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Best Emerging Markets Bank: HSBC |
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Also nominated: Citi and Standard Chartered |
Over the past year, HSBC has embarked on a dramatic shift in strategy. The group’s 19th-century roots in Asia, widespread international presence and universal banking capabilities in growth markets have buttressed its top line in recent years, compensating for its faltering European and north American units.
And yet, over the past year, HSBC has exited or downsized retail banking in key competitive emerging markets, including Russia, Chile and Poland, to cut costs and help the group edge towards its return on equity target of 12% to 15%. This retreat flies in the face of HSBC’s perceived raison d’être. After all its former advertising catchphrase – “the world’s local bank” – was more than a handy marketing pitch to clients. HSBC has established a sophisticated multi-product international network, centred on locally capitalized business units, which typically boasted retail capabilities.
The strategic shift, under chief executive Stuart Gulliver, heralds HSBC’s conversion away from unbridled global expansion to a more nimble and targeted path to emerging markets growth – in favour of commercial and investment banking, in particular. HSBC is finding its feet amid a new normal for global banks, in which efficient capital deployment, cost control and a targeted growth strategy will determine whether lenders are able to generate a decent return on equity above the cost of capital.
The jury is out on whether HSBC’s strategy will exact a large opportunity cost in the coming years, while execution risk and international market volatility will no doubt bedevil the group’s publicly stated financial targets. However, judging by the key financial metrics, it is clear that emerging markets are the jewel in the crown for the group, even with a more modest retail banking ambition, and the bank’s resilient earnings are the stuff of envy for its competitors, across its four key businesses – commercial banking, global banking and markets (GBM), global private banking, and retail banking and wealth management.
In the first quarter of the year, for example, in the teeth of the euro crisis, HSBC’s revenues in Latin America, and in Hong Kong and the rest of the Asia-Pacific, grew by 7%, 16% and 18%, respectively, year on year. The bank’s commercial banking unit – which serves 3.6 million customers ranging from sole traders to big corporations in 65 countries – posted a record $7.9 billion in profit before tax in the 2011 fiscal year. Profits in the Latin America region jumped 21% to $2.2 billion, with the bank opening 14 new branches in Argentina. Pre-tax net income in the ex-Hong Kong Asia-Pacific region was $7.3 billion, up 23% on 2010.
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“There is no other bank that has equal depth of client relationships in emerging markets”
Samir Assaf, CEO of global banking and markets, HSBC |
The UK and Hong Kong, HSBC’s two home markets, accounted for around 40% of profit before tax in the last fiscal year and the bank reckons 20 strategic markets will contribute the bulk of its profit. Like many other global banks, HSBC is positioning Asia at the centre of its global business and, on a daily basis, intermediates capital and trading flows between emerging regions. Samir Assaf, CEO of global banking and markets at HSBC, says: “There is no other bank that has equal depth of client relationships in emerging markets. Our ability to connect EM clients with EM clients, and EM to developed markets, is much more embedded within our banking proposition.” He adds: “We have the true capability to bring the rest of the world to Asia, as much as we can bring Asia to the world.” Boosting this mission, it’s worth mentioning that the bank, benefiting from local pools of liquidity, barely needs to shift its funding model to position itself for this expansion.
In Hong Kong, HSBC is looking to retain market share while capitalizing on its unique position to piggyback on China’s partial capital account liberalization. Elsewhere in Asia, the bank is seeking growth in India, Singapore, Malaysia and Indonesia. In the Middle East, Egypt, Saudi Arabia and the Gulf have been dubbed “strategic” markets by Gulliver in his review of the group’s operations in May 2011, as have Brazil, Mexico and Argentina in Latin America.
There is no doubt that the bank faces cyclical headwinds: in the event of a hard landing in China, for example, HSBC’s Asian earnings and asset quality will take a knock. However, the medium-term growth prospects of emerging markets and the projected pull-back by European lenders in Asia should profoundly boost HSBC’s earnings story. As with Citi, the group’s strong corporate relationships should help HSBC grab more investment banking mandates in the coming years.
In banking, first-mover advantage, strategic vision and luck are key ingredients for success. HSBC’s business model swims against the regulatory tide, and it’s difficult to imagine there will be serious contenders in the coming years to challenge Citi and HSBC in their capacity as truly global multi-product banks. The challenge for HSBC in the coming years is to be a nimble elephant. In short, it’s not just about global connectivity, an area most international banks are seeking to dominate. Beyond this, cross-product offerings and intelligent deployment of its vast infrastructure will prove crucial to continued outperformance.
