Multinational Firms

FAN YU is an expert in finance and economics and has contributed analyses on China’s economy since 2015. Fan Yu

Should Multinationals Split Up?

HSBC faces a challenge from Chinese insurer Ping An

It’s probably a question that isn’t being asked enough: Should multinational corporations divest themselves into smaller regionally or nationally aligned entities that may be better suited to tackle local geopolitical and economic challenges?

Global banking giant HSBC Holdings PLC is under pressure from its largest shareholder to do exactly that. Ping An, the Chinese insurer and HSBC’s biggest stockholder, has asked the bank to spin off its Asian business.

The insurer argues that HSBC as an international entity can no longer straddle the East and the West while effectively navigating both regions’ increasingly divergent political and economic landscapes.

There’s also some speculation that Ping An is just a proxy for the Chinese Communist Party (CCP) regime.

HSBC has a 157-year history. It’s a British bank with origins in Asia (HSBC originally stood for Hong Kong Shanghai Banking Corp.) that today operates a sprawling business across consumer and retail banking, corporate banking, investment banking, and investment management.

As of the end of 2021, 33 percent of its customer account value resided in Hong Kong, 31 percent resided in the UK, with the remainder residing across North America, Europe, China, the Middle East, and Asia. Unsurprisingly, it views Asia as a growth driver. In its lucrative wealth management business, 63 percent of 2021 global revenues were earned in Asia.

HSBC’s stock price over the past five years is down by a whopping 38 percent, severely lagging the 0.95 percent performance of the Dow Jones U.S. Banks Index, as well as the MSCI World Banks Index, which is up by 0.6 percent during the same period. In 2022, its shares have been largely flat, outperforming most peers.

I’ve previously covered HSBC’s precarious tight-rope dance of navigating Asian and Western politics. It was one of the only global corporations in 2020 to have cast its support for Beijing’s so-called national security law in Hong Kong criminalizing dissent. The CCP also accused HSBC of handing over information to U.S. authorities in the case of Huawei CFO Meng Wanzhou (who was held for a period in Canada as part of a prolonged extradition fight with the United States).

More recently, the international bank has been retrenching due to a disappointing financial performance and criticism from Ping An. Last month, HSBC sold its entire Canadian operations to the Royal Bank of Canada. It also recently closed 114 branches in the UK (25 percent of its UK branches) and has announced that it’s exploring a sale of its New Zealand franchise. Last year, HSBC exited the U.S. retail banking market by selling its east coast branches to Citizens Bank and its west coast branches to Cathay Bank.

Let’s go back to Ping An’s demands of splitting up the bank. HSBC, for its part, has gone on a publicity campaign to push back, including hiring investment bank Goldman Sachs to rebut some of Ping An’s economic arguments for a divestiture.

A manufacturing company could argue that different skill sets in different markets can present a labor arbitrage. For example, design specs can be drafted by a creative team in the United States, while manufacturing can be done in a lower-cost market such as Thailand.

Financial institutions have no such dynamic. A financial institution’s most valuable assets are the people who ride the elevators and walk out the door on a daily basis. It’s a trust business. Regional expertise and the cultivation of local relationships are valued. Compliance and regulatory mandates are also by jurisdiction. Top-of-house corporate management is viewed more as a nuisance than a help.

There also aren’t a ton of back-office synergies across multinational financial institutions that would be lost in a divestiture. Compliance is country-specific. Legal, accounting, tax, and treasury are also.

U.S. or European investors shouldn’t be forced to contribute capital to an organization that—out of commercial “necessity,” we’ll allow it to be called— has to bend Western ethical and moral norms to commercially operate in an environment. Each regional business is then free to focus its capital and resources on catering to customers and stakeholders within that market. We no longer need to jam a square peg into a round hole. Let local Asian or Middle Eastern investors, accustomed to operating in a different manner, do so independently.

It’s a form of nation-first, populist business building that should be discussed.

Ping An, the Chinese insurer and HSBC’s biggest stockholder, has asked the bank to spin off its Asian business.