Turning the tables: why China’s Ping An plans to interrupt up HSBC

Twenty years in the past, HSBC made a daring gamble to recapitalise an ailing Chinese language insurance coverage agency, paying $600mn for 10 per cent of Ping An.

The danger paid off handsomely netting the financial institution $2.6bn in revenue when the stake was bought in 2012.

However a decade on, Ping An has turn out to be HSBC’s largest shareholder and is asking for what could be the most important shake-up within the financial institution’s 157-year historical past — a break up of its Asian and western operations.

“There’s a sure irony in the truth that HSBC was as soon as the most important exterior shareholder in Ping An,” stated an adviser to the financial institution in Hong Kong. “Now the tables have turned.”

Since HSBC invested in Ping An their fortunes have gone into reverse. Ping An has grown into China’s most dear publicly listed insurer with a market capitalisation equal to $122bn, nearly equalling HSBC’s valuation of $131bn. 

It had additionally been constructing a stake within the UK lender since 2017 as HSBC’s share value tanked, earlier than stunning the financial institution’s chief govt Noel Quinn and chair Mark Tucker with its transfer into shareholder activism throughout a sequence of conferences in Hong Kong in latest months.

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Caught between Beijing and Washington

The rupture between HSBC and its Chinese language shareholder is the most recent in a string of geopolitical woes for the financial institution, which is headquartered within the UK however makes round two-thirds of its earnings in Asia. As HSBC has invested closely in a “pivot” to Asia, refocusing its as soon as world ambitions on Hong Kong and mainland China, it has turn out to be more and more troublesome to navigate tensions between Beijing and Washington.

Ping An has argued that this balancing act has dragged down its share value, claiming that an impartial Asia enterprise listed in Hong Kong would have greater profitability, decrease capital necessities and better autonomy to make selections.

A break up might additionally create a “China-friendly financial institution in Asia, and a US-friendly financial institution in all places else,” which can scale back its danger of being weak to sanctions from both aspect sooner or later, stated an individual near HSBC.

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The response from HSBC’s different giant shareholders has been combined. One top-10 shareholder stated Ping An’s proposal was “attention-grabbing” as a result of HSBC’s construction had turn out to be untenable.

Hugh Younger, Asia chair of Abrdn, which holds a 1.3 per cent stake in HSBC, stated: “It doesn’t make enterprise sense, but when it turns into far too onerous politically to exist then I can perceive why [a break-up] is likely to be thought-about.”

HSBC and Ping An have shut ties by way of their most senior leaders. HSBC has been rising its personal insurance coverage enterprise in Asia, which means Ping An is a competitor. However Tucker has inspired collaboration between the 2 firms by way of his private relationship with Ping An’s founder and chair Peter Ma, who he has identified nicely for 20 years.

Tucker organised a number of discussions for Ma and the insurer’s technique crew with prime HSBC figures, together with chief executives, and even invited Ma to talk at considered one of HSBC’s board dinners, an individual acquainted with the matter instructed the FT. “It’s barely ironic that the particular person Tucker introduced in as the important thing shareholder has turned on him,” the particular person stated.

Pedestrians pass through the HSBC Holdings Plc headquarters in the Central district in Hong Kong
HSBC had already been strolling a tightrope to keep up the assist of Beijing because it has deployed greater than $100bn of latest capital to Asia. © Paul Yeung/Bloomberg

Ping An shouldn’t be the primary HSBC shareholder to name for a break up of the financial institution however is by far essentially the most highly effective by advantage of its 9.2 per cent stake and its place as a systemically necessary monetary establishment in China, one of many financial institution’s fundamental markets.

Ping An’s measurement and significance in China means it’s prone to be working with a inexperienced gentle from Beijing, in keeping with individuals near the financial institution.

A former senior govt of the financial institution stated Ping An “would have had air cowl from Beijing” to make such a daring transfer.

HSBC had already been strolling a tightrope to keep up the assist of Beijing because it has deployed greater than $100bn of latest capital to Asia.

“It’s easy politics. Ping An is the shareholder however every part is centralised in China, nothing occurs with out the social gathering saying ‘boo’,” stated a veteran banking govt in Hong Kong who works intently with Beijing.

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As China has elevated its grip on Hong Kong in recent times, localising management of town’s greatest financial institution would make sense.

“For a very long time, the Chinese language have claimed that HSBC has shifted assets abroad and had an unfair benefit as they management the entire cash provide in Hong Kong,” the chief stated. “This [break up] places China within the driving seat.”

However some rejected the likelihood that Ping An, which isn’t state-owned, had turn out to be a mouthpiece for Beijing’s aims for HSBC. “Ping An shouldn’t be of that significance, it in all probability needs it was,” stated a former Ping An govt. The insurer actually has its personal motivations to suggest the separation of its companies.

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Since Mark Tucker joined HSBC in September 2017, the inventory has fallen 33 per cent, hitting a 25 yr low in September 2020.

Nonetheless, individuals acquainted with the timeline say the ultimate straw got here when the Financial institution of England banned UK lenders from paying dividends initially of the Covid-19 pandemic in early 2020. Ping An — and 1000’s of particular person retail HSBC shareholders — had been denied a dividend they counted on for revenue and reacted with fury, threatening lawsuits.

The difficulty was essential for Ping An as a result of it owns HSBC by way of its life insurance coverage arm, utilizing the usually dependable HSBC dividend to offset its long-term insurance coverage liabilities.

Even when the dividend was restored final yr, it was set at 25 cents a share, half the extent the financial institution paid till 2018. The ensuing stress on Ping An’s earnings partly explains the insurer’s determination to start out brazenly lobbying for a break up, fairly than pushing behind the scenes, the individuals stated.

Breaking apart is tough to do

HSBC’s place in an more and more polarised world has loomed over the financial institution for many years.

The final time it formally addressed the problem was in 2015, when a potential referendum on leaving the European Union was mooted in Britain. It performed a overview into relocating its headquarters from London to Hong Kong. On the finish of the method, it stayed put “as a result of shareholders had been involved that the financial institution’s market cap is way bigger than Hong Kong’s financial system”, in keeping with an individual concerned within the overview.

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This meant that China’s central financial institution, the Individuals’s Financial institution of China, would possible must turn out to be HSBC’s “lender of final resort” — the establishment it will flip to if it had been in monetary problem, the particular person stated.

“HSBC is the world’s main commerce financial institution and a few firms might want a UK regulated financial institution to 1 probably topic to Chinese language affect,” wrote analysts at Financial institution of America following the Ping An announcement final week.

The board — which sought the recommendation of consultants together with Henry Kissinger — additionally deemed that relocating the headquarters could be too difficult and costly. HSBC would have needed to redomicile and reissue lots of of billions of loss-absorbing debt that it had issued because the monetary disaster.

Analysts at Autonomous have stated these considerations are nonetheless related seven years on.

“We see important authorized and political obstacles . . . the capital construction of HSBC makes a redomicile or a break up very difficult,” stated analyst Manus Costello.

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The warning was in keeping with largely damaging analyst sentiment on Tuesday, citing the potential for giant restructuring prices and the low revenue of HSBC’s companies outdoors of Asia. HSBC’s share value climbed in London by 1.6 per cent, partly on the premise that Ping An’s transfer would power the financial institution into different motion, reminiscent of a sooner exit from its lossmaking US retail financial institution and pruning off different underperforming companies.

Nonetheless, the most important roadblock to breaking apart HSBC could possibly be its huge greenback clearing enterprise. HSBC has been the only settlement establishment for greenback clearing in Hong Kong since 2000 and is among the prime 5 clearers of cross-border transactions globally.

“We expect the Fed would possibly take problem with approving a deal which noticed a significant portion of worldwide US greenback clearing shifting to a Hong Kong domiciled entity,” Costello stated. The dimensions of HSBC’s enterprise could be slashed in such a situation, in keeping with an individual near the financial institution.

“If you wish to function as a regional financial institution however you deal in even one US greenback — particularly when most of your corporation is commerce associated — then you might be on the mercy of the US, not the Chinese language, authorities,” stated the previous Ping An govt.