HSBC looks back to its roots in Asia
Britain's biggest bank has had a turbulent time with its US business, but it now sees emerging markets as leading its growth.
Tuesday, 31 July 2007
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It is a cruel irony that as the world has woken up to the huge potential of emerging markets in Asia, HSBC - whose roots in Asia go back to the 19th Century - has been trying to shore up its reputation against problems in the US, the world's most advanced economy.
HSBC tried yesterday to draw a line under the most turbulent period in its recent history by ramming home the message that emerging markets are leading the bank's growth. Britain's biggest bank announced record pre-tax profit, up 13 per cent to $14.2bn (£7.0bn) for the first half of 2007, beating analysts' estimates, despite a $1.3bn profit drop in North America.
The bulk of the profit rise came from Hong Kong and elsewhere in the Asia-Pacific region, where HSBC opened its first branches in 1865. "Our roots lie in emerging markets... We will invest organically and by acquisition in developing markets," says its chief executive Mike Geoghegan.
HSBC started life in 1865 as Hongkong and Shanghai Banking Corporation and was based in Hong Kong until 1992, when it bought Midland Bank in the UK as part of a diversification spree that helped turn it into the world's third-biggest bank. After Midland, HSBC bought banks in Germany, France and the US to increase its exposure to developed economies.
HSBC is trying to reclaim its crown as investors' favourite bank for Asian and emerging markets, which have been overshadowed by its expansion into the racy market for US customers with poor credit records. This move paid off at first but the bank was hit by bad debts last year as defaults on mortgages rose with interest rates
The $14.8bn purchase in 2003 of the US sub-prime lender Household International by its former chairman Sir John Bond made the bank evenly balanced between Asia, Europe and the Americas, but HSBC has lost some of its traditional premium to the UK bank sector as Household's problems have grown and investors have questioned whether HSBC is still a play on Asia's booming growth.
"I think they have missed out on some opportunities to grow organically or through acquisition in Asia," says Oriel Securities analyst Mike Trippitt. "It's not just that they have not made enough investment in Asia, but they have switched that investment into the US. They are trying to restore that balance and make it clear that they are not going to ignore the heart of the business."
The explosion in Household's bad debts came at a bad time for HSBC, just months after the new leadership of Mr Geoghegan and chairman Stephen Green took over after Sir John's departure in May 2006.
After HSBC issued its first ever profit warning, alerting the market to the scale of Household's problems, Michael Taylor, the retiring head of equities at Threadneedle Investments, spoke for many when he asked why HSBC was involved with "trailer park" loans when it had opportunities for growth in Asia.
Analysts say some of HSBC's emerging markets premium has disappeared to its long-time smaller UK rival Standard Chartered, which makes almost all its profit in Asia, Africa and the Middle East. Standard Chartered beat HSBC to buy South Korea's Korea First Bank in 2005.
"HSBC were a bit too conservative," Mr Trippitt says. "Standard Chartered's recent results in Korea haven't been outstanding but it was a missed opportunity."
Mr Green points to growth in China, India and Indonesia as examples of the bank's continuing investment in emerging markets. HSBC is the biggest international bank in China, where profit grew 69 per cent in the first half to $473m. The bank plans to open more than 30 new branches by the end of the year to capitalise on China's liberalisation of retail financial services.
Mr Green also highlights the bank's Latin American operation, which has grown from about 10 branches a decade ago to 4,000 today after the bank spent $5bn on acquisitions. Mr Green says HSBC is not interested in joining the battle between Royal Bank of Scotland and Barclays to buy Dutch bank ABN Amro but he indicated HSBC would be interested in "the jewel in the crown", ABN's Latin American business, though he said it was unlikely to become available.
Mr Green and Mr Geoghegan talk about "joining up" HSBC to offer services between markets and finance increasing trade flows between emerging markets. "This is not just a PR thing; it is about the power of the franchise," Mr Green says.
In addition to Asian and Latin American markets, the bank singled out Poland, the Czech Republic, Armenia, Kazakhstan and a new operation in Georgia for investment.
HSBC fired the management of Household in February and installed its own man at the top of the business, with Mr Geoghegan taking personal responsibility for sorting out the mess. He says that as a result of reducing the bank's exposure to risky mortgage loans bought from other banks, the US impairment allowances were unchanged at $2.1bn in the first half.
Mr Geoghegan also says the bank faces a challenging environment in Britain due to competition and regulatory issues. The bank paid out $236m in the first half to UK customers reclaiming unauthorised overdraft fees. With pressures in its two biggest western markets, it is no wonder HSBC is now playing up its emerging markets potential.
"The opportunities are certainly there," says Collins Stewart analyst Alex Potter. "Through all the turmoil of Household, the parts of the business that have consistently outperformed expectations have been in Asia. As other elements are under pressure, it is in management's interest to focus investors on these businesses."
