Does HSBC need its US business? Bank says yes, some investors call for a break-up

HSBC famously declared itself the “world’s local bank” in an advertising campaign in 2002 under then-chief executive Keith Whitson, touting its local knowledge in 81 countries across its global network.

The ad campaign is long gone, but Europe’s biggest lender by assets continues to take pride in its vast international footprint, despite generating the bulk of its profit in Asia.

That international focus placed the London-based HSBC in an uncomfortable tug of war as tensions rose between the US and China. The frictions have prompted some investors to question why Hong Kong’s biggest currency-issuing bank is still operating in the US at all.

The US business has been a “monumental headache” for HSBC for years, forcing the lender to spend billions of dollars on compliance to stay on the right side of US regulators, said Francis Lun Sheung-nim, chief executive of Geo Securities in Hong Kong. The bank should be split in two, between its Asian operations and the rest of the world, he said.

That headache was recently amplified by a controversial national security law enacted by Beijing on Hong Kong in June, which provoked a global backlash. HSBC has been rebuked for its support for the law, and was later accused by the US Secretary of State Mike Pompeo of continuing to do business with officials sanctioned over the law.

HSBC has declined to comment on the accusations.

“They turn away so much business. It really hampers their ability to expand,” said Lun, who personally owns 400 shares in HSBC. “It’s the same story for all the major international banks. The US government is killing them off one by one.”

Noel Quinn, HSBC’s chief executive, said the bank’s US business remains important but needs to be smaller and more focused. Photo: Bloomberg alt=Noel Quinn, HSBC’s chief executive, said the bank’s US business remains important but needs to be smaller and more focused. Photo: Bloomberg

HSBC is in the middle of a massive restructuring, the third in a decade, that will see the lender cut 35,000 jobs globally to help trim its annual expenses by US$4.5 billion and increase its profitability over the next three years.

Much of the revamp will focus on shrinking underperforming operations in America and Europe and reallocating capital to growth markets such as Hong Kong and mainland China. In the first half of this year, Asia accounted for 55 per cent of its operating income before provisions, and nearly all of its pre-tax profit.

Despite Asia’s outsize contribution, chief executive Noel Quinn said the US operations remain a necessary cog in its business. It just needs to be smaller and more focused, he added.

“We remain a global international bank. We don’t have any plans to revert to being a pure regional bank,” Quinn said during its interim results presentation last month. “There is a role for an international bank, particularly one that is capable of bridging the East and the West.”

The US remains a significant market for many of its Asian clients. Trade finance has been a key revenue driver since the bank’s founding 155 years ago in Hong Kong, and an important one for wealthy Chinese living overseas. HSBC hopes to capture the rising affluence with its current restructuring.

In the US, HSBC is one of the primary dealers to the Federal Reserve, making it a counterparty to the central bank when it enacts monetary policy. HSBC is also one of the five biggest clearers of cross-border dollar transactions globally, and has been the sole settlement institution for dollar clearing in Hong Kong since 2000.

There’s still value for HSBC in maintaining an American wholesale banking presence, given the importance of dollar as a trade currency, according to Michael Wu, a senior equity analyst at Morningstar in Hong Kong.

“Close to 30 per cent of HSBC’s global outbound revenue is derived from the US,” he wrote in a report. “Further, the bank serves as a large US dollar clearing agent, mostly for its own customers, and acts as a valuable source of low-cost retail deposit funding.”

So far, Quinn said the bank’s management is pleased with the progress of the US unit’s turnaround.

The US unit reported a US$97 million pre-tax profit in the second quarter versus losses in the past two quarters. Its revenue was the highest since the final quarter of 2017.

“They’ve managed to retain 85 per cent of the deposit base in doing that,” Quinn said. “They’ve already reduced their headcount significantly. Still much to do, but progressing well.”

Some local brokers, however, remain leery of HSBC’s commitment to the US market, particularly after it was fined US$1.9 billion in 2012 for breaking anti-money-laundering and sanctions rules.

Shareholders would benefit if the bank withdrew from the US and focused on its greater China markets, according to Tom Chan Pak-lam, chairman of the Hong Kong Institute of Securities Dealers.

Hong Kong’s national security law is not the only flash point in HSBC’s business. The bank engaged in a quiet lobbying campaign last year to reassure officials in Beijing about its role in the US inquiry on Huawei Technologies.

The investigation resulted in criminal charges against Huawei and a public extradition fight after the arrest in Canada last year of Meng Wanzhou, Huawei’s chief financial officer and daughter of its founder. Mainland media took HSBC to task this year over its entanglement in the US investigation, forcing the bank to defend itself publicly on social media in July.

Peter Wong Tung-shun, HSBC’s Asia-Pacific CEO, signed a petition in support of Hong Kong’s national security law, sparking the ire of American and British politicians. Photo: Handout alt=Peter Wong Tung-shun, HSBC’s Asia-Pacific CEO, signed a petition in support of Hong Kong’s national security law, sparking the ire of American and British politicians. Photo: Handout

On August 26, the US Secretary of State accused the lender of restricting access by Next Digital executives to their personal credit card and bank accounts, whilst continuing banking relationships with city and mainland Chinese officials facing American sanctions over the national security law.

Media tycoon Jimmy Lai Chee-ying, the founder of Next Digital, was arrested last month on suspicion of violating the national security law. He denied the allegations and said the charges were trumped up by police in an interview with Bloomberg.

Commissioner of Police Chris Tang Ping-keung transferred his mortgage from HSBC to Bank of China (Hong Kong) just days before US sanctions were announced, but it is unclear if other sanctioned officials were HSBC clients.

For global banks like HSBC, a misstep in handling the sanctions could have severe consequences.

The Hong Kong Autonomy Act allows US regulators to sanction foreign banks and their executives if they engage in “significant transactions” with individuals deemed to have helped end the city’s “high degree of autonomy”. That can include a ban on serving as a primary dealer, as well as restrictions on executives travelling to the US.

At the same time, Hong Kong’s national security law prohibits sanctions, blockades or other hostile actions against the city or mainland China. It also is extraterritorial, meaning it applies to wrongdoings outside Hong Kong.

The argument to keep the US operations is “a lot weaker” since HSBC unveiled its restructuring in February, said Fahed Kunwar, an equity analyst at Redburn. Lower interest rates, pressure on returns and a fragile political environment are limiting its ability to reshape the business.

“They don’t want to make any big move in the US right now while the atmosphere is as fragile as it is between China and US relations and they’re sitting in the middle of it,” Kunwar said. “You could easily see the current US administration saying we’re going to take the dollar clearing licence away. That would become almost existentially threatening to HSBC.”

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.

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