Maintaining HSBC’s Grip As “The World’s Local Bank”
Touting itself as “the world’s local bank”, HSBC is one of the world’s largest banking and financial services organization, which provides investment banking, commercial banking and wealth management services. The company’s international network comprises over 10,000 offices in 82 countries in the following five regions: Europe, Hong Kong, Asia-Pacific, the Middle East, Africa, North America and South America. HSBC’s headquarters can be found in Canada Square, London and the company employs about 312,000 people worldwide (About HSBC, 2008).
As a reliable proof of HSBC’s strength as an organization, the company topped the “the latest Forbes 2000 list of the world’s largest companies, the first time a non-US company has led the rankings since its launch in 2004” (Brazil, 4 April 2008). According to the Forbes list, HSBC garnered $146.5 billion sales, with $19.13 billion profits last year (The Global 2000, 2 April 2008). An online magazine The Banker also ranked HSBC the number one spot in 2008 as in the Top 1000 World Banks, where it dethroned Bank of America from its top spot last year (Imeson, 4 March 2008).
Given the global crisis in high petroleum prices and the US financial slump caused by the mortgage crunch, will HSBC still stand firm on its grip as the world’s top banking institution? Knowing its history and assessing its strengths, weaknesses, opportunities and threats, we will be able to see HSBC’s capability to weather all its challenges in the days ahead. In comparing it with another established banking institution; we will be able to see if HSBC stands a chance in competing in the global market. At the end of this report, we will try to come up with recommendations on how HSBC could continue its leadership as the world’s top bank.
The HSBC Bank that we know today is just one of arms that move the HSBC Group. HSBC comes from the acronym of its founding member, the Hong Kong and Shanghai Banking Corporation Limited that was created in 1865. The main purpose of establishing this institution is “to finance the growing trade between China and Europe”. The person behind it all was Thomas Sutherland, a Scottish man who was “working as the Hong Kong Superintendent of the Peninsular and Oriental Steam Navigation Company” and he went on to put up the first bank in Hong Kong. As time went on in the early 20th century, HSBC grew into “a network of agencies and branches based mainly in China and South East Asia but also with representation in the Indian sub-continent, Japan, Europe and North America”. However, the banking operations were put on a halt when World War II erupted and “its head office was temporarily moved to London” (HSBC History, 2008).
After the Second World War, HSBC claimed a pivotal role in restructuring the Hong Kong economy. In 1965, HSBC acquired a controlling interest in Hang Seng Bank and in 1971 took over British Bank of the Middle East and Mercantile Bank. During the 1980s, the bank concentrated on expanding into markets where it was not yet fully represented. Thus, Hong Kong Bank of Canada was established in 1981, Egyptian British Bank was formed in 1982 and Hong Kong Bank of Australia in 1986. In 1987, Marine Midland Bank was established as the company’s wholly owned subsidiary in the US.
In 1991, the group’s member companies were consolidated under the single ownership and control of HSBC Holdings. This newly formed group was headquartered in London and its shares started trading on the London Stock Exchange. In the following year, the group’s acquisition of Midland Bank created one of the largest banking and financial services organizations in the world. Throughout the 1990s, HSBC continued its policy of growth through mergers and acquisitions, acquiring banks in Brazil and Argentina as well as the US based Republic New York Corporation in 1999.
As of today, HSBC’s international network comprises over 10,000 offices in 82 countries in the following five regions: Europe, Hong Kong, Asia-Pacific, the Middle East, Africa, North America and South America. HSBC still continues to acquire more partnerships worldwide by building comparative advantage by utilizing their scale and their local and international reach.
· Large scale of operations – HSBC is one of the largest banks in the world. According to the Forbes list, HSBC garnered $146.5 billion sales, with $19.13 billion profits last year (The Global 2000, 2 April 2008). The group also has a large presence across various regions. HSBC’s international network comprises over 10,000 offices in 82 countries in the following five regions: Europe, Hong Kong, Asia-Pacific, the Middle East, Africa, North America and South America. The group’s large scale of operations gives it significant bargaining power. Also, HSBC has adopted a policy of transferring best practices and product innovation across its global network. During 2006, HSBC launched a number of such initiatives.
· Global brand – HSBC is a leading global brand. The HSBC brand figured at the 23rd position in the latest top 100 global brand rankings of Business Week. Business Week valued the HSBC brand at $13,563 million in 2007. The group’s brand value increased by 16 percent in 2007, over the previous year as it gained 5 more notches from its previous 28th position in 2006. The HSBC brand is among the only four companies from the financial services sector to appear in the top thirty list (Business Week, 6 August 2007). The group’s strong brand value indicates reliability and acceptance of the company’s products and services. It facilitates customer recall and enhances market penetration opportunities.
· Strong tier I ratio – The group has been historically maintaining strong Tier 1 ratio. Tier 1 ratio is the ratio, which allows banks to absorb losses without being required to cease trading. The Tier 1 ratio of the company was recorded as 9.4% significantly higher than the Tier 1 ratio of 8% maintained by the global banking industry (Report Buyer, 2008). A higher Tier 1 ratio provides greater security to the group’s operations in the event of a financial crisis.
· Reduced profitability in North America – HSBC’s performance in North America declined last year. HSBC’s ‘profit before tax’ from North America reached $4,668 million, a decline of 21.1% over 2005. North America represented 27.5% of HSBC’s assets during fiscal 2007 (HSBC Sustainability Report, 2007). The region represents HSBC’s second largest investments in assets. Poor performance in North America had an adverse impact of HSBC’s returns on assets.
· Poor performance of the ‘personal financial services’ segment – The profitability of the ‘personal financial services’ segment declined in 2006. ‘Profits before tax’ from this segment reached $9,457 million during fiscal 2006, a decline of 4.5% over 2005 (HSBC Sustainability Report, 2007). The ‘personal financial services’ segment was the only operating segment to record a decline in profitability during fiscal 2006. It is the largest revenue earner for HSBC; due to which, a strong performance of this segment has a considerable impact on the overall financial performance of the company. Decline in profitability of the ‘personal financial services’ segment prevented HSBC from recording a more financial performance during fiscal 2006.
· Reduced net interest margin – HSBC’s net interest margins declined consistently during 2004-2006. The group’s net interest margin was 3.19% in 2004, 3.14% in 2005 and 3.1% in 2006 (HSBC Sustainability Report, 2007). The decline in net interest margin suggests declining profitability of the lending business of HSBC. A declining net interest margin could pull down HSBC’s profitability.
· Stronger global operations – HSBC strengthened its global operations during fiscal 2006. In China, where HSBC is the largest international bank, HSBC opened 13 new offices, taking the total to 45. The group also made significant progress in developing its personal and commercial distribution platforms throughout Asia and the Middle East. HSBC added 25 consumer finance offices in India and 28 in Indonesia. The group established a further 38 branches in Turkey and 3 in Malaysia. HSBC’s ‘profit before tax’ from Asia and the Middle East increased by 22.8% in 2006, over 2005. Stronger operations in the region are likely to increase the group’s market penetration opportunities (HSBC Sustainability Report, 2007).
· Growth in the US credit card market – HSBC’s credit card services business unit is the fifth largest issuer of MasterCard and Visa credit cards in the US. The credit card transaction value is forecast to grow at 6% reaching $1.7 trillion by 2010 in the US (Molitor, 2000). Being one of the largest credit card issuers in the US, HSBC can benefit from the growth in the US credit card market. The US credit card market provides an opportunity to boost HSBC’s returns on investments.
· Global investment banking prospects – The investment banking industry globally is benefiting from the increasing consolidations, mergers, acquisitions, corporate reforms and restructuring initiatives. The number of corporate deals has been rising strongly in the US and Asia-Pacific region. HSBC is one of the key players in this sector. Considering that it generates over 18.6% of its total revenues from its investment banking division, it is likely to benefit from the future opportunities presented by this industry (HSBC Sustainability Report, 2007).
· Mortgage crisis in the US – US mortgage lenders are suffering from rising default rates amid weak housing prices and slower sales in the housing market. The subprime mortgage industry, which caters to borrowers with weak credit in the US, is near a liquidity crisis and many subprime lenders have shut down since the start of the 2006. With inventories of unsold homes remaining high, residential construction activity continues to be weak in the US in 2007. A weak outlook for this sector poses a threat to HSBC’s future earnings from the sector.
· High interest rates – HSBC operates in a high interest rate regime. The past few years have seen central banks impose higher interest rates to check inflation in regional economies. The US Federal Reserve (Fed) has led the way in raising interest rates for the 17th consecutive time in June 2006 to 5.25% (the fund rate, the interest that banks charge each other). In the US, the high levels of interest rate continued to prevail through the first five months of 2007, and are expected to hold at the current levels right up to the end of 2007 (Peters, 7 August 2007).
Comparing HSBC to Barclays
In terms of global performance, HSBC overshadows Barclays in all levels. Barclays only operates in 50 countries, while HSBC is more far-reaching with offices in 82 different countries. HSBC has assets of about $1,861 billion, while Barclays only $1,227 billion.
Indeed, HSBC is an outstanding banking institution that constantly performs better compared all leading banks in the world. Although it is facing numerous challenges brought about by the mortgage crisis in the US, HSBC will remain profitable because of the booming credit card industry that is expected to grow until 2010. What HSBC should do is to maintain its leadership by increasing consolidations, mergers, acquisitions, corporate reforms and restructuring initiatives. As it is operating in the fastest-growing region in the Asia-Pacific and Middle East, HSBC should maintain its stronghold in this part of the world.
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Peters, J.W. 2007, August 7. U.S. Federal Reserve leaves rate steady; no sign of future cut. International Herald Tribune. Retrieved June 6, 2008, from http://www.iht.com/articles/2007/08/07/business/07fed.php.
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