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HSBC Refugees May Find a Stable Home in China

Nisha Gopalan
·4 min read

(Bloomberg Opinion) -- China’s banks may be about to assume the mantle of the ultimate widows-and-orphans home for Hong Kong’s small investors.

For decades, HSBC Holdings Plc has held that status — a reliable provider of investor income that even carried on paying dividends through the global financial crisis in 2008-2009. Hong Kong’s biggest bank hadn’t missed a payout in Bloomberg-compiled data going back to 1986. That changed Wednesday when London-headquartered HSBC scrapped its interim dividend in response to a request from the Bank of England. The lender’s stock plunged 9.5% in Hong Kong, the most in more than a decade.

It’s difficult to overstate the importance of HSBC to individual investors in the city where it was founded more than 150 years ago. The stock is unusually widely held. Institutions own just 61.5% of the shares, compared with 94% for Standard Chartered Plc, HSBC’s London-based and Hong Kong-listed rival. Standard Chartered also cancelled its dividend along with other British banks after the BOE called on them to conserve cash amid the coronavirus pandemic.

HSBC’s dependable payouts have also been a lure for institutional investors. Shenzhen-based Ping An Insurance Group Co., the bank’s second-largest shareholder, cited the dividend as an attraction for taking its 7% stake. Mainland Chinese investors will also be feeling the pain: As much as 8.2% of HSBC’s Hong Kong-listed stock sits with investors who bought via trading pipes that connect the city’s exchange with counterparts in Shanghai and Shenzhen. That’s risen from about 2% three years ago.

HSBC said it would cancel an interim dividend slated to be paid this month and make no payouts or buybacks until at least the end of the year. That raises the question of where investors will turn in search of the stable income that they used to take for granted from HSBC. The answer may lie in the bank’s giant, state-controlled rivals across the border in mainland China.

That might seem surprising. Shares of Industrial & Commercial Bank of China Ltd., and three fellow Chinese lenders that are members of Hong Kong’s benchmark Hang Seng Index, have languished over the past decade. Their poor performance reflects investor concerns that China’s post-financial-crisis buildup of debt will eventually lead to a surge in bad loans. ICBC’s Hong Kong-traded shares are 13% lower than they were a decade ago, and Bank of China Ltd. has slumped 27%. While China Construction Bank Corp. has lost only 1%, Bank of Communications Co. has fallen 44%.

Yet all have been steady dividend payers. Including dividends, ICBC has returned 46% in the past decade, Construction Bank 65% and Bank of China 28%. Only Bocom has lost money for its investors.

The four banks have typically traded at high dividend yields over that period. Yields for ICBC, Construction Bank and Bank of China have all averaged more than 5%, with peaks higher than 8%. Elevated yields often indicate that investors expect payouts to be cut or omitted altogether, but dividends have actually been rising at the Chinese banks in recent years.

China’s opaque financial system and the state-owned banks’ status as policy tools of the government have helped to deter some investors. Yet with the coronavirus shutting down economies from the U.S. to Europe and pressuring financial systems, it’s debatable whether Chinese institutions should be seen as any more risky than their overseas counterparts.

For one thing, having been first into the coronavirus outbreak, China’s economy is also the first to start getting back to normal. For another, the government has an incentive to ensure that the banks keep paying dividends because it relies on that income to fund social security spending. An unofficial rule has mandated the big state banks to pay at least 30% of their profits out as dividends, another reason to be sanguine that payouts will be sustained.

In 2016, HSBC chose to keep its headquarters in London rather than move back to Hong Kong, a call that it may now be tempted to revisit. It would be ironic if a decision by its adopted jurisdiction helped send shareholders in the bank’s home city — and biggest market — scurrying into the hands of Chinese rivals.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

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