Commentary
It’s probably a question that isn’t being asked enough: should multinational corporations divest themselves into smaller regionally or nationally aligned entities better suited to tackle local geopolitical and economic challenges?
Global banking giant HSBC Holdings PLC is under pressure from its largest shareholder to do exactly that. Ping An, the Chinese insurer and HSBC’s biggest stockholder, has asked the bank to spin off its Asian business.
The insurer argues that HSBC as an international entity can no longer straddle the East and the West while effectively navigating both regions’ increasingly divergent political and economic landscapes.
There’s also some speculation that Ping An—and its demands to break up the bank—is just a proxy for the Chinese Communist Party (CCP) regime. We’ll let our readers speculate on that; we want to focus the scope of this piece on whether splitting up HSBC, or other multinational corporations doing a similar juggling act, is a good idea.
Let’s get some background out of the way first. HSBC has a 157-year history. It’s a British bank with origins in Asia (HSBC originally stood for Hong Kong Shanghai Banking Corporation) that today operates a sprawling business across consumer/retail banking, corporate banking, investment banking, and investment management.
As of the end of 2021, 33 percent of its customer account value resided in Hong Kong, 31 percent in the United Kingdom, with the remainder across North America, Europe, China, the Middle East, and Asia. Unsurprisingly, it views Asia as a growth driver. In its lucrative wealth management business, 63 percent of 2021 global revenues were earned in Asia.
HSBC’s stock price over the last five years—likely the investment horizon its largest shareholders are more focused on—HSBC shares are down a whopping 38 percent, severely trailing the 0.95 percent performance of the Dow Jones U.S. Banks Index as well as the MSCI World Banks Index which is up 0.6 percent during the same period. In 2022, its shares have been largely flat, outperforming most peers.
I’ve previously covered HSBC’s precarious tight-rope dance navigating Asian and Western politics. It was one of the only global corporations back in 2020 to have cast its support for Beijing’s so-called “national security law” over Hong Kong criminalizing dissent. The CCP also accused HSBC of handing over information to U.S. authorities in the Meng Wanzhou case (the Huawei CFO who was held for a period in Canada).
More recently, the international bank has been retrenching, due to disappointing financial performance and criticism from Ping An. Last month, HSBC sold its entire Canadian operations to Royal Bank of Canada. It also recently closed 114 branches in the UK (25 percent of its UK branches) and has announced that it’s exploring a sale of its New Zealand franchise. Last year, HSBC exited the U.S. retail banking market by selling its east coast branches to Citizens Bank and its west coast branches to Cathay Bank.
Let’s go back to Ping An’s demands of splitting up the bank. HSBC, for its part, has gone on a publicity campaign to push back, including hiring investment bank Goldman Sachs to rebut some of Ping An’s economic arguments for a divestiture.
A manufacturing company could argue that different skillsets in different markets can present a labor arbitrage. For example, design specs can be drafted by a creative team in the United States while manufacturing can be done in a lower cost market such as Thailand.
Financial institutions have no such dynamic. A financial institution’s most valuable assets are the people who ride the elevators and walk out the door on a daily basis. It’s a trust business. Regional expertise and cultivation of local relationships are valued. Compliance and regulatory mandates are also by jurisdiction. Top of house corporate management is viewed more as a nuisance than help.
There also aren’t a ton of back-office synergies across multinational financial institutions that would be lost in a divestiture. Compliance is country-specific. Legal, accounting, tax, and treasury are also. Even the human resources function is difficult to share across subsidiaries due to local culture, salary, and skillset expectations.
U.S. or European investors should not be forced to contribute capital to an organization that—out of commercial “necessity,” we’ll allow it to be called—has to bend Western ethical and moral norms to commercially operate in an environment. Each regional business is then free to focus its capital and resources catering to customers and stakeholders within that market. We no longer need to jam a square peg into a round hole. Let local Asian or Middle Eastern investors, accustomed to operating in a different manner, do so independently.
It’s a form of nation-first, populist business building that should be discussed.
