A break-up proposal from HSBC’s (HSBA.L) biggest shareholder received a lukewarm response from the bank’s shareholders on May 3, raising concerns that a split would prove complex with no guarantee of raising returns.
HSBC has been asked by the Chinese insurance giant Ping An (601318.SS) to explore options that include spinning off its Asian business, which generates two-thirds of its pre-tax profits, sources close to the matter said on April 29.
The lender’s Hong Kong shares closed up 2.6%, while its London shares climbed 2.3% higher at 1553 GMT. The markets were both closed on Monday for a holiday.
A large UK-based institutional investor, who declined to be named, told Reuters that earnings from HSBC’s global banking franchise would be threatened by a break-up and it would also distract bosses when they should be considering to cash in on rising rates.
An Asian demerger could trigger increased costs of capital in the long-term and could successfully end up spilling any quick gains obtained from new listings, other investors and analysts said. Head of Financials at Federated Hermes, Filippo Alloatti, stated:
“If an Asia spin-off were to happen we would regard it as negative. A less diversified, less profitable HSBC would almost be certainly downgraded by the rating agencies.”
The idea of a breakup has lingered on the minds of HSBC shareholders severally in recent years due to disappointing earnings from European, US, and UK businesses that squeezed its share price and promises from management of double-digit shareholder returns. Ian Gordon, banking analyst at Investec, said:
“Separation would undeniably damage a number of key parts of HSBC’s DNA in international trade.”
For the past two years, HSBC’s CEO Nole Quinn has invested billions of dollars into Asia to prompt growth, focusing on wealth management, and has relocated global executives there.
Nonetheless, investors may be pushed to consider more than just the financial forces at work with the timing of Ping An’s call, amid growing geopolitical tensions between the West and China.
Ping An’s top five shareholders include state entities Central Huijin Investment and Shenzhen Investment Holdings Co – which is the second-largest owner of China’s largest insurer, according to company filings.
Despite withholding comment on Ping An, HSBC defended its structure, saying in a statement that it believed it had the right strategy and was focused on delivery.
All reform proposals that could help with HSBC’s long-term value growth are approved, Ping An said on April 30.
Shares of HSBC have fallen 35% since Ping An first reported it owned a 5% stake in HSBC in late 2017. According to Refinitiv data, the insurer owned an 8.23% stake in the British Bank since Feb.11.
Not much value has been generated for the parent through financial break-ups, such as that pursued by Asia-focused, London-listed Prudential (PRU.L), analysts at Jefferies pointed out.
Potentially lower network income, higher post-separation costs, and large restructuring costs from, most of all, low valuations for UK domestic banks and reduced benefits of scale would eat into any upside, UBS analysts said on Friday. Justin Tang, Asian research head at advisory firm United First Partners, said:
“A spin-off may be logical but it needs to be balanced by the fact that a significant portion of that is the result of HSBC’s global footprint bridging East and West.”
HSBC agreed to keep its headquarters in London in 2016 and rejected the option of switching its center of gravity back to Hong Kong after a 10-month review.
It was prompted to postpone plans last month for new stock buybacks this year following a report of an unexpected hit to its capital as a combination of geopolitical tension, rising inflation, and economic weakness dented its earnings prospects.
The bank has 220,000 staff and services and around 40 million customers globally through a network covering 64 countries and territories.