Britain’s largest bank has been caught in a cross between the United States and China

Bloomberg news

For years HSBC Holdings Plc and Ping An Insurance Group Co. they enjoyed cozy relationships, from the turns they took as financial support to each other, to the easy connection between their influential presidents.

That’s why the shock hit the highest ranks of the British bank worth $ 3 trillion, when it turned out that the company’s largest shareholder was pushing for the most dramatic split in banking history.

Ping An, led by Peter Ma, called on HSBC Chairman Mark Tucker to consider options, including splitting the company and bringing its Asian operations separately to the stock market. In a recent private note, the Chinese financial giant listed a number of alleged failures in HSBC’s management, from incredible returns to rising costs.

This is quite an activist turn for a longtime supportive shareholder, which raises questions about whether it is due to the bank’s lost valuation, the dramatic decline in Ping An shares or pressure from Beijing. And the biggest uncertainty: how would HSBC’s worship of growing geopolitical tensions work at all?

“Ping An understands the way regulatory winds blow,” said Isaac Stone Fish, founder of Strategy Risks, which specializes in corporate relations with China. “Companies are increasingly having to choose a country between the United States and China, and we may see more corporations considering disintegration as a way to choose between the two powers.

What would the break-up of HSBC mean?

The consequences can be huge. HSBC is headquartered in London but operates in 64 countries, including Hong Kong, Singapore, India and Malaysia. Approximately half of its 220,000 employees are based in the region. Each breakup would cost billions of dollars, with analysts at Barclays Plc estimating in a research note that the changes could bring down 3% to 8% of the group’s market value. It would also be a blow to the City of London and a black eye for the global banking model.

Most analysts, current and former HSBC executives, say the chances of a split remain low. Dividing one of the world’s largest financial groups would be terribly difficult, with Barclays analysts calling it “complex and expensive.”

Increased focus on Asia may not even be good. There is a risk that Covid’s cases could hit China’s economy, while the country’s besieged real estate sector is also a constant obstacle for the bank, to which a separate Asian-focused entity would be particularly vulnerable, said Susanne Street, a senior investment and market analyst. Hargreaves Lansdowne.

Even an old rival of HSBC says breaking up the bank is not a good idea. “It is very important that large financial institutions such as HSBC and Citigroup remain, because they are essential to global trade corridors,” said Mervyn Davis, former chairman of Standard Chartered Plc, a lender focused on emerging markets. “If we end up with regional banks, that will be a problem.”

But while Ping An’s proposal may be a dream come true, relations between the two companies have changed.

Does Ping An decide?

So far, Ping Ann’s thoughts have rarely spilled out of the boardroom. The already public nature of this debate – which first appeared in a Bloomberg News report – suggests that it is irritating. A former HSBC chief executive, who asked not to be identified when discussing the situation, described it as one of the most significant events in the recent history of the lender.

After Ping An felt that his message was failing, he decided to take a more aggressive approach, according to people familiar with the conversation. This blinded HSBC’s top executives, according to someone familiar with the discussions, who said that while HSBC and Ping An had a frequent dialogue, the idea of ​​separating the Asian unit had never been officially raised. There has been no official communication between the two countries since the news broke, the man said.

“HSBC has a regular engagement program with all our investors and is committed to maximizing value for all our shareholders,” the bank said in a statement. “We believe we have the right strategy and we are focused on implementing it.”

A Ping An spokesman declined to comment.

Bloomberg’s opinion: The division of HSBC is a sure way to destroy value

Despite the lack of talks, the insurer has a lot of burdens to throw. Founded as a government entity in 1988, Ping An is now a full-fledged financial giant roughly the size of its old mentor. Its share of over 8% makes it the largest shareholder of HSBC.

Once touted as the World Bank, HSBC’s idea of ​​moving from global business to Ping An’s preferred model for an Asian regional lender is likely to be hard to swallow for a bank that has long defended the benefits of its global network.

So is the change of roles. HSBC bought its initial 10% stake in Ping An in 2002 as part of a deal involving the provision of personal finance and insurance experience to the Chinese company. A few years later, founder Ma praised “HSBC’s respect for the independence of Ping An’s management style, approach and corporate culture.” HSBC eventually sold the holding company in 2012 after judging that Ping An’s growing investment in banking was a potential conflict, according to someone familiar with the matter.

In an introduction to Ping An’s company history for 2020, Tucker describes Ma as a business partner and close friend. Ping An’s rise came from its ability to emulate the systems of insurers such as Prudential Plc and AIA Group Ltd., both of which Tucker managed. Today, Ping An is believed to have overshadowed many of his rivals, prompting Western financiers to make their way to his headquarters to learn more about his methods, one man said.

What paved the way for the debate over the break-up of HSBC?

Tucker’s appointment in 2017 was the catalyst for Ping An to build a stake in HSBC. In addition to the bank’s reliable dividend, Ma bet that Tucker could work with the same corporate magic on the bank as on insurance companies.

Instead, the bank’s share price has fallen by about 30 percent since Tucker took office. More importantly for an income-hungry investor, these dividend payments abruptly stopped during the pandemic after the Bank of England imposed a de facto ban on payments. They were returned last year, but at a much lower level.

The results of the first quarter of last month did not help, as HSBC announced a decline in its fixed capital, which surprised the market. Chief Financial Officer Ewan Stevenson described the fall as a “capital mismatch” and said the bank was on the right track to increase its shares.

“We are not closed to hearing alternative views, but we believe that the implementation of the strategy will bring great value to shareholders in the next 12 to 18 months,” he said.

The announcement in early 2020 of the bank’s Asian center was intended to allay fears that the bank had traveled too far from its roots, such as Hong Kong and the Shanghai Banking Corporation. As part of that plan, the company said it would move the heads of most of its main divisions from London to Hong Kong, which means the bank’s day-to-day management has effectively moved from Europe to Asia.

Ping An did not seem to be convinced by the reset. In particular, the insurer was not impressed by some of those executives who parachuted into Hong Kong, saying he would rather see the bank develop and promote staff with extensive experience in the region than Westerners with experience in other parts of the world. the world.

Tucker Prudential’s old employer also provided the insurer with something like a game book. Under pressure from his own activist, the insurer withdrew its Asian division from its operations in the United Kingdom in 2019, although it maintained its listing in London.

Hong Kong, HSBC are on the political rope

The debate comes with Hong Kong’s own future in stream. The former British colony has seen widespread anti-government protests following Beijing’s introduction of a national security law in 2020. Strict blockades and quarantines during the pandemic have made business travel almost impossible.

Ping An told HSBC that he would see the creation of a stand-alone Asian business based in Hong Kong as a major impetus for the struggling Chinese city.

Former leaders find China’s hand in some of this. While Ping An is a private company, Ma enjoys good relations with senior officials in Beijing, and those familiar with the two companies’ internal affairs say she is unlikely to launch a campaign against the bank without at least some research.

However, HSBC has experience in sending investors looking for change. In 2007, activist firm Knight Vinke Asset Management unsuccessfully insisted on spinning off business in Asia. The bank itself examined the relocation of its headquarters to Hong Kong before deciding that regulatory hurdles were too onerous.

Ping Ann’s close ties to HSBC have added to this recent debate, although Ma has always made it clear that he has no interest in being a junior partner.