Of Special Interest

6th May 2011

HSBC should sell US retail business & Ping An stake

A research note from Barclays Capital suggests that HSBC should sell the US retail division as it shows "little evidence of competitive advantage or connectivity to the rest of the group" and was therefore hard to justify. The same note suggests it should sell its 16% stake in Ping An insurance, China's largest insurer.

Increasing concerns have been voiced over HSBC's profitability. Cost to income stands at 55% currently and its ROE was still in single figures last year. New Chief Executive Stuart Gulliver has briefed that he will focus more on core businesses and is said to have little enthusiasm for retail business. The note suggests HSBC could free as much as $30bn of capital from these two sales. Part of HSBC's long term success has been based upon very conservative business strategy. Although some were concerned at the time it purchased Household Finance Corporation (HFC) in 2003 which formed the US retail business few could have guessed how high a cost the acquisition would have. HFC had its roots as a 'moneyshop', lending to those who had little involvement with banks. It worked on building long term relationships with customers often converting initial unsecured loans to secured loans as the amount lent increased. At the time of the acquisition the term sub-prime was not extensively used to describe HFC operations. Although the group did not use the trickery of others in sub-prime the fact remained when property prices started falling customers were left with secured borrowing they could not afford and negative equity. Similarly with cards and unsecured lending HSBC faced severe losses. The bank spotted the adverse trends before the sub-prime securities market soured and has written of or disposed of $75bn in US assets in the last four or five years.

The US has to be considered a high risk area from the compliance and regulatory point of view also. Such bold action by Gulliver would point HSBC down a new path which may better capitalise on its strengths and help it attain what is becoming the new financial expectation for major banks - that of a ROE in excess of 15%.