Gulliver's travels: Part 2

HSBC has always striven to be a premier capital markets player. In part two of a special interview, its chairman of Europe, the Middle East and global businesses, Stuart Gulliver, says the bank is closing the book on life in Lilliput.
Stuart Gulliver
Stuart Gulliver

In the 10 years since was established, HSBC has been named International Asian Bond House of the Year, or Domestic Asian Bond House of the Year a total of eight times -- twice the number of times as its nearest competitor, Deutsche Bank. It has yet to win any awards as an M&A or equity capital markets house, but Stuart Gulliver says this is about to change.

One area where HSBC has really excelled over the past decade has been in the debt capital markets.
Yes, we've come a long way. Back in the mid-1990s we weren't even in the top 10 in Hong Kong. Now we're top five across all global markets, even Latin America where we only really started to gear up in 2003.

We built the franchise by leveraging our Hong Kong client base to get a couple of international deals under our belt. There were a troika in 1993 from Henderson Land, Sun Hung Kai Properties and Cheung Kong, but we only really got going when the primary bond markets started picking up after the Asian financial crisis and we were a lead manager on Hutchison Whampoa's debut euro-denominated bond in 1999 and KCRC's debut dollar bond later that same year.

And what of the domestic bond markets, which have seen huge growth since the Asian financial crisis?
If the Asian financial crisis taught the region anything, it was the importance of local bond markets. Companies in Hong Kong and Singapore, which had a domestic bond market to fall back on, came through the crisis unscathed. Companies from around the rest of the region, that had funded themselves in foreign currencies, rapidly came unstuck as their countries' dollar pegs broke.

There's been enormous growth since then and the local bond markets are becoming increasingly competitive, with margins under pressure. But we have so many inherent advantages over newer banks that are trying to break in. We've been in Asia for a very long time and we have the local knowledge. More importantly, we also have a local currency funding base in each market thanks to our domestic branch network. That's critical. No one wants to be reliant on the wholesale markets.

But we're acutely aware of the competition and we're moving fast to defend ourselves. It took us a long time to build up such a strong presence and we've absolutely no intention of letting it go. We intend to be a top two player in all of Asia's major domestic markets.

And what about China, the biggest domestic market of all. Last year, companies there raised over $221 billion. That's almost three times the amount raised in the international bond markets by Asian issuers. And yet, HSBC doesn't figure in the Chinese league tables at all, whereas UBS is up there at number eight and is said to have made about $50 million in fee income last year.
UBS is number eight because of its Sino-foreign joint venture UBS Securities. It was a brilliant deal for them and it isn't one that's allowed now under the current rules. Having said that, we're very keen to become actively involved in the domestic Chinese bond market and I hope we will be in the not too distant future.

We see it as a win-win situation. Chinese securities companies are seeing their clients expand abroad, but they don't have the international network to follow them. We can offer them that. The Chinese bond market also has a number of quirks, which the regulatory authorities are aware of. This is where we can bring our experience of other domestic markets and regulatory regimes to bear.

One area where HSBC hasn't historically excelled is M&A and equity capital markets.
I think it's fair to say that it's a work in progress. We tried to replicate the investment banking model back in the mid-noughties and it didn't work for us. I've spent a lot of time thinking about why not. I think part of the answer lies in the sheer amount of time it takes to cultivate an advisory "brand". We discovered that despite hiring a boatload of very experienced advisory bankers, our competitors would still get the advisory business and we'd get the financing just as we'd always done.

So in 2007 we decided to change the model based on the two undisputed advantages we have over our competitors. One is our ability to finance large deals thanks to our extremely strong balance sheet and the other is our expertise across so many geographies, whether that's Asia, the Middle East or Latin America. What we've become is a financing firm and our former M&A advisors have been morphed into hybrid bankers. What matters in any deal is the financing and it's their job to think about that -- its structure, its execution and the way it's hedged.

Our most senior bankers represent the firm holistically and it's a model which fits the way modern companies operate. They all have their own sophisticated planning departments these days and are far less reliant, or interested in outside advisors. The attempt by UK's Prudential to acquire AIG's Asian insurance assets is a case in point. The idea came from the Prudential, not from an investment banker. 

You were one of the lead managers on Prudential's record breaking $21 billion rights issue, which was cancelled when its acquisition of AIA fell through. Is this an example of you using your balance sheet to develop an ECM franchise?
Being able to underwrite a deal is key. Before the financial crisis, lots of banks promoted themselves by telling clients how many clever bankers they had. Many of those banks aren't solvent anymore. The world has moved in our direction. What counts is the ability to finance a deal. Our staying power during the financial crisis has shown the world that we're as smart as the next guy, but we're also very big, very strong and very liquid.

One example -- back in 2008 at the height of the financial crisis, we were one of the few banks able to provide the money that allowed the Brazilian iron ore miner Vale to mount a $36 billion bid for its rival, Xstrata.

And you're right, we've done a lot of very large rights issue over the past two years, including our own £12.5 billion rights issue, the £13.5 billion rights issue for Lloyds Banking Group in the UK and the €4.3 billion rights issue for France's BNP.

So are you serious about creating an equities franchise to rival your debt one? This wouldn't be the first time HSBC has signalled its intention to break into the ECM league tables and then nothing much has happened. Why should people believe you're serious this time?
For anyone who doubts our intent, I'd point them in the direction of our European track record. We've gone from being outside the top 25 to within the top five and that's even after excluding our own rights issue.

In most other respects, it's been Asia that's set the template for HSBC. This time round, we've built the European platform first and now we're replicating it in Asia. Doing it that way is probably a reflection of the fact that I'm in London now. But it doesn't detract from the importance we've assigned this. It's not a pipe dream; it's a priority.

A decade ago, we were handicapped by the fact that many of the big Chinese companies wanted to do dual listings in Hong Kong and New York. That always played to the strength of the American houses. But that's not the case anymore and we've been putting a lot of feet on the ground over the past year.

We've hired Jane Wang from Lehman Brothers to run our China coverage. We have a new ECM syndicate head in David Paine, who comes from Lehman/Nomura, and we've hired Liu Che Ning, head of global banking, Hong Kong and China, from Morgan Stanley.

What kind of deals are you planning on targeting?
We're following the same strategy we did to build out our DCM capabilities -- leveraging our Hong Kong client base to showcase our talents. A good example is the $2.7 billion IPO for Swire Properties where we're a bookrunner alongside Goldman Sachs and Morgan Stanley. Sadly, the deal has had to be postponed because of the renewed turmoil in the equity markets, but it's a fantastic company and one of our oldest clients. 

It's important to do what we do well and therefore we won't be going after deals across every single country in Asia. The intention is to concentrate on Hong Kong and China first and make sure that we do that well. When we've generated momentum, we'll use that as a springboard to move further afield.

We're also bulking up our secondary equities business and I've made sure that all our pitches show our consolidated broking market share. Together, HSBC and Hang Seng Bank account for about 3.5% to 4% of Hong Kong's retail market.

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