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Understanding HSBC Holdings plc (HKEX: 5): Asia’s Local Bank

The world’s Local Bank.

When we think of banks in certain countries, they tend to be part of the social fabric – a storied and long history of lending along with roots in the local community. That’s certainly the case for Hong Kong’s largest bank – by branch numbers – HSBC Holdings plc (HKEX: 5).

HSBC was established in 1865 in Hong Kong and was known as the Hongkong and Shanghai Banking Corporation after it also opened a Shanghai branch in the same year.

The bank was initially set up to facilitate and capitalise on the growing trade between Asia and Europe.

So, how has the bank evolved over the past 150 years and what should investors know about this global bank that still has a dominant position in Hong Kong’s banking scene today?

HSBC – Hong Kong And London Homes

While the majority of HSBC’s business is carried out in Asia, readers may be surprised to know that the bank’s global headquarters are actually located in London. One part of the reason for that was the bank’s 1993 acquisition of UK-based Midland Bank – which gave HSBC a major presence in Europe to complement its Asia and Americas business.

As part of the deal, HSBC moved its headquarters from Hong Kong to London and, in the process, its primary banking supervisory body became the Bank of England (BoE). Arguably, this deal turned HSBC into what later became the bank’s marketing slogan: “the world’s local bank”.

Today, HSBC has its primary stock market listing in London but has a branch listing in Hong Kong. HSBC’s Hong Kong shares are also important given the company is the third-largest constituent member of the benchmark Hang Seng Index with an 8.2% weighting.

Scaling Down HSBC

HSBC grew to become a global bank in the 2000s. This was a decade of rapid credit expansion globally, driven by China’s rise and subprime mortgages in the US.

In a similar way to Citigroup Inc (NYSE: C), HSBC decided to go down the route of global transactional banking for clients across multiple jurisdictions and practices, from wealth to trade finance. That worked well for a while when markets were buoyant but as soon the Global Financial Crisis (GFC) hit, banks had to sell off assets in the subsequent years.

HSBC was no exception and since the GFC the bank has exited around 20 countries and sold off multiple businesses, with one of the latest deals being the agreed sale of HSBC’s Canadian business.

Geopolitical And Shareholder Pressures

As HSBC has grown, it has also had to straddle geopolitical tensions between the West and China.

Given its primary supervisor is in the UK, many shareholders in Hong Kong (most of whom are older citizens who rely on HSBC’s quarterly dividends for income) were also upset when the bank suspended dividend payments in the wake of Covid-19. This was due to curbs imposed by the BoE that banned insurance companies and banks from paying out dividends.

Thankfully, for shareholders, HSBC has now resumed quarterly dividend payments. However, the episode also reminded shareholders that the bank is under UK regulatory bodies while making most of its profits in Asia.

Indeed, for the whole of 2022, HSBC generated over 78% of its global pre-tax profit from Asia. In terms of its business makeup, the bank’s main revenue driver is Wealth & Personal Banking – which made up around 43% of its Q2 2023 revenue.

Its Commercial Banking (CMB) and Global Banking & Markets (GMB) made up the rest, forming 33% and 24%, respectively, of Q2 2023 revenue.

With China’s Ping An Insurance (HKEX: 2318) as the bank’s largest shareholder (holding just over 8% of its shares), HSBC was recently under pressure from the Chinese insurer to break itself up into two parts – one focused on Asia and the other on Europe & the Americas. HSBC resisted the breakup and a shareholder vote was carried out in May 2023 on the issue, which rejected the shakeup proposal.

Looking To Asia For Growth And Efficiency

Overall, HSBC’s business has rebounded – along with many bank shares globally given higher interest rates. The bank is focusing on growing into the burgeoning “Greater Bay Area” project in southern China, which looks to further integrate Hong Kong, Macau, Guangdong, and Shenzhen.

After suffering for many years of mid-single-digit return on tangible equity (RoTE), HSBC is now targeting a mid-teens RoTE for both 2023 and 2024.

For investors interested in Hong Kong-listed bank stocks that have a global, as well as regional, presence then HSBC is certainly one company to have on their radar.

Read Also: DBS; UOB; OCBC: Singapore Banks Dividend Yield And Share Price Performance

Photo by Cheung Yin on Unsplash

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