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Today's Markets: HSBC and the great stumble forward

Mark Robinson pores over HSBC being pulled in two directions, and the latest companies news
August 12, 2022

There’s a fishing expedition underway. Ping An, the Chinese insurer and HSBC’s (HSBA) largest shareholder believes that a demerger would unlock as much as $35bn (£28.9bn) in value for shareholders. It also accused HSBC of exaggerating the potential difficulties involved in spinning off its Asian business. 

There is obviously a political dimension bound-up with the proposal – if that’s the right word – and the UK government has previously drawn the ire of Hong Kong investors when UK regulators blocked the country’s banks from paying dividends due to the financial crisis that followed the initial outbreak of Covid-19.

UK parliamentarians had previously criticised the bank for supporting China’s national security legislation in Hong Kong and, by extension, the heavy-handed way in which it was applied by Chinese authorities. This extended to freezing the accounts of pro-democracy activists. And despite any protestations to the contrary, Ping An is certainly in thrall to Communist Party hacks in Beijing. Calls for the break-up of the bank are every bit strategic as they are financial, especially given the increased US congressional attention over the bank’s corporate governance in Hong Kong.  

But the bank is no stranger to controversy, as evidenced by the $1.9bn fine it incurred for facilitating the laundering of money by the Mexican drugs cartel headed by Joaquín “El Chapo” Guzmán. It has also been criticised by Chinese state media for its alleged role in the arrest of Huawei chief financial officer, Meng Wanzhou, who was accused by the US of trying to evade sanctions on Iran.

Asia now accounts for around 60 per cent of the banking group’s reported pre-tax profits, so it’s easy to understand the rationale on that basis alone, let alone relative growth prospects. However, it would be disingenuous to suggest that the spin-off of the Asian arm of the business wouldn’t be without its costs. HSBC has compiled a 14-point list of reasons why changing the bank’s structure could harm its corporate performance, ranging from the length of time it would take to the loss of direct access to US dollars. 

The bank estimates a break up would take up to five years due to its complex structure, so there is certainly the potential for value destruction. Indeed, the aggregate value of the bank’s customer accounts is split more of less evenly across its Hong Kong, UK and rest-of-the-world segments. HSBC has hired Goldman Sachs (US:GS) and investment bank Robey Warshaw to shore-up defences against Ping An. Unfortunately, a protracted wrangle over the direction and composition of the assets will divert attention from ongoing turnaround efforts that have already produced better-than-estimated profits through 2Q 2022.