HSBC now has a major presence in the UK, the Middle East and Latin America and owns a regional bank in America - as well as being the premier regional bank in Asia. In his first interview, the dapper Bond - shunning the HSBC-hexagon tie that Purves would have worn - sets out his vision for the bank. He spoke to Steven Irvine for two hours about bank bail-outs, who his benchmarks are, his "indispensable" investment bank and why he can't leave a room without turning off the light.
What is the nationality of the HSBC group?
International. We are an unusual combination of the qualities of the British people and the qualities of the Chinese people. In 1991 we had 150,000 shareholders, many of them in Asia. At that time there was a regulation that nobody could own more than 1% of our shares. Today the majority of our shareholders would be institutions. We still have about 150,000 shareholders but by value the majority would be institutions in the UK, America, Switzerland, Germany, around the institutional world.
Does this break down the whole notion of a nationality, if your shareholders come from everywhere?
Capital is international. You can't define capital in terms of nationalism any more.
Historically the bank bet on Asian tycoons in times of trouble. There's a lot of loyalty to the bank as a result. Would you make those same bets in today's Asian climate as you have done in past recessions?
I'm not particularly enamoured of the word bet. What we exercised was judgement. We judged the character of people who didn't have a lot of capital but clearly had a tremendous amount of ability. And as you rightly say there are many names that spring to mind throughout Asia where our group has been intimately involved in the rise of a new business empire. In my conversations in Hong Kong - where clearly some western banks have cut lines - I have consistently heard, my gosh, we should be thinking very carefully about our relationship bank and we know who is there for us when it starts to rain. So if anything what is going on in Asia will buttress relationship banking and in my view that is good news.
The bank is sometimes described as being full of trappers rather than hunters. You like to acquire on the cheap.
It's fair comment to say that nearly all of the major transactions we have done have been when the market has been difficult. We have found good franchises which are going through difficult times at attractive prices, and that's when our strong capital position
has come into play. So yes, that is a fair description.
Does that mean that you are merely opportunistic?
We have a very clear strategy for the growth of this group. It is a mistake to assume that you can always use acquisition to supplement your growth. We have two ways to grow. One is very obviously doing more business with our existing client base. For example, we only sell 4% of our clients around the world an insurance product. And secondly by acquiring more clients. When we look for investment opportunities we measure what rate of return we can achieve from investing in our own business versus buying a business outside. We have consistently found that investing in our own business gets us the best opportunities. But if interesting acquisition opportunities come along, we will always look at them.
Do you think that having $50 billion under management is big enough to be a player in asset management?
Actually if you took in the funds we manage on a discretionary basis in private banking and other parts of the group the number would be over $100 billion. No. We would like the business to be larger. The question is how do you grow it. And our answer would be by selling more retail product through the 5,500 sales outlets we have around the world, rather than making an acquisition of the wholesale business which is highly competitive and very highly priced.
So going back to the analogy of being trappers would you be more interested in buying an asset management firm if there were a stock market crash, which brought down valuations.
Certainly we are more interested at lower valuations. Absolutely.
It is said that NationsBank has a group of people dedicated to looking at new acquisitions for the bank. Is there anything akin to that at HSBC?
No, because NationsBank is operating in a different environment. What you have in America is a banking system that used to have 14,000 banks, and is probably going to have below 5,000. You are witnessing what is essentially a domestic event - the consolidation of banks in America. And therefore it's perfectly natural to have a specific acquisition group. We have a very narrow group of people at the top who vet the acquisition proposals that are made to us. And we then decide if they are worth looking at and then we would take them to the CEO of the country, and say can you make this work? But to have all our people around the world combing for acquisition opportunities would be a recipe for too much down-time. We would lose focus on our existing businesses.
How did the Latin American acquisitions happen?
When we bought Midland Bank, it had something like $4 billion worth of assets in Latin America, and we were in the process of working out those assets. Rather than do a series of debt-equity swaps into canning plants, and different industrial projects, which we didn't know very much about, we decided to do debt-equity swaps into positions in banks, a business which we did know about. And out of that came a stake in Banco O'Higgins in Chile, and a 6% stake in Bamerindus in Brazil. And Midland already had a 29% investment in Banco Roberts in Argentina. When Bamerindus sadly ran into terminal difficulties, we were the people who knew more about the bank, perhaps, than any other potential investor, and out of that came the opportunity for us to buy 100%.
You seemed to get a very good deal.
We have a one-year ability to hand the assets we don't like back to the central bank. Now the central bank is pleased with the deal, I've heard that personally from the central bank governor. It solved a big problem for them, and it had a well-capitalized institution take over the third-largest delivery system in Brazil. We are happy so far with the transaction so it has worked for both Brazil and for us.
Is it a model for emerging market bank bail-outs?
Yes.
Would it probably work in Asia too?
Whether it works or not is a matter of political acceptance by the host government. I mean it is entirely up to the governments of the countries of Asia to decide whether this is the way ahead for them. But it is certainly a formula that has worked well in Brazil.
Has your deposit base increased in Brazil?
We have gained one and a half million clients in the first year of operation.
So there has been a flight to quality?
A demand to do business with a strongly capitalized financial services organization.
In such businesses, how does HSBC's role differ from a venture capitalist?
There are elements of venture capitalism in a lot of things we do, but there is more to Brazil than that. What we are looking for is growth markets, and what appeals to us about Brazil is a stable government committed to economic reform in a market of 170 million talented people of whom only 30% have bank accounts. So there is room for absolute growth in financial services. We compare that with an OECD market where maybe 70% of the people already have a bank account.
Would you consider an acquisition in Japan?
We'll consider making an acquisition anywhere in the world where we can make sense of it for our shareholders and we can manage it successfully and where the price is a fair one. And Japan would certainly fit into that mould. The challenge in Japan is that the return on capital is very low.
How do you benchmark your performance?
We start by benchmarking ourselves internally against our goals. We have five principles by which we run the group. We want revenues to grow faster than costs. We want the costing ratio to be below 55% and trending downwards. We want net income to be rising faster than risk-related assets. We want non-funds income trending towards 50% of total operating income and we have a percentage of our loan portfolio, which we want to be in certain grades. Those are our internal benchmarks. At the external level we benchmark ourselves against Citicorp, Bank of America, Lloyds-TSB, and ABN Amro.
Do you take the view that you need a 20% return on capital in businesses you're in?
We don't have a return on capital that we use throughout the group, for the simple reason that let's say it was 20%, well I think the Germans would go to work knowing they could never reach it, because our business in Germany has a return on equity of about 9% and in the old days, for example in Brazil, you could get 20% in the first month and go to sleep for the rest of the year. So it doesn't make sense in a group like ours to have this principle. We use the benchmarks I've described and if you follow those benchmarks by definition your performance next year will be better than your performance this year.
In Asia you already have extremely low cost/income ratios. How do you generate better returns going forward if you can't cut costs?
Raise revenues, do more business, sell insurance, sell fund management, sell investment products, there is a whole array of opportunities. The biggest opportunity to grow this business today is by doing more business with our existing client base.
Considering that Barclays and NatWest pulled back, what is your attitude to investment banking?
First you need to define investment banking, because it means different things to different people. At HSBC Group it's five quite clear businesses: private banking, fund management, equity capital markets origination and distribution and corporate finance, private equity and project finance. Over 60% of our earnings in our investment bank come from private banking and funds management. Investors lose faith if they think the commercial bank is becoming predominately an investment bank. They can buy a share in an investment bank. What they look for from us is to provide an investment that works in a coherent way with the commercial bank. It's no good us financing some small corporate in its infancy then when they become huge conglomerates saying well you need an investment bank. For us investment banking is an extremely important part of our group.
Your UK peers lost faith in equity capital markets because the returns were felt to be too low.
One of the big challenges that the commercial banks face in today's world is how to make corporate clients profitable, and it seems to me pure lending doesn't pay the way in today's world. So you have to be able to do other things with the corporations, one of which is advising them on raising equity capital. Why would we advise them on how to raise debt capital, but say to them if you want equity talk to somebody else? The important thing is not to let the investment bank become so large that you confuse your investors as to whether they are investing in a commercial bank or an investment bank.
But shareholders quite liked it when Barclays and NatWest divested their equity capital markets business. Why not do the same?
You have to consider the comparative sizes of the investment bank. At HSBC, 94% of our assets are in commercial banking and 6% in investment banking. I don't know what the comparative figures were in NatWest and Barclays, but they were considerably larger than that. We operate the group to certain guidelines, one of which is, we don't want more than 10% of our operating revenues to come from dealing profits, because it's too volatile a source of earnings. We also don't want investment banking to constitute more than 12% of our net income. So we have a feel for how large we want these businesses to be, and I hasten to add that our investment bank could quadruple its profits and still be within our guidelines. And bear in mind 60% of those investment-banking profits are coming from private banking and fund management, which are absolutely super businesses.
You were rumoured to have approached JP Morgan about an acquisition last year?
We have not approached JP Morgan.
You like Latin America because it has growth potential. What about eastern Europe?
We have had our eyes on Latin America for four decades because quite a few of our clients in the early 1950s migrated there. There is quite a strong nexus between those parts of the world and Asia. It's driven by the potential for clients from America, the UK, Europe and Asia to do business in Latin America. The same isn't true of eastern Europe for our group. We don't have a lot of clients who are wanting to do business with the former Iron Curtain countries.
HSBC is one of the world's most profitable banks, yet the market values other banks such as Lloyds-TSB more highly. Why?
The market goes through different phases of perception, and the current perception is that a financial services group which is focused predominantly on one country, particularly where that country has a sustained period of growth or boom in its financial services, is more appealing than an international commercial bank. You need to step back and take a long-term perspective on any investment and I would back HSBC's record of 30 years of 24% per annum compound average growth against any of our competitors. In fact there is a second factor: that ours is not a highly leveraged balance sheet. Our tier-one capital ratio is 9.8%. If you look at some of our competitors that have a higher price-to-book they have more leveraged balance sheets. We have a very conservative balance sheet.
Must your balance sheet be so conservative?
We have found that over the long haul a strong capital position has been a competitive advantage for us. It has enabled us to get the chequebook out at times when other people are less inclined to do so, it attracts deposits in times of uncertainty, it lowers our cost of funding in wholesale markets. So as long as you can make a decent return on the shareholders' funds we think it is a competitive strength.
A lot of your growth has been Hong Kong based.
Hong Kong has always been a very important business for us. It always will be. So you have to attribute part of it to Hong Kong, but I think it would be unfair to attribute it entirely to Hong Kong. If you look at Canada we put C$150 million into Canada, but we have the most profitable foreign bank. We have a bank which may have a market value of C$2 billion out of that. So there have been lots of other areas where we have had dramatic growth from relatively small investments.
Is shareholder value sometimes short-termist and at odds with a long-term growth strategy?
I don't think you can create shareholder value without having created customer value, I think if you ran a bank - and I'm not aware of anybody that does it this way - purely for shareholder value, with blinkers on, you might have a very spectacular performance for a period of time, but in the long run it wouldn't be successful. You have to create customer value, thereby creating shareholder value, and that's the neat triangle. If you are going to create customer value, you have got to have motivated and talented staff. So, you need a combination of all three. I don't think that shareholder value necessarily implies short-termism. I think there will be people who look at HSBC over a long period of time, and recognize we have proved ourselves to be one of the few commercial banks that can be successful internationally.
Why are conglomerates breaking up in industry but proliferating in the financial world?
A conglomerate to me is a collection of different businesses under one holding company. You don't have that in HSBC. You have 94% of its business in commercial banking, it's just done in different markets. I've never perceived HSBC to be a financial conglomerate. It is a coherent international commercial bank with an important investment banking and insurance business.
Will you be one of the five big groups that dominate global finance?
We are one already. If you look at domestic customers around the world and our spread of commercial banking business, we are one of probably three or four banks that have that level of business, around the world.
Are you strong enough in America?
We have an optional strategy here. Is it better in the long run to buy a bank at a discount and with net assets in Brazil today and where the market for financial services is growing? Or is it better to buy a bank in America at five times book, where the demand for commercial banking services has been declining for the past 30 years? That is the sort of strategic decision we have to make.
It seems to be a HongkongBank tradition that everyone picks up their own telephone.
Absolutely. Unless I have someone with me, I answer my own telephone. That is as it should be, and if it is a customer complaining, I learn.
What percentage of your time do you spend travelling now?
I tend to be away about a hundred days a year.
Do you think that travelling is a necessary evil?
You can do the routine meetings through video conferencing and that is growing in our group, as it should. But I still think the really important meetings you have are best done face to face.
Your new building in Japan has no light switches, nor does the building in Hong Kong. All the lighting is centralized. What does it say about the group's culture that you put up buildings without light switches?
I turn out the lights whenever I leave the boardroom or whenever I leave this office. For the very simple reason I was taught when I first joined HSBC that you should treat the shareholders' money exactly the way you would treat your own, and I turn out the lights when I leave home and I expect my colleagues to do the same. It annoys me when I go past one of our head-office buildings late at night and I see the lights on. I know what the light bill for this building is. I hadn't heard to be honest that we had got a centralized system in Tokyo, I hope it's one that works - for the sake of our shareholders.
You're not the best paid in the group, are you?
As it happens I am outside the top 20. We were given very high marks in a recent survey for boardroom pay.
Do you find that because you are closer to certain businesses you spend more time looking at them?
I have spent 25 years in Asia, five years in America, and now five years in the UK, but I have spent very little time in the Middle East. The challenge for me is to meet the clients we have in the Middle East and make sure I understand that business. But the real answer to that question is we have a very detailed planning process at the beginning of each year. We set fairly demanding targets for ourselves and then focus our attention on those parts of the group which aren't making plan. I am watching the businesses that aren't performing up to plan. Secondly, 70% of the net income of this group comes from Hong Kong and the UK, so I need to be very sure that I am conversant with both those businesses, that I know the top clients, that I know what the issues are, and then I divide my time evenly with the proviso I have just made.
But bricks and mortar are clearly a barrier to new entrants into the banking market? The internet could destroy that barrier?
We have constantly said that we have 5,500 sales outlets around the world, where we can do business with our clients, and when our clients don't want them anymore, they will tell us because they won't walk through the door. You don't close branch networks because accountants in head office tell you that it is a cost-effective thing to do. You close them when your clients no longer use them. We are a long way from that happening.
HSBC has a federal structure and many banking brands within it. In future is the brand HSBC going to be on everything?
You should expect to see increasing use of the HSBC name around the world.
What is the role of the international officer today?
There are 370 people who are international officers. They are broadly based. We have people of all nationalities and they are a talented group of people. The key ingredient we look for is people that want to make a long-term career with us. And people who are totally mobile. We marshalled a team of 50 to go into Bamerindus [in Brazil].
The vast majority are still British. Will that change?
We took on 23 new people this year, and 13 were not British. And coming up is a much more diverse group of people, which is just as it should be.