HSBC Holdings Plc, Europe’s biggest bank, is relying on insurance units in Asia to help restore profit growth after a US$15.5 billion expansion into US sub-prime lending went awry. HSBC earned US$1.6 billion from insurance in the first half of 2007 and plans to double the division’s profit in five years. The London-based bank agreed this week to buy stakes in insurers in India and Vietnam. Earnings from the US, where HSBC acquired Household International Inc. in 2002 in its biggest takeover, fell 43% in the first six months of this year.
“Insurance is a genuine growth opportunity,” said Simon Maughan, a London-based analyst at MF Global Securities Ltd who has a “hold” rating on HSBC shares. “It is also a good distraction from the problems they are having in the US”
Chair Stephen Green is under pressure to improve shareholder returns, which have trailed Spain’s Banco Santander SA and UBS AG of Switzerland, HSBC’s biggest European competitors, since it bought Household. Knight Vinke Asset Management, the investor that campaigned to block Suez SA’s merger with Gaz de France SA, asked Green and HSBC’s board last week for a “fundamental review” of strategy and management.
The bank has lost senior bankers in Asia and Europe in the past three months. Paul Hand, global banking co-head, will leave after 21 years, an internal memo given to Bloomberg showed today.
Green named former private banking head Clive Bannister to oversee insurance last year. The bank plans to increase earnings at the unit to 20% of profit by 2012 from about 10% last year, with much of the growth coming from Asia.
HSBC, which owns 17% of Ping An Insurance (Group) Co., China’s 2 insurer, announced plans yesterday to buy 10% of Bao Viet Insurance & Finance Group, Vietnam’s biggest state-owned insurer, for US$255 million. The company has the option to buy 8% more of Hanoi-based Bao Viet after 18 months. Today, the bank said it had applied for a license to set up a life insurance company in China.
“Asia is literally on fire,” Bannister, 48, said today in Hong Kong. “In Vietnam, for instance, 50% of the population is under 30. There is a generation of people who have no expectation there will be public provision.”
HSBC said September 10 that it had reached an agreement with India’s state-run Canara Bank and Oriental Bank of Commerce to create a life insurer in that country, where insurance sales increased more than 20% annually for the past five years. It will invest US$43.6 million for 26% of the company.
Return to Roots
Asia accounted for a third of the profit at HSBC’s insurance division in the first half, compared with 30% in Europe, 21% in North America and 16% in Latin America.
“We have grown in Asia around 20% plus,” Bannister said in an interview earlier this year. “It would depress me were we to do any less well.”
Life insurance premiums at Shenzhen-based Ping An rose 10% to 32.1 billion yuan (US$4.3 billion) in the first half. HSBC also owns 24.9% of Beijing-based HSBC Insurance brokers. The bank is also waiting for approval from the China Securities Regulatory Commission for a license to set up a new life insurance company, Bannister said today.
HSBC was founded as the Hongkong & Shanghai Banking Corp in 1865 to finance trade between China and Europe. The company, which moved its headquarters to London from Hong Kong in 1993, has 745 branches in Asia, where it generates 23% of revenue.
Expanding in Asia “is the right thing to be doing for a bank that has access to distribution and the customer base,” said Youssef Ziai, an insurance analyst at ABN Amro Holding NV in London. “Emerging markets in Asia have good growth potential as the standard of living increases.”
Knight Vinke, the New York-based fund manager calling for changes at the bank, criticised the Bao Viet deal. The purchase “will do nothing to add value,” said Eric Knight, 48, who runs the firm. “HSBC will be a minority shareholder with limited influence for the foreseeable future.”
HSBC’s newly appointed Asia-Pacific CEO Sandy Flockhart defended the acquisition of minority stakes in an interview today in Hong Kong.
“In many of these markets, we can’t buy a majority position,” he said. “It’s key that we get our foot in the door and start developing the relationship.”
Ping An, for instance, was a “fantastic investment,” he said. “I think you’ll see the same thing from Bao Viet.”
Ping An’s Hong Kong traded shares have gained 90% this year to HK$81.80. The stock was sold at HK$10.33 in a 2004 initial public offering.
Citigroup, Credit Suisse
Economic growth in Vietnam, a nation of 85 million people, has averaged 7.3% since 2001.
Knight Vinke plans to meet with 20 of HSBC’s investors to convince them that the bank should review its strategy and make changes to corporate governance.
The bank’s shares have gained 25% since November 13, 2002, the day before the purchase of Prospect Heights, Illinois-based Household was announced. Shares of Santander, Europe’s 2 bank by market value, climbed 116% in the same period and those of Zurich-based UBS gained 84%. HSBC’s stock is down 5.1% so far this year.
HSBC is ramping up insurance operations after banks, including New York-based Citigroup Inc. and Credit Suisse of Zurich, shed their operations. The UK company will stick to selling through bank branches, rather than trying to build an insurance company, Bannister said in the earlier interview.
“We don’t intend to spend shareholders’ money where we don’t have a competitive advantage,” he said.
To meet its goal, one of HSBC’s biggest challenges will be finding insurers to buy, ABN Amro’s Ziai said. “Unfortunately in the Far East, there aren’t many targets,” he said.
The acquisition of Household soured when the lender to US borrowers with patchy credit histories suffered increased loan defaults. The bank set aside US$6.4 billion to help cover doubtful US home loans in the first half.
HSBC’s net income rose 25% in the first half to US$10.9 billion, driven by gains in Asia, Latin America and corporate lending. Profit in the final six months of 2007 probably will decline about 10% to US$6.36 billion, estimates Sandy Chen, an analyst at London-based Panmure Gordon & Co.
“Insurance is a growth strategy, but there’s also an element of defense,” said Colin Morton, who helps manage 14.4 billion pounds (US$29.2 billion) at Rensburg Sheppards Plc in Leeds. “They are trying to grab market share of almost any kind of financial business.”