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.

Ping An Insurance Group of China, aka Ping An, has reiterated its push to force HSBC into slashing costs and quitting sub-scale non-Asia markets.

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. 

Alleged lack of progress
The firm also criticised the bank’s cost-cutting progress.

“Although HSBC management claimed its cost-cutting efforts are paying off, its cost-income ratio is still up to 64.2 per cent, which is 13 per cent points higher than an equivalent peer group mean. Meanwhile, HSBC Asia's cost-income ratio is 58.7 per cent, which is 18 percentage points higher than the 40 per cent mean of an equivalent Asia banking peer group,” it said.

“We suggest HSBC be much more aggressive in radically reducing its costs to close the huge ‘cost-income ratio gap’, for example, by reducing its operating costs such as manpower and IT, as well as reducing its ‘global headquarters costs as a % revenue’ compared to that of an equivalent peer group,” it said.

“This is the most important, urgent and absolutely needed action for HSBC to improve its business performance, reducing costs and increasing efficiency, particularly amid slowing growth in the global financial industry,” it added.

In July, there was controversy when it was revealed that employees who form branches of the Chinese Communist Party within private companies had a unit in HSBC’s China securities business. HSBC was quoted by media as saying that such branches were a common feature and had no influence on the bank’s day-to-day activities.

Balancing interests
Ping An argues that HSBC cannot easily reconcile its large Chinese exposures while also staying on the right side of UK regulators and policymakers. The insurer says that this dilemma has hit HSBC’s share price, and that an independent Asia business listed in Hong Kong would be more profitable, require less capital and be freer to take decisions. 

A number of rival banks have shut booking centres and focused on specific regions. For example, Citigroup is in the process of selling a number of retail businesses around the world and pivoting to wealth management.

Back in 2008, when the financial crisis hit, the sheer size of some banks raised questions over whether such lenders had become “too big to fail” and that the UK government would lack the resources to bail it out. HSBC, with its global muscle, did not need a bailout; at the time its CEO criticised state support for other lenders.

Ping An said the benefits of a global footprint for a bank need to be reconsidered at a time when globalisation has, in some ways, gone into reverse. 

“The global finance model that once dominated and shaped the global financial industry in the last century is no longer competitive; its weaknesses, costs and risks have become increasingly evident, particularly following the two global financial crisis in 1997 and 2008. Since then, the financial market risks and geopolitical risks and other negative impacts that are transmitted across the borders, have continued to increase,” it said.

“In recent years, multinational banks in Europe and the US have announced their exit from businesses in some regional markets and [have] further shrunk their global footprint,” Ping An added.