Banks on Hong Kong high wire
SEEMS like only yesterday that HSBC was threatening to move its headquarters out of London because it found the tax and regulatory regime too onerous and expensive. There was talk of setting up its stall in Canada and France, but where was at the top of its list? Hong Kong.
The threats came to nothing. However much one dislikes the Financial Conduct Authority and HMRC, they are not quite as terrible as being under an authoritarian communist regime.
Shareholders will this week see the impact of five months of political protest in Hong Kong on HSBC and its fellow London-listed international bank, Standard Chartered, when they report third-quarter figures.
The pair are highly vulnerable to the turmoil as each derives a high proportion of their profits from Hong Kong.
It may be too soon for the full effect of the protests to have made themselves felt on the bottom line but, if they continue, serious damage seems inevitable. The turmoil has led to businesses closing and has hurt retail sales. There has been a drop in visitors from mainland China and elsewhere.
HSBC and Standard Chartered are putting in place support for small and medium businesses to help them get through the protests, alongside the government. They have also been carrying out ‘stress-testing’ on some clients to assess their resilience.
To make matters worse, the protests are taking place against a troubled global economic backdrop. China is locked in a corrosive trade war with the US and the world is facing what the International Monetary Fund calls a ‘synchronised slowdown’.
Interest rates remain ultra-low, which is bad news for bank profits. Then there is Brexit. HSBC has a significant exposure to the UK economy through its ownership of the former Midland Bank. The British business is, like its peers, on the hook for heavy costs for PPI mis-selling.
IT IS also under siege from fintech operators, so is relaunching its First Direct brand in an effort to lure younger customers from the likes of Monzo. Stringent cost-cutting is likely to figure highly in HSBC’s update. Plans are afoot to shed up to 10,000 staff on top of 4,700 redundancies announced in the summer. It’s not clear where the axe will fall, but Europe, where the bank made a loss of $520m in the first half of this year, is a likely target. As for
Standard Chartered, it does not have a High Street operation in the UK, so it will be spared the PPI agony. It has, however, warned it will be hit by the wider impact of Brexit.
Central to both banks is the idea of making fabulous profits in the dynamic markets of Asia. It’s a seductive strategy, but one that comes with high risks. The focus this week will be on how they are dealing with the situation in Hong Kong and the delicate diplomacy each has to conduct with Beijing. But the duo have to keep the Americans sweet as well. One HSBC boss, John Flint, has already been caught in those tendrils. He left in a swirl of rumours that he was a scapegoat for anger in Beijing, allegedly over the bank passing information on telecoms group Huawei to the US Department of Justice.
Falling out with the Chinese leadership would come at a ruinous price. Yet the same applies if they alienate the US Government, where the pair have both been in terrible trouble over money-laundering and sanctionsbusting. Talk about a tricky tightrope.