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Despite finishing a stint in “zero-Covid” quarantine, Noel Quinn may not be relishing his new-found freedom in Hong Kong this week.
In the coming days, HSBC’s chief executive will traipse to a succession of awkward meetings with Chinese investors following calls to break the international bank up.
The proposal to split off the lender’s more profitable Asian operations, put forward by insurance giant and top shareholder Ping An, could generate £22bn of extra value, according to one analysis.
But it has been rebuffed by the bank’s management and most analysts, who say a split makes little financial sense and will be fiendishly complicated.
Western institutional investors have also remained largely silent, with HSBC boosting the case for the status quo on Monday as it predicted booming profits on the back of higher interest rates.
Yet experts warn that Quinn, who has been at the helm since March 2020, will need more than spreadsheets to put the issue to bed for good.
The tussle with Ping An has become emblematic of the bigger question facing the bank: whether it can emerge intact from a tug of war between the West and China.
It is a theme that has emerged again and again in recent years as the bank has been pulled in different directions.
As authorities in Hong Kong used new security laws to launch a brutal crackdown, HSBC was condemned by western diplomats for “kowtowing” to China and publicly backing the changes.
Conversely, the bank earned Beijing’s ire for complying with US demands to disclose information about sanctions breaches that was used by Washington to seek to extradite the finance chief of Chinese telecoms giant Huawei.
Quinn has so far walked a tightrope between the two sides, for example arguing that the bank is not in a “position to make a moral or political judgement” in the case of Hong Kong.
But that position may become harder and harder to sustain. “There will be more problems of this nature, especially if international relations continue to unravel,” says Ian Gordon, a banking analyst at Investec.
“And things are hardly looking rosy at the moment.”
This is just one reason why, he acknowledges, that the Ping An proposal has sparked so much discussion.
Another is timing. Ping An and other Chinese investors were angered by HSBC’s decision to axe the dividend during the pandemic, a move many felt was forced on it by the Bank of England at the expense of Hong Kong shareholders who relied on the income.
They also complain of a risible share price performance - yet with interest rates rising again and huge cost reductions accomplished under Quinn, the bank now looks well-placed for a big comeback.
Some have noted that hiving off the bank’s Chinese and Asian operations could be favourable to Beijing, putting control of Hong Kong’s biggest bank in local hands, while industry sources also point out Ping An is unlikely to have made such a high-profile attack without the blessing of political commissars in Beijing.
The Shenzhen-based company, which is the largest insurer in the Asia-Pacific region, is run by Peter Ma, who is one of China’s richest men but has kept a lower profile than other entrepreneurs.
His business counts several state-owned enterprises among its backers, including a Shenzhen government investment fund and China Securities Finance, as well as the families of senior communist party figures according to the New York Times.
Intriguingly, Ma is also old friends with HSBC chairman Mark Tucker and had reportedly been invited by the latter for meetings with top executives at the bank’s insurance business in the past. This made his move against HSBC even more surprising.
It has left Quinn, a straight-talking Brummie who has spent most of his career at the London-headquartered bank, playing the unlikely role of diplomat as he seeks to persuade investors that the status quo is both profitable and sustainable in the long run.
On Monday the chief executive sought to argue that a break-up would be a costly mistake and that investors would be better off sticking with the bank’s current strategy.
After slashing costs aggressively, it is promising big profits and a return to pre-pandemic dividend payouts.
He pushed back against suggestions Ping An could get a seat on HSBC’s board, pointing out that their rival insurance offerings created a conflict of interest, before adding: “We believe the discussions between ourselves and Ping An have been purely around commercial issues. We do not see this as about politics.
“We recognise and understand their frustration with the performance of the bank over the past ten years.
“And that’s why we’re determined as a management team, as a board, to improve the performance of the bank, improve its returns, and improve its dividends. And we’re working hard to do that.”
Nevertheless, some analysts warn there is an undeniable logic to the break-up proposals.
John Moore, senior investment manager at Brewin Dolphin, says that although HSBC’s half-year numbers show the bank is “emerging from the cold… splitting out HSBC’s Asian division feels like the easiest of the options available to the bank”.
“It will allow these businesses to focus on their respective markets, better align to local opportunities, and embed themselves in local business culture, regulation, and relationships with governments,” he adds.
“Whether the bank can hold off investors calling for a split remains to be seen, but the next few sets of results are likely to be under even more scrutiny than usual.”
Investec’s Gordon considers the break-up plan a “complete Red Herring” and says rising interest rates have handed Quinn a “gift from God” as he seeks to persuade investors of the case for staying put.
“HSBC’s unique selling point is that it has connectivity in most parts of the world”, Gordon says.
“In my experience, a break-up hasn’t got any sympathy with any UK or US investors.”
But even he admits that the political risk is rising in China for HSBC.
“That difficulty has always been there," Gordon says.
"But there is the sense that it's come to the fore more now.”
As he made the case against a break-up on Monday, Quinn evoked the bank’s history, stretching back to its founding by shipping entrepreneur Sir Thomas Sutherland in the 19th century, in defence of its current approach.
“We believe that the strategy we’re pursuing as an international bank, alongside many of our peers and global competitors, is one that has stood us in good stead over 157 years and will continue to serve us well,” he told journalists.
It is a case he will need to make convincingly in the days to come if HSBC is to remain a bridge between an increasingly distant East and West.
HSBC attacks Chinese bid to muscle into its boardroom
The chief executive of HSBC has hit back at the Chinese insurer trying to muscle its way onto the bank's board, as he fights against pressure to break up the lender.
Noel Quinn said it would be a “conflict of interest” to give a board seat to Ping An Insurance Group, HSBC’s biggest investor with a stake of 8.3pc.
“The board has a process by which they consider options for board seats,” he said. “They consider a number of different factors, one of which would be potential conflicts of interests.
“And there is a view that such a board seat would have a conflict of interest in this case, given the overlap in business models and the overlap in geography.”
Ping An has been lobbying to join the board as part of its campaign to break up HSBC. The Shenzhen-based insurer, which operates across China and Hong Kong, called on the bank to spin off its Asian business in April and list the business separately in Hong Kong.
“There would be a significant execution risk over a three-to-five year period when clients, employees and shareholders would all be distracted,” Mr Quinn said on Monday as HSBC delivered half-year results.
In an effort to placate restive investors, Mr Quinn promised HSBC would pay out 50pc of its earnings as dividends for 2023 and 2024. The bank plans to reinstate quarterly dividends next year and pledged to restore payouts to pre-pandemic levels “as soon as possible”.
It came as the bank reported pre-tax profits of $5bn for the second quarter, which convincingly beat analyst estimates.
The break-up push has attracted support from some Hong Kong-based shareholders, who were disappointed when HSBC acted under the Bank of England’s orders to suspend its dividend in early 2020 at the onset of the pandemic.
“We would suggest separating out its (HSBC) Asian Business from HSBC,” Christine Fong, a district council member in Hong Kong, posted to Facebook on Sunday. “Bringing back primary listing in Hong Kong is the best way to protect interest for minority shareholders.”
She added: “We suffered the 2020 cancel dividend lesson, that’s why we strongly support Ping An taking seats on the board of directors for HSBC.”
In an effort to head-off growing pressure, Mr Quinn will join HSBC chairman Mark Tucker on Tuesday to address a group of Hong Kong shareholders – the first such in-person meeting since 2019.
On a call with analysts on Monday, chief financial officer Ewen Stevenson said a demerger would undermine HSBC’s core business model.
“It’s very hard to find any value case that we can put in front of shareholders,” he said.
Leadership has in recent years faced an increasingly difficult task of straddling the growing divide between communist China, its most profitable market, and the West, where many of its investors are based.
Last month, HSBC drew criticism from politicians including Tory MP Tom Tugendhat after allowing a Chinese Communist party (CCP) committee to be set up within its China investment banking subsidiary, HSBC Qianhai. The move was widely understood as an effort by Beijing to exercise more control over the bank.
Mr Quinn said of the break-up push: “We do not see this as about politics, it’s more an issue of commercial matters.”
The London-headquartered lender books around 90pc of its profits in Asia, much of it through Hong Kong and mainland China. The Beijing government holds a 0.6pc stake in the bank, according to Bloomberg data.
Mr Quinn swatted away questions about Chinese interference in HSBC’s business, and frosty relations between East and West over geopolitical issues, including the status of Taiwan and Beijing’s human rights record.
He said: “We believe that the strategy we’re pursuing as an international bank, alongside many of our peers and global competitors, is one that has stood us in good stead over 157 years and will continue to serve us well.”
HSBC has hired Goldman Sachs and boutique advisory firm Robey Warshaw to help work on its defence against the Ping An break-up push.
Separately, HSBC is to give around 17,000 lower-paid employees, making up almost half of the UK-based operation, a one-off bonus of £1,500 to help them deal with the cost of living crisis. All five of the UK’s largest retail banks have now pledged to pay staff more money as household incomes are squeezed by inflation.