October 9, 2017 / 12:17 PM / a year ago

Breakingviews - HSBC’s next challenge is how to grow responsibly

LONDON (Reuters Breakingviews) - Edmund Burke, a father of modern conservatism, emphasised the principle of gradual change over revolutionary fervour. HSBC will have demonstrated the same values if John Flint, head of retail banking and wealth management, replaces Stuart Gulliver when he steps down as chief executive next year. The consummate company man, who has spent nearly three decades at the sprawling Asia-focused lender, is awaiting approval from regulators, according to the Sunday Times. Installing Flint would continue the bank’s tradition of appointing insiders as CEO.

John Flint, HSBC

Such lack of radical change is hardly galling. HSBC has already broken with convention by installing Mark Tucker, an outsider, as chairman. The bank’s shareholders want a low-risk, diversified bank that produces steady payouts. After nearly seven years of restructuring and selling assets, Gulliver has largely achieved this. HSBC had a solid capital ratio of 14.7 percent at the end of June, well in excess of its 13 percent target, underpinning dividends. HSBC shares have outperformed the STOXX Europe 600 Banks index by a whopping 45 percent over the past two years and trade at a relatively healthy 1.2 times book value.

The bank’s net operating income – which deducts bad debt provisions but not expenses – has fallen by an average of 5.8 percent a year since 2011 as Gulliver sold businesses and shed low-returning assets.  Tucker, newly recruited from AIA, could be forgiven for plotting a change of tack. Under his watch assets at the Asian insurer grew by 38 percent to $185 billion over the past five financial years, according to Eikon data. HSBC’s balance sheet shrank by 11 percent over the same period.

The bank is placing some bets: for example, it is redeploying $100 billion in risk-weighted assets to Asia, specifically the Pearl River Delta region in Southern China, in a quest to sign up middle-class customers. Investors who recall HSBC’s disastrous 2003 purchase of Household International – a bid to capture a bigger piece of the then-booming U.S. property market – might point to the perils of chasing debt-fuelled growth.

There is also more cleaning up to do. The bank has yet to make a compelling case for keeping a foothold in Mexico. Its 19 percent stake in China’s Bank of Communications also looks increasingly superfluous. Further disposals may disappoint those questing for headline-grabbing enlargement. Those who applaud HSBC’s conservative focus would be cheered.


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