HSBC battles shareholder revolt as breakup vote looms, Nikkei Asia, May 3, 2023.
ECHO WONG, Nikkei staff writer
Bank’s balancing act between U.K. and China appears increasingly untenable
One might be forgiven for thinking Ken Lui is running for office. His face adorns leaflets, kiosks, posters, buses and billboards across his native Hong Kong. He is inescapable on social media and the city's press are lining up to cover his latest moves.
The campaign Lui is running, however, is not for a seat in government. It is to break up an institution that has been at the heart of Hong Kong's economy for over 100 years: HSBC bank. "Spin off HSBC Asia Now," reads Lui's ubiquitous slogan.
Lui, a self-described professional investor and HSBC shareholder, says that splitting up HSBC -- which last year was the world's eighth largest bank by assets, according to S&P Global -- and separately listing its operations in Asia would unlock huge value and add more than 40% to the share price. Most of the bank's profits are made in Asia.
The first step could happen as early as Friday at the bank's annual shareholders meeting in Birmingham, U.K. There, investors are set to vote on Lui's resolution 17, which asks the bank to increase "its value by structural reforms," including "but not limited to spinning off, strategic reorganization and restructuring its Asia business."
The type of split proposed by Lui -- though it includes few public details -- would be nearly unprecedented for a healthy bank. Experts estimate it could take years and cost tens of millions of dollars to accomplish. But Lui's proposal got a boost last month after it won the public support of HSBC's largest shareholder, Ping An Asset Management, a Chinese insurer that holds 8.4% of the bank. Ping An has favored a split since November and in April proposed to create a separate listed entity out of HSBC's Asia business.
Even with Ping An supporting a split, however, a straw poll of analysts indicates that HSBC's present structure is safe for now. The rebels need 75% of shareholder votes, which seems out of reach after two shareholder advisers came out against the split in the past two weeks. But momentum has been gaining, and Lui says he has just gotten started.
The battle with its mainly Chinese shareholders has been a humbling experience for HSBC, once a symbol of British colonial domination, set up in 1865 in the aftermath of the Second Opium War against China. It remains an iconic symbol of Asian finance, which still prints Hong Kong's bank notes, but has been caught between two worlds ever since it moved its headquarters to London in 1993, before the handover of Hong Kong to China four years later.
"The bank's privileged status has become a dilemma," said Michael Sheridan, a writer who has studied the bank's history and interviewed its former chairs, William Purves and John Bond. "The present management will win the vote. But it can only be a rear-guard action to delay the inevitable."
"Change is coming, maybe not this year or next, but in the long run," he said.
HSBC, meanwhile, is taking no chances -- in April it sent a team of executives to Hong Kong to meet with Lui and other disgruntled shareholders, and issued a statement on April 19 laying out, point by point, why investors should vote no on May 5. The bank "has assessed structural options for HSBC Asia Pacific with an open mind" but that the benefits of a spinoff "were meaningfully outweighed by expected value decline in multiple areas, as well as a diminution of service to long-standing HSBC customers" it said in the statement.
Lui will not be dissuaded, however. "I will spend the rest of my life coming after you, [HSBC]," the 42-year-old told Nikkei Asia in an interview on April 24, surrounded by a media relations team. He claims to have "over 100 million Hong Kong dollars ($12.7 million)" of shares in the bank and says he has the support of about 100 investors -- most significantly, of course, Ping An -- though he will not say how much total capital his group represents. He insists he is acting on his own initiative and he and Ping An first got in touch and met in mid-April. Ping An confirmed the meeting.
"A proposal which grants the Asia business more autonomy merits serious consideration following years of underperformance."
Ping An Group statement, April 18
Lui said his main grievance is with interference by U.K. regulators, chiefly the bank's decision in April 2020 to suspend dividend payments at the request of the Prudential Regulation Authority during the pandemic. That year, Lui sued HSBC in a Hong Kong court and lost in the following year.
HSBC's stock price plunged after the dividend suspension announcement. "I was really pissed off," Lui said. "HSBC used to be the stock that made me money both through dividends and stock price [rise], so whenever I had money, I put it back into the stocks."
HSBC's decision in March to buy the U.K. assets of bankrupt Silicon Valley Bank was another move widely criticized by shareholders, who blame pressure from U.K. regulators. "The trouble [with HSBC] is that the management now has a tendency to stand on the side of the U.K. [regulator]," Lui said. In a call with the media on May 2, Noel Quinn, HSBC's group chief executive, defended the acquisition, saying it would give HSBC a network of tech entrepreneurs who are "building [the] business models of tomorrow."
Recently, Ping An has also started piling on the pressure, publicly blasting HSBC for a "consistent closed-minded attitude" toward spinoff proposals, and accusing the London lender of refusing to "verbally engage" in discussions.
"HSBC management has failed to fundamentally address key business model challenges," Ping An said in a statement on April 18. "These challenges include weak localization, excessive cost base, capital inefficiencies, and elevated geopolitical tensions."
"In recent years, numerous shareholders have repeatedly suggested that HSBC management should spin off HSBC's Asian business into a separately listed entity that is Hong Kong-headquartered. We believe that such a proposal which grants the Asia business more autonomy merits serious consideration following years of underperformance and underinvestment," Ping An said in the April statement.
HSBC responded on April 19 that it has been boosting overall performance. "HSBC has taken actions to grow noninterest revenues, increase capital allocation to Asia Pacific, exit non-core businesses in the West, reduce risk-weighted assets ahead of target, and reduce costs despite inflation and significant investment in technology. This strategy is working and is delivering improving returns" it said. In 2022, the bank announced two exits from Western markets, including a proposed sale of its French retail banking business and exiting from Canada operations, which it expects to complete early next year. In 2021 it announced the sale of its U.S. mass-market retail banking business.
The bank also insists it has held roughly 20 meetings with the Chinese group since 2022, and "has discussed its conclusions extensively with Ping An through both multiple meetings and written correspondence."
Huang Yong, chairman of Ping An Asset Management, appeared to respond to this in a public statement on April 21, however, saying that "HSBC has never conducted any formal discussions regarding the new strategic restructuring proposal with Ping An."
During the media call on May 2 Quinn acknowledged having "differences" with Ping An on the bank's structure but added they have a "shared objective" in improving the bank's performance. On the same call, the bank announced it would pay its first quarterly dividend since 2019 and would initiate a share buyback of up to $2 billion after the May 5 meeting in an effort to buttress shareholder support.
"It's political"
In addition to a compelling economic rationale, a number of political factors have intervened recently to make HSBC's current structure appear increasingly untenable: first and foremost a 2020 security law in Hong Kong that has been a catalyst for China to gradually erase what is left of Hong Kong's autonomy.
"China is now taking full control of Hong Kong, and Ping An is acting with top-level approval."
Michael Sheridan, writer
"HSBC rode out wars and revolutions but this time it's different because China is the sovereign power," said Sheridan, the author. "So it is not a business or financial question, it's political. That's the reality. China is now taking full control of Hong Kong, and Ping An is acting with top-level approval."
Ping An said it could not comment on this assertion, though a spokesman referred to an interview by Quinn last December in the Financial Times, where he said he did not believe that Ping An's campaign was directed from Beijing. "I do not believe it is politically motivated based on all the dialogue we've had with various stakeholders. Quite the contrary," Quinn said then.
Even before the security law, however, HSBC had been stuck in the middle of a tug of war between Chinese and U.K. regulators and law enforcement agencies -- a conflict that the security law has only exacerbated. For example, the bank froze the accounts of a Hong Kong pro-democratic figure in 2020, not long after the law was enacted, which in 2021 and 2022 provoked furious grilling from U.S. and U.K. politicians.
"To the extent that we have frozen accounts, it is because we are obliged to under request from the police authorities as they undertake their investigations," Quinn answered parliamentarians at a hearing in the U.K. House of Commons on Jan. 26, 2021.
But HSBC also provided information to U.S. prosecutors pursuing a case against Meng Wanzhou, CFO of the Chinese telecom company Huawei Technologies, who was arrested in Canada in 2018 and subsequently charged with bank fraud in the U.S., a case that invited the wrath of Beijing. The charges were dismissed in 2022.
Any further U.S. or U.K. sanctions on China would be complicated for the bank to enforce but would be difficult to avoid given its current U.K. base. However, experts question whether shifting the headquarters from the U.K. would make the bank any less liable to enforce Western sanctions against China.
In its two public statements calling for a breakup of the London-based lender, Ping An has never mentioned sanctions specifically, but "geopolitical risks" are flagged as a factor for consideration of the proposal.
China roots
For years, HSBC's destiny has been intertwined with Hong Kong. "HSBC was founded on a Scottish model of banking as part of the imperial reach of Britain," Catherine Schenk, a professor of economic and social history at the University of Oxford, told Nikkei Asia. "But it was always firmly an Asian bank with operations dominated by its region based in Hong Kong."
Started as the Hongkong and Shanghai Banking Corporation in 1865 by Scottish banker and politician Thomas Sutherland, it played a central part in trade and finance during China's violent 19th century, when colonial powers forced Peking to allow imports of opium at gunpoint. HSBC for a period was acting as a central bank for Hong Kong.
In 1872, the bank was authorized to print HK$1 notes, and soon became the provider of some 75% of bank notes in circulation in the territory, according to Richard Roberts and David Kynaston who chronicled the bank's century and a half of history in their 2015 book "The Lion Wakes: A Modern History of HSBC."
For China, the bank was the leading underwriter of foreign loans for the Qing Imperial government from 1874 to 1895 and essentially functioned as a central bank of China before the establishment of an official one in 1928.
HSBC's identity became more connected to Hong Kong after the 1949 communist revolution in China. "Its fortunes and those of Hong Kong became far more critically connected -- bank and colony in effect standing or falling together -- than had previously been the case," wrote Roberts and Kynaston.
Gradually the bank began to look beyond Hong Kong and in the 1970s embarked on an effort to diversify its revenue and profit through a globalization strategy led by then-executive chairman Michael Sandberg.
The bank's management spent much of the 1980s preparing for the eventual handover in 1997 of Hong Kong to China.
Sandberg himself was concerned with how to safeguard the bank's identity. From a conversation in 1986 recounted in "The Lion Wakes," he was quoted as saying: "I think if we did absolutely nothing, because we've headquarters in Hong Kong, because Hong Kong in eleven years' time will be Chinese territory, it must be absolutely as night follows day that we would become a Chinese bank. It would be a complete anachronism to have all our senior officers British."
Management eventually announced its decision to form a holding company headquartered in London, known as today's HSBC Holdings, to incorporate the Hong Kong business in 1990. The decision, however, did not come to a pass until William Purves, the bank's CEO, "had checked that there would be no outright opposition from Beijing," according to the book.
Today, over 35% of pretax profit still comes from Hong Kong, its top profit generator, and almost 20% from mainland China. The U.K. contributes about 20%.
"Broadly, HSBC is perceived as a global bank with operations sprawling around the world," said Susannah Streeter, head of money and markets at Hargreaves Lansdown, a U.K. financial services company. This perception has not significantly changed in the face of recent problems, she noted, and is unlikely to unless a split indeed takes place.
"Throughout its history, HSBC has been quite local or Asian in its business. Its primary markets have been mostly Asian, starting from Hong Kong and Shanghai, then Asia and now back to its China roots, even though HSBC started its globalization in the late 1970s," said Tao Zhigang, a professor at Cheung Kong Graduate School of Business who has been advocating for a breakup of the bank for five years, citing the rise of geopolitical tension.
However, the 2020 security law subsequently put the delicately crafted post-handover compromise between HSBC's China business and its U.K. headquarters under severe strain.
One example came during the Jan. 26 2021 hearing in the U.K. House of Commons, where lawmakers quizzed Quinn, asking if there was ever a red line the Hong Kong authorities would cross that could force the bank to leave the city. He gave an unequivocal answer of "no."
"If the question was whether I am willing to walk away from Hong Kong the answer is no," Quinn said. "We are too committed as an institution, through our heritage and our history."
In March 2022, a bipartisan group of U.S. senators asked Quinn to justify HSBC's actions including the freezing of accounts of depositors who fell afoul of the security law. A spokesperson for the bank said the bank would work to address the questions. The U.S. has already introduced the Hong Kong Autonomy Act, which puts secondary sanctions on banks that do business with entities and persons seen as undermining the city's autonomy. The bank so far has not been sanctioned under the act.
The ownership of HSBC by Ping An and the insurer's ultimate owner was also raised by U.K. lawmakers in the 2021 hearing.
"Who owns Ping An Insurance?" Chris Bryant, a lawmaker, asked Quinn, The CEO responded, "I am not aware of the details of all that. It has multiple shareholders." In a follow-up, Bryant said, "Broadly speaking, it is the Chinese state, isn't it?" Quinn said, "I do not believe so. It is a listed company and it has financial institutions from around the world as members of its share register. I believe that it is a listed institution."
Thai conglomerate CP Group is Ping An's top shareholder, according to the insurer's 2022 annual report. Another top shareholder of Ping An is Shenzhen Investment Holdings, which is backed by Chinese state-owned capital.
Asked whether it has talked to any Chinese regulators' about its push for a separation of HSBC, Ping An declined to comment, but referred to Quinn's interview in which he said he does not believe that Ping An's campaign to break up the bank is directed from Beijing.
China, for its part, introduced an anti-foreign sanctions law in June 2021 that gives it the right to freeze assets of companies seen as facilitating foreign sanctions on Chinese companies and citizens. HSBC is seen as a top target for such conflicts.
"How would it be able to handle demands from both sides?" asked Dennis Kwok, a former Hong Kong pro-democratic lawmaker who now runs his own business from New York. "[The Chinese government] could freeze its assets any time."
Sanctions are very much on the minds of Hong Kong shareholders: "In a global environment like this, the U.K. and U.S. often sanction China. How can the management ensure Hong Kong shareholders and depositors if they sanction Hong Kong?" one shareholder asked on April 3, when five HSBC senior executives held a meeting with some 1,100 Hong Kong retail investors.
"If a spinoff means we no longer have to follow U.K. government policy, then we should support resolution 17," said the investor, followed by a round of applause.
In response, Quinn called the investor's spinoff rationale "a flawed assumption that does not stand scrutiny." Even if HSBC were only a Hong Kong bank, it would not address the problem as long as the Western sanctions are imposed on targeted financial institutions, he said.
"The truth is that the future of HSBC is a matter of national security for both Hong Kong and China."
Steve Vickers Associates, risk consultancy
"If this bank was a Hong Kong bank, and it was sanctioned, and all of the shareholders were just Hong Kong shareholders, it would have the same effect as if it was registered in the U.K.," Quinn said.
"Unfortunately for the bank's executives, this discussion is about much more than the commercial merits of a restructuring. Rather, the truth is that the future of HSBC is a matter of national security for both Hong Kong and China," according to a note issued in late April by political and risk consultancy Steve Vickers Associates.
"Ping An's claims, then, derive not just from commercial issues, but also from concerns about the jarring gap between HSBC's center of gravity in Hong Kong and its subservience to a regulatory framework in London, which is an accident of history and a remnant of the colonial era," the note says.
Turning the tables
Were a breakup to eventually succeed, it could cost the bank $100 million and take five years to execute, according to Stewart Aldcroft, former Cititrust chair in Hong Kong. A restructuring process would increase profits but could cost HSBC clients.
Michael Makdad, senior equity analyst at Morningstar, said if the bank were to split, separate entities of the bank would be required to meet local capital requirements too high for individual units, but not for the global bank as a whole. In addition, there would be tax implications on those entities.
"If we were to restructure, it would take a lot of time just to decide what to do even before you get to the process of trying to start to do it," Makdad said.
There's almost no equivalent breakup case for a bank of HSBC's size to compare, he added. The only analogy that approaches this in complexity, he said, is Citigroup's effort since 2021 to exit consumer banking in 13 markets, which include Taiwan, Thailand, Malaysia, Indonesia and China.
Since early April, Lui has held his street campaign across 18 Hong Kong districts to persuade investors to vote for the spinoff. He said he is paying the bill for his campaign -- including street stalls, banners and leaflets -- on his own.
"I have 100% confidence that [the resolution] will be passed," Lui said, declining to discuss how much support the resolution currently has.
However, when asked how the resolution would be implemented once it's passed, Lui only said it would be "up for the management to decide."
"I only know the stock prices would go up, stimulated by this news," Lui said. If it does not pass, "I won't [give up]," he said, although there's no concrete plan of what to do next.
The activist investor is working with proxy group Alliance Advisors to engage with big investors and has secured six meetings with institutional investors of the bank in the weeks leading to the shareholder meeting.
Lui has also brought another resolution for voting, which demands stable dividend payments from the bank to shareholders. He plans to cast his vote in person at the annual general meeting in Birmingham.
Investors could also change their votes before the meeting.
Ping An said it supported both the restructuring and dividend payout resolutions. It is unclear whether it has voted.
ISS and Glass Lewis, two proxy investment firms followed by many institutional investors, have recommended voting against the spinoff resolution. ISS said the resolution lacks detailed assumptions such as potential revenue loss of network effects and capital requirements for a new entity in Asia. Glass Lewis said it does not believe a breakup now would improve the bank's returns. If the resolutions do not pass, Lui has not ruled out working with Ping An on a future agenda.
Splitting up a bank is "just like a country trying to gain its independence" and has a very complicated regulatory process, said a senior executive in China for a European bank. "Regardless of whether the spinoff happens this time, the bank will certainly have its decision-making more separated and regionalized.
"The push behind the split-up, from China's perspective, is simple, that the bank will become closer, emotionally and politically, to China, and that [the] Hong Kong [office of the bank] would be able to make the call, instead of having to listen to London.
"HSBC is a flagship international bank in the eyes of Chinese authorities, but it also faces numerous challenges in the market."
In the short term, HSBC might pay a high cost for a breakup, but the cost would be justified with a longer-term return as the move gives it greater room to grow in China.
"The question for HSBC," the banker said, "is then if it has the determination to do it."
Additional reporting by Rhyannon Bartlett-Imadegawa in London.