Why Shareholders Are Picking on HSBC

They want takeovers, not just solid returns

John Bond runs the world's second most profitable bank. But no one will ever accuse the chairman of Britain's HSBC Holdings PLC (HBC ) of living it up at shareholders' expense. Bond is a notorious penny-pincher. His latest money-saving trick: For trips to the London airport, he sometimes calls a motorcycle service that zips him through traffic faster and more cheaply than a taxi. Cost efficiency is "a way of life for us at HSBC," says the 60-year-old Bond.

HSBC's conservative strategy is paying off, even as economies and markets slump in the 78 countries where the bank operates. Its earnings have held up far better than those of its peers (table). On Aug. 6, the 136-year-old bank posted solid half-year results. Group pretax profit was $5.4 billion, up 4% from the same period in 2000, not bad in this market.

So should Bond's tightfisted approach be a model for the industry? Investors apparently don't think so. The bank's share price has been pummeled. Its stock is down 18% in dollar terms this year, on par with Merrill Lynch & Co. (MER ) and Morgan Stanley (MWD ), investment banks that had dizzying drops in second-quarter earnings. Citigroup (C )--the world's most profitable bank--reported only marginally better earnings than HSBC, but its stock has held up much better.

Clearly, Bond has a problem getting respect from investors. Analysts say the market is telling HSBC it needs to beef up its services, especially in such areas as insurance, where Citigroup has the upper hand with its Travelers subsidiary. Corporate customers, in particular, want one-stop financial shopping. Moreover, points out Bear, Stearns & Co. analyst Michael Trippitt, "there is some confusion in the marketplace about HSBC's aspirations in investment banking," an area where Citigroup, J.P. Morgan Chase, and Bank of America are bulking up. In the past, HSBC insisted it only wanted to get 10% of total profits from the volatile trading business. Lately, Bond has stopped stressing the point. Is that a sign? Perhaps, but "HSBC's management is incredibly prudent, and they'll only move at the right time," Trippitt says.

A DURABLE RUMOR. That's one reason why the market remains fixated on HSBC's relationship with Merrill Lynch. For some time, rumors have swirled that HSBC would nab the No. 1 U.S. brokerage. Bond insists he won't make a move just to thrill the markets. "We have the greatest respect for one another," he says of Merrill. "There are lots of people out there whom we respect and admire, but that doesn't mean we are going to become united."

Bond has never quite denied he would make a play for Merrill, with which HSBC now runs an online bank. But as long as shareholders don't apply too much pressure, he can afford to wait. Meanwhile, he is doing what he is best at: taking the numerous midsize acquisitions the bank has made of late and integrating them into its rigorous, profit-driven culture. The bank is still digesting two acquisitions it made in 2000, Republic Bank of New York and Safra Holdings in the U.S., and Credit Commercial de France, one of France's most profitable banks.

CCF is turning out to be especially promising. "We both have the same set of values, which makes for an easy integration," says CCF Chairman Charles de Croisset. Buying CCF gave HSBC a much needed entree into the euro zone--a priority area since the lucrative market in euro-denominated bonds goes increasingly to Continental banks.

At the same time, HSBC has won plaudits for making acquisitions in markets such as Taiwan, Greece, and Turkey, where Bond has found good value. But the markets will remain wary until Bond makes a splashy purchase in asset management or investment banking--or convincingly demonstrates that slow and steady will keep winning the race.

By Kerry Capell in London

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