HSBC today published its response to the statement issued by Ping An Asset Management Company on 18 April 2023.

As FNG has reported, Ping An pushed for restructuring at HSBC, with the proposed changes affecting primarily the operations of HSBC Asia Pacific.

In its response, HSBC argues that a structural reconfiguration of HSBC Asia Pacific would result in material loss of value for HSBC shareholders.

In 2022, HSBC undertook a thorough evaluation of structural options for its Asia Pacific businesses, the conclusions of which were summarised in our 2022 interim results. The Board considered the potential revenue and value benefits from these structures, including capital allocation and business choices, potentially obtaining new licences and potentially increasing risk appetite.

However, HSBC says, these benefits were meaningfully outweighed by expected value decline in multiple areas, as well as a diminution of service to long-standing HSBC customers. The Board therefore concluded that these structural options would result in material loss of value for shareholders and lower dividends.

Further, HSBC argues that separation is not consistent with HSBC’s business model: HSBC is not a portfolio of discrete domestic banks. It is an integrated bank. Structural steps that create separation within HSBC’s integrated model would result in meaningful costs and risks and would damage a core commercial proposition – global interconnectivity – that is a key driver of revenues.

The idea of a partial listing of HSBC Asia Pacific appears to be based on Ping An’s belief that it will not negatively impact the international model of HSBC, whilst creating incremental value for shareholders. But HSBC’s analysis does not reach the same conclusion.

HSBC’s work identifies negative impacts of Ping An’s proposed financial engineering approach on revenues, capital, liquidity and costs that would outweigh any perceived valuation arbitrage that may exist from a partial Hong Kong listing. A partial listing would also erode client confidence in the long-term sustainability of HSBC’s international customer proposition.

HSBC also notes that its current model manages returns from clients globally. Under a standalone listing, HSBC’s Asia Pacific and ex-Asia businesses would be driven to assess client economics with reference to their own geographies only, particularly under stressed macroeconomic conditions. This would result in reduced revenues and returns. In addition, the customer experience and service for international customers would be negatively impacted by significant incremental administrative burden, less coordinated customer service, and decision-making governed by arm’s length contracts.

Further, HSBC claims that a restructuring would incur a number of one-off and recurring costs that are material in aggregate. A number of these would be required to meet relevant regulatory and other requirements for banks. These costs would include IT systems and applications, standalone funding, standalone processes and governance, and tax leakage. HSBC Asia Pacific would also likely need increased capital, based on Hong Kong peers.

In addition, HSBC says that any separation would be subject to regulatory approvals in c.25 jurisdictions, require shareholder approval, and oblige HSBC to alter its customer service around the world. It would also create a multi-year period of uncertainty when clients and employees in particular would be distracted and impacted.

Finally, HSBC says that structural reforms of HSBC’s Asia Pacific businesses suggested by Ping An would significantly dilute the international business model upon which HSBC’s strategy is based. This would result in a material erosion of earnings, returns, dividends and shareholder value, and a disruption to HSBC’s global customer service proposition.

Accordingly, HSBC cannot support or recommend to its shareholders the structural options that have been proposed or otherwise considered.