HSBC’s $14 billion purchase of US consumer credit company Household International in 2002 was a cracking transaction. But given how big the UK banking group is, this was not a transformational deal in the way Royal Bank of Scotland’s takeover of NatWest was. Two years on, investors are asking what HSBC might do for an encore.
Household is increasingly looking like an opportunistic one-off deal. HSBC snapped up Household for an attractive price when the target’s rating was depressed. Initial scepticism about the deal quickly turned into euphoria as the market digested how little HSBC had paid.
But HSBC cannot dine off the deal for ever. It was always going to take a couple of years to integrate Household fully. Now the spotlight is on where HSBC goes from here.
One answer is more M&A. HSBC generates plenty of capital. Moreover it is also one of the two genuinely global banks. Only Citigroup has the same sort of capacity to buy just about any other bank.
Hungry again
HSBC appears to have regained its appetite for deals. It is considering the purchase of 49% of Korea First Bank for a proposed $3 billion. It has also been linked to a possible purchase of the store card businesses of Federated Department Stores, the owner of Bloomingdale’s and Macy’s, also for $3 billion.
This reinforces the impression that HSBC is having to chase rather more risky opportunities to deliver growth to its shareholders. True, further beefing up its Asian businesses is an obvious strategy. After all, one factor behind HSBC share price appreciation this year is its existing exposure to the region. But it would still increase the balance of emerging market risk in its portfolio.
The same can be said of HSBC’s forays into consumer finance. Even before it was linked to the FDS assets, HSBC was already raising its game here. It snapped up UK retailer Marks & Spencer’s financial services business, Money, in the summer with a view to making use of consumer finance expertise it had acquired with Household.
Consumer finance margins might be fat, but competition is fierce too. HSBC’s UK rival Barclays has just gained a toehold in the US market, having bought Juniper, a tiny credit card issuer.
Investment bank initiatives
Then there is the investment bank. It would be wrong to suggest HSBC has recklessly loosened the purse strings here, but the fact that it is allocating significant chunks of capital to this volatile business at all is further evidence of a willingness to take on more risk. HSBC might have balked at the thought of buying Merrill Lynch, but it has become happier to extend its balance sheet to corporate clients, and has become a visible hirer of capital markets talent.
Of course, HSBC’s size gives it many advantages. It can absorb localized risk within its broader portfolio. And being big means it would not suffer too badly if it were to overpay slightly for deals.
All the same, leaving aside Household, HSBC’s track record on acquisitions is not sparkling. Its other two big deals, French bank Crédit Commerciale de France and Republic National Bank of New York, have attracted criticism. In isolation, these could have stuck HSBC chairman Sir John Bond with a reputation for overpaying.
And recent results from Household indicate that even assets bought on the cheap can turn sour. If HSBC is moving up the risk curve, it might have to prepare investors for bumps ahead.
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