HSBC in China

HSBC's Ping An exit draws questions about BoCom stake

Analysts generally agree that HSBC won’t and shouldn’t sell its 19.9% stake in China’s fifth-biggest bank.
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Not for sale?
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<div style="text-align: left;"> Not for sale? </div>

HSBC‘s stake in Bank of Communications (BoCom) is now at the centre of attention as the British bank’s proposed sale of its stake in Ping An Insurance is fuelling speculation about the future of other non-core assets.

The consensus among analysts is that HSBC will not (and should not) sell its 19.9% stake in China’s fifth-biggest bank. “HSBC cooperates more with BoCom compared to Ping An,” said Steven Chan, an analyst at Citic Securities International, who is confident that HSBC will hold on to its stake, “even though BoCom’s return on investment is probably at the same level as Ping An’s”.

HSBC’s chief executive Stuart Gulliver has said many times that BoCom is the bank’s core investment in China. If it were to get rid of both its Ping An and BoCom stakes, it would struggle to find similarly profitable investments elsewhere, Chan said.

Sharnie Wong, Asia ex-Japan bank analyst at Barclays, agrees. “HSBC has more strategic cooperation in BoCom, whereas Ping An is just a financial investment,” she said. “We believe that HSBC has no desire to exit its banking exposure in China.”

Foreign banks have found their share of the pie getting bigger after years of effort — their Chinese assets grew 24% from 2010 to 2011, outpacing the 18% average growth of the overall sector, according to KPMG, a consulting firm. While still modest as a percentage of total banking assets in China, foreign banks now account for 1.95% of total banking assets, up from 1.87% in 2010.

HSBC has invested more than $7 billion in select financial services businesses and in the growth of its own operations in China, making it the biggest foreign bank investor in the country. Its stake in Bank of Communications is its most valuable investment, followed by its 15.6% stake in Ping An. It also has an 8% stake in Bank of Shanghai.

Worldwide, the London-based bank has announced 41 disposals and closures of its non-core assets since early 2011. On Monday, HSBC said that it is in talks to sell its stake in Ping An.

The Chinese government often frowns on foreign investors quitting the country, for fear that they will weaken confidence in China’s growth, but HSBC’s potential sale of Ping An is not a straightforward case.

As one analyst pointed out, HSBC is clearly not a forced seller as it has a stronger capital base than any of its European counterparts. “HSBC doesn’t really need the extra capital — it meets all the Basel III requirements,” said the analyst. “It has started the disposal process of non-core business assets over the past few years, and the stake sale in Ping An is just part of its strategy.”

However, not everyone agrees. Citic’s Chan said that the investment in Ping An, which he estimated to be worth about $3.2 billion, is too good to let go — HSBC earns a 14% return on equity from the stake.

The insurance industry in China is said to enjoy a better outlook than the banking industry, which faces continuing challenges from interest-rate deregulation, whereas the insurance industry is benefiting from China’s aging population.

HSBC’s sale of its stake in Ping An will require approval from China’s insurance and banking regulators, as Chinese authorities only allow financial institutions to invest in the country’s banks and insurers, which will apparently limit the universe of possible buyers.

The $3.6 billion IPO of PICC, one of China’s biggest insurers, will likely compete for buyers’ attention. PICC will be the biggest Hong Kong IPO since AIA’s $20 billion offering in 2010.

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