largest shareholder, the Chinese insurer Ping An. Management must hope that the return of quarterly dividends next year – the suspension of which were a bone of contention – plus an exhaustive round of personal briefings and presentations in London and Hong Kong will be enough to halt the momentum for a break-up.

The problem for management is that it is clear from the results that resisting those calls means swimming against the prevailing tide. The bank’s operations, capital and profit are migrating to Asia as new consumers demand loans, insurance and wealth management services. In the half, 44 per cent of the bank’s capital and revenue allocation was destined for Asia, well on course for the bank’s own 50 per cent target.

The revenue generated by key divisions also shows a definitive change in the customer base. For instance, in wealth management, Asia produced $2.4bn (£1.97bn) of business for HSBC, compared with $1.17bn from Europe (mainly the UK). While Asia’s share here is down year on year, it’s nonetheless easy to see why this statistic gives conviction to the argument that maintaining a corporate structure that includes high-street branches in places such as Saffron Walden has little relevance to the future direction of the business.

Management’s strategy, apart from reinstating dividends, seems to be to keep a tight rein on costs and ensure that no more skeletons tumble out of HSBC’s closet of legal horrors. On both counts, there was some progress in these results. The cost efficiency ratio was essentially flat for the half at 65 per cent, combined with a higher net interest margin of 1.30 per cent and there was nothing new on the legal front. Management also forecast that cost growth will be restricted to 2 per cent next year. However, it did book more than $1bn in impairment charges, compared with a gain of $700mn in 2021, mainly related to loans linked to China’s shattered real estate sector and exposure to Russia.

With the Asian business now making up 70 per cent of HSBC’s total operations, resisting a break-up will be difficult. Until the argument is resolved, taking a view on the shares is tricky, therefore a wait-and-see approach might be the only sensible option. Hold.

Last IC View: Hold, 542p, 22 Feb 2022