Venerable HSBC Loses its Way

‘Strategic refreshment in the cards, whatever that means

HSBC, aka the Hong Kong & Shanghai Banking Corporation, is due to announce a “strategic refreshment” next month, according to Bloomberg.

“Not again,” critics might mutter as the London-based bank whose major profits center is Hong Kong, struggles to define itself. Once the very model of a conservative bank run more to oil the wheels of commerce and sustain financial stability than please investment funds, its very diversity is now a threat.

Last year it announced a shift of resources away from Europe and the US back towards Asia. The pandemic and what it has revealed has apparently further sharpened this focus. But Asia is a big place, so what exactly does this Asia mean? And what sort of banking? Commercial and retail – its traditional base and prime source of profits even today? Or investment banking, in which it has long had a presence but never progressed to the big leagues? Or private banking and wealth management, supposedly a gold mine as Asian million- and billionaires proliferate?

Those with long memories will recall that HSBC had a presence in Southeast Asia – Thailand and Vietnam and Indonesia as well as former British-ruled territories back in the early 20th century. Post-1945 expansion in these countries, notably Malaysia and Singapore, was blocked by nationalism or nationalization so the Hong Kong Bank, as it was then usually known, moved tentatively into the Middle East. Flush with Hong Kong profits, it made a great leap into the US in the late 1970s and then to the UK itself, the colonial upstart taking over the large but troubled Midland Bank.

A move into investment banking through subsidiary Wardley damaged it badly in the 1980s via support for two notoriously fraudulent enterprises, Carrian group in Hong Kong and the Australia-based Bond Corp. But armed with easily earned Hong Kong oligopoly profits, HSBC continued to expand in the 1990s, acquiring a major bank in France, and planting its logo in various Latin American countries. It came through the Asian crisis largely unscathed thanks to Hong Kong’s currency stability. Its investment bank never made the top league but always tried hard, backed by a healthy balance sheet. It moved into private banking with the purchase of the Safra group’s Swiss operation. By the early 2000s, HSBC boasted of being The World’s Local Bank, its logo found prominently in almost every major airport.

Pride came before the fall. In 2002 it embarked on what even by its own standards were inappropriate diversifications: the purchase of Household Finance, one of the US biggest sub-prime lenders. So in its search of a quick boost to earnings per share the venerable Hong Kong Bank bought at a high price a poster-child of the 2008 financial crisis and lost billions in a short time.

For sure, its HSBC’s other business, especially Hong Kong, enabled it to ride out the crisis. But the slogan went into retirement as HSBC gradually shed some of its lesser performing assets. Yet these included not merely Latin America and less capital for investment banking but even one of its oldest Asian arms – its presence in Thailand – and retreated in Japan too.

Since then the bank has been in almost-constant little shifts of direction and changing chairmen but always under pressure for short-term benefits to please analysts. It has been torn between traditional activities and investment and private banking, and between the diverse attractions of such a wide geographic spread.

The latest, if Bloomberg’s recent interview with chairman Mark Tucker is a guide, is towards two Asian geographical areas – the Greater Bay Area of Guangdong beyond Hong Kong, and South Asia. In neither however can it be more than a smallish player. Its proximity to China may also be a problem for expansion in South Asia.

As for industry focus, “the wealth business” is especially attractive, said Tucker. However, that is now a competitive field and one where its Hong Kong base, which was once a huge asset, now faces the challenges of the National Security Law imposed by China which makes it possibly a lesser haven than in the past. Managing wealth from London, Singapore and Zurich may not fit too well with a retail business in a Hong Kong ruled from Beijing.

The bank’s London headquarters and British background are no help in the era of Chinese nationalism. So although it remains trusted, not least by its Hong Kong depositors and shareholders, it faces tugs of loyalty. Whether these result in a formal split between its China (and maybe other Asian) operations remains to be seen. But whatever strategic choices it now makes, its future is to a significant degree now out of its own hands. HSBC is a product of history which moves on.

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