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IT’S RAPIDLY BECOMING clear that Beijing, and not London, New York or even Hong Kong, holds the key to HSBC’s future. Business is booming for the bank in Asia’s tearaway economy. In 2007, pre-tax earnings at its mainland China operations surged to $1.28 billion, from $708 million the previous year. Most of that was generated by the bank’s mainland-based joint-venture partners, notably Bank of Communications (BoCom). Pre-tax earnings from HSBC’s non-organic operations surged 89% year on year in 2007, to $1.087 billion.
It’s little wonder then that the bank’s group chairman, Stephen Green, regularly and prominently describes the People’s Republic as set to be HSBC’s single most important market – emerging or otherwise – over the coming decades.
That wisdom is regurgitated almost verbatim down the bank’s food chain. When asked by Euromoney in July if China was the key to the bank’s future, HSBC’s chief executive of global markets and banking, Stuart Gulliver, said: "It has to be".
Gulliver also noted that HSBC, which in April 2007 incorporated itself in the mainland, now boasts the "largest branch network of any foreign financial institution in China", with more than 80 offices across 18 cities. In the first quarter of 2008, according to the bank’s interim statement, a further seven offices were opened across the country.
And in a confidential internal strategy document obtained by Euromoney and entitled China strategic plan: 2006–2010, the bank lays out some self-consciously aggressive – not to say often hubristic – targets.
Our vision
"Our vision is to build the best universal banking franchise in China, and to offer superior China financial services globally," the document says, adding that the country’s re-emergence as an economic superpower offers the bank "an unprecedented opportunity to reinforce our global leadership position".
Growth forecasts for China are sprinkled liberally throughout the document. Some are realistic; others overreach; some seem almost deliberately cautious, designed to promise little in the hope of surpassing expectations.
The executive strategy sets the tone of the document. It forecasts operating profit before provisions (OPBP) hitting $627 million in 2010, up from $101 million in 2005, a compound annual growth rate (CAGR) of 54%. Other key targets for mainland China (referred to throughout the document as Area Office China, or AOC) include raising returns on assets and equity to 2.51% and 27.87% respectively by end-2010, primarily in its personal financial services (PFS) division; and cutting its cost-income ratio to below 50%. HSBC hopes that the PFS division will contribute 25% of mainland China earnings by 2010, up from 5% in 2005.
In commercial banking, HSBC wants to raise OPBP to $250 million by 2010, with the AOC region becoming the most profitable market in Asia-Pacific ex-Hong Kong, underpinned by greater scale, a broader domestic franchise and its ability to lean on its global banking franchise.
The document also paints some broad strokes, to accompany the fine print. By 2010, HSBC hopes to raise performing advances in mainland China to $19 billion and customer deposits to $48 billion, a CAGR of 65% above 2005 levels. Total non-performing loans will rise to $318 million, with the ratio of failing to performing loans declining, to 1.71% in 2010 from 2.14% five years previously. Net interest margins are seen rising to 1.25% from 1.17% over the same period, while interest income on customer deposits are tipped to grow at a CAGR of 59% to $491 million, with non-funds income rising at a CAGR of just shy of 50%, to $359 million, driven by "significant growth in transaction banking fee income". Dealing profits are set to grow at a CAGR of 45% in the five years to 2010, to $116 million.
As HSBC’s mainland China business expands, so will costs. The bank sees total costs rising at a CAGR of 35% in the five years to 2010, to $612 million, with staff costs rising at a compound rate of 36%, comprising 55% of all costs by 2010.
Rather to its chagrin – not to mention its burning sense of corporate pride – much of HSBC’s future success in China appears dependent less on its organic presence in the country than on its vast roster of mainland financial services partners.
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"We’ve gone from a standing start to $181 million in five years, therefore the growth in profit potential is huge"
Sandy Flockhart, HSBC |
Directly or indirectly, by July 2008 the bank had splashed out just over $4.4 billion on stakes in six finance-related Chinese firms, notably stakes in Ping An Insurance (19.9%), Industrial Bank (15.98%) and Ping An Bank (27%), as well as gobbling up stakes in two smaller city lenders, Bank of Shanghai and, in January 2008, Yantai City Commercial Bank. That’s not to mention the $1.75 billion paid in 2004 to buy a 19.9% stake in Shanghai-based BoCom, China’s fifth-largest lender, a deal that now looks both prescient and, for HSBC, cracking value. When BoCom (already listed in Hong Kong) went public in Shanghai in May 2007, HSBC booked a one-off profit of $1.1 billion on the sale.
Yet for all of this vicarious success, HSBC is desperate to see its own brand succeed in China. So far, it has done well enough. Pre-tax profits from the bank’s own organic activities are rising steadily – up 36% year on year in 2007, to $181 million. Its global banking and markets division alone saw earnings rise 84% last year, to $149 million.
Talking to Euromoney, the bank’s group head of Asia, Sandy Flockhart, said the bank would only be considered a success in China "when we are organically a $1 billion-a-year profitable business [there]". Flockhart considers that could happen within the next seven years. That would involve the bank growing at closer to 50% than 36% but bank officials believe it can be achieved. "We’ve gone from a standing start to $181 million in five years, therefore the growth in profit potential is huge," adds Flockhart.