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What next for HSBC after preventing Ping An from carving up Hong Kong's largest bank, quelling shareholder revolt?

For much of the past year, HSBC, the largest of Hong Kong's three currency-issuing banks, has faced pressure from its biggest shareholder, Ping An Insurance Group, and a vocal contingent of frustrated retail investors in the city to break up the bank.

The London-based bank's management argued that its core strategy centred around its international network, driven by its strength in growth markets in Asia, and said a spin-off of the Asian business suggested by some shareholders would be too costly and not drive higher returns.

Last month, HSBC prevailed in a contentious shareholder vote at its annual meeting in Birmingham, England, where no major shareholder other than Ping An voted in favour of splitting the lender's Asian business.

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HSBC executives have pointed to its improved profits and greater ability to return capital to investors as signs its strategy is paying off, but will its recent performance, a US$2 billion share buy-back this year and promises of a higher dividend payout in the future be enough to placate Ping An and other frustrated shareholders?

"We have spent the last three years transforming the Asia business, fine-tuning the portfolio and investing in technology to provide an integrated international offering for our customers, and ultimately generating strong returns for our shareholders," HSBC CEO Noel Quinn said as part of an investor and analyst seminar in Hong Kong and in Singapore in late May. "All parts of HSBC Asia are now motoring.

"We have proved that our globally interconnected offering is needed and valued now more than ever before."

Generating the bulk of its pre-tax profit in Asia, HSBC has faced a challenging operating environment since former CEO John Flint was ousted after 18 months in the top job and replaced by Quinn in 2019.

The bank's biggest market, Hong Kong, saw its economy battered first by civil unrest in 2019 and then by three years of zero-Covid restrictions in an effort to control the spread of Covid-19, which disrupted travel and investment in the city.

At the same time, HSBC found itself caught in the middle of rising geopolitical tensions between China, where it has operated since its founding in 1865, and the West, including its support for the introduction of a controversial national security law in Hong Kong in 2020.

Central banks kept near record low interest rates in place much longer than expected in response to the coronavirus pandemic.

In recent months, a banking crisis sparked by the collapse of Silicon Valley Bank (SVB) and other US regional banks has also weighed on lenders globally, with UBS acquiring its Swiss rival Credit Suisse amid a crisis of confidence and HSBC acquiring SVB's UK arm.

But, the biggest rift between the bank and its shareholder base came three years ago when HSBC's chief regulator, the UK's Prudential Regulation Authority, asked the lender to cancel its final dividend for 2019 and suspend its dividend in 2020 to ensure it had enough capital on hand to support the economy during the pandemic.

The dividend suspension rankled HSBC's large retail shareholder base in Hong Kong, as well as Ping An, who began calling for a spin off of the bank's Asia business last year.

It also hurt many Hong Kong pensioners who had come to rely on the regular payments to supplement their income.

"HSBC should treat Hong Kong shareholders better as many Hong Kong people have supported the bank for decades," Stephen Hui Chiu-chung, chairman and CEO of Luk Fook Financial Services, said. "The bank should invest more in Asia and Hong Kong."

Amid those challenges and ongoing tensions with some shareholders, the outlook has started to turn more positive for HSBC in recent months.

Hong Kong removed the last of its zero-Covid restrictions in March and the city's economy is expected to grow between 3.5 per cent and 5.5 per cent this year after contracting in three of the past four years.

Pedestrians in Causeway Bay on the first day after the government lifted its mandatory mask-wearing requirement in March. Photo: Dickson Lee alt=Pedestrians in Causeway Bay on the first day after the government lifted its mandatory mask-wearing requirement in March. Photo: Dickson Lee>

The reopening of China's economy also is expected to boost global growth - and trade between the East and West, a sweet spot for HSBC, the largest foreign bank by assets in the mainland.

China's economy is expected to grow by 5.2 per cent this year, after its gross domestic product increased a modest 3 per cent in 2022, according to the International Monetary Fund.

"We continue to like Asia where we see potential for premium growth as China emerges from lockdowns," Keefe, Bruyette and Woods analysts Perlie Mong and Edward Firth said in a May 17 research note.

"HSBC is well-positioned for a more demanding global economic environment given its low gearing to credit and strong deposit franchise."

Another positive for HSBC: China's property sector appears to be stabilising after years of stress among debt-laden developers.

"While homebuyers may have lingering concerns over home affordability, project incompletion risk and defaults by developers, we believe the risk of a further sales decline from the trough in the second half of 2022 is low," said Kelly Chen, a Moody's Investors Service senior analyst, in a May 15 research note upgrading its outlook for the nation's property sector from negative to stable.

"This is because of the more favourable policy and operating environment that will support sales."

In the first quarter, HSBC took a US$62 million charge related to credit quality adjustments in its China commercial real estate portfolio and reported no defaults during the period as conditions improved in the sector.

By comparison, the prior year's quarter included US$410 million in provisions related to its Chinese commercial real estate loan portfolio and its exposure to Russia.

HSBC said in May that it now has an ambition of achieving at least 12 per cent return on tangible equity (ROTE) for 2023 and beyond. Excluding one-time items, its ROTE was 19.3 per cent in the first quarter.

However, Ping An has argued that much of the bank's improved performance in the past year has stemmed from the rapid rise in interest rates, rather than underlying improvements in HSBC's operations.

"HSBC Group and HSBC Asia performance continues to significantly underperform peers despite absolute performance improving," Michael Huang, the chairman of Ping An's asset management arm, said in an April 18 statement calling for the separation of the Asia business.

Even with Ping An's concerns, investors appear to be betting on HSBC's potential for future growth.

HSBC CEO Noel Quinn addresses shareholders during the bank's annual general meeting in Birmingham, England, in May. Photo: Chad Bray alt=HSBC CEO Noel Quinn addresses shareholders during the bank's annual general meeting in Birmingham, England, in May. Photo: Chad Bray>

HSBC's shares in Hong Kong were trading just below its 52-week high on Friday and is near its highest level since January 2020. The bank's shares hit a 25-year low at one point during its dividend suspension in 2020.

Despite the improved outlook, there is more to do as HSBC places an even greater emphasis on Asia under Quinn.

As part of its strategic plan three years ago, Quinn said the bank would shift more capital from underperforming markets and businesses in the West to Asia, including investing US$6 billion in its wealth management and wholesale banking operations in Asia over a five-year period.

Since then, the bank has announced plans to sell its French retail bank, exit its mass market retail business in the United States and sell its businesses in Canada, Greece and Russia.

The US exit has been completed, but HSBC said the sale of its French bank was "less certain" in April as an unexpected rise in interest rates since the deal was agreed in June 2021 has "significantly increased" the capital requirements for the buyers at closing.

Quinn has said the bank still believes it is right to sell the business, but is keeping shareholders' interests in mind as it seeks to negotiate revised terms with Cerberus Capital Management-backed My Money Group.

HSBC said in May that it now expected its sale of its Canadian business to Royal Bank of Canada to be completed in the first quarter of 2024 to ensure a "smooth transition".

The Canadian sale is important, as HSBC said it is considering returning a portion of the excess capital from the sale to investors through a special dividend of 21 US cents a share in the first half of next year.

The bank is expected to complete the Greece and Russia sales in the first half of this year and is conducting reviews of as many as another dozen smaller markets, which it could exit. Reuters first reported the smaller markets review last week. HSBC operates in 62 countries and territories globally.

At the same time, the bank faces the challenge of integrating several new businesses that could be key to its future growth.

In March, HSBC acquired the British arm of SVB for a nominal £1 (US$1.24), which the lender believes will give it greater exposure to cutting-edge life sciences and technology companies.

The bank reported a provisional gain of US$1.5 billion from the acquisition as part of its first-quarter results.

HSBC also has reportedly agreed to buy out its partner in its mainland China fund management joint venture, the latest move to consolidate control of its onshore businesses.

If approved, HSBC will take full control of HSBC Jintrust Fund Management and have greater access to China's US$3.8 trillion fund management market, Reuters reported last month, citing sources.

The bank bought out its China life insurance joint venture partner three years ago. It also has been bulking up its wealth management and private banking staff as it has pursued higher income clients in recent years.

Campaigners protest in front of HSBC's annual meeting at The Eastside Rooms in Birmingham, England, in May. Photo: Chad Bray alt=Campaigners protest in front of HSBC's annual meeting at The Eastside Rooms in Birmingham, England, in May. Photo: Chad Bray>

However, HSBC may not be out of the woods with some of its Hong Kong shareholders, despite prevailing in the vote at its May 5 annual general meeting.

Ken Lui Yu-kin, the leader of the minority shareholder body "Spin Off HSBC Asia Concern Group", said he plans to bring resolutions at next year's annual meeting, including seeking to move HSBC's headquarters to Hong Kong and to nominate a "Hong Kong heavyweight" as a director to represent the city's shareholder base.

"Our mission is achieved. Our lobbying and the two proposals at the AGM have forced the management of HSBC to do more to improve the share prices and performance," Lui, a property and stock investor, told the Post.

"What I want to see is if the bank listens more to the voice of Hong Kong-based shareholders and improves its corporate governance and business performance further," he said.

Louis Tse Ming-kwong, managing director at Wealthy Securities, said he wishes shareholders and HSBC's management could put aside their differences.

"The minority shareholders and Ping An Insurance have made their points very clear to the management of HSBC," Tse said. "If they keep arguing with the management, that will affect the image of the bank, which may affect its share price and the shareholders will suffer as a result."

"While the shareholders may have their own thinking, they should trust the management, who are professionals, to run the daily businesses of the bank," he said.

Mrs Mak, a Hong Kong shareholder since the 1980s who asked only to be identified by her surname, said she appreciated that the bank's management has responded to concerns raised by shareholders in recent months.

"While they decided not to split up the business, they have introduced many new measures to improve the operations and development of the bank," she said.

"It would be impossible for the management to satisfy every shareholder, but at least they are trying to communicate with the shareholders."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2023. South China Morning Post Publishers Ltd. All rights reserved.

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