New HSBC breakup plan is deeply unconvincing

Ping An Insurance Co has little chance of winning big backers for its quest to break up HSBC Holdings Plc if the best that can be said for the plan is a lackluster value analysis laid out by a Hong Kong-based consultancy.
The Shenzhen-based insurer has been trying for months to convince HSBC that shareholders would value its Asian businesses more highly if they could be in some way detached from the slower growth and regulatory restrictions that make the group as a whole less attractive. As its largest shareholder with an 8.2% stake, Ping An has been unhappy since the bank was forced to suspend dividends during the pandemic.
Hong Kong retail investors may be open to the idea, but no big institutional shareholder has come out in support and stock analysts that cover the bank have been skeptical.
The analysis from In Toto Consulting Ltd, which was commissioned by Ping An according to the Sunday Times, is the first report to try and make a case for the break up. Its conclusions are caveated and cautious yet still underwhelming. In Toto declined to comment on the identity of its client or the contents of its report. Ping An didn’t comment on the document, a copy of which I have read.
Its best-case scenario lays out the possibility of a $26.5 billion uplift in market value for shareholders if the Asia businesses were completely demerged in a spinoff, with the rewards evenly split between $13.5 billion of capital release and the Asian business trading at a higher valuation. If fulfilled, that would give HSBC a market capitalization of almost $159 billion, which would be its highest since just before the Covid-19 pandemic hit but still more than 25% below its recent peak set in early 2018.
That kind of hope doesn’t obviously look worth the cost, effort and risks of a breakup, and it may already be overly optimistic. The capital release rests on HSBC being deemed systemically less important without its Asia business and assumes that Hong Kong regulators wouldn’t demand more capital at a standalone HSBC Asia based there. Neither outcome is guaranteed.
The analysis also assumes that the separated banks lose little revenue from global clients. HSBC outlined vaguely how much of its Asian investment and commercial banking revenues were derived from western clients with its full-year results in February. Its case for existing as a global bank is based on these network benefits.
While it’s hard to tell exactly what these revenues are worth, In Toto’s report said it “conservatively” assumes $1.9 billion was at risk and anyway might not be lost. But that looks small compared with the relevant global-client revenue base in 2021 of between $10 billion and $16 billion, according to my estimates.
This global revenue flatters HSBC’s returns in Asia because it is more fee-based than risk-based. Losing these fees would hit Asia profits hard, as I wrote previously, and it could be worth significantly less than expected even if a spinoff of HSBC Asia traded at a higher valuation.
Getting a high appraisal for an Asia-focused business is also just hard to do, as Prudential Plc discovered. If HSBC were to spinoff Asia by creating shares for the business and then handing them to existing investors, it would have to list the Asia shares in both London and Hong Kong just like HSBC’s group shares are today. And as with Prudential, global institutions investing in London might not then value the Asia bank’s stock as highly as Ping An hopes Hong Kong retail investors would do.
The other options explored by In Toto are minority listings for either an Asia business, or a purely Hong Kong consumer and wealth business. Neither would threaten the global revenue, but nor would they release any capital or add any strategic value — they would just create another Hong Kong bank stock a bit like Hang Seng Bank, which is 62% owned by HSBC today. Local investors might bid that up slightly, but maybe at the expense of selling Hang Seng. How many bits of HSBC does anyone really want to own as separate stocks?
HSBC is like the proverbial oil tanker of global banking that’s taking forever to turn around and improve its group returns on equity. It has been cutting assets and changing the mix of its business for years and still has further to go before it will reach its medium-term target of making a 10% return on tangible equity.
There may be things it can do without too much risk to get there faster and even go beyond this target. But splitting the bank the way Ping An wants doesn’t look like it.

—Bloomberg

Paul J Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the
Financial Times

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