When Mark Tucker arrived as the new chairman of HSBC on a cloudy day in London in October 2017, he was prepared for the challenge. The former insurance chief was the first outsider to head the 157-year-old bank, which was in the midst of a period of intense turmoil. HSBC was downsizing its investment bank, selling underperforming businesses and cutting thousands of jobs as it tried to adapt to the post-financial era.
Although Tucker was well prepared to lead the lender during this period of turmoil, he now has to contend with a much bigger existential question – should the bank be broken?
He has a form of dealing with such decisions: as head of the Prudential insurer in the late 2000s, he resisted calls to separate the weaker business in the UK from his more lucrative Asian operations, which account for more than half of profits from a new business.
But his resistance there ultimately proved futile. Prudential eventually split up – albeit almost a decade after Tucker’s departure.
A similar dilemma now faces him at HSBC after the largest investor, China’s Ping An insurance group, revived calls to separate the bank’s lucrative Asian business from other lender operations.
HSBC’s Scottish founder, Sir Thomas Sutherland, envisioned a Hong Kong-based lender to finance trade between Europe and Asia when he launched the Hong Kong and Shanghai Banking Corporation in 1865. But the bank’s success largely reflected the rise of globalization as it scatter cash in a series of acquisitions from the 1970s – including Britain’s Midland Bank in 1992 – as international business thrives.
Until the 2008 financial crisis, when HSBC had a presence in 86 countries and had long since relocated its headquarters to London, the bank’s traditional domestic markets still accounted for most of its profits. “It was a strange situation where the bank spent most of its money in territories it had previously been in before the global upheaval,” said David Kinaston, historian and author of The Lion Awakens: A Contemporary History of HSBC. . Subsequent pressure from shareholders to take advantage of its strengths meant retreating from some of these projects.
Before publicly pushing for a breakup, Ping An privately called on HSBC to pull out of the draining assets in the west, shift to Asia and take a cost-cutting scheme to reduce surpluses.
Mark Tucker needs to quell growing discontent with HSBC’s largest investor in China over the loss of dividends during the pandemic – something that requires thousands of miles in London. Photo: Xinhua / Alamy
“There has been a significant setback over the last 15 years or so,” Kinaston said, noting HSBC’s recent decision to dump its retail banks in the United States and France and shrinking its footprint from 86 to 64 after the financial crisis.
Since then, financial arguments for downsizing its global network have expanded into a debate over the breakup. Ping An expressed disappointment with the return on its investment after seeing that the dividend was canceled during the first blockade in the UK and was restored to only half of the level observed before the pandemic.
Some have suggested that any shareholder vote to split HSBC’s Asian and Western operations would also be a referendum on the bank’s strategy with Tucker, a former trainee professional footballer and a staunch Chelsea fan. Tucker faced and participated in the removal of CEO John Flint, who was in office for less than two years, in August 2019, before launching a more ambitious cost-cutting program – involving about 35,000 losses. jobs – when Flint replaced Noel Quinn.
Ping An’s calls for separation added fuel to the already burning fire. The East and West HSBC’s role has been eroded by an increasingly polarized political climate and a wave of protectionism that has been turbulent since Donald Trump’s trade war with China and gained momentum during the pandemic.
Most of all, HSBC is struggling to cope with pressure from Washington and London, on the one hand, and Beijing, on the other, after the bank accepted China’s controversial authoritarian crackdown on democracy in Hong Kong in 2020. Meanwhile, UK regulators The Kingdom and the United States have retained HSBC, although it makes most of its profits in Asia, disappointing its investor base.
HSBC’s leadership has consistently defended itself against political pressure to take part in the crackdown in Hong Kong and has internal support for the bank’s position, with some believing its only advantage is providing a navigation platform in such geopolitics and ultimately allowing the money to cross borders, regardless of regimes.
The abolition of its international ambitions would also have severe consequences beyond the bank’s balance sheet. About 9% of global trade funds go through its infrastructure, and disintegration would add further friction as the world still recovers from the pandemic, feels the rippling effects of the war in Ukraine and struggles with rising inflation that is putting pressure on on supply chains.
The additional levy on the banking sector introduced by George Osborne brought in £ 800 million to the HSBC treasury in 2019. Photo: Kirsty Wigglesworth / AP
“HSBC supports customers, corporations and institutions in key capital and commercial centers around the world,” the bank said in a statement. “This network is reflected in our leading global franchises in retail, wealth and wholesale banking. The most important thing that management needs to focus on is to continue to provide higher returns, as we have done very successfully, despite the interruptions of Covid-19. ”
Leaving aside geopolitics and trade, British politicians also have a financial interest in keeping HSBC together. The Treasury will be aware of the potential losses associated with the break-up: while the divestment of HSBC’s operations in Asia is likely to leave the UK retail bank intact, treasury revenues through the UK bank fee will fall. The banking levy, first imposed by former Chancellor George Osborne as a result of the financial crisis, tax UK-based banks on their global balance sheets rather than local operations, ensuring that global lenders such as Standard Chartered and HSBC contribute more seriously to the British public portfolio.
In 2019, HSBC paid an additional $ 988 million (£ 800 million) to the Treasury as a result of the bank fee, more than six times the $ 154 million it paid in the same year as corporate tax in the UK. Incumbent Chancellor Rishi Sunak may have taken this income for granted when he announced plans to reduce bank fees from 8% to 3% by 2023.
The finance ministry declined to comment, saying any decision was a trade issue for HSBC.
However, the UK’s grip on HSBC’s finances seems to have fueled Ping An’s calls for separation.
Ping An – China’s most valuable publicly registered insurer – first announced a 5% stake in the lender in December 2017, at a time when HSBC shares were trading at an average of 706 pence and the bank was paying 51 cents per share. dividends. The investment was strategic for Ping An, which took over the shareholding through a life insurance division that relies on dividend income to offset long-term liabilities.
Ping An’s decision to broadcast its complaints through the press is believed to be the result of pressure on its own volatile state.
But by 2020, the world has changed. As regulators feared the worst in the early days of the pandemic, UK banks have reached an agreement with the Bank of England to eliminate nearly £ 8bn in dividends, ensuring creditors have a strong enough capital cushion for any economic shocks that could follow.
The announcement, which meant HSBC would have to drop promises to pay $ 4.2 billion to shareholders, worried investors and sparked a debate over HSBC’s structure: a less lucrative European court was able to dictate important financial decisions to a bank. , which attracted about two-thirds of its profits entirely from a different continent.
But Ping Ann held on. In September 2020, she voted for HSBC when she raised her stake to 8% and became its largest shareholder – right in the middle of a political dispute over the bank’s support for China’s controversial security law, which extends to Hong Kong. .
The resulting calm was short-lived. Ping An faced further disappointment when HSBC recovered its dividend to only half of the previous percentage after the Bank of England lifted the restrictions last year.
HSBC executives met regularly with their largest shareholder in the coming months, although discussions became tense at the beginning of the new year. Understandably, they feel blinded by Ping An’s call for separation, as they have never been officially notified that the investor is calling for a clear separation.
Ping An’s decision to broadcast his complaints through the press is believed to be the result of pressure on his own hesitant state. On the same day that his demands for the breakup went public, he saw a 24% drop in first-quarter profits to 20.6 billion yuan (£ 2.5 billion), blaming market volatility. He also warned that the continuing effects of the pandemic create a more “complex, difficult and uncertain” environment for global business.
Some also speculate that the insurance company may consider selling its stake in HSBC to free up some money and find a more profitable home for its investment.
Meanwhile, HSBC executives are expected to maintain their position when talking to the insurer later this month.
HSBC said: “We believe we have the right strategy and we are focused on implementing it. Implementing this strategy is the fastest way to generate higher returns and increase shareholder value. “
And yet, as long as Tucker can put out that fire, the debate over HSBC’s future is not over.
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