HSBC (LSE: HSBA) is going back to its roots. The bank, which was first established in 1865 to finance trade between Europe and Asia from Hong Kong, is looking to expand its Asian operations, after scrapping international expansion plans.
In many respects, this change makes a lot of sense for HSBC.During the first-half of this year, 69% of group pre-tax profit came from HSBCs Asian arm. The groups Asian operations reported a cost efficiency ratio of 39% for the same period.However, only 36% of HSBCs assets are located in Asia.
Most profitable region
Asia is, without a doubt, HSBCs most productive region and the bank is looking to capitalise on this.
Managementis looking to increase thebanks workforce in thePearl River Delta area of southern China, which includes the mega city Shenzen and Hong Kong, by 30% during the next few years. At the same time, the group is planning to cut 50,000 jobs from its global headcount. HSBC has targeted a ten-fold increase in pre-tax profit from the Pearl River Delta region by 2020.
But while HSBC is increasing its Chinese presence, many of the banks peers are fleeing the region.
Change of heart
Before the financial crisis, global banks fought tooth and nail to buy into Chinas financial industry.Deutsche Bank,Goldman Sachs Group Inc.andBank of America Corp.all snapped up shares in Chinese lenders, often off-marketand at premium prices. However,since 2012 global banks have sold off $14bn of shares in Chinese lenders. Deutsche Bank may currentlybe planning the sale of its $3.5bn Huaxia Bank Co. stake.
According to financial news service Bloomberg, Western banks are leaving China as the countrys economic situation deteriorates. The number of bad loans in the financial system is rising, and some of Chinas biggest lenders reported zero profit growthfor the second quarter.
The right decision
So is HSBC making the right decision by swimming against the tide? Well, unlike other international lenders HSBCs roots are in Asia, and the group already has strong ties with China.For example, the bank recentlybecame thefirst foreign commercial bank to issue bonds in China, a landmark deal signalling authorities soft stance towards the bank.
As theFinancial Times points out, greater access to local funding could aid HSBCs plan to build up its Chinese business. Indeed, international banks that have tried to expand in China have been faced with restrictionson lending and the transfer of funds between their Chinese arms and offshore parents. An in-country source of funding would significantly improve HSBCs growth potential within the region.
Still, only time will tell if HSBC is making the right decision by increasing its presence within China. That said, the company is in a better position than most to benefit from the regions growth and has the potential to succeed where others have failed.
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