HSBC Holdings PLC is lining up further acquisitions in Asia as it targets wealthy consumers and is confident it can steer a path through the challenges of operating in Hong Kong and China.
The British bank struck a $575 million deal for AXA Insurance Pte. Ltd. in August, an example of a number of "bolt-on" acquisitions that the lender is assessing as part of its strategic tilt toward Asia. HSBC, under Chairman Mark Tucker, aims to revitalize its share price by shifting $100 billion of capital to Asia, where it made $7.1 billion profit in the first half compared with $2.7 billion in Europe, and adding 5,000 staff to its Asia-based operations.
"I suspect wealth manager acquisitions would be a focus for the bank in Asia. Growing wealth management assets under management profitably, earning double-digit return on tangible equity, would validate the strategy," said John Cronin, analyst at Goodbody, via email.
Additional deals in Asia are aimed at developing HSBC's Asia wealth business and are all likely to be around the $500 million mark, Group CFO Ewen Stevenson said at the bank's second-quarter results.
Accelerate in Asia
In the same earnings presentation, Group CEO Noel Quinn told investors that the bank was looking for companies with product and distribution capabilities to accelerate its growth plans in Asia.
"On Wealth bolt-ons, we're clearly looking at pan-Asia. We believe we have good organic growth opportunities with the platform we have in Hong Kong. We're organically investing in China to grow our Wealth business there," Quinn said.
"We're willing to invest organically in the rest of Asia. But if we can find some bolt-on acquisitions that can accelerate those organic investment plans, that would be helpful. We are looking at three to four as we speak, and they are a combination of products and distribution capabilities being acquired in areas such as insurance, high net worth wealth management and asset management."
HSBC's intention is to retreat from slow-growing markets in Europe and the U.S., while cutting 35,000 jobs, with the aim of becoming a market leader in fee-based, wealth management operations in Asia. It is relocating key executives from London to Hong Kong and Quinn has said the bank's strategy is paying off.
"We've already seen strong traction in our Asia Wealth business, with global Wealth balances up more than $250 billion or 18% in the last 12 months. This was driven chiefly by growth in assets under management rather than deposits. We've expanded our Asia Wealth franchise, recruiting around 600 new frontline colleagues and growing affluent and high net worth customers in Asia by 7%. While it's early days, we're seeing promising productivity data from our Pinnacle wealth planners in mainland China with exciting momentum within the business. Because of that, we're accelerating the rollout of Pinnacle to five new cities in mainland China and planning to hire 100 more wealth planners this year than we had originally planned," said Quinn at results.
A program that allows banks in Hong Kong to sell offshore wealth management products in some of the wealthiest cities in southern China began earlier this summer. The so-called Wealth Management Connect program will allow banks to sell mutual funds and other offshore investment products to residents who meet certain financial criteria in nine cities in mainland China.
HSBC's long-held determination to "pivot to Asia," as former CEO Stuart Gulliver said six years ago, has seen the bank come under fire from political authorities in both the West and China and it could face further potential difficulties.
The bank drew criticism from the U.K. and U.S. last year when it backed a new Chinese security law prohibiting secessionist and subversive activity in Hong Kong. It has also frozen some activists' accounts when requested to do so by China and has faced recent further criticism in the U.K. from parliamentarians on the issue. In July, U.S. President Joe Biden said China's government was not keeping its commitments to the territory and the U.S. State Department issued a business advisory note warning companies about the risks of doing business in Hong Kong.
HSBC declined to comment but has said previously that its policy is to comply with the laws of the territories in which it operates.
Indeed, Tucker took a confident line while speaking to an audience in Hong Kong this month in a video obtained by Bloomberg. Tucker said business opportunities in China were "too big to ignore." He said the U.S. and China were moving toward a status quo and he did not think the bank would be in a position where it had to take sides.
However, the bank's difficulties in this area are set to mount since China is planning to introduce new laws in Hong Kong and Macao that could bar foreign firms and people from complying with Western sanctions against China. This follows legislation already introduced in China itself in June where a law barring foreign entities and individuals from complying with foreign sanctions was passed after sanctions were imposed on it by Europe and the U.S.
"It is not inconceivable that an action taken by a bank in order to be consistent with U.S. sanctions, for example closing the accounts of a sanctioned individual, could incur the anger of Beijing. The Chinese government has a number of tools to 'punish' a bank in such circumstances and the anti-foreign sanctions law would be another such tool," said Ambassador Kurt Tong, previously U.S. consul general and chief of mission to Hong Kong and Macao and now a partner at The Asia Group, via email.
'China pumps the brakes'
China was expected to introduce the laws into Hong Kong in August but has now postponed their introduction. The laws will now go through the Hong Kong legislative procedure instead of being passed straight into Hong Kong law by China.
"I think the fact that China has pumped the brakes on the Hong Kong version of the anti-foreign sanctions law shows that they recognize that these laws could have harmful effects on companies doing business in Asia and the U.S. and West. China has passed a number of laws which have been in response to western laws against China and each one has been passed with a lot of fanfare but there hasn't been a lot of enforcement," said Ben Kostrzewa, foreign legal consultant at law firm Hogan Lovells and former assistant general counsel at the Office of the U.S. Trade Representative. He declined to comment directly on HSBC.
Nicholas Turner, a lawyer at Steptoe & Johnson LLP in Hong Kong who specializes in economic sanctions, would not comment specifically on HSBC but said via email that most multinational financial institutions should be able to resolve potential conflicts as most U.S. sanctions do not impose an across-the-board prohibition on business while the ones that do are only legally applicable to "U.S. persons," that is companies incorporated in the U.S. excluding locally incorporated subsidiaries of U.S. companies.
"If I heard a banking executive say they believed the business opportunities in China and Hong Kong vastly exceeded the current risks associated with sanctions and anti-sanctions, I would agree completely with that assessment," Turner said.