An Asian Slowdown Could Complicate HSBC Restructure - Agency

Tom Burroughes, Group Editor, 7 January 2020


If the Asian economy decelerates this year, as might happen as US-China trade arguments drag on and with Hong Kong's political troubles causing problems, it would affect HSBC's plans to refocus some of its activity towards the region. That's the view of a credit rating agency.

Hong Kong/London-listed HSBC, whose profitability has already been blunted by weak European results as shown a few weeks ago, will be hit if its major Asian marketplace gets more challenging amid international trade tensions, according to Morningstar DBRS, the credit ratings group. 

Asian results were a major driver of HSBC’s performance as its latest figures showed, which means a more difficult Asian market is not welcome news in some ways, the group said in a note yesterday. HSBC, which reports full-year results in February, is also slated to announce restructuring plans that month.

“With its Q3 2019 results, HSBC Holdings highlighted that returns in some of its businesses remained insufficient and, due to a deterioration in the operating environment, decisive action was needed to improve the group’s profitability,” Morningstar DBRS said.

Its analysis did not refer explicitly to HSBC Private Banking; but it did point out how wealth management – to use a wider definition – is an important earnings driver in jurisdictions such as Hong Kong. 

The note comes as analysts start to ponder how fourth-quarter and full-year 2019 results will look as the reporting calendar cranks up later in January. The comments also highlight how banks, including those with existing Asian franchises, have pivoted some of their operations to the region in recent years, attracted by its relatively strong growth rates. HSBC, meanwhile, remains based in London.

“HSBC’s Asian business has been more profitable and growing faster than other parts of the franchise. The group operates in Hong Kong through its two fully consolidated subsidiaries The Hongkong and Shanghai Banking Corporation Limited, the largest bank incorporated in the region and Hang Seng Bank Limited. While the contribution of Hong Kong to the group’s results remained strong in 3Q19, the region has seen a rapid deterioration in its economic performance, reflecting the social unrest and global trade tensions,” the note continued.

“The economic outlook for Asia has also deteriorated as illustrated by the downgrade in the IMF’s [International Monetary Fund] growth forecasts in October 2019,” it said.

The note said that Hong Kong remains the most important contributor to HSBC’s performance; in the first nine months of 2019 it contributed 53 per cent of the group’s adjusted pre-tax profit, and together with the rest of Asia more than 80 per cent.

Hong Kong worries
During H1 2019 Hong Kong’s economic growth was “weak”, Morningstar DBRS said, and below the long-term trend due to weak private consumption growth and contraction in investment spending, reflecting low consumption and investment confidence. 

“The intensification of social protests appears to have had an important impact on the economic performance. The economy also suffered from poor export performance, reflecting global trade tensions, notably the US-China trade dispute. We note that Hong Kong’s economy is highly dependent on trade with the rest of the world,” it continued.

Register for WealthBriefing today

Gain access to regular and exclusive research on the global wealth management sector along with the opportunity to attend industry events such as exclusive invites to Breakfast Briefings and Summits in the major wealth management centres and industry leading awards programmes