Via Financial Times

Not so long ago, HSBC was the world’s biggest bank by market value. Even after a decade of trimming, it is still vast, with $2.7tn of assets and a presence in 65 countries. Think of globalisation and you think of HSBC.

And yet the bank is not really global at all — at least not in terms of where it makes its money. In the third quarter of last year, the latest reported period, the Hong Kong and Shanghai Bank, true to its name, made about 80 per cent of its profits in Hong Kong and mainland China.

For much of the bank’s 155-year history, that often vibrant home market has been a strength, offering high profit margins and high growth. But, with the fate of Hong Kong as a semi-autonomous Chinese territory hanging in the balance, it is starting to look like a vulnerability.

Last week there was a small but potent reminder of that, as Hong Kong protesters made a vociferous start to 2020. On Wednesday and Thursday, a string of branches and ATMs came under attack from protesters who accused the bank of bending to the will of Beijing when it froze money raised through crowdfunding to finance the protests.

So far, there has been little impact from the protests on financial performance. HSBC’s Hong Kong profits actually grew in the third quarter. Locals apparently saw the bank as a beacon of strength amid market jitters.

But it would be absurd to be sanguine. Three big risks still loom.

The first relates to the sustainability of business in the region. Quite apart from the tensions over Hong Kong, Chinese growth is slowing and the shift towards a more consumer and services-based economy is also less capital intensive — and less needy of bank finance.

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An anti-government protester feeds a flame near an HSBC ATM machine to vandalize it during an anti-government demonstration on New Year's Day to call for better governance and democratic reforms in Hong Kong, China, January 1, 2020. REUTERS/Navesh Chitrakar
An anti-government protester on new year’s day © Navesh Chitrakar/Reuters

China-US trade tensions, even if they ease, have already hurt, too. Last autumn, the World Trade Organization slashed its estimate of global trade growth to 1.2 per cent, down from 3 per cent in 2018 — bad news for the world’s biggest trade finance bank. And there has been direct fallout for HSBC from the US-China stand-off as well: last summer the bank infuriated Chinese officials after it provided information that helped US prosecutors build a case against telecoms group Huawei, leading to the arrest of its finance director.

A second risk for HSBC is Hong Kong-specific and pending. The hit to travel and tourism as a result of the protests will soon feed through to the banking system — a prospect foreshadowed when HSBC more than doubled its estimated credit losses from the territory in the third quarter. The Bank of England last month highlighted another risk, when it revealed an exodus of $5bn of funds from Hong Kong since April.

The third headache is far more fundamental. The conflict between Hong Kong and Beijing could not clash more awkwardly with HSBC’s core business model. Hong Kong is by far its biggest market. But good relations with Beijing have been crucial as it has expanded across the Pearl River Delta and beyond. If tensions escalate further, HSBC is bound to upset one or other camp — with four-fifths of profits hailing from greater China, the downside risk is substantial.

It wasn’t supposed to be like this. From the time of its landmark acquisition of the UK’s Midland Bank 28 years ago, HSBC spent the next couple of decades enthusiastically trying to diversify away from Hong Kong. But it used its cash-cow home market to fund mostly misguided acquisitions in the US, Latin America and Europe, several of which blew up during or after the financial crisis.

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The irony is that with many of those mistakes now undone, Hong Kong and greater China are coming once again to dominate the bank’s revenues and profits just as the fragility of the region is more evident than ever.

An optimist would counter that China is vast, that its growth outlook still trumps most of the rest of the world — and that for all the headwinds, HSBC is set fairer than any other bank. An optimist might also praise ongoing plans to overhaul bureaucracy and shed up to 5 per cent of the workforce (though even the biggest bulls are puzzled that such a big restructuring effort — and a related strategic rethink — are being directed by an interim chief executive).

For now at least, investors are focused on the bear case: HSBC’s shares have underperformed compared to those of arch rival Citigroup by nearly 60 per cent over the past year. With the China story all-important, HSBC’s supposed global credentials understandably count for very little.