In light of significant and at times misleading market speculation and reports regarding Ping An’s relations with and views about HSBC Holdings plc, Ping An Asset Management Company (PAAMC) today publicly clarified its ownership stance on HSBC.
PAAMC has been a long-term investor in HSBC having initiated the position in 2015. Despite initial optimism, PAAMC says it grew increasingly concerned about HSBC’s deteriorating operating performance, marked underperformance against a credible peer group, damaging dividend policy adjustments, market value decline and tepid response to global business model challenges.
According to PAAMC, HSBC Group has drained HSBC Asia of dividends and growth capital to support its relatively low return non-Asia businesses.
Over the past three years, HSBC Asia has upstreamed 61% of its cumulative profits to HSBC Group. The US$16bn worth of dividends upstreamed by HSBC Asia to HSBC Group over the past 3 years is more than 1.1x the total dividends that HSBC Group paid out to shareholders over that period.
In effect, PAAMC says, HSBC Asia has been subsidizing the Group’s relatively low return non-Asia businesses, which have taken up over half of the Group’s overall Risk-Weighted Assets (RWA) over the last three years, but contributed only 14% of profits. While HSBC has exited some non-core operations, these exited businesses are very small (only 4.7% of RWA), hence the Group still has 51% of RWA outside of Asia which generates only a quarter of the returns that the Asia business does (pre-tax return on RWA for ex-Asia 0.9% vs 3.4% Asia).
PAAMC states:
“It is necessary for HSBC to push for structural reform to fundamentally address HSBC’s underlying market competitiveness issues, improve performance, enhance value and accelerate growth opportunities in Asia”.
In recent years, numerous shareholders have repeatedly suggested that HSBC management should spin off HSBC’s Asian business into a separately listed entity that is Hong Kong headquartered. PAAMC says such a proposal which grants the Asia business more autonomy merits serious consideration following years of underperformance and underinvestment. Over the past two years, PAAMC has also shared numerous structural suggestions with HSBC management ranging from listing the HSBC Asia business in Hong Kong to consolidating Asia businesses.
PAAMC suggests that the original spin-off solution be adjusted to a strategic restructuring solution, which can fully address HSBC’s concerns, including but not limited to global value destruction, surging operating costs and legal barriers.
PAAMC says:
“Challenges aside, we believe that a structural solution which creates a separately listed Asia business headquartered in Hong Kong will crystallize multiple benefits to all HSBC Group shareholders. This would include material value creation driven by a multiple re-rating of an Asia focused business, RoTE accretion, cost synergy benefits (where proposed structure involves in-market business combination), and capital relief benefits.
A structural solution would also deliver a refocused Asian organization that is more streamlined, nimble, localized and has stronger competitive positioning to benefit from Greater Bay Area development and the Chinese yuan internationalization. The HK-listed business would be able to focus on investing resources in Asia and being more attuned to local Asia market dynamics. We also believe a separately listed Asia business would provide greater dividend protection for HSBC Asia shareholders from challenges in the Group’s ex-Asia operations.
We believe the new HSBC Asia, after strategic restructuring, will rapidly become one of the most profitable businesses with a dedicated Asia focused management team capable of generating stronger shareholder returns. It will be the most valuable and unique bank in Asia with the strongest growth potential within the HSBC system, and also the only local bank with global competitiveness”.
