Today’s Headlines: HSBC Returns to Its Roots

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 Today’s Headlines:  HSBC Returns to Its Roots
June 16, 2015

HSBC Refocuses on Asia

The banking giant HSBC may be based in London, but its roots are firmly entrenched in Asia. Founded in 1865 in Hong Kong as the Hongkong and Shanghai Banking Corporation, HSBC has strong ties to the Asian market and still thrives there. According to the Los Angeles Times, around 75% of the bank's profits in 2014 were generated in Asia with only a fraction of the assets that the bank holds in the European market and approximately one-third of the staff.

Given that background, the announcement that HSBC plans to cut around 25,000 jobs globally and refocus in the Asian market comes as no surprise. HSBC's CEO, Stuart Gulliver, released a statement saying, "The world is increasingly connected, with Asia expected to show high growth and become the center of global trade over the next decade."

HSBC's stated goal is to achieve nearly $5 billion in cost reductions by the beginning of 2018. Operations in Turkey and Brazil will be sold to reduce staffing by around 25,000, and a similar number will be cut from remaining operations, with around one-third of those losses coming from British operations. The bank hopes to return its global banking and markets division to previous profit levels after posting $14.7 billion in post-tax profit during 2014 — a $3.1 billion drop from 2013. Much of the drop is attributed to various fines and settlements within Britain, which was yet another motivation for HSBC to alter their strategy.

Headquarters Likely to Move

Both HSBC and Standard Chartered, another large British banking operation, have been making noise about moving their headquarters out of Britain for some time now. In HSBC's case, a review of relocating headquarters was scheduled back in 2011 and an announcement is still anticipated at the end of the year. Signs are pointing toward that location being in Asia.

There are several driving forces, but a primary one is taxation. Recent increases in the taxes levied on British banks have been large and frequent since 2010, when the taxes were levied to ensure, as reported by the New York Times, a "fair contribution" after the preceding years' financial crises. There have been eight tax increases in the five years since then, with HSBC set to pay some $1.5 billion in UK taxes this year.

That might be tolerable to HSBC if they did not already have Asian roots and viewed Asia as a primary growth opportunity. The real question is whether HSBC is a unique case or if there will be more banks looking toward Asian operations as a growth vehicle.

A Collective "Pivot toward Asia?"

HSBC intends to expand the asset management and insurance sectors in Asia to take advantage of the wealth management opportunities in the region. Increased business developments in China's Guangdong province and in emerging Southeast Asian markets such as Indonesia are also planned. Growth opportunities in the region are too tempting to pass up.

The April 2015 Regional Economic Outlook report from the International Money Fund (IMF) says it all in its subtitle: Stabilizing and Outperforming Other Regions. The region is called "stable and robust" financially, with a 5.6% growth rate expected throughout 2015, slowing slightly to 5.5% the following year. Contrast that with a projected global growth rate of 3.5% and US and European growth rates that will struggle to match that by most estimates, and Asia seems like an obvious choice for increased efforts by financial institutions.

Other banks seem to be following suit. Citi had previously announced plans to narrow its consumer business banking operations to 24 markets and limit US operations to larger cities in order to focus on the growing Asian market. To underscore this shift, Stephen Bird, the former head of Citi's Asian Pacific efforts, was recently named head of consumer banking operations.

The economic shift toward Asia is not just in consumer financing. The appearance of the Asian Infrastructure Investment Bank (AIIB) is, in part, a move to satisfy Asian infrastructure lending needs currently unmet by organizations such as the IMF, the World Bank, and the Asian Development Bank. Currently the gap is filled by "shadow banking" operations, a system of risky investments similar to those underlying the US mortgage crisis and especially prevalent within China. In a May 2013 report, JPMorgan Chase estimates that the shadow-banking sector is approaching $6 trillion — or 69% of GDP. That is up from just $0.4 trillion in 2011.

China's leadership in funding the AIIB and convincing Western nations to become founding members over American objections is a clear signal that Asia intends to take more control over its own regional growth, and many of the world's financial institutions are following their lead.

The Takeaway

The Chinese economy and other Asian growth markets are not sufficient, by themselves, to warrant a mass exodus of financial institutions from Western markets. However, the building blocks and growth expectations are in place for a more significant Asian pivot over the next few years.

Like the famous quote falsely attributed to Willie Sutton about why people robbed banks, financial institutions are refocusing on Asian operations "because that's where the money is." Nevertheless, at the investor level, a little more caution may be in order before investing in China. If the money is already there, you may be late to the party.

Some economists are suggesting that the high Asian growth rates may be nearing an end, including former US Treasury Secretary Larry Summers. Summers told the IMF that export-led growth was "mostly over" and that Asian countries are likely to revert to average growth.

If you intend to invest in the Asian markets, make sure you research your investments thoroughly. It might be wise to shift them upwards in the risk scale as you rebalance your portfolio. The IMF may be right in the short-term, but Larry Summers may have the longer term correctly pegged.

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