HSBC If you had invested $100 in HSBC stock at the end of 1998 and realized that investment at the end of last year, your total return would have been $211. The total shareholder return for a similar investment in a group of HSBC’s peers would have been just $126. The HSBC group might be renowned for conservative capitalization, for being better at containing costs than growing revenues and for a refusal to overpay for entry into certain glamorous business segments, but shareholders have reaped the benefits.
HSBC is one of a tiny group of truly global banks and one that has produced good returns for shareholders by getting the basics right for its large corporate customers, pursuing long-term relationships based on lending, structured finance and leasing, payments and other transaction services. It has dealt similarly with small and medium-size enterprises. And while many of its competitors have been mired in scandal following the exposure of expensive misdeeds and mistakes during the bubble years, HSBC has kept its corporate nose comparatively clean.
In personal financial services, the bank provides a case study in successful brand building.
In truth, HSBC’s reputation for cautious conservatism is overstated. It wins Euromoney’s best bank award this year after 12 months in which its senior management has shown substantial progress with two bold risks: the integration of US consumer finance group Household which it acquired in 2003 for $14.8 billion, and the build-up of its corporate, investment banking and markets business, which it launched last year.
The Household acquisition continues to arouse controversy. Financial analysts first worried about rising non-performing loans. Then, as the bank shifted the emphasis onto near prime customers, they fretted about declining margins. They also worry about potential reputation risk and damage to the brand. HSBC group chief executive Stephen Green is quite unapologetic about Household. He sees it as providing new impetus to the group. “Household brings a presence in 45 US states and 53 million customers,” he says. “It brings us an extraordinary information base. The new head of group IT is from Household, which had leading-edge data-mining capabilities. And the addition of Household gives us huge new impetus in cards and consumer lending and we are looking to take that to markets such as Mexico, Brazil and other emerging markets which have obvious and burgeoning needs for consumer finance.”
Green has been an advocate of brand building at HSBC and is determined to avoid damaging the bank’s name. He acknowledges that “there may be, around the fringes of the consumer finance business, practices which we do not want to see at HSBC”, but stresses that “the vast bulk of the consumer finance business is perfectly legitimate. Some 40% of the US market is classified as non-prime, but these are people with financial needs that deserve to be met. The key is to make sure the business is conducted with the highest levels of responsibility and care for our reputation.”
A visionary acquisition In the past year, the bank has concentrated on numerous initiatives to reduce costs, cross-refer customers and wring efficiencies between HSBC and Household. But there is a visionary aspect to what was at the time a surprising acquisition.
As well as giving the group huge impetus in consumer finance in emerging markets, Household brings a point of entry into another key market: cross-border remittances between the US and Mexico. Some 20% of Household’s US customers are of Hispanic origin. HSBC has a large operation in Mexico. The opportunity is there to act on both ends of lucrative cross-border remittance flows.
Before taking over as group CEO, Green had headed HSBC’s corporate, investment banking and markets division and had been working on the integration of a series of fragmented businesses – run along country-lines and as disparate products – into a single global business. This project was given new impetus by the promotion of Stuart Gulliver, an HSBC veteran and architect of its world-class markets business, and John Studzinski, a big-name investment banker hired in from Morgan Stanley, as co-heads. Their task is to improve the bank’s position as strategic adviser on mergers and acquisitions and fundraising for corporations with which it already has strong lending and transaction services relationships.
“We have an absolute raft of such relationships, albeit mainly at treasurer level rather than at the CEO and CFO level,” says Green. “The feedback we were getting from customers was that if we could truly offer a greater breadth of services, they would gladly do more business with us. So we have embarked on a growth strategy and said that we would be prepared to invest in the order of $400 million over the next two to three years to grow what is already a very significant part of the group.”
The signs so far are that Studzinski is doing a sterling job in attracting high-profile investment bankers, and the bank is transplanting its Asian debt capital markets success to Europe. It remains to be seen what it will make of its equity business. “We believe in a global sector approach, rather than a ‘cover the whole waterfront’ approach in investment banking,” says Green, “so hiring is about quality of people rather than quantity.” As to equity, he says: “That is where the most radical change is taking place. They key thing is not to duck that challenge. We know that the old brokerage model doesn’t have a sustainable future and believe that equity trading should be integrated within the markets business with research positioned differently. And we know that if we want that high-level strategic relationship with a company then we need the equity capital markets capability.”
At the end of last year, the bank’s five-year strategic plan of managing for value came to an end and the bank announced a new five-year plan, managing for growth. For a bank of this size, doesn’t significant growth get harder and harder to achieve? Green still sees its growth coming from Asia, notably greater China and India and the Americas and an enlarged Nafta. It has just added a minority stake in China’s Bank of Communications to its stakes in Ping An insurance and UTI in India. “I don’t see any market where we now operate where we have such a large market share that we cannot build on it,” says Green.
