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HSBC’S Indian Loan Debacle Spurs Bank to Target Rich in Asia

Naina Lal Kidwai, HSBC Holdings Plc’s country head for India. Photographer: Adeel Halim/Bloomberg
Naina Lal Kidwai, HSBC Holdings Plc’s country head for India. Photographer: Adeel Halim/Bloomberg

Feb. 24 (Bloomberg) -- Naina Lal Kidwai, HSBC Holdings Plc’s country head for India, remembers when the bank’s plan to boost profits by lending to the nation’s burgeoning middle class went awry.

It was February 2008, and the government of Prime Minister Manmohan Singh stunned local lenders by ordering them to cancel $15 billion in loans to help debt-strapped farmers. Inspired by the amnesty, borrowers from all walks of life, some of them newly minted HSBC customers, began abandoning their own debts as political rhetoric about heavy-handed loan collectors grew, she says.

Kidwai’s consumer unit lost $374 million in 2008 and 2009 as credit card customers and retail borrowers simply stopped paying -- chopping HSBC’s India earnings by about half in 2009, Bloomberg Markets magazine reports in its April issue.

“The whole business across banks got into one hell of a bind because suddenly it became OK not to repay your loans,” says Kidwai, 53, sipping a Coke in her first-floor office in a 10-story building in central New Delhi.

HSBC would seem an unlikely candidate for Asian growing pains. The bank was founded in Hong Kong and Shanghai in 1865 and today is the biggest foreign lender in China and among the largest in India. Yet Kidwai’s loan nightmare is just one of the setbacks and regulatory hurdles that HSBC has confronted as it turns to emerging markets to fuel growth.

‘Missed Opportunities’

During two crucial decades -- the 1990s, when India opened its economy to outside investors, and the 2000s, when China blossomed into an economic superpower -- HSBC strayed from its Asian turf. It switched its headquarters to London from Hong Kong in 1993 en route to becoming Europe’s No. 1 bank in market value. Then, in a disastrous U.S. foray in 2003, it paid $15.5 billion for subprime lender Household International Inc.

After the housing market began to collapse in 2007, HSBC set aside more than $58 billion for North American losses.

“In this 10-year sojourn into the U.S., they missed opportunities in Asia -- which is their newfound mantra,” says Sunil Garg, JPMorgan Chase & Co.’s head of research for Asia equities, except Japan, and for Asia banks and financial services.

Now, after its Western detour, HSBC is navigating the challenges of India and China -- the most potentially lucrative emerging economies. China’s 20 percent cap on foreign ownership of banks by a single investor and India’s reluctance to license new branches are among local rules stymieing growth. Rising inflation puts earnings at risk.

‘Will Be Bumps’

And the battle for customers with New York-based Citigroup Inc. and London-based Standard Chartered Plc keeps a lid on the interest rates HSBC can charge for loans and the commissions on its investment services.

HSBC said on Feb. 9 it was cutting management fees by as much as 40 percent on Hong Kong pension funds for workers in the territory. HSBC managed more than $14 billion of the funds, or a third of Hong Kong’s mandatory pensions, in November.

“Nobody should take a view that emerging markets is one straight line up,” Michael Geoghegan told investors on a Nov. 5 conference call shortly before he retired as HSBC’s chief executive officer. “There will be bumps along the road as economies adjust.”

Geoghegan, 57, who departed in December after the board passed him over as chairman, said competition and rising real estate prices in Hong Kong and China were among the challenges.

“However, we believe the long-term fundamentals for emerging economies are as compelling as ever,” he said.

Reporting Earnings

The bank is scheduled to report 2010 earnings on Feb. 28. Net income probably rose to $13.91 billion, from $5.83 billion in 2009, according to the median estimate of 15 analysts surveyed by Bloomberg, in part as the company set aside less money for bad loans.

HSBC’s board underscored emerging economies when it picked investment bank chief Stuart Gulliver to replace Geoghegan.

Gulliver, 51, has spent most of his career in Hong Kong and Japan. He immediately singled out Asia as a priority, building on the bank’s strategy of using its history in the region and presence in 87 countries and territories as an advantage in cross-border deals.

Last year, for example, HSBC set up a Brazil-Latin America desk in Shanghai and staffed it with two bankers sent from Brazil. It formed a similar China desk in Sao Paulo, where Chinese bankers help countrymen vet investments in South America’s largest economy.

Stock Rebounds

Cross-border arrangements are the first part of HSBC’s two-pronged approach in emerging markets. The bank increased loans and advances to customers in developing regions to 31 percent of its global total in the first half of 2010, or $283 billion, up from 23 percent at the end of 2006.

In those six months, HSBC got 64 percent of its pretax profit in developing economies, delivering on management’s 2007 decision to focus on India, China and other nations in Asia, the Middle East and Latin America.

Investors are applauding the invigorated Asian strategy. HSBC shares, which tumbled as much as 62 percent from their 2008 high of 808.5 pence during the subprime disaster, have almost recovered to pre-crisis levels. The stock, which trades in London and Hong Kong, more than doubled to 696.8 pence in the U.K. on Feb. 23 from 304.1 pence on March 9, 2009.

Executives say they want to list the shares in Shanghai as soon as this year.

“We’ve welcomed the move to Asia; it’s something we’d been asking them to do for a long time,” says David Trenchard, a managing director in London at New York-based Knight Vinke Asset Management LLC. “The subprime venture in the U.S. was a debacle, and HSBC had insufficient focus on China.”

Golf Perks

HSBC has learned a lesson from Kidwai’s retail-banking experiences in India. It now targets affluent customers throughout Asia, tailoring offerings for each market. For its so-called Premier service in India, HSBC wants clients with minimum deposits and investments of $55,000 -- about 50 times the per capita income. In Hong Kong, the minimum is $128,000.

HSBC sells high-end clients everything from life insurance and mutual funds to emergency cash transfers for children studying abroad.

Premier credit card benefits in India grant access to the Greg Norman-designed Jaypee Greens golf course about 25 miles (40 kilometers) from New Delhi, with a concierge to book tee times.

On a January afternoon outside HSBC’s New Delhi office, a pair of silver-colored lions stands watch -- replicas of the Hong Kong mascots said to bestow good fortune on those who rub their paws. Cars of Premier clients are ushered into the branch’s private lot while a guard directs others to find parking on the street.

India Investment

To extend its reach, HSBC paid $296 million in 2008 for control of brokerage IL&FS Investsmart Ltd., which it renamed HSBC InvestDirect India Ltd.

It is also purchasing Royal Bank of Scotland Group Plc’s Indian commercial and consumer division, which offers accounts for Indians living abroad.

The number of Indians with investable wealth of $1 million or more surged 51 percent in 2009 to 126,700, a study published in June by Bank of America Corp.’s Merrill Lynch and Capgemini SA found. The ranks of China’s wealthy rose by 31 percent to 477,400. HSBC tripled its branches and outlets in China to 107 during the four years through 2010 and added to stakes in two Chinese banks.

These new services and investments must prosper to compensate for laggards in other markets, says Ian Gordon, an analyst at Exane BNP Paribas in London.

Asian Roots

“Substantially all their growth is coming in Hong Kong and the rest of Asia,” he says. “Growth in customer loans at the group level has been shrinking, and strong growth from Asia offsets that.” HSBC says net loans have fallen every half since the first half of 2008.

Asian banking runs in HSBC’s genes. Thomas Sutherland, a Scot employed by The Peninsular and Oriental Steam Navigation Co., joined with partners in 1865 to establish The Hongkong and Shanghai Banking Corporation Limited. The bank financed trade in tea, cotton and silk through a Hong Kong headquarters that operated out of a harbor-front office with access for boats.

HSBC repeatedly returned to Asian markets after war and politics drove it away. In December 1941, as Japanese troops advanced on the then-British colony of Hong Kong, the board temporarily moved legal headquarters to London, according to handwritten minutes at the bank’s archives in Hong Kong.

Shrinking Under Mao

A black-and-white photo there shows bankers, who had been rounded up by Japanese soldiers and forced to live in a former brothel, marching to work in shorts and pith helmets.

HSBC resumed its base in Hong Kong after the war only to see its China business shrivel under Mao Zedong. From 1949 to 1955, all of the bank’s mainland branches closed except one in Shanghai.

The bank began its push west in the early 1990s, taking over the U.K.’s Midland Bank Plc. In the U.S., it paid $9.85 billion in 1999 for financier Edmond Safra’s Republic New York Corp. and Safra Republic Holdings SA. Then it bought Household.

HSBC invested smaller amounts in Asia in that period, making its biggest purchase in 2004: $1.75 billion for a 19.9 percent stake in Bank of Communications Co., China’s fifth-largest lender.

Now, with its sights back on the East, HSBC will have to weather what could be turbulent economic times for the world’s two most populous nations.

Rising Prices

Chinese consumer prices jumped 4.9 percent in January from a year earlier, the fourth straight month they exceeded the 2011 target of 4 percent. In response, the central bank raised its benchmark lending rate on Feb. 8 for the third time since October.

India’s wholesale-price inflation index increased 8.23 percent in January from a year earlier. On Jan. 25, the Reserve Bank of India boosted rates for the seventh time in a year and signaled more increases ahead.

HSBC, which until the past two decades mostly dispatched British men to run country units, chose two women with local roots to spearhead the emerging-market push.

Kidwai, a career banker who grew up in Mumbai and was the first Indian woman to graduate with an MBA from Harvard University, became India chief in 2006. Hong Kong-born Helen Wong, 49, was named China CEO in June. HSBC says its international managers represent 52 nationalities.

Cross-Border Deals

From her New Delhi office, Kidwai says she’s trying to create a modern bank amid antiquated regulations. Wearing a blue sari and a red lanyard with her ID card, Kidwai says she has had to explain even simple derivatives to local regulators.

“It takes time to introduce what’s very traditional stuff elsewhere,” she says.

Kidwai’s unit has also engineered successes for the bank’s cross-border aspirations. In 2007, HSBC bankers in India helped arrange financing for Tata Steel Ltd., the nation’s biggest steel company, on its 6.8 billion pound ($10.9 billion) purchase of U.K.’s Corus Group Plc. That company was advised by HSBC in the U.K.

“Some of these companies don’t need us here just as a bank,” Kidwai says. “Where we’re really able to add value is knowledge of that new country or that acquisition.”

Kidwai’s exit from riskier consumer businesses has helped her unit’s profit. In the first half of 2010, earnings rose to $340 million before taxes -- about as much as the unit made in all of 2009.

Badminton Trophies

Wong, Kidwai’s counterpart in China, woos affluent customers by offering them access to HSBC’s global network of bankers. The bank opened 40,000 accounts on the U.S. West Coast for mainland Chinese clients in the first four months of 2010.

She says she can’t afford to compete for retail customers in China with the likes of Industrial & Commercial Bank of China Ltd., the country’s biggest bank, with more than 15,000 outlets nationwide.

“We are not trying to bank 100 million people in this marketplace,” says Wong, who has a bachelor’s degree in social science from the University of Hong Kong. “We can’t put ATMs across the whole country,” she says in her office in a Shanghai high-rise designed by architect Cesar Pelli. Her shelves display trophies from amateur competitions in badminton, golf and basketball.

HSBC is making most of its money in mainland China by investing in the country’s financial firms. The bank reported pre-tax profit of $1.28 billion on the mainland in the first half of 2010, up 70 percent from a year earlier.

Chinese Credit Cards

Stakes in Chinese companies produced 92 percent of those earnings. HSBC built a 19.9 percent share in No. 2 insurer Ping An Insurance (Group) Co. in 2002 and 2005 that has been diluted to 16 percent. It bought 8 percent of Bank of Shanghai Co. in 2001, a stake it has maintained by investing in a 2010 issue of new stock.

In a venture with Bank of Communications, HSBC has issued 15 million co-branded credit cards.

“The major growth engine from mainland China would be from these associated companies,” says Dominic Chan, a Hong Kong-based analyst at BNP Paribas.

In the first half of 2010, mainland companies accounted for about half of new customer growth at the commercial-banking division in Hong Kong.

Just like in India, HSBC has stumbled in China. After taking its stake in Bank of Communications in 2004, HSBC sent brochures to Shanghai residents on marketing lists, some of whom happened to be customers of the Chinese firm, says Peter Wong, HSBC’s Asia-Pacific CEO. Bank of Communications complained to HSBC that it was trying to poach BOC’s clients.

Hong Kong Tower

“We told them: ‘We’re not. We don’t. We just got these marketing lists,’” Wong says. Peter Wong, who isn’t related to Helen Wong, set up regular meetings for managers at both banks, which continue today.

Peter Wong, 59, plots HSBC’s expansion in the East from the 34th floor of its Hong Kong head office. The landmark tower, which wears its steel girders as an exo­skeleton, was designed by British architect Norman Foster.

HSBC holds the most deposits in the territory, which produces about 50 percent of the bank’s Asia profits. HSBC also issues more than 60 percent of Hong Kong’s currency, which bears Peter Wong’s signature.

Wong, A Hong Kong native with a master’s degree in computer science from Indiana University in Bloomington, says he’s boosting loans and fees from foreign exchange in the territory through Chinese customers and currency.

Luxury Hong Kong

In July, China started allowing wider global use of the yuan to compete with the U.S. dollar. During the next two months, Hong Kong handled 64 percent of the world’s international trade payments in yuan, according to Goldman Sachs Group Inc. The currency is also known as the renminbi, or RMB.

“The RMB, the way it’s being internationalized, is very fast,” says Peter Wong, as he rides a glass elevator down to the tower’s atrium, where ATMs dispense yuan and other currencies.

At Pacific Place, a 10-minute walk from HSBC’s tower, stylish men and women haul shopping bags from Prada and Kate Spade. Wong says such Chinese customers are increasingly using credit cards to buy from HSBC’s business clients in Hong Kong.

“We can see the volumes,” he says.

HSBC is also offering mortgages in a city where home prices soared more than 55 percent from the start of 2009 through January 2011, according to property broker Centaline Property Agency Ltd.

‘Survived Bubbles’

All of that adds up to what some investors warn is a bubble about to burst. Hedge-fund manager Jim Chanos, who was among the first investors to predict the 2001 collapse of Enron Corp., says property values in China are headed for a fall.

Hugh Young isn’t so sure. “It can always blow up,” says Young, global head of equities at Aberdeen Asset Management Plc in Singapore, who helps manage $287 billion of assets, including about 41 million HSBC shares. “Maybe it is another bubble, but Hong Kong has survived bubbles.”

Hong Kong’s housing and luxury boom may foretell a coming slowdown for HSBC if the region’s inflation spins out of control, says Christopher Wheeler, an analyst at Mediobanca SpA in London.

Peter Wong says rising wages, food prices and property values in Guangdong province, Beijing and other Chinese cities worry him most. Escalating prices would crimp profits from corporate clients and trim spending among retail customers.

“We need to handle that,” he says. “One of the things about China is, they’re handling it. They keep increasing the interest rate until they get the inflation into shape.”

HSBC has been late to the party before. The bank’s last major global shift -- buying a U.S. mortgage lender before the subprime fiasco -- produced multibillion-dollar losses.

In reviving its roots in Asia, HSBC again faces the possibility that its timing is all wrong -- investing in a red-hot region just before it cools down.

To contact the reporter on this story: Vernon Silver in Rome at

To contact the editor responsible for this story: Michael Serrill at

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