Ping An is at it again. On Tuesday, the chair of Ping An Asset Management, Michael Huang, issued a 2,200-word ‘J’accuse!’-style letter full of condemnation for HSBC, a lender that has so far refused to bow to demands by the Chinese insurer to break itself up and spin off its Asian business.
Huang didn’t hold back in a treatise that laid out how a “strategic restructuring” could work. He called for the creation of a “separately listed Asia business headquartered in Hong Kong” – a move that would, he promised, “crystallize multiple benefits” to all shareholders, cutting costs and driving higher returns.
He added: “It is necessary for HSBC to push for structural reform” to boost performance, enhance value and “fundamentally address [its] underlying market competitiveness issues.” The bank continued to “significantly underperform” on a like-for-like basis, he noted. Last year, it posted a return on equity of 9.9%, versus 12.5% for its global peers.
And he fulminated against the bank’s argument that a break-up would destroy value, not create more of it, outlined in detail at its 2022 interim results presentation.
Huang accused HSBC's management of “refus[ing] to countenance any benefits” accruing from a split and of “exaggerat[ing] many of the costs and risks” relating to, among other things, building new IT systems and a loss of group purchasing power.
Great squeeze
For HSBC, this couldn’t have come at a worse time.
Huang’s latest broadside, the most piercing and precise to date, comes at a time of rising division and discord between China and the US-led West, with the former accusing the latter of seeking to encircle and weaken it, and seeking other nations to join it in a new power-sharing bloc of nations.
HSBC, which is listed in Hong Kong and London, finds itself squeezed between great powers, reliant on the US dollar to clear trades and on Beijing to permit it to continue to generate big profits in Hong Kong and, increasingly, in mainland China.
This is a quandary with no clear resolution, and the question of whether or not HSBC can remain a global banking group in its current shape will be visited many times ahead of its annual meeting next month. That is when Ping An intends to vote in favour of two resolutions that ask the bank to publish regular updates on its Asia business and to restore its dividend to pre-pandemic levels.
For the past two years, Huang has been calling for HSBC to act decisively by listing its Asia business in Hong Kong or consolidate its regional operations
Huang’s problem is not that he is wrong.
For the past two years, he has been calling – at first behind the scenes and latterly and more vociferously in public – for HSBC to act decisively by listing its Asia business in Hong Kong or consolidate its regional operations.
As its largest shareholder – Ping An owns 8.3% of the bank, worth $11.95 billion at today’s valuation – Huang is more than entitled to express his view.
It is probably erring on the pejorative to suggest, as he does in this week’s missive, that the bank has “drained HSBC Asia of dividends and growth capital” to support its business elsewhere.
But there is no doubt Asia is where the action is. China is gunning its economic engines anew, now it has reopened to the world. The region generated $13.7 billion in pre-tax profit in 2022, or 78% of the group’s total. The bank has moved some senior staff to Asia, but far too many still live in Surrey, not Shenzhen.
And by acting as a pseudo-activist investor, Ping An has already accomplished much. Huang linked HSBC’s decision to exit ex-Asia business lines – notably Canada and US retail – and to raise its long-term return on average tangible equity target range to 13% to 15.5% from 8% to 11%, to years of “persistent effort” on the part of his firm.
Common ground
Over the past year, Ping An and HSBC are understood to have conducted 20 separate meetings in an attempt to find common ground and to agree on an operating structure acceptable to both sides. This is believed to have included meetings between the chairs, chief executives and chief financial officers of both firms.
“Over the last year, we have had extensive discussion with Ping An… during which we have explained the material value destruction that would ensue were we to implement their proposals,” HSBC said in a statement.
Rather, Huang’s problem is that as things stand, he is unable to make enough of a compelling case to force through the kind of systemic and lasting change he so ardently seeks.
Mark Tucker has taken an over-my-dead-body approach to Ping An’s increasingly strident entreaties
For one thing, he hasn’t yet managed to convince any other large HSBC shareholders to join his crusade, leaving him looking, to borrow from the maxim, less like a leader and more like a man taking a solitary walk.
On Tuesday, Glass Lewis issued a report suggesting stock owners vote against the two proposals at next month’s meeting, saying they were “not in shareholders’ interest”.
The influential proxy adviser added: “The board’s strategy and plans appear valid and are likely to result in greater returns and value than the overly prescriptive and, in our opinion, unnecessary proposals submitted.”
Ouch.
In a statement, HSBC said ‘alternative structural options’ would “not deliver increased value for shareholders. Rather, they would have a material negative impact on value. We remain clear that our current strategy is the fastest, safest and most value-enhancing way to deliver returns.”
Winners and losers
It is important to ask who would benefit from splitting up one of the last few universal lenders.
Ping An would, of course: the Shenzhen-based conglomerate would become the second-largest shareholder of a banking group with assets and offices scattered across the world’s fastest-growing and most-populated region.
So, without doubt, would China, given that Hong Kong would overnight become home to a genuinely pan-Asian bank. That would tick a lot of long-term boxes for Beijing.
Meanwhile, the rest of the lender – let’s call it ‘rump HSBC’ – would be left looking grossly misshapen, overseeing an almost random assortment of assets in Europe and bits of the Americas and the Middle East. It would be the end of HSBC as we know it, and a weird coda for a 158-year-old financial institution.
Little wonder its chair Mark Tucker has taken an over-my-dead-body approach to Ping An’s increasingly strident entreaties.
Huang may be right in many ways. That doesn’t mean he’ll get what he wants.
