Hello and welcome to another episode of the Finrestra podcast! I am Jan Musschoot.
In this episode, I will talk about the sale of HSBC Canada and especially what HSBC can do with the cash it will receive from this sale. But first, let’s do a quick recap of the financial news of November.
FTX, a crypto trading platform, went bankrupt and its founder SBF went from being a multi-billionaire to essentially being broke.
In the euro area, inflation finally went down a little. Inflation was 10% in November whereas inflation was still 10.6 percent in October. Inflation is going down a little thanks to lower energy prices.
If you look at where HSBC derives its revenue from, Canada is barely three percent of revenue. It’s about four percent of profits and also four percent of the balance sheet. So banking in Canada is just a small part of the global group that is HSBC.
So it makes sense to exit this market, because you cannot have the scale you want to be highly profitable. Canada also has some big domestic banks who dominate banking in the country, so it makes sense for HSBC to exit the market, especially given that they received a good price for it.
This Go big or go home strategy is something that HSBC has been following for a few years now. For example, last year they also announced that they would exit [part of] the retail banking business in the US and that they would sell the French retail banking business, which was also about three percent of the group’s revenue. But they cannot compete to with the large French banks in France. And then in November 2022, so last month, HSBC also sold its bank in Oman (in the Middle East) to a local bank.
And this ‘let’s go big or go home’ strategy is not unique to HSBC. For instance last year I did a podcastepisode about the sale of Bank of the West by BNP Paribas. The French multinational bank sold its US retail banking division to focus more on its core markets. And that’s also what HSBC has been doing here with the sale of HSBC Canada.
In financial terms, it seems that HSBC has done a pretty good deal because they received 13.5 billion Canadian dollars (which is about 10 billion US dollars). That’s about eight percent of HSBC group’s market cap. So that’s actually a good deal. If you look into the financial statements, they say they will make a net profit of more than 5 billion dollars on this sale above the book value1. And of course, selling the Canadian division will also shrink HSBC’s assets by a little less than 100 billion US dollars. So the sale provides a good boost to the capital ratio of HSBC as well.
Now let’s focus on what HSBC could do with the cash that it will receive.
One possibility is just to return it to the shareholders in a dividend. But that’s kind of boring, so what I would do is to follow the Go big or go home strategy and ‘go big’ in the core markets of HSBC.
HSBC’s core markets are firstly in Asia, where it’s the biggest bank in Hong Kong and also has significant operations in China, India, in the Middle East, and in some other Asian countries.
So what could we do with the cash (or the cash plus some extra borrowed money)?
The obvious takeover candidate would be Standard Chartered. Standard Chartered is another British bank that is based in London and is mostly operational in the Far East (and also partly in Africa and the Middle East). If HSBC were to buy Standard Chartered, there would be synergies of course in the London offices. I’m not sure if they would be allowed to take over the Hong Kong division of Standard Chartered because maybe HSBC would become too dominant in Hong Kong, but at least buying the Asian divisions would be a huge boost to HSBC in Singapore and it would also strengthen the bank in China,India and South Korea. Also in the United Arab Emirates and Asian economies like Malaysia, Indonesia, Vietnam. All those countries would contribute to a higher market share of HSBC and hopefully also to higher profitability and economies of scale.
I already mentioned that they should probably sell the Hong Kong division of Standard Chartered. And I guess they should also sell the African subsidiaries of Standard Chartered because I don’t see a lot of synergies there. And HSBC is mostly focused on Asia and not on Africa. So that would also bring in some extra cash because the 10 billion US dollars won’t be enough to buy standard Charters. But I think there’s a very clear business case to purchase Standard Chartered.
Another possibility would be to stay in the United Kingdom. So I found some research by Mordor Intelligence showing the market share of banks in the British market. You see that Lloyds is the clear market leader while HSBC is only the fourth largest retail bank in the UK (together with Santander UK). So a possible takeover target would be NatWest, which is the parent company above Royal Bank of Scotland – which is currently the third largest bank in Britain. Together with HSBC, they would be about as large as Lloyds Banking Group. So they would be the first or second largest bank in the United Kingdom. This [acquisition] would definitely provide some economies of scale on its British home market and would be quite easy to integrate. I think that deal makes a lot of sense also from a business perspective. Compared to Standard Chartered, where you would need to do a lot of divestments and integration in a lot of markets, the NatWest acquisition would be quite simple in terms of geography. You would also only need the approval of the British authorities. So I think that makes a lot of sense as well.
And then finally, thinking out of the box, we could also look at Credit Suisse. I wouldn’t suggest to buy the entirety of Credit Suisse, although its market cap is so low that with $10 billion you could almost buy the entire bank.
But what is probably a better idea is if HSBC would buy the Asia Pacific operations and maybe also the Middle Eastern operations of Credit Suisse. So I guess you don’t need the entire amount of 10 billion dollars. But by buying the Asia Pacific operations of Credit Suisse, HSBC could strengthen its wealth management in countries like China but also in Singapore and in other East Asian countries. And maybe also strengthen some of the investment banking operations in Asia. I think management of Credit Suisse would probably be happy to sell those divisions because then Credit Suisse can focus more on its core divisions in Switzerland and the Americas. While now CS are a global bank but they don’t have the size they need to be a real global bank.
So these have been three ideas. HSBC has sold its Canadian division for a lot of money. They could either buy Standard Chartered, or NatWest, or the Asian activities of Credit Suisse. I’m very curious of course what you think. Should they just return the money to their shareholders? Or should they buy other banks? Or do you have any other ideas? Maybe they should focus on share buybacks.
Please take into account exchange rates, Ayadi et al. Even if you don’t know that HSBC and BNP Paribas are the largest banks in Europe, the change in assets of the Nordic banks should have been a huge red flag.
The same study classifies HSBC as a retail bank and La Banque Postale as an investment/wholesale bank. I’ll take common sense over fancy statistical software any day…
Euro area inflation remains far above the ECB’s 2 percent target. Dutch inflation was 5.2 percent, a figure not observed since 1982. The German inflation rate was the highest since 19 ninety 2. Ironically, the union of the ECB’s own employees wants higher wages due to inflation.
In other record news, the French stock market index CAC 40 reached a new all-time high. It finally surpassed its peak from the year 2000.
There was also consolidation news:
BBVA wants to buy the stake of Turkish Garanti BBVA bank it doesn’t own yet
KBC buys the Bulgarian banking activities of Raiffeisen Bank International
The news of record high stock prices brings us to the topic of this episode: European bank CEOs should be ashamed.
Why?
Because their stocks have been horrible investments. Despite a nice rally in 2021, most large European banks still trade 70, 80 or 90 percent below their 2007 highs.
Or look at banks by market capitalization. The biggest European bank, HSBC, is only worth a quarter of American JP Morgan. And you could argue that HSBC isn’t even really a European bank, as most of its profit is generated in Hong Kong.
What’s the second largest European bank by market cap? Surely it must be a German, British or French one? Nope. It’s actually Sberbank of Russia. Russia, a country with a GDP smaller than Italy’s.
I can hear some CEOs already. How they are victims of low interest rates, low growth, overcapacity. Blah blah blah.
Instead of making excuses, take a hard look at banks like DNB, KBC, Nordea and SEB. Why are these relatively small banks worth more than giants like Deutsche Bank, Société Générale and UniCredit?
I know the answer. But do bank CEOs?
Here’s some free advice. Listen to episode 3 of the Finrestra podcast. And watch the “Bank in two minutes” series on our YouTube channel.
What will you learn? That successful banks focus. Focus on a few countries. Focus on one client segment, or at least on very complementary segments.
In contrast, banks with low profitability are often monsters of Frankenstein. They are part retail bank, part investment bank. They are active in dozens of countries.
They are big, but do they deliver what clients and investors want? The market doesn’t think so.
Now dear listener, before I go, I want to ask you a favor. For an upcoming episode, I would like to talk about Industry, the series about junior investment bankers. I recognized a lot of situations in the series. So if you work in a bank, watched Industry and would like to talk about it, please contact me! This has been another episode of The Finrestra Podcast. If you have suggestions for topics or guests, you can mail me at jan.musschoot@finrestra.com. You can find me on twitter @janmusschoot. Thanks for listening!”
“Hello and welcome to another episode of The Finrestra Podcast. My name is Jan Musschoot. We were off last week due to the banking holiday on November 1st. So here is a recap of the European financial news of October.
The governing council of the ECB discussed inflation, but central bankers expect no rate hikes in 2022.
Italy and UniCredit ended negotiations over the sale of Monte Paschi di Siena.
Swedish Handelsbanken will leave Denmark and Finland. This fits into a trend that I discussed in episode 3 of the Finrestra podcast.
Volvo Cars had its IPO in Stockholm, one of the largest European IPOs this year
French government bonds were traded on a blockchain with central bank digital currency
ING phases out its payment subsidiary Payvision
ABN AMRO passes on anti money laundering costs to coffeeshops, which can increase fees up to 1000%
French bank La Banque Postale will exit oil and gas by 2030
Dutch pension fund ABP stops investing in fossil fuel producers by 2023
Finally, COP26 started. COP26 is the climate summit in Glasgow.
And that brings us to the deep dive of this episode.
What do banks do against climate change?
The website Our world in data has a nice overview of the greenhouse gas emissions by sector. The majority of global emissions come from energy use in industry, transport and buildings. Other activities that emit a lot of greenhouse gases include agriculture and the production of cement.
Banking or finance aren’t explicitly mentioned. Not surprising, because you only need an office and a computer to generate financial services. So the direct CO2 emissions of banks are negligible.
On the other hand, banks provide funding to coal miners, oil and gas companies, and other carbon intensive industries. Asset managers and pension funds invest in the stocks and bonds of fossil fuel producers. These assets contribute to the so-called ‘Scope 3 emissions’ of the financial industry. According to Greenpeace and the WWF, UK financial institutions are responsible for nearly double the UK’s annual carbon emissions.
But banks can also steer their clients towards lower emissions. They can refuse credit for power plants that burn coal, and divert the money to wind farms. Loans for real estate, both residential and commercial, are a big chunk of banks’ assets. Banks can stimulate borrowers to make buildings energy-efficient.
To formalize their climate commitments, 50 European banks have joined the Net-Zero Banking Alliance. This alliance is convened by the United Nations and led by the banking industry. The members of the Net-Zero Banking Alliance commit to transition their lending and investment portfolios to align with net-zero by 2050. The signatories include sustainable banks like Triodos and GLS Bank. But without the big banks, this initiative wouldn’t have much effect. However, the CEOs of most large European banks have also signed the Commitment Statement of the Net-Zero Banking Alliance. Members currently include global systemically important banks such as HSBC, BNP Paribas, Santander, Deutsche Bank and UniCredit. So far, no Belgian banks have joined.
Is the Net-Zero Banking Alliance yet another case of greenwashing? Is it all blah blah blah, as Greta Thunberg would say? It shouldn’t be.
Banks that join the Alliance have to disclose targets on how they will support the temperature goals of the Paris Agreement. These targets will be reviewed to ensure consistency with climate science. Everybody will be able to check whether banks keep their promises, because they have to report the emissions of their lending and investment portfolios annually.
This has been another episode of The Finrestra Podcast. If you have suggestions for topics or guests, you can mail me at jan.musschoot@finrestra.com. You can find me on twitter @janmusschoot. Thanks for listening!”
