May 9, 2023/Fitch Ratings
Growing demands and increased pressure from some of HSBC’s (A+/Stable/a+) shareholders to review and potentially change the banking group’s structure, including carving out more independence for its Asia operations, increases uncertainty surrounding the execution of the group’s strategy, Fitch Ratings says.
Recent proposals for a strategic review, including an assessment of HSBC’s Asia operations relative to the entire group, were put forward by a Hong Kong-based retail investor to be voted on at the upcoming annual general meeting on 5 May. HSBC’s management has recommended this be voted against, given it would be costly and increase execution risks.
It is too early to assess the effect on HSBC’s ratings if the resolution is passed given high uncertainty and complexity involved with a strategic review. Fitch’s ratings for HSBC balance the benefits from the group’s solid international network and connectivity, diversified business model and sound business and funding franchise across geographies against material exposure to emerging markets and potentially more volatile regions given increased geopolitical tensions.
Details on any strategic or organisational review, if accepted, and potential implications are unclear, but a separation of the group’s Asia operations would be costly, with the division of functions likely to be time consuming given high integration across the businesses and legal entities.
The Asia operations are core to HSBC’s international franchise and have been growing in importance for the group in recent years. In 2022, the Asia region contributed to the bulk of HSBC’s reported operating income (56%) and profits. HSBC’s management has looked to reshuffle group resources to Asia since the announcement of its 2020 strategy, and has moved some essential functions there. The Hongkong Shanghai Banking Corporation Limited (AA-/Stable/a+) is Hong Kong’s largest bank with a solid deposit franchise.
HSBC aims to employ approximately 50% of tangible equity in Asia over the medium-to-long term, which stood at 47% at YE 2022, up from 43% in 2019, with recent small acquisitions supporting growth of its Asia wealth management franchise. The group has been increasingly deploying risk-weighted assets to the region from other less-strategic geographies. HSBC’s pivot to Asia was reinforced by the group’s planned disposal of its French retail unit, Greek operations and its Russian subsidiary. The recently announced delay of the sale of its French retail bank is likely to continue to weigh on the performance of HSBC’s European operations. HSBC also agreed to the sale of its well-performing Canada subsidiary late last year.
Fitch revised HSBC’s Outlook to Stable from Negative in September 2022, reflecting Fitch’s expectations for the group’s profitability to materially improve, given accelerated interest rate hikes, which help to offset execution risks relating to the restructuring of weaker-performing parts of the group. Fungibility of capital across the group’s operating banks is also a key ratings consideration.
