Breakingviews imagines the letter that HSBC’s Chairman might write to shareholders six years from now.
Dear shareholder,
The year 2020 was a historic one for your bank. I am writing to you from our new head office in Shanghai’s Pudong district, a stone’s throw from where we first opened our local branch 156 years ago. It is a solemn acknowledgement of China’s return to greatness that we have made it our global headquarters.
We are more optimistic than ever about the opportunities in this giant nation. Though economic growth last year dipped below 3 percent, this was in line with the government’s policy of harmonious rebalancing. We were deeply honoured that my good friend President Xi Jinping opened our new head office, and we will respectfully carry out his command to realise the Chinese dream of redesigning the international financial order.
HSBC is proud to be one of the preferred partners of the new Asian Infrastructure Investment Bank. In the past twelve months, we helped arrange loans worth $200 billion to Kazakhstan, Tajikistan and Pakistan. Interest rates were low considering the political and security risks in the region. However, the projects should boost demand for Chinese steel and coal, allowing those industries to delay bankruptcy a little longer.
The China Banking Regulatory Commission has taken over as our lead supervisor, and we are making good progress in adapting to its rules. This includes bringing executive compensation into line with other large Chinese banks, where the pay of senior managers is capped at 600,000 Chinese yuan ($97,000). On the positive side, these payments are entirely in cash, with no deferrals or provisions for future clawbacks.
The last year brought fresh reputational challenges. Following an investigation known as “Operation Squid Hunt”, it was established that HSBC – among several institutions – had helped Chinese officials subsequently charged with corruption to transfer money overseas. We deeply regret and apologise for these lamentable lapses, which were the responsibility of executives who have since retired. The $3 billion fine we paid to the Chinese authorities should draw a line under this unfortunate episode.
Ongoing pro-democracy protests in Hong Kong caused widespread disruption to our business. The government’s decision to censor some news websites and block access to social media, while understandable from the perspective of maintaining order, led to further clashes. The upheaval has prompted some of our wealthier clients, and some international staff, to leave the city.
We rebranded our UK business as New Midland, now universally known as “Birmingham’s Global Bank”. Its core Tier 1 capital ratio of 19 percent, while high by international standards, remains below the minimum demanded by British regulators. New Midland’s board, which is wholly independent as required by UK ring-fencing rules, has once again voted not to pay a dividend to the group. As a result, we have decided to sell our entire shareholding, ending our three-decade involvement in British retail banking.
Following Britain’s withdrawal from the European Union after the 2017 referendum, we transferred our Global Markets and Banking team from London to Amsterdam. We are pushing ahead with the conversion of our former head office in London’s Canary Wharf into a home for retired workers from the financial industry.
Now that we are no longer a member of the FTSE 100 index, several leading UK funds have sold their stakes. Fortunately Chinese state investor Central Huijin and our long-standing partner Bank of Communications stepped in and now own close to 20 percent of HSBC. Each will appoint representatives to our board, helping to meet our objective of adding more non-executive directors from Asia.
Perhaps the biggest disappointment of the past year has been our share price. Moving our head office and shrinking our UK balance sheet frees us from Britain’s bank levy, which after the latest increase was expected to cost us 3 billion pounds ($4.7 billion) a year. However, despite our long track record of prudence, we have been affected by negative sentiment towards China’s banking sector, and the recent high-profile bankruptcies in the Chinese brokerage industry.
During the year, several shareholders questioned whether the costs of becoming a Chinese bank outweigh the benefits. As we believe in listening to our investors, we have initiated a review to look at moving our head office to Mumbai, Jakarta or Yangon. As ever, you will be the first to hear what the board decides.
Thank you for your support,
Hank Paulson.
Chairman, HSBC.