HSBC Holdings PLC's decision to support China's proposed security law in Hong Kong could tarnish the U.K. bank's reputation and prompt some customers, including corporate clients, to question their loyalty to it, analysts said.
HSBC — along with British peer Standard Chartered PLC, which has also endorsed the proposal — has come under pressure from politicians and investors after it supported China's move to impose the new law. Beijing signed off on the draft proposal that would prohibit secessionist and subversive activity in Hong Kong in response to last year's anti-government protests.
Hong Kong's secretary for security, John Lee Ka-chiu, told Hong Kong newspaper Wen Wei Po that the law would help maintain public order. But Britain, along with the U.S., Canada and Australia, has said it violates Beijing's obligations to guarantee Hong Kong's "one country, two systems" regime.
U.S. Secretary of State Mike Pompeo called HSBC's decision to support China on the issue a "corporate kowtow," and British Conservative Member of Parliament Tom Tugendhat, chair of the Parliamentary Foreign Affairs Select Committee, asked on Twitter why HSBC and StanChart are "choosing to back an authoritarian state's repression of liberties."
The U.K. opposition Labour Party's shadow foreign secretary, Lisa Nandy, and shadow chancellor, Anneliese Dodds, wrote to HSBC and StanChart saying they expected public attitudes to harden toward the banks as a result, and warned they could face boycotts of the kind seen aimed at the South African government during apartheid.
HSBC declined to comment for this article. Standard Chartered told S&P Global Market Intelligence: "We believe the national security law can help maintain the long-term economic and social stability of Hong Kong. The 'one country, two systems' principle is core to the future success of Hong Kong and has always been the bedrock of the business community's confidence."
U.K. insurer Aviva PLC, a top 20 investor in both companies, made its views on the matter clear. David Cumming, chief investment officer, equities, of global asset management arm Aviva Investors, said both banks had supported China's move without knowing the details of the law or how it will operate in practice.
"If companies make political statements, they must accept the corporate responsibilities that follow," Cumming said in an emailed statement. "Consequently, we expect both companies to confirm that they will also speak out publicly if there are any future abuses of democratic freedoms connected to this law."
Gary Greenwood, an analyst at investment bank Shore Capital, said HSBC was in a no-win situation when it came to speaking out over Hong Kong.
"It's damned if it does and damned if it doesn't, and it's particularly tricky because Hong Kong is the biggest and most profitable part of its business," he told S&P Global Market Intelligence.
In 2019, of HSBC's $13.3 billion profit, Hong Kong accounted for $12 billion with mainland China separately recording $2.9 billion, compared with a $3.3 billion loss in the U.K. and relatively negligible sums for its U.S. arm.
"I think there is a possibility that corporate customers will move their accounts out of [HSBC]," Greenwood said. "Reputational concerns are a very powerful force for global corporate customers now and pressure from politicians and the media can be very powerful indeed, and that could make big corporate customers think again about HSBC. They certainly won't gain any customers, let's put it that way."
Sam Theodore, managing director of Scope Insights, an independent research arm of Scope Ratings, pointed out the importance of customer attitudes.
"Banks are highly competitive over customers," he told S&P Global Market Intelligence. "HSBC is a global bank and it would be a little bit foolish to take its customers for granted. Public opinion counts and some customers may decide they don't want to keep their accounts at the bank anymore after this."
Some HSBC and StanChart customers already seem anxious about the banks' future. Sources with knowledge of the matter speaking to Reuters said each bank had seen a 25% to 30% spike in inquiries from customers in Hong Kong about opening offshore accounts following news of the potential new law, with concerns expressed over the possibility of U.S. sanctions affecting banking operations.
The bank is engaged in its biggest restructuring program to date, launched in February, which includes a $100 billion reduction in risk-weighted assets and could see its U.S. business cut back, further increasing its reliance on Hong Kong.
Adding to its challenges, retail investors in Hong Kong have threatened to sue the bank over its decision to refrain from paying dividends amid the coronavirus crisis. The Bank of England requested that all major U.K. banks take such a step.
While most of a dozen or so investors contacted by Market Intelligence declined to comment, one HSBC investor, HL Asset Management, said the bank's decision to support China could have far-reaching consequences.
"HSBC faces a dilemma and so far it appears to be seeking to avoid the displeasure of the most powerful actor on the stage, China. We will only know whether that was the best course for the business to steer some time further down the line," Steve Clayton, manager of the HL Select Funds at investment firm Hargreaves Lansdown, told S&P Global Market Intelligence.
HL Asset Management's investment in HSBC represents the combined position of its execution-only stockbroking clients and the firm has no control over these positions. Hargreaves Lansdown's head of investment analysis, Emma Wall, said HSBC's "political acquiescence" carried risks.
Analysts at investment bank Jefferies said in a June 1 note that, although the near-term headline risk regarding Hong Kong is likely to remain negative, they "emerge constructive on the medium-term fundamentals."
It suggested risks associated with Hong Kong for banks were "overdiscounted," saying there has been mounting investment concern around banks with large operations in Hong Kong since at least mid-2019.
Jefferies suggested that the proposed new law could have positive consequences in that it may make mainlanders more likely to return and buy property once the health restrictions as a result of the coronavirus pandemic are removed, "so the present situation may present a longer-term buying opportunity."
Share price volatility
HSBC's share price declined nearly 4% to 370 pence per share May 29 after the bank was directly targeted in a Facebook post by the former chief executive of Hong Kong, Leung Chun-ying, warning it to make its position on the proposed security law clear.
Following this, HSBC's Asia-Pacific CEO Peter Wong signed a petition in support of Beijing's proposal.
"We reiterate that we respect and support laws and regulations that will enable Hong Kong to recover and rebuild the economy and, at the same time, maintain the principle of 'one country two systems,'" the bank said in a post on Chinese social media platform WeChat.
Its share price closed at 382.05 pence per share June 17.
Pirc, a London-based independent shareholder advisory firm, said HSBC risked appearing to apply double standards toward the U.K. and China.
Spokesman Tim Bush told Market Intelligence that, on occasions when HSBC has not liked something in the U.K., such as ring-fencing banks to prevent the British taxpayer guaranteeing global operations of banks, or more recently the Bank of England asking it not to pay a dividend, it has threatened to relocate to Hong Kong, but when there are issues in Hong Kong "it seems to behave differently."