Who can blame Michael Geoghegan, chief executive of HSBC, for warning of the possibility of a double-dip recession when there is so much conflicting data around?
Not for him a storming of the barricades and a rapid expansion of HSBC’s balance sheet when the outlook remains so uncertain. Geoghegan prefers a more measured approach — and rightly so, as investors would react badly if he took risks at this stage of the economic cycle.
Like others, he believes there may be months, even years, of pain ahead, and possibly a couple of serious wobbles on the stock market before recovery takes hold. But though nervous about the backdrop, Geoghegan is viewing the world from a position of strength. HSBC has weathered this recession better most competitors, many of which have been rescued by taxpayers and are now controlled by government.
Its balance sheet has been bolstered by March’s £12.5 billion (US$20 billion) rights issue, the biggest in UK corporate history, a move that boosted its capital ratios and gave it the financial headroom to make medium-sized acquisitions. Last week, the bank was in pole position to acquire assets in Asia being sold by two troubled Western financial groups — ING and RBS — for around US$2 billion, chickenfeed for a bank capitalized on the London market at £122 billion. Its funding base is the envy of the industry: a loan-to-deposit ratio of just 84 percent reflects its status as a magnet for savers seeking safety.
HSBC has a reputation for being conservative and risk-averse, and this has stood it in good stead during the credit crunch. But its record is hardly unblemished: It blotted its copybook by investing in US sub-prime lender Household, on its own admission destroying about US$10 billion of shareholder value since the acquisition in 2003.
Executives led by John Bond, then the bank’s chairman, talked regularly about the bank having more than 100 employees with doctorates and expertise at predicting consumer behavior. But they did not predict the collapse of the US mortgage market.
It is clear that HSBC expanded Household and bought other banks’ risky subprime mortgages in the mistaken belief that it was better able to assess the risks. It has now scaled back its US consumer finance operations, closing much of them to new business.
But HSBC is a huge corporate animal and profits at its international businesses have held up remarkably well. So well, in fact, that it has been able to withstand the damage from Household with relative ease. An analysis of its 2007 results shows that 63 percent of group profit came from Asia and Latin America, illustrating its dependence on emerging markets, where the credit crunch has been less severe.
Known in the industry as “the big elephant,” HSBC could generate 60 percent of profit from Asia alone in 10 years, analysts say. So important is the region to the bank that it announced recently that Geoghegan would move from London to Hong Kong, where HSBC was established in 1865 as the Hong Kong and Shanghai Bank.
As part of a wider management reshuffle, chairman Stephen Green will cede responsibility for group strategy to Geoghegan, though Green will continue in a full-time executive role.
The timing of the announcement, close to the 60th anniversary of the Chinese Communist Party coming to power in China, could hardly have been more significant. HSBC is already the biggest foreign bank in a country where the market potential is viewed as vast. Currying favor with the Chinese is both sensible and necessary if you are serious about growing in a nation with 1.3 billion people.
HSBC is preparing to list on the Shanghai stock market in a bid to draw in local investors and further raise its profile, and this could happen within months, City of London experts say.
“You can’t overestimate the importance of China. If the Chinese were to move towards more open capital markets, perhaps allowing foreign institutions to invest in Chinese government debt, HSBC would be better positioned than any other western bank because it already has such a big presence in Hong Kong. The rewards would be enormous,” said Simon Maughan, an analyst at MF Global.
Other analysts are more circumspect.
“Asia is not without its risks: There are already signs that asset prices are overheating, so HSBC have to be careful. On the other hand, they are punching below their weight in personal financial services, so they need to do something,” one analyst said.
Green said that Geoghegan’s move to Hong Kong was rich in symbolism and underlined the fact that Asia and China were “at the heart of HSBC’s business.”
The maneuver has the added benefit of addressing criticism from Knight Vinke, the activist investment group, which argues that the chairman should be less involved in day-to-day strategy, and that the bank should have been focusing more on Asia. By putting Geoghegan in Hong Kong with overarching executive powers, HSBC has tacitly admitted that Knight Vinke might have been right all along.
But the bigger point HSBC has demonstrated is that if you do not have your top executive in Hong Kong, your commitment to China may be viewed as half-hearted.
There is no doubt that other banks will sit up and take notice, as will multinational corporations that are targeting China for expansion.
“You have to be there on the ground if you want to be taken seriously,” Maughan said.
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