Gulliver's travels: Part 1

HSBC’s chairman of Europe, the Middle East and global businesses explains how the bank’s historical roots in the Far East and lessons learnt during the Asian financial crisis have helped it successfully navigate the ongoing global financial turmoil.
Stuart Gulliver
Stuart Gulliver

Stuart Gulliver is the man who led one of the swiftest and most sustained profit increases in HSBC's 145-year history. And it is a feat he performed in Asia, against the backdrop of a debilitating regional meltdown, while head of treasury and capital markets from 1994 to 2002. 

That experience has served the bank well ever since. If any bank can claim to have sailed through the global financial crisis relatively intact, it is HSBC. The bank has not been censured by the regulators; it has not been bailed out with one dollar of government funding and, most uniquely of all, its strategy and ethos has not been ripped apart by the Western media. Indeed, it was HSBC that depositors considered the safe haven during the financial crisis, with deposits growing by $199 billion in 2007 and staying above $1 trillion ever since.

In the first of a two-part interview to mark's 10th anniversary, Gulliver explains why he thinks the bank has been able to do this. In part two, which will be published tomorrow, he discusses the bank's strategy and its intention to match its strengths in debt capital markets by creating an equally strong equities powerhouse.

Outside observers say HSBC has been able to propel itself up the league tables thanks to its ever expanding balance sheet, which has given it the capital markets firepower to help other banks repair their own balance sheets. And the man who has been leading that charge is Gulliver. 

Indeed, having successfully helped steer HSBC's global markets business through the Asian financial crisis, he was called to London in 2003 to replicate his highly profitable Asian strategy across the rest of the bank's global corporate, investment banking and markets division. Since then, he has also become responsible for asset management and global private banking. His success has been rewarded with a main board seat and in 2010 he became chairman of the bank's overall business in Europe and the Middle East.

From his office on the 42nd floor of the bank's headquarters in Canary Wharf, Gulliver is now a contender to succeed HSBC's current group chief executive Mike Geoghegan, who moved to Hong Kong in a highly symbolic move for the bank earlier this year. And as Gulliver tells FinanceAsia, it would be a welcome return to the place he still regards as his home.

It's where his career began back in 1980 when he joined the bank's prestigious graduate programme of international managers. At that time, China was only just one year into its open door policy to the outside world. Shanghai's Pudong District was still a mud flat, there were virtually no private cars anywhere in the country, and its fledgling bankers were conducting business with their foreign counterparts based out of bedrooms in Beijing's Media Hotel.

And it's easy to forget just how much of a "foreign country" HSBC was back then as well. Some of its "good men" were still turning up to work in their safari suits and the modus operandi of many of its country heads wouldn't have looked out of place in a Joseph Conrad novel. Overhauling this culture, while retaining the bank's local expertise, was the key to unlocking its profitability and to understanding the reason behind its focus on liability management and credit management processes, which have enabled it to survive and thrive through two major shocks to the financial markets.

In 1994, you effectively centralised control of HSBC's 19 Asian dealing rooms out of Hong Kong and profits shot through the roof. How radical a move was this for HSBC at that time?
It had to be carefully sold to the country heads, a couple of whom were very, very resistant to the idea. At that point, they still had enormous power that dated back to the bank's early days when documents were sent by packet steamer and they had complete control of their own personal fiefdoms. For example, if I, or any of my colleagues, wanted to pay their country a visit we had to solicit their written permission first. I remember one letter around this time from Stephen Green (then group treasurer), which went: "My Dear X, I'd like Stuart Gulliver to pay a visit to your dealing room. Yours Stephen Green." He received the reply, "My Dear Green, that won't be necessary. Yours X."

How was this impacting profitability?
We were getting picked off by anyone who was more centralised than we were. We also had 19 dealing rooms all independently trading the same product -- let's say dollar/yen. We were crossing our own bid/offer spread several times a day. Willie Purves, the group chairman at that time, was also becoming very worried that HSBC would be disintermediated by US banks like Goldman Sachs, which were starting to take big corporates like Hutchison Whampoa to the international bond markets. He was the driving force behind all of this -- calling Mr X to tell him that I would be visiting his dealing room and that, henceforth, it would also report into Hong Kong. 

It was the first time HSBC had ever had a functional management structure. Profits then jumped from $300 million across 19 dealing rooms in 1994 to $1 billion three years later in 1997. It's now a huge part of the bank's P&L and, globally, the global banking and markets division made $10.5 billion in 2009.

And the next step was to apply that policy to the rest of HSBC's global operations?
Yes, the trading floors in London and New York were still dysfunctional. If you think of HSBC's history, it's a bank that emerged out of the Hong Kong & Shanghai Banking Corporation via a patchwork of acquisitions, which all traded under their own brand names for a long time. It took a while to stitch them all together. So the trading rooms in London and New York were behaving as separate entities and neither was leaving overnight orders with HSBC in Asia. The former was leaving them with Chemical Bank and the latter with Citi. And it was happening at a time when banks were really starting to sell quite sophisticated products to Asian clients. We needed a global platform to be able to do that.

Critics say that the US is still a weak spot for you in that respect?
No, I don't agree. The US made more than $500 million last year and our operations there do what we want them to do, which is to serve our emerging market clients. In 2008, we turned the reporting structure on its head and now Sao Paulo has equal billing as New York. In the past, we always struggled to do everything in America. But you need scale, otherwise you're out of the day-to-day information flow and end up being the one on the wrong side of the trade.

That's not to say the US isn't hugely important to us, because it is. It has the world's largest pool of investable assets and our clients want access to that. But do we really need to be trading domestic municipal and corporate bonds to achieve that? I don't think so. 

One country where you've made numerous attempts to make deeper inroads is Korea. Why do you think you've found it so hard to buy a Korean bank?
We actually have very strong operations in Korea, which we've developed organically. In 2009, HSBC Korea made more than our foreign competitors who made well-publicised purchases there. But notwithstanding that, we have made numerous attempts to buy a domestic bank since the Asian financial crisis, none of which have worked out.

And what about India? It's a country where you've also had ambitions to expand through acquisitions? 
Yes, in 2008 we bought the retail broking arm IL&FS Investmart. We'd also love to extend our banking presence in India, as would many of our competitors. If the regulatory environment there changed, we'd be keen to increase our investments in the country. But India has taken a different tack to China. The Chinese authorities have used foreign banks as a tool to bring domestic banks up the learning curve, whereas India has chosen not to embrace foreign banks.

In China you have your joint venture with Band of Communications as well as your own branch network. What's the next step?
We've said that we want to be one of the first foreign companies to list in Shanghai and that's very important for us as the city is as much our spiritual home as Hong Kong. This year, capital raisings by the Chinese banks will dominate the domestic equity markets. They want to bolster their balance sheets after ramping up lending last year to pull China through the global financial crisis. We continue to make preparations for our listing and will proceed at a pace the authorities allow.

You say Shanghai and Hong Kong are the bank's spiritual homes. How important is Asia to the group as a whole these days? 
It's our key focus. Asia is propelling world growth and we believe that 50% to 60% of our pre-tax profits will come from the region within the next five to 10 years. Mike's (Geoghegan) recent move to Hong Kong reflects Asia's strategic importance to us. 

A number of other banks are trying to follow our lead, but it's not straightforward for them. It takes a long time to grow organically and Asia's not a region where countries typically welcome foreigners trying to take over their banks. So it's not easy to create an emerging markets bank, but for us it's embedded in our very DNA and the spirit of the firm.

And yet the majority of your assets are in Europe. 
A large proportion of our deposits come from Asia ($409 billion of deposits versus $179 billion of loans in 2009). That's because Asia's the part of the world that is saving. But the bulk of the loans are in Europe, because that's the part of the world that is borrowing ($349 billion of deposits versus $329 of billion loans in 2009). That is the nature of developed markets versus emerging markets.

HSBC's Asian operations are also more profitable on an underlying basis than Europe ($9.2 billion versus $6.6 billion profit before tax in 2009). Is that a sign of less competition?
No it's not. When I was in Hong Kong, I think there were about 120 banks serving 7 million people. Hong Kong is a hugely competitive market. The profitability is due to fast GDP growth, the velocity of activity is higher and it will stay that way for some time. Also, we are the largest international bank in Asia.

Why do you think HSBC has emerged as one of the few winners from the global financial crisis? 
It is definitely due in large measure to our Asian history and experience. It's a region where there have historically been very few social safety nets. People live their lives, expecting to pay for their own old age and to look after their parents when they're too old to work. That ethos has infused HSBC.

And we've never assumed that we ultimately had a put to any government, because we're always the foreigner in whatever country we operate. If we fall down in Malaysia, we know Bank Negara won't be there to bail us out and the same in Singapore and so on. That knowledge makes a bank more cautious and we priced risk accordingly. We've always had lots of capital and liquidity because we know we don't have a lender of last resort. In the so-called "good times" we were heavily criticised for that strategy by some investors and research analysts at some of the bulge bracket firms. We were derided for our conservative attitude, cautious approach to risk and abundant liquidity. I think the latest crisis has proved us right.

This is part one of a two-part interview. Log on tomorrow for more.

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