Sir John Bond’s makeover of HSBC Holdings is gathering momentum.
By Kevin Hamlin
December 2000
Institutional Investor Magazine
Since becoming chairman 30 months ago, he has spent more than $21 billion on acquisitions and sealed a $1 billion joint venture deal with Merrill Lynch to create an Internet bank. Now he wants to turn HSBC,s underdeveloped investment bank into “a world-class business.”
To that end, he has quietly abolished a long-standing internal guideline that kept a ceiling of just 10 percent on the amount that investment banking , which includes treasury, capital markets, equity origination and distribution, merchant banking, private banking and trust, asset management and private equity , could contribute to HSBC’s net income. “That was when we had a business that had different characteristics and much more volatility,” Bond told Institutional Investor in late October. “We,ve removed the 10 percent ceiling. We are determined to become a major competitor in this arena.”
Just how major is an open question. Bond says investors would be wrong to interpret the strategic shift to mean that HSBC is preparing to buy a bulge-bracket investment bank. “You shouldn,t see this as any more than an internal signal to the team at HSBC that we would be very happy to see this grow as a percentage of our net income , perhaps, I should say, to grow organically as a percentage of our net income,” he says.
He adds that the group retains tight limits on dealing activities, which are treated separately from investment banking, because HSBC aims to give volatility-shy shareholders “long-term capital appreciation with a good dividend stream.”
Still, analysts believe that Bond is making a strategic change that ultimately could pave the way for HSBC to buy an investment bank. Speculation has paired it with Merrill Lynch, which has the equity and other investment products that HSBC wants to offer its more than 20 million customers. And analysts note that HSBC patiently got to know U.S. bank Marine Midland and the U.K.'s Midland Bank by acquiring small initial stakes that years later, in the late 1980s and early 1990s, respectively, became outright purchases.
“The group is seeing as a mistake that it doesn,t have investment banking capability on a par with other banks of similar size,” says Simon Samuels, a banking analyst with Schroder Salomon Smith Barney in London. “The joint venture with Merrill Lynch is partly a getting-to-know-you exercise. For HSBC, a significant part of any deal is [to assess whether] they like the people [and whether] they think the cultures will work.” The Internet bank, known as mlhsbc.com, will target wealthy individuals outside the U.S. with a variety of investment services.
The joint venture is an instance of “two of the world’s most important financial institutions coming together for a specific purpose,” says Bond. He adds that “there have been no conversations whatsoever that have gone beyond the joint venture.”
Bond’s attitude toward investment banking seems to be evolving. A year ago, in an interview with Institutional Investor, he defended the 10 percent ceiling on investment banking’s income. His concern was that a higher proportion of volatile income would undermine the overall quality of HSBC’s earnings and cause investors to downgrade the value of its shares, which have recently been trading at HK$109 ($13.97), near their 2000 high of HK$117.50.
Times have changed, says Bond, noting that in the early 1990s major investment banks traded at price-earnings multiples of between 7 and 10. “Today they are in the range of 18 to 24,” he says. “That tells you that the market values them on a higher basis than it did. So the market has changed, apart from anything else.” At their recent price, HSBC shares carry a multiple of more than 20.
No matter what HSBC decides to do, it will move deliberately. Says Bond, “We,ve got a successful business, so the downside of making a mistake is not to be taken lightly.”
