The world’s best bank for public-sector clients: HSBC

Public-sector clients spent 2023 tackling the key themes of security and sustainability. They are at the frontline of geopolitical volatility, and liability management around external shocks is increasingly front of mind. Funding decisions are being taken on more of a political basis as borrowers frontload, prefund and manage liabilities ahead of key risk events.

Behind the scenes, however, the sector continues to tackle its digital evolution, how to implement transition strategies and the reform of the multilateral development banks (MDBs). These are all challenges that this year’s winner of the award for the world’s best bank for public-sector clients, HSBC, has been central to solving.

“The reform of MDBs is one of the biggest opportunities with the public-sector client base,” Michael Ellam, chairman of public-sector banking at HSBC, tells Euromoney.

There has been a clear change in attitude among MDB shareholders since Ajay Banga took over as president of the World bank in June 2023. They are now prepared to work much more closely with the private sector to mobilize private finance.

“We have been central to the debate and Noel Quinn has been involved in the World Bank innovation lab – we are one of only 15 institutions invited to participate,” continues Ellam.

The bank’s work on projects – such as the Pentagreen joint venture with Temasek in southeast Asia, the Just Energy Transition Partnership, Fast-Infra, the Asian Development Bank’s Energy Transition Mechanism and the bank’s own Real Economy Green Investment Opportunity fund – demonstrate the firm’s commitment to partnering with MDBs in funding and structuring solutions that mobilize private capital.

“We view the evolution of services provided to MDBs during the reform period similar to what we’ve seen in debt capital markets,” says Asif Sherani, head of public-sector DCM at HSBC. “There will be tiering between banks. Groups that can structure more complex transactions – hybrids, securitizations – and that can innovate and dedicate balance sheet will differentiate themselves.”

This was all in evidence on the $1.9 billion guarantee arranged by HSBC Mexico in October 2023 for the World Bank’s Multilateral Investment Guarantee Agency (Miga) – the agency’s largest guarantee to date. The structure provided $800 million of additional capacity for sustainable projects in Mexico in various sectors including renewable energy, energy efficiency, clean transportation and sustainable agriculture.

“The deal with Miga in Mexico is a standout transaction,” says Nora Rodriguez, head of public sector Americas. "It provides capital relief to HSBC’s mandatory reserves in Mexico and allows us to recycle this across a portfolio of new investments."

The same month, the bank used two MDB partial credit guarantees to unlock funding for Egypt. It partnered with African Development Bank and Asian Infrastructure Investment Bank to deliver the first onshore China renminbi-denominated bond for the country. The timing was critical as sentiment around Egypt had started to shift, and through this deal the sovereign was able to demonstrate market access.

As rates continued to rise during the year, there was understandable concern among sovereigns, supranationals and agencies over the associated hit to servicing costs. However, Sherani argues that the impact has been manageable.

“With the higher rate environment there has been concern that debt servicing costs would be materially higher,” he says. “But we have seen huge inflows into fixed income – huge resources were parked at the ECB – and there has been a significant increase in demand that has negated some of the impact.”

Nevertheless, this has continued to be a big problem for issuers with fiscal discipline concerns.

One of the key strengths of a bank such as HSBC is its access to worldwide pools of liquidity. This has meant that it can give issuers comfort around their ability to fund. It is also key to diversifying funding sources.

“The importance of diversifying funding sources remains paramount, and we can help clients access lots of pools of capital,” points out Himesh Patel, head of public sector Europe, Middle East and Africa at HSBC. “We supported the inaugural sukuk for PIF, tapped the samurai market for South Korea and did the panda bond market for Egypt.”

To achieve this the firm has been getting issuers in front of investors more regularly and responding more to reverse enquiries to de-risk deals.

Sustainable finance has long been a strength at HSBC, and it applied this to public-sector clients in new and imaginative ways in 2023. The bank was structuring agent on the Republic of Chile’s sustainability-linked bond in June that was the first to introduce gender-focused key performance indicators. HSBC structured three KPIs targeting lower greenhouse gas emissions and a new KPI that promotes female participation at board of director level in public companies.

It was also sole global coordinator for the first environmental, social and governance-labelled bond from the Gulf states, the $1 billion nine-year deal for Sharjah in February. The deal followed over 12 months of work between HSBC and Sharjah to establish a sustainable financing framework that will help it to meet the UAE 2050 net-zero target, UAE Centennial 2071 and the sustainable development goals of the United Nations.

When it comes to innovation, however, one trade stands out above everything else: the multicurrency digital green bond for Hong Kong, which began pre-marketing in December. This was Hong Kong’s first digitally native bond on the HSBC Orion platform and it reduced settlement time from T+5 to T+1.

“The HKMA trade was a game changer,” says Sherani. “There were four different tranches, four different currencies and over 50 investors.”

HSBC acted as joint global coordinator for the deal, which opens up a raft of possibilities in terms of what future issuance from public-sector clients worldwide might look like.