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As Gulliver's Sun Sets, HSBC Should Look East

As Gulliver's Sun Sets, HSBC Should Look East

(Bloomberg Gadfly) -- It may not seem it, but Stuart Gulliver is ending his seven-year tenure as HSBC Holdings Plc's chief executive officer with plenty of shareholder giveaways behind him.

While fourth-quarter results disappointed and there wasn't any word of a buyback as the bank announced financial results Tuesday, it has been generous in the past, with $5.5 billion in payouts since August 2016. On top of that, restructuring has lowered risk, a slew of regulatory fines are history and there's also the prospect of rising interest rates.

Now the lender, a favorite with Chinese investors and Hong Kong depositors, will have to start justifying that love and improve returns.

As Gulliver's Sun Sets, HSBC Should Look East

Come Wednesday, Gulliver will hand the reins to John Flint, HSBC's chief executive of retail banking and wealth management. He leaves a financial institution in good shape.

HSBC reported full-year adjusted pretax profit of $21 billion, up from $18.9 billion in 2016 but missing the lowest estimate of $21.1 billion. The London-headquartered lender also highlighted an $188 million increase in loan impairment charges for the fourth quarter, driven mainly by two corporate borrowers in Europe.

Still, adjusted revenue for the 12 months was $51.5 billion, 5 percent higher than 2016 and the bank's first full year of gains after five consecutive annual declines. Crucially, HSBC's operating jaws, or revenue growth minus cost growth, are positive, at 1 percent. HSBC also has a sound capital position, with a common equity Tier 1 ratio of 14.5 percent and a leverage ratio of 5.6 percent.

Much credit must go to Gulliver's pivot to Asia strategy. He's worked to shift HSBC's business mix toward the region, with growth of 15 percent and 20 percent in revenue and customer lending respectively versus 2014. If Flint is smart, he'll maintain that focus.

As Gulliver's Sun Sets, HSBC Should Look East

HSBC is still too dependent on the U.K. and Europe, as well as North America. That's the case even after it axed more than 87,000 jobs since 2011 and exited about 100 businesses and 18 countries.

France is a low-return market, while HSBC has been hurt by money-laundering allegations in Mexico. In the U.S., HSBC is a bit player. In investment banking, its focus is bonds and loans, and it falls down on M&A advisory.

HSBC is also heavily exposed to the U.K., where mortgage balances during the fourth quarter rose 7 percent to $8.2 billion. This at a time when property prices in the country are increasing at below the 10-year average and people are calling the end of the London housing boom.

Surely a better idea would be to hone in further on Asia. Tuesday's fourth-quarter interim dividend of 21 cents a share will keep mainland Chinese money flowing through the stock connect into Hong Kong, while booming trade flows among emerging markets can only benefit the bank.

In Asia, HSBC's brand is nonpareil, and considering the region's wealth, it would make sense to beef up in private banking and insurance. HSBC should aim to become the go-to lender for global multinationals wishing to do more business in Asia, especially at a time when Brexit worries are causing headaches in Europe.

HSBC also counts the funds arm of Ping An Insurance Group Co. as its second-largest shareholder -- closer ties could help it increase its presence in China, one of the world's biggest and fastest-growing markets for insurance products.

Rising interest rates should help HSBC boost net interest margins, although like all banks in Hong Kong, the city's super-competitive property market makes it hard to pass any hikes onto home buyers.  A fixed-rate mortgage of 1.68 percent for the first year is already among the lowest in the former British colony. Plus with a loan-to-deposit ratio of 70.6 percent, it's sitting on too much money.

Still, with their backgrounds, Flint and Mark Tucker, the ex-AIA Group Ltd. head who's now HSBC chairman, know what works in Asia.

For now, HSBC may be able to bask in the afterglow of Gulliver's turnaround. When that sun sets, it should turn its attention east.

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

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

  1. HSBC's net interest margin in the fourth quarter fell from a year earlier. HSBC attributed the decrease to lower yields on customer lending, and margin compression in Europe and Asia.

To contact the author of this story: Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net.

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net.

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