HSBC is scheduled for an informal meeting with shareholders in Hong Kong today for an update on its group strategy. finews.asia reviews the various points of contention, including Ping An’s breakup proposal.

Later today, HSBC chairman Mark Tucker and CEO Noel Quinn will meet Hong Kong shareholders to provide an update on the group’s strategy. This follows the release of its results yesterday which saw the British lender beat analyst expectations with a pre-tax profit of $9.2 billion in the first half.

The headline issue that will be closely watched is Ping An’s proposal to split the bank via a demerger or spinoff of the Asian business. While a report by Toto Consultancy and independently commissioned by Ping An said that $26.5 billion of market value could be unlocked from such a breakup, HSBC has argued against it. It believes that it is its global connectivity that drives growth and profits.

According to its earnings presentation yesterday, a breakup would negatively impact the bank in the long term in regard to its credit rating, tax liabilities, and operating costs. Executing a restructuring on the scale that Ping An proposes would be a sizeable one-off cost, according to Quinn, and would distract key stakeholders over a three to five-year period. Ping An was not directly referenced in the comments.

Profits Lead to Dividends

Chief amongst the dissatisfied investors that HSBC will face are Hong Kong’s retail shareholders who are estimated to own around one-third of the bank. The key matter they believe should be addressed relates to dividend payments after they were scrapped in 2020 on orders from the Bank of England as a way of preserving the health of the bank's balance sheet in the early days of the pandemic.

Activist shareholder Ken Lui was a key organizer then, and he gathered around 3,000 local investors to protest against HSBC’s canceled dividends. He is reportedly engaging the same group now to back Ping An’s breakup call, claiming that such a restructuring will increase the bank’s ability to pay dividends to local shareholders. 

But from HSBC’s perspective, the optimal level of profitability will only be achieved by maintaining its globally connected structure. In a sign of improved management confidence, the bank raised its target for return on tangible equity to at least 12 percent yesterday and vowed to resume quarterly dividend payments from early 2023 onwards.

Political Risk

Although Quinn reportedly said that discussions with Ping An have been focused on commercial and not political factors, Lui stated that the latter is a relevant issue to be discussed in any potential breakup. 

«On the one hand, in Asia, they have to live by the rules and regulations in China, but in the UK, they have to face regulations from the UK government,» according to a «Bloomberg» report citing Lui. «This creates risk for both HSBC and the shareholders.»

Separately, Hong Kong politician Christine Fong also called for the inclusion of Ping An on HSBC’s board, also citing the 2020 dividend cancellation as a reason to support the Chinese insurer. In response, Quinn said yesterday that this is unlikely given the conflicts of interest resulting from the overlapping business models in banking and insurance. 

Face Off Time

One of the factors in HSBC’s favor is the fragmented nature of the bank’s retail shareholders in the city. Despite the widely reported discontent with the canceled dividends in 2020, subsequent calls for an extraordinary meeting to reverse the decision failed to reach the required thresholds. 

Another favorable factor at play is the lack of support from the bank’s largest shareholders and industry analysts for any breakup. One anonymous UK-based institutional investor reportedly said that such a step would jeopardize earnings and distract management from cashing in on rising interest rates. Analysts at Investec and Federated Hermes underlined the potential downside of being less diversified and less connected to international trade. 

«One must recognize that much of that trade and payments activity is into and out of Asia,» Quinn said during the last annual shareholders' meeting. «I think we’re uniquely positioned to help, particularly, corporate customers and some of our international retail customers' trade between the West and the East and that is what we’ve been doing for 156 years.»