HSBC’s new breakup plan still not very convincing

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Ping An Insurance Co. is unlikely to win big backers for its quest to break up HSBC Holdings Plc if the best that can be said for the plan is a lackluster value analysis presented by a consultancy based in Hong Kong.

The Shenzhen-based insurer has been trying for months to convince HSBC that shareholders would value its Asian business more if it could somehow detach itself from the slowing growth and regulatory restrictions that make the group in its less attractive together. As its largest shareholder with an 8.2% stake, Ping An has been unhappy since the bank was forced to suspend dividends during the pandemic.

Retail investors in Hong Kong may be open to the idea, but no large institutional shareholder has come out in favor and stock analysts who cover the bank are skeptical.

The analysis by In Toto Consulting Ltd, which was commissioned by Ping An according to The Sunday Times, is the first report to try to make the case for the breakup. His conclusions are cautionary and cautious but still disappointing. In Toto declined to comment on the identity of its client or the content of its report. Ping An did not comment on the document, of which I read a copy.

Its best-case scenario forecasts the possibility of a $26.5 billion increase in market value for shareholders if the Asian companies were completely spun off in a spin-off, with the rewards split evenly between the $13.5 billion release of capital and the Asian company trading at a higher valuation. . If realized, that would give HSBC a market capitalization of almost $159 billion, which would be its highest since just before the Covid-19 pandemic hit, but still more than 25% below its recent peak established in early 2018.

That kind of hope obviously doesn’t seem worth the cost, effort, and risk of a breakup, and it may already be overly optimistic. The capital release is based on the fact that HSBC is considered systemically less important without its Asia business and assumes that Hong Kong regulators would not demand more capital from a stand-alone HSBC Asia based there. No results are guaranteed.

The analysis also assumes that separate banks lose little revenue from global customers. HSBC vaguely described how much of its investment and commercial banking income in Asia comes from Western customers in its February annual results. Its case for existing as a global bank is based on these network advantages.

While it’s hard to say exactly what that revenue is worth, In Toto’s report says it “conservatively” assumes $1.9 billion was at risk and might not be lost anyway. . But that seems small compared to the relevant global customer revenue base in 2021, which is between $10 billion and $16 billion, according to my estimates(1).

This global income flatters HSBC’s returns in Asia as it is based more on cost than risk. Losing this fee would hit Asia’s earnings hard, as I’ve written before, and it could be worth much less than expected, even if an HSBC Asia spin-off trades at a higher valuation.

Getting a high valuation for an Asia-focused company is also hard to do, as Prudential Plc has discovered. If HSBC were to spin off from Asia by creating shares for the company and then selling them to existing investors, it would have to list Asian shares in London and Hong Kong, just as HSBC Group shares are listed today. today. And as with Prudential, global institutions investing in London might then not value the Asian bank’s shares as high as Ping An hopes Hong Kong retail investors would.

Other options explored by In Toto are minority listings for an Asian business or a purely Hong Kong-based consumer and wealth business. Neither would threaten global earnings, but they would free up no capital or add strategic value – they would simply create another Hong Kong banking stock much like Hang Seng Bank, which is today now 62% owned by HSBC. Local investors may bid slightly, but perhaps at the expense of the sale of Hang Seng. How many pieces of HSBC does someone really want to own as separate shares?

HSBC is like the proverbial world bank oil company that takes forever to turn around and improve its group’s return on equity. It has been downsizing its assets and changing the mix of its business for years and still needs to go further before it achieves its medium-term goal of a 10% return on tangible equity.

There may be things he can do without too much risk to get there faster and even go beyond that goal. But dividing the bank as Ping An wants doesn’t look like it.

More from Bloomberg Opinion:

• If you think China cares about investors, think again: Shuli Ren

• The West’s energy war against Russia demands sacrifices: Liam Denning

• Prudential has a breaking lesson for HSBC activists: Paul J. Davies

(1) There is room for debate on these figures as HSBC did not provide details in the summary it gave with its full annual results for these network benefits. He said roughly how he calculated the basis of what he called “customer value”. It starts with the combined revenue of the investment and commercial banking divisions, subtracts revenue from global markets and major investments, which can be found in its results, and subtracts revenue from domestic merchant banking customers, which does not not appear in its results. My estimate assumes they are worth anywhere between two extremes of zero to $6 billion (equivalent to all credit and loan income in commercial banks). If we assume that the true benefits of the cross-border network are only 25% of this subtotal of international customer value, this still represents between $2.5 billion and $4 billion in revenue at risk, rather than the estimates of $1.9 billion In Toto.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.

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