HSBC continues China banking divorce

HSBC's likely sale of its stake in Bank of Shanghai later this year is part of an ongoing divorce as global lenders rethink their China strategy.

PUBLISHED : Monday, 15 April, 2013, 10:55am
UPDATED : Monday, 15 April, 2013, 10:55am

A new media report says global banking giant HSBC (0005.HK; London: HSBA) is likely to sell-off more of its Chinese assets, continuing an ongoing divorce by top global lenders tired of slow progress in the complex China market. This latest report doesn't have any specific insider knowledge of a looming sale, but rather quotes analysts saying such a move is likely. Still, such disposals seem both likely and logical, following HSBC's sale last year of its 15.6 per cent holdings in Ping An Insurance (2318.HK; Shanghai: 601318) after years of inability to get any strategic returns out of the tie-up.

Let's take a closer look at the latest news, followed by the bigger picture and what's likely to come next as frustrated global banking giants like HSBC and Citigroup (NYSE: C) readjust a China approach that has yielded little more than headaches over the last decade. According to the new reports, analysts believe that HSBC is likely to sell off its 18.7 per cent stake in regional lender Bank of Shanghai later this year. Such a sale would come as the Shanghai-based lender is expected to raise up to US$2 billion in a dual listing in Hong Kong and Shanghai later this year, with HSBC receiving about US$800 million for its stake, the analysts said.

HSBC is one of the last big global lenders to retain major holdings in China, following a sell-off over the last two years that has seen names like Goldman Sachs (NYSE: GS) and Bank of America (NYSE: BAC) dump stakes in big Chinese peers including ICBC (1398.HK; NYSE: 601398) and China Construction Bank (0939.HK; Shanghai: 601939). The global names sold their stakes partly to raise capital after the global financial crisis; but many were also frustrated by multibillion-dollar investments that failed to help them make any major progress into China's vast banking market.

HSBC has been one of the most bullish of the global banks on China, partly due to its roots as the Hongkong and Shanghai Banking Corp that was previously based in Asia. But even HSBC's patience has worn thin, resulting in the decision to dump its Ping An stake last year and the likely move to sell more China assets later this year. Besides the Bank of Shanghai stake, HSBC's other major China asset is its 8 per cent holdings in Shanghai-based Bank of Communications (3328.HK; Shanghai: 601328), which has been one of its more successful tie-ups.

So the next questions become: who are the potential likely buyers for HSBC's probable asset sale, and how are foreign lenders likely to change their approach to China in the next five years? In answer to the first question, I seriously doubt that other foreign lenders will be lining up to buy Bank of Shanghai. Most big foreign lenders are still busy repairing their balance sheets after the global financial crisis, and seem to finally realise that buying stakes of Chinese counterparts isn't the best path into the market. Their lack of interest was on prominent display last year when HSBC ended up selling its Ping An stake to a Thai group that lacked any major banking credentials.

As to the second question of how foreign lenders will change their China approach, many are probably keeping close watch on a year-old joint venture between Pudong Development Bank (Shanghai: 600000) and mid-sized US lender Silicon Valley Bank to see if that arrangement works. If it does, perhaps we could see more international lenders, both large and mid-sized, start returning to China in the next five years to set up similar joint ventures in a second attempt to tap the large but also difficult market.

Bottom line: HSBC's likely sale of its stake in Bank of Shanghai later this year is part of an ongoing divorce as global lenders rethink their China strategy.

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