The argument centres on whether HSBC's global footprint is a strength or a weakness. Ping An, a major shareholder, wants the Hong Kong/UK-listed lender to focus more on Asia, to improve performance versus peers on metrics such as return on equity and cost/income ratios.
The firm has been building a stake in the lender since 2017. The group first proposed to split off HSBC’s Asian operations in April this year.
“As one of HSBC's major shareholders, we are most concerned about HSBC's performance, dividends and market capitalisation. However, in recent years, HSBC's performance on these indicators has been far below that of an equivalent per group and far below the expectations of most shareholders,” Ping An said in a 4 November statement on its website.
HSBC hit back at the data that Ping An cited (see further below in the story) in its critique of the bank's performance.
“This data doesn’t take into account our recent performance. As we said at Q3, we delivered a double digit return on tangible equity for the nine?month period, excluding significant items and we have kept a tight grip on costs by driving greater efficiencies across the organisation. We remain on track to hit all of our financial targets, including a return on tangible equity of at least 12 per cent, from 2023 onwards," a spokesperson told this news service in an emailed statement.
The campaign to force HSBC, which is listed in Hong Kong and London, into such a radical change has so far been resisted by the lender’s managers, who say its global footprint is a strength, not a weakness. At the same time HSBC’s strong Asian heritage raises potential issues. For example, if China were to invade Taiwan, prompting Western sanctions and even military response, this would put a Hong Kong-listed firm such as the bank in an unenviable position.
The campaign by Ping An is also an example of shareholder activism that tries to unlock shareholder value that is said to be restricted inside large conglomerates. In the 1980s, such activists or “raiders” broke up a number of major businesses, although evidence is mixed about whether this benefited shareholders in the long run.
HSBC reported a fall in profits for the third quarter a few days ago. Since 5 January, shares in HSBC have risen 3.15 per cent, bucking wider stock market trends. Rising interest rates tend to boost banks' margins, so the lender has benefited from the tightening of monetary policy as central banks have tried to curb inflation.
Can do better
In its statement, Ping An said HSBC’s return on tangible equity (ROTE) has averaged only 7 per cent over the past five years, “which is far too low in absolute terms and also low relative to peers that also suffered from a low interest rate environment.” The bank’s rankings against peers, and operating performance, are also weaker than they ought to be, the firm said.
Ping An said HSBC should focus on its Asia business and get out of under-performing areas in other parts of the world.
“HSBC Asia contributed 68.7 per cent of total pre-tax profit in 1H22, whereas Europe and North America contributed less than 10 per cent respectively and Latin America less than 5 per cent. Asia is the main driver of HSBC's profit growth. However, HSBC's global resource allocation strategy in the past has made the Asian business compensate its European and American businesses, making HSBC Asia unable to gain sufficient resources for business growth,” Ping An said.
“We suggest HSBC to review its global resource allocation strategy, reallocate more resources to Asia to gain higher return, and exit sub-scale peripheral ex-Asian markets,” it said.