A Chastened HSBC Comes Home to Hong Kong

The bank mounted its horse and rode off in all directions. Now trying to find its way back

Only a few days after the United Kingdom retreated into Little England via Brexit, the last surviving major part of its imperial corporate presence announced a retreat to its own little Hong Kong home.

HSBC announced massive impending cuts to its operations in Europe and the US, cutting 35,000 jobs over the next three years, as well as the further slimming of its already sub-par investment banking and equity trading operations, and the folding of its private banking arm into its retail operations to focus on what it describes as faster-growing Asian markets.

All this is supposed to raise its return on capital employed, and to reposition assets in Asia where it has enjoyed higher margins than on older continents. At first glance that might sound credible. But the reality is that it is home base Hong Kong which is its primary earner thanks to decades of having been coddled by the former colonial government.

HSBC was not only the government’s bank but was large enough to come to the rescue of some small banks during the banking crises Hong Kong saw in the 1960s, 1970s and 1980s. For example, its locally-listed subsidiary Hang Seng bank was rescued in 1965. Hong Kong is also a place where relatively high loans margins, and loan growth based on property inflation, may prove things of the past. It faces new challenges both from mainland banks and upstart online operations, and the endless rise of property prices is no longer assured. Nor does it any longer have a particular role in banking sector stability.

As for the rest of Asia, HSBC is now a minor player everywhere. Mainland China business is growing but it is on the fringe of a banking system dominated by state giants and provincial banks. It has a profitable presence in Southeast Asia but again it is a minor player. Once it was a major player in Singapore, Malaysia and Thailand as well as having a presence in Indonesia, the Philippines and Vietnam. But from the 1960s in Malaysia and Singapore, it was elbowed out by official preferences for locally-owned banks. A similar policy in Thailand even saw it exit the country’s retail sector in 2012, where it had been the first bank.

Indeed the history of the bank over the past 50 years has been one of ultimately failed attempts to become a global player by using its hefty profits from Hong Kong to offset the limits to its expansion in Asia.

This globalization attempt began with the acquisition of the British Bank of the Middle East, which had a strong presence in the Arab world, notably the Gulf countries and Beirut. Then it snapped up big US regional lender, Buffalo-based Marine Midland, and then Midland Bank of the UK, one of Britain’s top four banks. A cash-rich HSBC was able to pick up banks weakened by the financial turmoil of the md-1970s. Later, in 2000, it went on the acquire a major French bank, Credit Commercial and then a German financial services company, Trinkhaus and Burghardt. In 2019 it was put up for sale.

HSBC also expanded in a bewildering variety of directions. Investment banking was one, initially under the name Wardley Ltd until it became deeply involved in two of the financial scandals of the 1980s, the Carrian affair in Hong Kong, and the Bond empire debacle which saw the jailing of their respective principals George Tan and Alan Bond and various bankers, and the flight of Wardley boss Ewan Launder.

With the globalization of financial services over the past 30 years, HSBC endeavored to build an investment banking position equal to that of the big names on Wall Street. But it never quite came off, the HSBC style, product of decades of stolid commercial banking, never being quite ruthless enough to compete. Then in 2004, it took another huge step which was contrary to its own conservative traditions. It acquired Household Finance, one of the biggest names in sub-prime lending in the US. It was not long before it found that it had made a top-of-the-market purchase of one of the prime players in the sub-prime loan market which was the originating cause of the 2008 financial crisis. Write-downs from that venture totalled US$10.5 billion.

The fever for quick bucks which by then had taken over the old-style bank was such that, despite or because of Household, it took on a new type of risk – laundering money for the Mexican drug barons and allegedly helping avoid US sanctions on Iran. A senior forex trader was also convicted of fraud – front running currency trades of HSBC clients.

There have been a bewildering number of geographical expansions – for instance to Poland, Iraq and Mexico – but also many contractions with the sale of insurance and pension businesses and the 2016 closure of many branches in India – though it is a major part of fast-growing Asia.

Another business in Asia which was supposed to be growing fast was private banking, looking after the wealth of Asian and other rich families. In 2018 it announced an aggressive expansion of this business, where it been falling behind Swiss and other newcomers despite its long presence in the region. Now the private bank, registered in Switzerland, is to be merged with the group’s retail banking operations. So much for consistent goals.

Frequent changes in strategy, both in terms of product and geography, have been the result of changes in chairman and chief executive, some with very different backgrounds and approaches to traditional HSBC ones, have been one cause. Another has been the pressure from leaders obsessed with short-term stock market performance and demands to increase returns on equity and share buybacks.

Indeed, tactics appear to have overwhelmed any sense of long-term strategy. HSBC remains a very large and well-capitalised institution but there are now questions over its raison d’etre.