Breakingviews – HSBC breakup will turbocharge CEO’s Asian pivot

A pedestrian is reflected on a display panel showing the HSBC lion at its headquarters at the financial Central district in Hong Kong, China August 4, 2020. REUTERS/Tyrone Siu – RC207I9LI9WY

LONDON/HONG KONG (Reuters Breakingviews) – HSBC, Chief Executive Noel Quinn has the right idea, but he’s going about it too slowly. In 2021, a lagging share price may force him to turbocharge his pivot towards the more lucrative Asian business. Selling the bank’s U.S. retail network and spinning off its ring-fenced UK unit would help.

Like his predecessors, Quinn is freeing up capital to invest in Asia by cutting elsewhere – specifically HSBC’s U.S. operations and European investment-banking business. Yet between him taking charge in August 2019 and mid-December 2020, the bank’s shares had fallen by a third; rival Standard Chartered was down a quarter over the same period. At a multiple of 0.7 times expected tangible book value, HSBC was trading at a 16% discount to global rival Citigroup in mid-December. It was valued at a premium when Quinn stepped up.

Time to accelerate the strategy. Though HSBC is already cutting roughly a third of its U.S. retail branches, offloading the unit would be cleaner. The division’s $21 billion in consumer loans implies a tangible book value of $1.6 billion, based on the capital typically carried by other U.S. retail banks. Citigroup would be a logical buyer, if regulators approved.

A more radical move would be to spin off HSBC’s UK retail and commercial unit. Local ring-fencing rules mean that its roughly $300 billion of deposits are effectively trapped in the country, where they mostly fund local mortgages and business loans. Handing shares in the business to HSBC investors would create a stand-alone unit which could participate in any future bank consolidation in Britain. On the same multiple of tangible book value as UK rival Lloyds Banking Group it would be worth $15 billion.

Jettisoning American and British businesses acquired during HSBC’s westward expansion in the 1980s and 1990s would focus investors’ attention on its operations in Asia, which in 2019 generated an adjusted return on tangible equity of 15.8%. The region would then account for more than half of HSBC’s risk-weighted assets, compared with around two-fifths in June. In theory, a higher valuation should follow: regional peers like DBS trade at a premium to tangible book value. Quinn’s pivot to Asia needs a shot in the arm. The best way for him to achieve that will be to lop one off.

– This is a Breakingviews prediction for 2021. To see more of our predictions, click here


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