HSBC seeks Asia lifeline beyond Hong Kong

The HSBC Holdings Plc logo is displayed on the company's headquarters building at night in Hong Kong, China, on Saturday, Feb. 13, 2016.©Bloomberg

The group of analysts and reporters that showed up at DJI, the world’s largest manufacturer of drones, did not come to play with the flying contraptions.

Instead, the trip to Shenzhen was organised by one of the Chinese company’s banks, HSBC Holdings, with the expressed intention of demonstrating the innovative nature of the London-based lender’s clientele in the region.

Squeezed by the growing burden of global regulation and its own tight control on risk-taking, HSBC has struggled to generate growth since the financial crisis. Its revenues have shrunk for four consecutive years and are down almost a fifth since their 2007 peak.

Last year Stuart Gulliver, the bank’s chief executive, unveiled a restructuring plan aimed at boosting return on equity by exiting or restructuring lossmaking activities, such as Brazil and Turkey, while doubling down in more promising areas, such as Asia.

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Almost two-thirds of HSBC’s profits came from Asia in the first quarter, emphasising its importance to the group. Hong Kong, with a population of 7m, bears an even more disproportionate weight for the bank’s earnings.

The city, where HSBC was founded a century and a half ago, accounts for $ 6 out of every $ 10 of profit the bank generates in Asia, and 38 per cent of its global profits. Yet HSBC’s leaders recognise that growth in Hong Kong is reaching its limit, prompting them to push inland in search of new growth.

“Confined to Hong Kong, we have a strong market share but we aren’t going to get much bigger,” Mr Gulliver told reporters on a train between the southern Chinese cities of Guangzhou and Shenzhen.

The bank made $ 3.5bn in pre-tax profit in Asia during the first three months of 2016, about 10 per cent lower than the same period last year, it reported. Globally, growth fell 13.5 per cent year-on-year.

The drone maker DJI is an example of the kind of customer HSBC wants more of. The bank said last year that it would strip out $ 290bn in risk-weighted assets from operations worldwide, mainly from its investment bank, then reinvest $ 180bn-$ 230bn in higher-growth places such as Shenzhen and the conurbation of 60m people that unravels to its north, known as the Pearl River Delta.

Fast-growing groups such as DJI, HSBC’s investment thesis holds, will need a spectrum of banking services, from personal banking and credit cards for company staff to heavy-duty corporate products such as debt and equity issuance, and someday even mergers and acquisitions advisory.

The bank has 1,500 full-time employees across 51 outlets in the delta region but wants to quadruple that to 6,000 over the next few years, according to analyst notes.

Sceptics, mainly analysts who cover HSBC, are plentiful. They lament the move as coinciding with an economic downturn that will expose the bank to struggling corporations. They also highlight the stiff competition the bank faces from Chinese lenders that dwarf foreign competition.

One thing analysts agree with Mr Gulliver on is the confining nature of Hong Kong. HSBC is still by far the city’s biggest bank, but research from Sanford C Bernstein shows that its share of loans has shrunk nearly 30 per cent from a high in 2003 and 2004.

chart: Guangdong gross regional product growth rate

Expanding beyond Hong Kong could be a lifeline for one of the region’s oldest banks. The question analysts are putting forth concerns timing.

“Is there a case for investment? Yes,” says Bernstein analyst Chirantan Barua, who also made a trip to the region with HSBC last month. “Is now the right time? Absolutely not.”

The economic statistics emerging from Guangdong province suggest it is the worst time in a decade to ramp up exposure to the region.

Guangdong’s economy is expected to grow 5.6 per cent this year, slowing from a pace of about 10 per cent five years ago, according to BMI Research. That means what was once considered one of China’s primary engines for gross domestic product expansion will probably come in below the national target of 6.5-7 per cent growth for this year. Total trade volume, the lifeblood of Guangdong, shrank by 3.9 per cent last year as labour costs and real estate prices continue to climb.

Foreign banks with heavy exposure to the region are showing the strain of the slowing economy.

Bank of East Asia, for example, the foreign bank second only to HSBC in number of branches in Guangdong province, said non-performing loans in its mainland China book jumped to 2.63 per cent last year, an industry high. Profits from the mainland, however, plunged by 71.5 per cent year on year.

HSBC has held up far better. In 2015, it brought in $ 1.05bn in pre-tax profit from China, tenfold growth over five years earlier. Much of that has come from corporate and commercial banking based in its two other China centres of Beijing and Shanghai. It is the kind of growth the bank wants to replicate in Guangdong.

Yet HSBC and all other foreign banks will ultimately have to reckon with their relatively tiny scale alongside Chinese competitors.

Chart: HSBC Pearl River Delta branches

With nearly 5,000 branches in the Pearl River Delta, the outlets of China’s five national commercial banks outnumber HSBC’s 100 to one. Smaller banks, such as China Merchants Bank and Ping An Bank, are also entrenched in the market and have strong digital banking brands.

“This will end up being a pain point for retail banking and wealth management as HSBC’s mass affluent segment target would also be surely overbanked in the Pearl River Delta,” Mr Barua notes.

Additional reporting by Martin Arnold

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