HSBC's Strategy is No Occident

Nick is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Europe’s biggest bank may dominate the continent even more by becoming less European.

HSBC (LSE: HSBA)(NYSE: HBC) continues to see over three-quarters of its profits coming from outside the troubled North Atlantic Rim.  With less than ten percent originating in its home market, the London-based banking and financial services firm is returning to its international roots with the H (for “Hongkong”) leading the way. The firm’s operations in the Special Administrative Region yielded a 21% increase in before tax profits last year, and record revenue increases among some divisions are directly tied to Europe becoming the leading destination for Chinese companies investing abroad.  CEO Stuart Gulliver credits commercial and investment banking success outside of Europe and North America as driving HSBC’s recovery after shedding 14,000 jobs in recent years.

Before taking the top position with the bank, Gulliver spent 32 years in its investment banking division, and his expertise has been at the crux of HSBC’s three year old recovery plan which is centered on Asia while it waits to see how the US and Europe are going to continue digging their holes.  Gulliver’s leadership is paying off in high-yield service lines that are establishing bridgeheads for the bank’s other products and services.  Their strategy is proving superior to competitors’ preference for consolidation rather than expansion.  Analysts at Morgan Stanley are likely to concur having estimated that HSBC’s share of Asia trade finance went from 3% in 2010 to 14% in the last quarter.

Although, the widely reported 67% increase in 2011 profits for HSBC’s Middle East and North Africa (MENA) division has prompted some regional observers to comment that the correct application of fair value accounting would render the figure closer to -6.3%, MENA has been one of the least significant regions for the bank worldwide.  Figures reported for other regions have yet to face similar criticism, and are just as suspect as other banks' numbers.  Before tax profits for HSBC were up in Latin America (11%) and Asia-Pacific (24%) – regions that account for roughly 40% of HSBC’s current assets.  Considering that these regions face lower tax, labor, and transaction costs imposed on these thalers, HSBC might use these surpluses to seize on opportunities to acquire or edge out its continental rivals that are under increasing stress by the Greek gift that keeps on giving.

Events seem to confirm that HSBC is not merely in the right place at the right time.  The recent downsizing of Royal Bank of Scotland’s (LSE: RBS) investment banking division across Asia-Pacific has shown that surfing the rising economic tide requires skill, otherwise it can quickly turn into a financial wipeout.  However, the UK-taxpayer subsidized RBS has become an embarrassment to Scrooge McDucks the world over.  HSBC (itself founded by a Scotsman) had hoped to acquire RBS in the mid-1980s in its drive to expand in Europe.  However, a version of that dream was realized when it recently bought the India holdings of RBS (making it the second largest international bank on the Subcontinent, a market notorious for its regulatory barriers to foreign expansion).  The 20% increase in locations is likely to buttress HSBC’s already strong showing in a country starved (by its own government) for financial services that meet international benchmarks.  (Last year, HSBC India reported a before tax profit of $814 million – a 22% increase from the previous year.)

While the state-linked RBS may be vanquished in Asia, it now appears that HSBC may soon have to deal with the emerging regional player CIMB (MYK: 1023), Malaysia’s second-biggest bank, which is likely to salvage RBS’ operations in the hemisphere as part of its aggressive expansion all along the Western Pacific seaboard from Korea to Australia.  CIMB also has about a two decade head start on HSBC in Burma/Myanmar and is gearing up to facilitate the first round of post-sanctions investments in the coming months.

HSBC’s recent sale of its Japanese private banking division (the oldest banking group in the archipelago) to Credit Suisse (NYSE: CS) reflects mutually better alignments for the two firms’ differing strategies.  While HSBC has been public about its cost-cutting strategy to “leave businesses or countries where it lacks scale,” Credit Suisse also believes that Japan offers better synergies for its existing businesses – managing the wealth of rich dying societies.  While that strategy gave Credit Suisse's stock a bounce after the recession felled most financial institutions, its price continues to slide while HSBC is looking up.

At the same time, HSBC has continued to pursue acquisitions that position it in growing emerging and frontier markets.  As in other parts of Asia, another British financial institution is on the retreat and HSBC’s announcement to acquire by year’s end the United Arab Emirates holdings of the scandal-ridden, UK-government linked corporation Lloyds Banking Group (NYSE: LYG) is one more sign that HSBC continues to press its advantages in overseas markets.  Despite minor setbacks like Qatar’s central bank barring conventional financial institutions from offering sharia-compliant services, HSBC has not made poor decisions like Lloyds' failure to double down on the real estate market in Dubai (which ultimately necessitated their exit from the domestic markets of the emirs).

Far more consequential for Middle Eastern and emerging markets, and a complement to its dominant positions in the Kingdom and the Emirates, is that last week HSBC cleared the regulatory hurdles to merge with Oman International Bank (MSM: HBMO), the Sultanate’s most innovative and aggressive financial institution which has interests through out the Indian Rim.  While the future of Oman post-sultan is unclear, the business interests of the country have not only maintained the nation’s centuries old commercial links, but have expanded them as far as the Philippines.  Most American observers are aware that Oman was the key to brokering the recent US hiker hostage incident with Iran, but the event was a minor challenge for a strategic US ally that is responsible for creating and servicing financial transactions for interests not only in the Islamic Republic but in Russia, Kazakhstan, and a number of African nations that are only now learning the global financial ropes. 

The current leadership at HSBC has been convincing shareholders it is more capable than its competitors over the last few years.  RBS and Lloyd's shares remain a pittance of their pre-recession levels and the Credit Suisse approach has served only to slow the decline in its share price.  HSBC is showing itself to be one of the few large caps genuinely multinational enough to adapt global resources for local markets.  All things being relative, those in the market for a good bank or a way to bet on foreign markets outperforming London and New York this decade may want to consider HSBC.

Nick Slepko has no position in any company mentioned here at the time of publication.  The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus