HSBC Holdings PLC (LSE:HSBA) seemed to make concessions at an informal meeting with Hong Kong shareholders yesterday in a panicked attempt to appease activist shareholder Ping An, but seems unlikely to break itself up.
The meeting was prompted by renewed calls from the China-based insurance conglomerate, HSBC’s largest shareholder, to break up the bank.
HSBC's leadership team, including chief executive Noel Quinn and chairman Mark Tucker, gathered in an emergency meeting with shareholders at the Kowloonbay International Trade & Exhibition Centre.
Gary Greenwood, a banking analyst at Shore Capital, said the Chinese insurer would need to rally significant support from other shareholders to force a shareholder resolution at HSBC’s next annual meeting.
He said it was “unlikely” that an activist investor could carry enough weight to split up the bank, “unless Ping An can get enough people on side” to push for a shareholder resolution.
It would take “a lot more votes than 8% stake to force a shareholder resolution”, he said.
Yet, when confronted by 1,000 investors in Hong Kong yesterday, the bank’s chair tried to ameliorate their concerns by saying he understood how much “distress and pain” cancellation of the dividend in 2020 caused investors.
He indicated that the bank had explored the possibility of separate structures but said such a move would damage growth.
“The board has a clear responsibility to protect and grow shareholder value, and the work to date suggests that the separation structures would not be consistent with that and would destroy value,” he said.
“While our work is ongoing, and we continue to listen carefully, we continue to believe that our current strategy and structure will deliver very good returns over the next few years and offer significant and material benefits over other options.”
It is not the first time that HSBC has faced off with an activist investor after Eric Knight similarly sought to split the group in 2009.
Then, he was calling for the bank to split from its struggling US lending operations shortly after the financial crisis.
This time, Ping An is asking the bank to hive off its profitable Asia operations in a split from its traditionally core UK bank.
The difference now is that, as the ad hoc meeting held in Hong Kong yesterday ahead of the bank’s scheduled AGM shows, now the bank is listening.
“It certainly means they're being listened to,” Greenwood explained. “Whether they can force any change is the difficult question.”
In Greenwood’s view, the bank’s board might examine alternative ways of operating to simply appease investors as they “were quite happy with the path they were going down”.
“They’re probably only looking at alternative structures as part of any response, [e.g.] due diligence process to assess alternative options and then rule them out,” he said. “It just means they need to show they’ve explored them.”
HSBC's CEO Quinn tried to focus investors' minds on growth plans, reiterating in yesterday's meeting that if the bank generates a return on tangible equity of at least 12% from 2023 onwards it would represent the bank’s “best return in a decade”.
He emphasised the bank’s commitment to its Hong Kong business, pledging to invest in the banking arm, which he said, “continues to be one of [HSBC’s] strongest franchises”.
His words illustrate that the board is making a clear attempt to keep Hong Kong investors on side.
The bank’s Asia operations accounted for US$6.3bn of adjusted profits, according to the interim results posted earlier this week, compared to US$2.5bn at HSBC UK, so this is unsurprising.
Quinn pledged to abolish fees on bank services, launch a new mobile app and invest HKD40bn in SMEs in the Hong Kong region.
“If you look at profit performance it’s dominated by Hong Kong and Asia,” Greenwood explained. “They’ve had this pivot toward Asia for a while now. They make about profits and return in Asia it can allocate more capital there.”
Analysts remain divided on whether a split between the regions could accelerate HSBC's market value or damage it. Barclays has suggested, going against the grain of other independent analysts, that a split could wipe 8% of the bank's market value.
Meanwhile this week, Credit Suisse indicated that the growing debate over whether to break up the bank threatened to undermine its investment case.