HSBC Holdings PLC (LSE:HSBA) shares traded higher following reported calls from its biggest shareholder for a break up the bank, but analysts questioned whether this would actually deliver true benefits and could instead reignite talk of the bank moving its headquarters out of London.
Chinese insurer Ping An, according to reports in the UK press and newswires, called for the board to look at spinning off its Asian business or find other ways to break up the bank in an attempt to boost returns.
According to sourced cited in the FT, the shareholder is claiming that an independent Asia business listed in Hong Kong “would have higher profitability, lower capital requirements and greater autonomy to make decisions”.
With UK bank’s lowly rated for some years, and HSBC shares trading at around seven times 2023 earnings, analysts at UBS said that with local Asian peers like Hong Kong's Hang Seng Bank (of which HSBC is already a majority owner) or Singapore's DBS both trade at a premium, assigning a P/E ratio to the HSBC Asia business in line with those rivals “would clearly indicate upside to overall valuations, all else equal”.
Given that two-thirds of HSBC’s profits are earned in Asia and chief executive Noel Quinn has been looking to focus the bank on wealth management in Asia over the last two years, Victoria Scholar, head of investment at Interactive Investor, said calls for a spin-off “could be in alignment with the C-suite’s own ambitions for the lender”.
Calls for HSBC’s break up are “obvious on paper” but the bank’s main strength in Asia is its size, the analyst Jason Napier added.
“The group is not as driven by Asia as it may appear at a headline level,” said Napier, noting that significant income booked in Asia comes from HSBC’s business relationships outside the region.
“Being the biggest trade bank in the world is at least partly driven by being in markets outside Asia,” he said.
Furthermore, while UK domestic banks excluding Barclays trade at 6.6 times 2023 earnings (“despite the upside to come from a rates cycle which the market says will be around 250bps from bottom to top”), he added that selling HSBC's UK business to the market is “unlikely to yield more than the current group P/E valuation once restructuring costs are taken into account”.
Restructuring costs from splitting the Asian business off would also be likely to be “far more substantial than initially expected”.
With the shares under pressure since the February’s near-two-year highs, as Quinn and the board abandoned the lender’s share buybacks amid pressures from inflation and geopolitical uncertainty, Scholar said: “Perhaps this is the start of fresh conversations about whether the bank will review its 2016 decision to keep its headquarters in London.”
After a long review, previous-but-one CEO Stuart Gulliver said in 2016 that the bank had decided to stay in London due to the UK's "important and globally connected economy" and supply of skilled and talented international staff.
Having been reviewing its head office location every three years, HSBC said it would drop this practice but revisit the matter if there was a material change in circumstances.
As this was before the Brexit vote later that year, the circumstances could easily be said to have changed.