Looking back, this abnormal activity was a clear sign of irrational exuberance. Today, the Childrens Investment Fund has such a low profile it might as well be a mole and Atticus has closed two funds and handed money back to investors. My doubts about the activist investor phenomenon were confirmed in September 2007 when Eric Knightof Knight Vinke wrote to HSBCs chairman, Stephen Green. Knight complained about the banks underperformance and cited: "The perception that HSBC lacks focus and that the worlds local bank is seeking to be all things to all people."
Two years and a massive banking crisis later, Knight Vinke has egg on its face and HSBC is sitting pretty. The only comfort for the hedge fund must be that the HSBC shares that it acquired in order to have a soapbox to preach from are hovering not far from their all-time high. This is more than can be said for most other bank shares.
HSBC benefits from sensible management and a strong balance sheet but it also has access to the gold mine of our era: Asia. The past 18 months have revealed the deep divide between the developing and the developed economies. The future belongs to the emerging markets, and HSBC has an edge here, particularly in China. Indeed the group was founded in Hong Kong and Shanghai in 1865 and remains the largest international bank in the region. This September, the bank announced that its chief executive, Michael Geoghegan, was relocating to Hong Kong.
The firm has also done well in the thorny field of investment banking. HSBC has its own model of investment banking-lite. Since the departure of John Studzinski, co-head of the investment bank, in 2006, HSBC has abandoned ambitions to compete head to head with top advisory firms such as Goldman Sachs or Morgan Stanley. Nevertheless, for the first half of 2009, the global banking and markets division, run by Stuart Gulliver, made $6.3 billion profit before tax, which was some 125% of group profit because of write-downs in other areas. For a while now I have been a fan of Gulliver, who exhibits a disarming combination of intelligence, sardonic wit and self deprecation rarely found in complacent investment bankers.
The most important transaction of 2009 for me was the £12.9 billion ($21.5 billion) HSBC rights issue launched on March 2. This was a turning point for the markets. That a big bank could raise so much capital at such a bleak time without resorting to government coffers calmed frenzied nerves. Now that we are in an apparent bull market, with share prices bubbling upwards every other day, it is hard to relate to the ubiquitous gloom that prevailed in February and March. A mole reminded me of the terrible turmoil when he confided: "Citi was under consideration as a joint bookrunner for the deal. But then we decided there was a chance they might be nationalized during the transaction." In fact, Goldman Sachs, HSBC and JPMorgan acted as joint bookrunners. This reunited former Robert Fleming colleagues Ian Hannamand Alex Yule-Smith(JPMorgan Cazenove) with Russell Julius(HSBC). Matthew Westerman, global head of equity capital markets, was the key person from Goldman Sachs. The issue was a huge success, with more than 90% of shareholders taking up the rights.
Another big equity transaction where HSBC featured prominently was the BNP Paribas 4.3 billion rights issue launched in November. HSBC was the sole joint bookrunner with BNPP. "Strong banks want to work with strong banks," a source said phlegmatically. HSBC is also a global bookrunner on the Axa rights issue launched in November and the just-completed Lloyds Banking Group £13.5 billion rights issue. Russell Julius, the engaging and articulate head of equity capital markets at HSBC, told me: "2009 has been a transformational year for our business, especially in Europe. The groups focus on supporting and cross-selling to core clients in our chosen markets has paid rich equity capital markets dividends."
HSBC is the number 18 bookrunner in the global equity offering league table but stands at number six in the EMEA equity and rights offering league table. HSBCs lower global ranking reflects the fact that it does not have an equity platform in the US, Japan, Australia, Canada or much of Scandinavia. Julius reports to Kevin Adeson, who joined HSBC in 2006 and is the head of global capital financing. I look forward to catching up with Adeson and some of his other senior colleagues for a future column.
HSBC issued its interim management statement in early November. The market loved what the bank had to say: in particular news that bad debts at its troubled HSBC Finance Corporation subsidiary might be peaking. "In the US consumer finance run-off portfolio, loan impairment allowances declined in the quarter, representing the first quarterly fall since the start of 2006," HSBC stated. The firm also pointed out that, on the same basis, pre-tax profit for the third quarter of 2009 was significantly ahead of the comparable period in 2008 while total costs for the year to date compare favourably with 2008. I am writing 10 days after the trading statement issued on November 10, and HSBCs shares have risen by some 6%.