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The quiet revolution at HSBC

An interview with Sir John Bond, who wants to turn his globe-spanning financial empire into a wealth management giant.

An interview with Sir John Bond, who wants to turn his globe-spanning financial empire into a wealth management giant.

By Kevin Hamlin
January 2001
Institutional Investor Magazine

Sir John Bond can be an awfully modest, self-effacing man. So modest and self-effacing that he is quick to play down his own role in the strategic overhaul that has consumed HSBC Holdings, the world,s seventh-largest banking company in terms of assets and second-biggest in market capitalization, since he became its chairman in May 1998. "There's no personality cult here," Bond declares.

Yet make no mistake: This is a man very much in control. Bond is in the process of transforming London-based HSBC from a traditional commercial bank centered on loans and trade finance into one that aims to lead the world in wealth management and consumer banking. After taking charge, he wasted little time in shaking up the ultraconservative institution. During his first year he listed HSBC on the New York Stock Exchange and revamped the company's acquisitions policy to allow it to pay premiums for purchases. He dumped the name Hongkong & Shanghai Banking Corp., which had adorned the bank since its founding in 1865. The new name, HSBC, unified the company's far-flung operations under a single global brand. Bond also embarked on an acquisition spree and in April 2000 announced an ambitious joint venture with Merrill Lynch & Co. to offer online banking and brokerage services to affluent customers around the world. More recently, he has begun tinkering with HSBC's legendary aversion to investment banking (Institutional Investor, December 2000). He has erased the 10 percent ceiling on the contribution that investment banking was allowed to make to group net income and vowed to become "world-class" in that business.

"He's changed the paradigm," says Keith Irving, Hong Kong,based regional banking analyst for Merrill Lynch Far East. "Historically, HSBC acquired distressed assets at knockdown prices and turned them around. Bond makes growth acquisitions or franchise-expansion acquisitions targeted at wealth management. It reflects a new way of managing the business: looking specifically at shareholder value measures and economic profit and deciding that there are times when it,s justified to pay a premium for performing businesses."

Bond has spent more than $21 billion on acquisitions and new ventures since becoming chairman. In May 1999 he agreed to buy Republic New York Corp. and its private banking affiliate, Safra Republic Holdings, for $9.85 billion. In early 2000 he kicked in $500 million for the joint venture with Merrill. In April he picked up Crédit Commercial de France for $10.6 billion; it was the first time a foreign entity was able to get past France's protectionist barriers to purchase a bank.

Bond overturned the strictures of his predecessor, Sir William Purves, who considered acquisitions priced at 3 times book value to be unthinkable. HSBC paid 2.8 times book for Republic and Safra and between 3 and 3.5 for CCF. "You can,t have a wealth management strategy and buy distressed banks, because wealthy people tend not to be banking with banks that are in difficulty," says Bond.

Adding Republic and the Luxembourg-based Safra catapulted HSBC into a leading position in global private banking. Assets under management doubled, to $122 billion. The move also fortified HSBC's retail position in New York State, adding 83 branches to its existing 373.

CCF, which controls about 10 percent of the French private banking market, brought an additional $54 billion of funds under management and 650 more branches. Though France's sixth-largest bank in terms of assets, CCF is its most profitable, producing a 15 percent return on equity. CCF's retail banking operation contributed 35 percent of its E531.9 million ($506.4 million) gross operating profit in the first half of 2000. Institutional and corporate banking produced 29 percent; asset management and private banking, 15.6 percent. The remainder came from capital gains and other activities.

Bond hopes the Merrill Lynch joint venture will help to propel HSBC into such potentially lucrative markets as Germany and Japan, with their relatively untapped savings pools.

"In just over two years, we,ve gone from $75 billion of funds under management to something on the order of $270 billion," says Bond. Still, growth hasn,t come only from acquisitions and new ventures. Bond instigated a big push to improve the cross-selling of products, a move that caused insurance sales to grow at a 33 percent compound annual rate over the past three years. During 1999 the bank increased its insurance sales staff by 19 percent and its bank staff licensed to sell insurance products by 26 percent.

Bond was also behind the group's aggressive assault on Hong Kong's new Mandatory Provident Fund, a compulsory pension scheme for local workers that began taking contributions in December. HSBC signed up more than 40 percent of the employees who joined the plan, which is expected to generate first-year contributions of up to $1.9 billion and assets of some $130 billion by 2030.

The moves appear to be paying off. Bond took charge at HSBC during the unprecedented recession in Asia, which accounts for about half of group profits. Earnings dipped 21 percent in 1998, to $4.3 billion, but quickly bounced back, rising 25 percent to $5.4 billion in 1999. Profits leaped another 30 percent, to $3.5 billion, during the first half of 2000 compared with the year-earlier period. ROE, after slumping from 20.7 percent in 1997 to 15.9 percent in 1998, climbed to 18.9 percent in 1999 and to 20.5 percent in the first half of 2000. Return on assets, 0.9 percent in 1998, was 1.2 percent in the first half of 2000. The bank's stock price almost doubled, from about £5 ($7.40) in May 1998, when Bond took over, to £9.72 in mid-December.

Bond credits HSBC's progress to its "world-class management team," but analysts say that the chairman,s strategic savvy and deal-making know-how are what,s really sharpening HSBC's edge.

Take the CCF acquisition. When Bond plucked the Paris bank from the clutches of Dutch giant ING Groep over a weekend in April, the coup was billed as a stunning dawn raid. In fact, it was more on the order of low-key diplomacy. ING had begun increasing its stake in CCF in early 1999; by November it held 19.2 percent of the shares. A month later ING made a $10.1 billion friendly takeover bid, then abruptly withdrew it a day later, citing a lack of CCF management support. It later emerged that CCF was piqued by a 48-hour deadline that ING had attached to the offer and by ING's refusal to negotiate financial terms or the post held by CCF chairman Charles de Croisset.

Bond, head of investment banking Stephen Green and finance director Douglas Flint sniffed an opportunity and began patiently building relations with CCF,s management behind the scenes. Formal takeover discussions began in February, and in early April HSBC stunned the markets by announcing a friendly deal that already had been approved by the French central bank, CCF's board and 58 percent of its shareholders, including ING. De Croisset would remain CCF's chairman and join HSBC's board. "It is truly a very beautiful offer," de Croisset said at the time.

"CCF was a deal that ING couldn,t do," says Hugh Pye, a banking analyst with Chase Manhattan Corp. in London. "CCF was very reluctant to be absorbed by ING. Yet Bond hit it off very well with the management of CCF and allayed all their fears about being swamped by a vast organization, by offering them a degree of autonomy within a still quite-rigid framework of control."

The way in which HSBC acquired CCF could pay future dividends in Europe. "It brings them deal-making credibility," says Simon Samuels, London-based banking analyst with Schroder Salomon Smith Barney. "If they can buy CCF and bring it into the HSBC group without killing it culturally, it positions HSBC as an acquirer of choice for other banks in Europe."

The online venture, Merrill Lynch HSBC, shows how far Bond is willing to take HSBC's thinking out of the box. Targeting individuals outside the U.S. with more than $100,000 to invest, the operation opened last month in Canada and Australia and plans to be in 24

more countries over the next four years. Australia, Canada, Germany, Hong Kong, Japan and the U.K. are considered the most promising markets. The sites will offer share trading on a number of stock exchanges, equity research, high-yielding bank accounts and a mutual funds supermarket.

Not even HSBC's long-standing antipathy toward investment banking prevented Bond from forging the alliance with Merrill. Indeed, Pye says it's clear that Bond "struck up a very positive relationship with the Merrill Lynch management. He seems to be able to get right through the ego issues in a very smooth way." Pye adds, "In banking, that's never easy to do. It,s something quite extraordinary, and he's doing it in a very clever way that most other banks are just not capable of."

Still, some analysts believe that HSBC gave too much to Merrill. They wonder why the joint venture is free to expand into such key HSBC markets as Australia, Hong Kong and the U.K., but not into Merrill's U.S. stronghold. The reason, say some, is that HSBC seeks to prevent customers in those core markets from transferring their low-yielding bank deposits into competitors, potentially higher-return stocks, bonds and mutual funds. Bond disputes this rationale, arguing that the Internet venture is targeted mainly at markets where HSBC does not have a large footprint.

The deal with Merrill Lynch inevitably has triggered speculation about whether HSBC is poised to acquire the U.S. investment bank. Rumors of talks between the two periodically surface. HSBC has always evaluated potential partners carefully before acquiring them. It had a five-year courtship with the U.K.'s Midland Bank before finally buying it in 1992. Analysts wonder if HSBC is now using the joint venture to test its chemistry with Merrill.

Bond makes no secret of his admiration for Merrill Lynch, which he likes to call not only a power in investment banking but also "the premier asset management and wealth management company in the world." Still, both Bond and Merrill chairman and CEO David Komansky said when the Internet venture was launched that it was not a prelude to a merger or to further ties between the companies. Says Bond, "There have been no conversations whatsoever that have gone beyond the joint venture."

Recently, Bond sat down at his London headquarters to discuss HSBC's strategic positioning with Institutional Investor Hong Kong Bureau Chief Kevin Hamlin.

Institutional Investor: What compelled HSBC to set up an online Internet bank with a partner such as Merrill Lynch?

Bond: This is about speed to market. For us to have done this 100 percent on our own presupposes that this breed of self-directed investor we,re targeting would see a commercial bank as the right place to conduct his or her equity investments. So I think there's an important perception issue here. Many analysts say that the future in the e-age is about a lot of partnerships for specific purposes. I would regard the joint venture with Merrill as groundbreaking in that area.

How does HSBC benefit from this joint venture?

We probably only have a noticeable capability in this business in the U.K., Canada, Hong Kong and Australia. Fifty percent of the world's savings lie in America, Germany and Japan. So it is a huge opportunity for us to use the joint venture as a means of attracting brand-new clients to HSBC.

Some argue that the joint venture is defensive, that you are protecting deposits that could be plucked away in the future by competitors offering higher interest rates or other higher-yielding investment products. Is that so?

It's clearly offensive in Japan, where we don,t have a lot of deposits to defend. It's clearly offensive in Germany. I,m looking down the list of countries covered by the joint venture: Italy, Spain, Taiwan, Benelux, Scandinavia , many of the countries where we are taking this are countries where we don,t have a footprint at all. I can,t say to you that we know that X amount of deposits in the U.K., which would have left us, will go into the joint venture. Any numbers I produce in that area would be totally spurious.

But isn,t it true that Merrill Lynch gets the better deal, because it has access to your international client base?

In Germany and Japan we have virtually no clients, and the answer is categorically no. If the question is, are we yielding a client base, the answer is no. We haven,t got where we are today by delivering our clients to our competitors.

In terms of contributing to HSBC's income, the joint venture is not going to be much more than a rounding error in the near future, is it?

We don,t invest HSBC's shareholder funds in ventures that won,t appear on the radar screen.

With CCF, you,ve established a beachhead in Europe. Is it the first step of a grand European strategy?

Does it mean that we think the euro zone is an extremely interesting marketplace for any financial services organization that is interested in wealth management? The answer is categorically yes. Are there more wealthy people in Europe outside France whom we would like to get in touch with? The answer is yes. But are there many more financial services companies like CCF [likely to become available] in other countries? The answer to that is, sadly, no.

What do you gain from the CCF acquisition?

It does a lot for us. We have the capital; we have distribution outside the euro zone. CCF has the clients, particularly within France and within wider Europe, too, and it has the capability to arrange and lead debt issues, so this will transform our debt capital markets business within the euro zone. It gives us a euro-zone clearing capability for our clients.

Investors are used to HSBC being an ultraconservative institution that buys distressed assets at the bottom of economic cycles. By paying higher prices for banks such as Republic and CCF, aren,t you fundamentally changing HSBC?

Look at the balance sheet. We,re more conservative today than ever. We,re looking at total loans of 48 or 45 percent of total assets, a tier-1 capital ratio of more than 9 percent, record first-half earnings. That doesn,t sound to me like a bank that has parted company with its conservative principles.

In the U.S. you,ve fortified your position with the acquisition of Republic. What further plans do you have for expansion there?

We,ve said fairly consistently that we would anticipate in the decades ahead that HSBC would develop a larger presence in the U.S. We,re hard at work on making sure that we bring Republic safely into the HSBC family. We need to make sure that we execute that successfully, and we,ll keep our eyes and ears open, but we have nothing on the agenda at present.

Wouldn,t it make sense for you to build out from the East Coast, where you can capture synergies from your existing operations?

That's the historical way of looking at the marketplace. But we,re moving into the borderless world of the Internet. is available to people in San Francisco and Scottsdale, Arizona. It's around the Sunbelt. HSBC has marked out clearly its interest in wealth management. We,ll grow in nontraditional areas for commercial banks.

How concerned are you about the deteriorating quality of banking assets in the U.S.?

One, we have seldom seen a spike in oil prices that hasn,t been accompanied by some form of downturn in consumer demand. Two, it's the first time in my 39 years of banking that I can remember hearing of banks topping up their loan-loss reserves and announcing lower profits than anticipated when the economy is still expanding. Normally, you see that happening on the downside, when the economy is slowing down , then, any portfolio problems seem to emerge. HSBC is very conservatively positioned for the credit cycle. We,ve got less than half of our total assets in loans, 25 percent of our loan portfolio is in residential mortgages around the world, and just less than 40 percent is consumer lending around the world. So we,ve got a relatively small exposure to the corporate and consumer world.

Can you be the global financial services champion without buying U.S. bulge-bracket investment banking capability?

Let's reflect for a second. We said in the 1998 annual report that our vision is to become the world,s leading financial services company. With the advent of the HSBC brand, the growth of funds under management, the growth of the insurance business, the addition of the euro zone, the addition of a serious private banking business and the addition of an Internet-based investment vehicle for an important, self-directed group of clients, we,ve taken some significant steps along that route. I don,t think we,ve reached our goal yet, but I think we are considerably further down the track.

What's your vision for HSBC over the next several years?

I couldn,t have sat here with you two and a half years ago and told you that within two years we would have transformed our private banking business, that we would probably be the only bank outside the euro zone with a significant presence in the euro zone and that we would have linked up with probably the world,s premier personal brokerage and asset management company in an Internet joint venture. If you look at the evolution of HSBC, you can see that funds under management are assuming more and more significance. The joint venture with Merrill Lynch is one vehicle that will accelerate that process. The Mandatory Provident Fund in Hong Kong would be another. The rapidly growing sales of unit trusts to our clients around the world would be another. The pace of change is accelerating. You have all of the impact of technologies. It would be fashionable to talk about the Internet, but it isn,t just that, it's wireless applications, interactive TV, a whole plethora of new technologies. The key is preparing your team for a constant diet of change, which means communications, persuasion and imagination to see what lies around the corner.