HSBC Holdings Plc can reap a windfall from its $9.2 billion stake in a Chinese insurer without eroding the bank’s commitment to its most profitable emerging market, analysts at CCB International Securities Ltd. and Mizuho Securities Asia Ltd. said.
Europe’s largest lender by market value said Nov. 19 it’s in talks to offload its holding in Ping An Insurance (Group) Co., without identifying potential buyers. Thailand’s Charoen Pokphand Group is offering to buy the stake for HK$74 billion ($9.6 billion), the Shanghai Securities News said on Nov. 20, citing a person it didn’t identify.
The sale -- HSBC’s largest since at least 1995 -- would leave it with more than $10 billion of stakes in Chinese banks even as Chief Executive Officer Stuart Gulliver sells insurance operations across Asia. The lender, founded in Hong Kong and Shanghai in 1865, aims to boost its outlets in China sixfold to 800 when regulators ease rules, consolidating its grip as the largest foreign bank in the country.
“HSBC isn’t taking its eye off of China,” said Sandy Mehta, the Hong Kong-based chief executive officer of Value Investment Principals Ltd. “They are walking a tight rope, wanting to book profits on Ping An while at the same time not wanting to appear to be less committed to China.”
The British lender valued its holding in Shenzhen-based Ping An at $6.37 billion at the end of December, according to its annual report, compared with the $1.6 billion it has spent since 2002 building up the stake. A disposal would result in about $3 billion in pretax gains for London-based HSBC, CLSA Asia-Pacific Markets analysts estimated this week.
Shares of HSBC have climbed 26 percent this year in London trading, and 30 percent in Hong Kong, as Gulliver pared costs and sold assets to revive profit and focus on emerging economies in which the bank has a greater market share.
Pretax profit from China increased 14 percent in the first half to $2.02 billion, accounting for 16 percent of HSBC’s total, according to an interim report. Losses in the U.K. weighed down the group’s net income in the period, which fell 8.3 percent to $8.44 billion.
HSBC booked a pretax profit of $447 million from its investment in Ping An in the first half, accounting for 3.5 percent of the group’s total.
“The issue is not China, which is clearly a market for the future of HSBC, the issue is insurance,” said Jim Antos, a Hong Kong-based analyst at Mizuho Securities. “The bank has sold a number of general insurance businesses globally in the past year, so divesting Ping An shares is a logical step.”
In March, Paris-based Axa SA agreed to pay about $494 million to acquire HSBC’s general insurance business in Hong Kong, Singapore and Mexico. Sydney-based QBE Insurance Group Ltd. will pay about $420 million for operations in Argentina and a unit of Hang Seng Bank Ltd., a subsidiary of HSBC.
Meanwhile, the bank, which has so far invested more than $7 billion in China since 2001, has held on to stakes acquired in Chinese financial firms even as rivals including Goldman Sachs Group Inc., Citigroup Inc. and Bank of America Corp. pared holdings to replenish capital.
HSBC now owns 19 percent of Bank of Communication Co., the nation’s fifth-largest lender, and 8 percent of closely held Bank of Shanghai Co. Its Hong Kong unit, Hang Seng Bank, holds a 13 percent stake in China’s Industrial Bank Co.
Its commitment to China has already paid off. The holding in Shanghai-based Bank of Communications, known as BoCom, now has a market value of about $9.9 billion -- a more than fivefold increase from its initial investment in 2004 -- and was valued on HSBC’s books at $8.51 billion as of the end of 2011. Bank of Shanghai is planning an initial public offering in Hong Kong.
HSBC’s strategy in China won’t change if the bank sells the stake, Gareth Hewett, a Hong Kong-based spokesman, said in an e-mailed response to questions.
“We are continuing to invest in and expand our businesses and operations in China with new branch openings and a new back office center in Guangzhou,” he said. “We continue to work with our long-term strategic partner BoCom, helping with their clients ‘going-out’ and our clients investing in China.”
The lender is unlikely to sell its holdings in Industrial Bank or BoCom, said Adam Chan, an analyst at CCB International in Hong Kong who rates HSBC as neutral, said by telephone.
“HSBC’s core competence isn’t insurance,” said Chan. It also needs to hold on to the remaining stakes because it needs “to provide investors with exposure to China, and at this point of time, the most effective way is through these investments.”
HSBC and other overseas banks have struggled to expand their independent operations in China, while local lenders’ earnings soared. The combined profit at China’s four largest banks, led by Beijing-based Industrial & Commercial Bank of China Ltd., rose 15 percent to 189 billion yuan ($30 billion) in the third quarter, almost triple the amount at the top four U.S. banks.
Foreign banks hold less than 2 percent of banking assets in China, the lowest share among emerging markets, according to a January report from the International Monetary Fund. That means HSBC and rivals such as New York-based Citigroup are dependent on their minority stakes in their Chinese counterparts for a large part of their profits from the nation.
Goldman Sachs, Bank of America, UBS AG, Citigroup and Royal Bank of Scotland Group Plc were among the global financial institutions that began buying into Chinese lenders more than a decade ago. They have since collectively sold about $24 billion in holdings in the past three years to replenish capital and meet global regulatory requirements.
The sale of the stake in Ping An, China’s second-largest insurer, would be “a step that fits the bank’s overall strategy, which is to focus on businesses in markets where HSBC can achieve meaningful scale and meaningful profitability,” Mizuho’s Antos said.
China may become the world’s third-largest insurance market by 2020, the China Center for Insurance and Social Security Research said in a report in September.
Still, losses on Ping An’s equity holdings helped to crimp the rise in third-quarter profit to 21 percent. Bigger competitor China Life Insurance Co. reported its first quarterly loss since 2008 on lower returns as China’s benchmark Shanghai Composite Index lost 8 percent this year.
HSBC is rising for a fourth consecutive day in Hong Kong following its Nov. 19 statement on Ping An, in which the bank said it “is in discussions which may or may not lead to the sale of the shares.” The shares gained 0.3 percent as of 10:29 a.m. to HK$76.25.
The lender approached China Investment Corp., which manages some of the nation’s foreign-exchange reserves, about purchasing its shares in Ping An, the Wall Street Journal said yesterday.
“China remains core to the group’s strategy and an important engine for earnings growth,” Fitch Ratings analysts Sabine Bauer and Cynthia Chan wrote in a note yesterday. “The group would have greater control over the risks it undertakes there if it grows organically rather than increases its exposure through minority stakes.”
Disposing the Ping An holding would also help the bank to bolster its risk buffers before the Basel Committee on Banking Supervision’s latest round of capital rules take effect.
“Selling now is intelligent capital planning,” Mizuho’s Antos said. “They may invest the proceeds in highly liquid, but low yield, government bonds to bolster their Basel III liquidity ratio.”
The profit from the sale of the Ping An stake together with the reduction in capital required under the Basel III rules would boost HSBC’s core Tier 1 ratio by 50 basis points, Josh Klaczek and Joy Wu, analysts at JPMorgan Chase & Co., estimated in a research note on Nov. 19. A basis point is 0.01 percentage points.
The world’s biggest banks will probably continue paring investments in China as well as other parts of the world to deleverage balance sheets, Value Investment’s Mehta said.
“It’s more of a reaction to the evolving regulatory situation globally, and not necessarily a reflection of their view on China,” he said. HSBC, for one, remains “very committed and bullish about China,” he said.
— With assistance by Jun Luo, Stephanie Tong, and Aipeng Soo