The lights dimmed and the music stopped for financial services last September when Lehman Brothers died. Sweet, siren-like, songs are playing once again. But have you noticed how quiet it has been on the activist investor front? At the peak of the market, activist hedge fund investors won plaudits for their acumen. Upstart Atticus Capital started dictating strategy to staid Deutsche Börse, The Children’s Investment Fund astounded the establishment when it wrote an open letter to the head of ABN Amro demanding that the bank sell or dismember itself. In the ensuing three-way love affair (ABN, Barclays and the RBS consortium), Atticus Capital harangued the senior management of Barclays on the best way to conduct their bid. At the time, I found it odd that virtually anyone could decide to be an activist investor, buy a relatively small number of shares in the target company, claim to be the incarnation of shareholder value and start bossing management about. Looking back, this abnormal activity was a clear sign of irrational exuberance. Today, the Children’s Investment Fund has such a low profile it might as well be a mole and Atticus has closed two funds and handed money back to investors. My doubts about the activist investor phenomenon were confirmed in September 2007 when Eric Knight of Knight Vinke wrote to HSBC’s chairman, Stephen Green. Knight complained about the bank’s underperformance and cited: "The perception that HSBC lacks focus and that the ‘world’s local bank’ is seeking to be all things to all people."
Two years and a massive banking crisis later, Knight Vinke has egg on its face and HSBC is sitting pretty. The only comfort for the hedge fund must be that the HSBC shares that it acquired in order to have a soapbox to preach from are hovering not far from their all-time high. This is more than can be said for most other bank shares.
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HSBC shrugged off the credit crunch as an elephant might swat away a buzzing mosquito with its trunk. The mosquito is irritating but unlikely to cause significant harm. There are several reasons why the bank has successfully surfed the tidal wave that engulfed some of its competitors. Primarily: it’s the management, stupid. HSBC’s key men are conservative, bordering on the uninteresting. They don’t do corporate jets, entourages or star-studded charity parties that somehow get leaked to the tabloids. The culture is studiously ascetic and focused on boring things like business. It might be apocryphal but a source confided an exchange that occurred during a lunch between Sir John Bond, the former chairman of HSBC, and Chuck Prince, the former chief executive of Citigroup, when they were both in their positions. Prince noted that HSBC was much more adroit at avoiding the wrath of regulators than his own institution: "Compared with HSBC, Citi is like a drunken bus driver," the American mused. "Every day, we collect speeding tickets and then occasionally we mount the pavement and kill a pedestrian." Glamour and football-style pay packages have rarely been a feature of the HSBC landscape. Today, we realize that this is how a well-managed bank conducts itself. Mistakes were made of course. In particular, HSBC undertook the disastrous acquisition of US sub-prime lender Household International. Yet the fallout from this foreign foray might now be in the rear-view mirror. Plaudits must go to Douglas Flint, the highly respected group finance director, who recently won an outstanding industry achievement award from AccountancyAge. Such an award could be viewed as a drab accolade but at the same time it is deeply reassuring if you’re a fund manager looking for a safe home for millions of dollars.
HSBC benefits from sensible management and a strong balance sheet but it also has access to the gold mine of our era: Asia. The past 18 months have revealed the deep divide between the developing and the developed economies. The future belongs to the emerging markets, and HSBC has an edge here, particularly in China. Indeed the group was founded in Hong Kong and Shanghai in 1865 and remains the largest international bank in the region. This September, the bank announced that its chief executive, Michael Geoghegan, was relocating to Hong Kong.
The firm has also done well in the thorny field of investment banking. HSBC has its own model of investment banking-lite. Since the departure of John Studzinski, co-head of the investment bank, in 2006, HSBC has abandoned ambitions to compete head to head with top advisory firms such as Goldman Sachs or Morgan Stanley. Nevertheless, for the first half of 2009, the global banking and markets division, run by Stuart Gulliver, made $6.3 billion profit before tax, which was some 125% of group profit because of write-downs in other areas. For a while now I have been a fan of Gulliver, who exhibits a disarming combination of intelligence, sardonic wit and self deprecation rarely found in complacent investment bankers.
The most important transaction of 2009 for me was the £12.9 billion ($21.5 billion) HSBC rights issue launched on March 2. This was a turning point for the markets. That a big bank could raise so much capital at such a bleak time without resorting to government coffers calmed frenzied nerves. Now that we are in an apparent bull market, with share prices bubbling upwards every other day, it is hard to relate to the ubiquitous gloom that prevailed in February and March. A mole reminded me of the terrible turmoil when he confided: "Citi was under consideration as a joint bookrunner for the deal. But then we decided there was a chance they might be nationalized during the transaction." In fact, Goldman Sachs, HSBC and JPMorgan acted as joint bookrunners. This reunited former Robert Fleming colleagues Ian Hannam and Alex Yule-Smith (JPMorgan Cazenove) with Russell Julius (HSBC). Matthew Westerman, global head of equity capital markets, was the key person from Goldman Sachs. The issue was a huge success, with more than 90% of shareholders taking up the rights.
Another big equity transaction where HSBC featured prominently was the BNP Paribas €4.3 billion rights issue launched in November. HSBC was the sole joint bookrunner with BNPP. "Strong banks want to work with strong banks," a source said phlegmatically. HSBC is also a global bookrunner on the Axa rights issue launched in November and the just-completed Lloyds Banking Group £13.5 billion rights issue. Russell Julius, the engaging and articulate head of equity capital markets at HSBC, told me: "2009 has been a transformational year for our business, especially in Europe. The group’s focus on supporting and cross-selling to core clients in our chosen markets has paid rich equity capital markets’ dividends."
HSBC is the number 18 bookrunner in the global equity offering league table but stands at number six in the EMEA equity and rights offering league table. HSBC’s lower global ranking reflects the fact that it does not have an equity platform in the US, Japan, Australia, Canada or much of Scandinavia. Julius reports to Kevin Adeson, who joined HSBC in 2006 and is the head of global capital financing. I look forward to catching up with Adeson and some of his other senior colleagues for a future column.
HSBC issued its interim management statement in early November. The market loved what the bank had to say: in particular news that bad debts at its troubled HSBC Finance Corporation subsidiary might be peaking. "In the US consumer finance run-off portfolio, loan impairment allowances declined in the quarter, representing the first quarterly fall since the start of 2006," HSBC stated. The firm also pointed out that, on the same basis, pre-tax profit for the third quarter of 2009 was significantly ahead of the comparable period in 2008 while total costs for the year to date compare favourably with 2008. I am writing 10 days after the trading statement issued on November 10, and HSBC’s shares have risen by some 6%.
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