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HSBC's defence is sturdier than Standard Chartered's

Paul J Davies
Paul J Davies2/23/2023 02:52 PM GMT+08  • 4 min read
HSBC's defence is sturdier than Standard Chartered's
HSBC’s headquarters in Hong Kong. The bank’s valuations are moving rapidly back to pre-Covid levels / Photo: Bloomberg
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HSBC Holdings and Standard Chartered both have unwanted attention from outsiders: HSBC’s biggest investor is demanding a break-up, and a potential suitor from Abu Dhabi is threatening the latter’s independence.

Each London-based lender wants to plough its own furrow and stick to its strategy. Their defence tactics have been remarkably similar: Keep shareholders quiet by putting cash in their pockets. Cost-cutting and capital savings have been the route to achieving this for both, too. HSBC’s rearguard action looks more successful after 2022 results.

Both are signalling bigger payouts to come, although investors are being asked to take these promises on faith somewhat for now. Details on the size of share buybacks, in particular, remain vague. Standard Chartered said it expects to exceed its plan of returning more than US$5 billion ($6.7 billion) to shareholders by the end of next year — it has unveiled US$2.8 billion of dividends and buybacks since the start of 2022.

HSBC, meanwhile, will restart buybacks this quarter, but it did not reveal how much it would spend and declined to say whether buybacks would be repeated. It is increasing dividends and making them more regular again, plus it pledged a US$4 billion special dividend once the sale of its Canada business is completed next year. Most of this did not look at all likely after third-quarter results when its capital levels fell below its own target range. But the bank has fixed the hole quickly, helped by strong interest income growth and a lower tax bill than expected.

External pressure

It is slightly surprising that these two are under such external pressure given their focus on Asia, with its high growth and burgeoning middle classes. China’s extended Covid-induced economic hibernation has not helped, but HSBC and Standard Chartered both had their own issues, too.

See also: UBS’s Khan vows retention plans for Credit Suisse Asia staff

HSBC had too much low-return business that added nothing to its main selling point of being the bank for globally interconnected trade and finance flows. Standard Chartered’s lending was too concentrated in large individual companies in India and in some higher-risk industries such as energy and mining. Both have shed assets and reduced the riskiness of their balance sheets while cutting costs.

The result has been a steady reduction in risk-weighted assets, which are used to set capital requirements, as a proportion of total assets. This has released capital for both HSBC and Standard Chartered, but both remain riskier than other UK-listed banks.

More efficient balance sheets and expense reductions have helped both banks boost profitability too: Returns on risk-weighted assets have risen. Standard Chartered still lags HSBC on this measure, but again both still look worse than UK-focused rivals such as NatWest Group or Lloyds Banking Group.

See also: UOB CEO Wee Ee Cheong's salary grew by 30.2% y-o-y to $14.2 mil after UOB's record-high earnings for FY2022

External agitator

HSBC’s external agitator, its lead shareholder Ping An Insurance Group, became unhappy when UK regulators forced the bank to stop paying dividends during the Covid pandemic. It has been pushing for a break-up based on the view that the Asia business makes better returns and would be more highly valued if listed separately. Higher payouts might placate Ping An, but HSBC’s results also show that the investor’s reasons for a split look misguided, at least right now.

HSBC’s ring-fenced UK bank has improved its returns markedly at a time when the Hong Kong arm has suffered. The return on UK risk-weighted assets has jumped significantly and is better than Lloyds, NatWest and HSBC’s Hong Kong bank. Ping An should take note: Better growth and profits in Asia are far from guaranteed.

Standard Chartered’s unwanted interest comes from the persistent rumours that First Abu Dhabi Bank is considering a takeover bid. This would be a complicated and risky undertaking: The regulatory approvals required for a bank that operates in nearly 60 countries are enough of an obstacle for a start.

China’s reopening should be a boon to these banks, stimulating economies throughout Asia even if geopolitical shadows cast by EastWest tensions show no sign of lifting. But Standard Chartered’s investors have been left much less impressed by its potential for growth and capital returns than those at HSBC. It still trades at a big discount to book value, while HSBC is moving more rapidly towards its pre-Covid valuation.

Of the two, Standard Chartered looks more vulnerable to those outside forces. — Bloomberg Opinion

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