John Bond's Hsbc
It was a rough week for John Bond. The reserved, disciplined chairman of HSBC Holdings had worked for seven months on a $900 million deal to buy South Korea's Seoulbank. Then, on Aug. 31, he walked away convinced that the bank's huge debts weren't worth the price. Worse, Bond's carefully-plotted takeover of New York's Republic Bank was suddenly thrown into peril. Government investigators in Japan and the U.S. have launched a probe into a Republic securities unit and one of its clients who may have inflated the value of his Japanese holdings. HSBC now says that the investigation may delay the planned acquisition, which was supposed to be completed by yearend.
A setback in Korea. A possible misstep in New York. These are unusual events for HSBC, one of the most risk-averse banks on the planet. But the 58-year-old Bond may have to get used to such detours. That's because he's trying to turn his institution into the world's best-performing retail bank in short order. Bond wants HSBC to be No. 1 in terms of profitability and return on equity, beating nine key competitors, from Citigroup in the U.S. to ABN Amro Holding in the Netherlands.
And he has set himself a tough schedule for doing it. He needs only look out the window of his 10th-floor office in the City of London to stay focused on his goal. Looming in the distance is the gleaming silver tower that serves as Citigroup's European headquarters. Just a few hundred yards away is the partially built 42-story skyscraper that will serve as HSBC's headquarters when it is finished in 2002. Bond intends to overtake Citi in terms of profits by the time HSBC moves in. He also wants to double HSBC's stock price, which recently began trading on the New York Stock Exchange, every five years. "Today, we are a contender and not yet the champion. We aim to change that," says Bond.
The question is whether HSBC, despite its acknowledged achievements in markets from Hong Kong to Sao Paulo, is champion material. It doesn't have the brand recognition of Citi. It's still a small-scale player in the U.S. And look closely at its operations. Most of its profits still come from Hong Kong and Britain--two saturated markets that don't leave much room for growth. Hence the need to step up the pace of acquisitions, which of course increases the risk of missteps.
Bond also has a fundamental task to crystallize HSBC's global strategy--and execute it. Bond's predecessor, the flamboyant Willie Purves, spent the late 1980s and early 1990s snapping up properties in a bid to turn the more than century-old Hongkong & Shanghai Banking Corp. from an Asian-based colonial bank into an international powerhouse. Now it's up to Bond to make the patchwork of acquisitions a seamless operation that follows a common playbook.
STARTING GUN. Early this year, Bond articulated a group strategy for the first time to senior managers at the group's rustic training center, Bricket Woods, outside London. The game plan, in fact, closely resembles Citigroup's. Although HSBC is smaller in size (table, page 66), both banks want to earn big profits by finding the perfect combination of consumer banking, asset management, investment banking, insurance, and corporate banking. They're both betting that they can cross-sell financial products, from credit cards to investment funds, around the globe. And they both are eyeing the possibilities of Internet banking on a global scale.
This is an ambitious strategy for a farflung group that doesn't have the same level of integration as Citigroup. Citigroup is well ahead of HSBC in asset management and insurance, while they both are chasing retail customers from Buenos Aires to Bombay, analysts say.
It's the possibilities of a global retail network that most intrigue Bond. Not just the ho-hum business of taking deposits: Bond's mantra is "wealth management"--doing everything from offering mortgages to Brazilians to investing the assets of his wealthiest Saudi Arabian clients. "We want to do 100% of our clients' business," declares Bond. That's the attraction of Republic Bank, which finance wizard Edmund Safra turned into a low-profile but lucrative private banking machine.
Technology plays a role here. HSBC was the first institution to offer online banking in Britain. And this fall, it will be the first bank in Britain to offer customers interactive banking services through their television sets, a joint project with Rupert Murdoch's British Sky Broadcasting. In Asia, it's about to launch an E-commerce service together with Compaq Computer Corp. And HSBC is pioneering screen-based stock-trading in Hong Kong. Still, analysts say HSBC's technology lags that of Citigroup, which allows customers to do more over computers and phones.
To get more high-end accounts, HSBC must improve its name recognition around the globe. That's why Bond has launched a $100 million global branding campaign to unite HSBC's 5,000 offices in 79 countries under a single name for the first time. From bank branches on New York's Upper West Side to offices in Malaysia, HSBC's 20 million clients will now be greeted by its distinctive red-and-white, hexagon-shaped logo.
It could take years for HSBC to become more of a household name, and it may never be able to rival Citi on that score. Nevertheless, Bond is determined to finish the job that Purves started of turning HSBC into a top-performing, truly global bank. Bond's goal is to balance earnings equally between developed and developing countries. So he's going to keep making strategic acquisitions. He's looking at two banks in Thailand, Bangkok Metropolitan and Siam City Bank. And HSBC may consider upping its 20% stake in Mexico's Banco Serfin.
Bond has plenty of strengths to leverage. The bank already ranks among the most profitable. Earnings for the first half of 1999, released Aug. 2, showed profits of $2.7 billion, up 12% from the same period in 1998. Return on equity was 15.9%. That's impressive given that HSBC's chief franchise--the economy of East Asia--is still recovering from the worst financial crisis since World War II. Says Ronnie C. Chan, chairman of Hong Kong property developer Hang Lung Development Co. and a longtime customer: "HSBC can survive problems like the Asian crisis better than almost anybody else."
Still, Bond isn't satisfied. He wants to get HSBC's return on equity back above 20%, where it was before Asia's markets tanked. And it's true that HSBC's profit performance varies sharply from market to market. In Asia outside of Hong Kong, for example, HSBC has run into trouble. Although bank officials won't comment, HSBC is believed to be one of the largest foreign lenders to Daewoo Group, which is dangerously close to defaulting on its $10 billion in foreign debt. Risk controls were less stringent in Malaysia, which accounts for half of the $425 million in bad debts in HSBC's Asian portfolios outside Hong Kong. But HSBC Bank Malaysia Berhad plans to cut its workforce by 1,000 people by yearend. Meanwhile, the recession in Argentina is hurting profits as HSBC boosts its provisions for bad loans.
These problems underscore the importance of Bond's plan to bring in the cash-generating Republic Bank, whose acquisition may now be delayed by the investigation. Most analysts think that the deal will eventually go through but that Bond may be able to shave the price. Assuming the takeover is completed, Republic would double HSBC's private banking business overnight by bringing in 30,000 clients from Europe, Latin America, and Asia and 50,000 U.S. retail customers. "Republic will give us a jump of 10 years in high-end private banking," says Bond, who hopes to sell a broad range of financial products to Republic's clients. At the same time, Bond plans to gain as much as $350 million in aftertax savings by bringing together the HSBC and Republic back offices. Analysts expect the bank will close up to 20 of its 450 New York branches.
TUBE COMMUTER. To oversee that task, Bond has asked Jim Cleave, the former CEO of HSBC Canada and Marine Midland, to come out of retirement and serve as Republic's new CEO. Known as a cost-cutter, Cleave will have to take his knife to Republic's staff costs, which average nearly twice those of HSBC, one of the most tight-fisted employers in the business.
That policy comes straight from the top. Bond earns $1.1 million--a far cry, for example, from Citigroup co-chief Sanford Weill's $167 million compensation. Bond takes the London underground to work and is known for admonishing co-workers to switch off the office lights. HSBC execs are required to fly economy class.
Bond's personal life is just as mundane. "I'm married, with three children and a dog--thoroughly boring," he offers by way of personal information after persistent prodding. "You won't find any star culture around here," adds Bond, who joined HSBC when he was 19 years old, after working on a cargo ship that sailed from Long Beach, Calif., to Hong Kong. Known as a technocrat and a quiet consensus builder, he earned his spurs in the late 1980s in Buffalo, where he turned around the old Marine Midland Bank acquired by his predecessor, Purves. Then he moved on to Britain's Midland Bank. He was named chairman of HSBC in May, 1998.
The Midland turnaround shows HSBC at its best. HSBC paid $6 billion for control of Midland, the smallest of Britain's four major commercial banks, in 1992. Since then, the bank has slashed 4,000 jobs, increased income, and poached a sizable share of the British mortgage market across its 1,700 branch network. And it has made a major push into wealth management. Sales of insurance and investment products rose by 18% in the first half of this year alone.
HITTING THE BEACH. All these efforts have made Midland one of Britain's most profitable banks. Pretax profits for the first half of 1999 increased 12%, to $1.5 billion, and return on equity hit 27%. "It is clear that Midland benefited enormously from HSBC's network and scale," says Simon Samuels, senior banking analyst at Salomon Smith Barney in London. Bond hopes to integrate Republic into the HSBC group in much the same way.
Midland's profits have countered the turmoil in Asia. When the Asia crisis started to brew, Bond dispatched members of the bank's SWAT team, an elite group of 370 international officers handpicked and groomed by top management to parachute into troubled markets and whip the franchise back into shape. Within the industry, the cadre of executives is often described as the marines of HSBC.
Hong Kong's high-flying property mogul and infrastructure developer Gordon Wu was one of the first to get a call from the marines. "They told me only one thing, `Don't put more money into Bangkok,"' recalls Wu, who was pouring money into a troubled Bangkok mass transit project. He toughened his stance in negotiations with Thai authorities and avoided default on his debt to HSBC, although his company had to write off more than $600 million. The team was stern with other borrowers, too. It issued warnings to one of Hong Kong's most aggressive developers, Lai Sun Group, forcing it to shed such assets as New York's Four Seasons Hotel to raise cash.
Now that the crisis is ebbing, HSBC has to deal with the changing banking business in Hong Kong. For years, HSBC has enjoyed a privileged position as a leading member of the local interest-rate cartel, which has allowed HSBC and other banks jointly to set interest rates, essentially locking in fat returns. But the cartel is set to be dismantled over the next two years, so the spreads between what HSBC pays depositors and what it charges borrowers are sure to narrow. To make up the difference, HSBC figures it will have to charge for services that are now free, such as low-balance checking accounts and checks. That could scare some customers away. But HSBC hopes its marketing clout will make it a winner, while many smaller banks will be forced to merge.
HSBC is also boosting its Asian income by playing a more aggressive game. In Japan, for example, HSBC is helping Japanese companies restructure their operations and sell off money-losing units. The bank handled the bidding war for International Data Communications Inc., a telecom player acquired by Cable & Wireless PLC. Before, "HSBC was regarded as a fragmented player," says Stuart D. Pearce, chief executive officer of HSBC Securities Japan Ltd. But "we are starting to show up on the radar screen as a big integrated player."
That's exactly what John Bond aims to do, more and more. Much depends on quickly bringing Republic Bank into the HSBC fold and finding other properties to turn into quiet money machines. HSBC has come a long way since the days when it was a sleepy Hong Kong bank. But the final step from contender to champion is always the hardest.