HSBC's split personality is dragging it down

Tue, Aug 04, 2020

Nisha Gopalan


HSBC Holdings Plc can't seem to get a break. Even the financial-market boom that buoyed profits at some banks wasn't enough to save Europe's biggest lender from missing estimates.

Chief executive officer Noel Quinn said HSBC is looking at accelerating restructuring plans that are expected to lead to the loss of 35,000 jobs. He may need to think even more radically.

The bank on Monday reported second-quarter adjusted pretax profit fell 57 per cent from a year earlier to US$2.59 billion, versus an estimate of US$2.94 billion. HSBC lifted its projection for loan losses to between US$8 billion and US$13 billion for this year, as it contends with the economic impact of the Covid-19 pandemic.

The shares fell as much as 4.7 per cent in Hong Kong trading, reaching their lowest since the depths of the 2009 global financial crisis.

Shrinking its workforce can't fix the geopolitical headwinds the bank is facing. Headquartered in London but focused on Asia, HSBC is trapped between the demands of the UK and US on one side and China on the other.

With relations deteriorating and little prospect of an improvement, it may be time for the bank to consider separating its Asian business from the rest.

HSBC appears to have few allies in government. British lawmakers criticised the bank for showing support for China's national security legislation in Hong Kong, while US Secretary of State Michael Pompeo attacked what he called "corporate kowtows".

At the same time, toeing China's line appears to have won HSBC scant reward in Beijing. The Communist Party's People's Daily newspaper published an opinion piece last week saying the bank was an accomplice of the US in the arrest of Huawei Technologies Co chief financial officer Meng Wanzhou and fabricated evidence against the company. HSBC has denied the allegations.

The attacks have helped to drive the slump in HSBC's Hong Kong-traded shares this year. They have lost 45 per cent, far exceeding the 13 per cent decline in the city's benchmark Hang Seng Index.

HSBC'S London and Hong Kong listings serve largely different investor bases. That alone might argue for some form of separation.

A more fundamental shift would be to spin off the non-Asian business, creating two companies with separate management teams and perhaps listings. That might give HSBC a better chance of satisfying government and legal expectations in different parts of the world.

The prospect of Microsoft Corp buying TikTok's US operations shows how the world is growing accustomed to the idea of sensitive businesses being carved into separate spheres of influence with different owners.

A side-benefit of splitting the Asian business might be to shift its domicile back to Hong Kong. That would enable the more-profitable regional unit to resume dividend payments, which HSBC was forced to cancel earlier this year at the behest of UK regulators.

Such a restructuring might face considerable regulatory hurdles. Mr Quinn called the last few months the most challenging in living memory. But without radical change, HSBC may remain stuck between a rock and a hard place. BLOOMBERG