Source: Economic Times, 06 September 2022
HSBC, the world’s local bank, would choose to operate as a full- service lender in select geographies such as the UK, and a corporate financier in most others, Noel Quinn, Group Chief Executive, tells MC Govardhana Rangan, Bodhisatva Ganguli and Joel Rebello. While a group of investors sought the bank’s restructuring to boost returns, Quinn believes recent rising incomes prove the lender’s current structure is adequate to help achieve the desired results. Edited excerpts:
How would you read Fed chairman (Jerome) Powell’s speech at Jackson Hole indicating big rate increases due to high inflation?
Clearly, there’s a major economic challenge for the world with the level of inflation where it is. And nobody’s quite sure as to whether inflation will start to cap out in the near term or will continue to rise. The question mark is on how much higher interest rates need to get to in order to manage the inflationary pressures. There will be a correction in the demand curve, because as inflation is starting to impact disposable income, I believe the demand side of the equation is going to start to soften. And maybe that will do some of the job of interest rates.
Some say that the withdrawal of QE (Quantitative Easing) poses a greater challenge for the markets.
I think QE needs to be withdrawn progressively. QE was brought in for a reason… first of all, for the global financial crisis, then brought in because of the COVID situation. And I think markets did need to see a level of normalisation emerge. And, therefore, it is right to progressively withdraw QE to return the markets to a more normal operating environment.
This is a time when rates would go higher and economies would contract. How is this going to play out in the financial markets?
It’s not equal all around the world. There are different market dynamics taking place in continental Europe, particularly at the moment with the impact of the Russia-Ukraine war, the energy supply challenges for Europe and the inflationary consequences of that. Contrast that to the Middle East which is a very different set of economic circumstances. If I contrast it here in India, the inflationary pressures in India are not as great as the inflationary pressures elsewhere in the world. So I think what you’re going to find is governments will adopt different interest rate policies to suit their particular part of the economy. You’re going to see more divergent economic policies emerge over the coming years.
In this divergence, who wins and who loses?
I think the big challenge for the economy at the moment is energy supply. Any country that has an energy supply problem has the potential to have a challenging time over the next few weeks or months. So, continental Europe has both an inflationary pressure and an energy supply problem. The UK, on the other hand, doesn’t have so much of an energy supply problem; it does have a significant energy inflation problem. And then the US, as I said, has less of a supply problem. But there is some inflationary pressure in the energy sector and the food sector as a consequence. I think India in particular, has a very strong, bright future ahead of it. It’s quite a stable economy, with manageable inflation, very strong growth prospects, and a stable political environment within India. And I think that fosters a very strong growth environment.
One of the big trends in the last few years has been de-globalisation…
I put it slightly differently; I call it re-globalisation. Supply chains are changing, they’re changing for a number of reasons. They’re changing, partly because of geopolitics. They’re changing partly because of resilience. COVID made people aware of their over dependence on any one source of supply. There is a longer supply cycle today. As a consequence, goods are on the water longer. And then the ticket price of trade has gone up. So with inflation, the invoice prices of goods are higher today than two years ago. We are seeing a significant growth in trade, but the supply chains are different.
There’s a strong belief here that India will benefit from a China plus one strategy. What are your thoughts?
Buyers are seeking more than one or two sources of supply, some of that supply will be scale further away from their home market; some of that supply will be near assured, in order to allow greater flexibility to manage supply demand implications of their market. So we have seen a significant amount of supply chain shift into the likes of Mexico, from Asia, but it’s not for the whole but for part of the supply chain. So, you have part of the supply chain within 24 hours, 48 hours of delivery to the US market. India can be a massive beneficiary of that and you have a good developing, growing market.
What should India do to get that?
To be an effective global supplier, you clearly need a large manufacturing capability. Now, for India, it’s how do you facilitate the creation of large scale manufacturing plants that can be built within reliable timescales that can be approved and brought to operational capacity within a reasonable timeframe. And in the past, some of the planning regulations, some of the approval processes were more cumbersome than they are today. And I think there’s progress being made in creating the environment for large scale manufacturing plants to be built. The second thing that you need for an effective supply chain is very efficient and effective logistics capability. Now I think India has all of the raw material that it needs because it’s got a significant supply of labour in order to be a supplier to the world.
What do these mean for HSBC’s India business?
When I was living in Hong Kong and I first came to India, I remember having a conversation with my team and said: I’d love you to be boringly consistent for the next 10 years. Now, my definition of boring was 15% per annum growth, maybe 20%. India is such a huge opportunity. It’s a market that does value relationship banking, and long-term dependable relationships. If you go back to our report and accounts, including all of our activities in India, last year, we reported a pre-tax profit of $1.11 billion. So it’s not a small business. We are constantly seeing PBT over the last few years growing by 10% per annum.
Do the geopolitical tensions between the West and others have any impact for a bank like yours?
We have been an international bank for 157 years, and geopolitics has changed very significantly in those years in many different ways and forms and will continue to. If you are an international bank, which is what we are, then you try and stay focused on finance. This year, our corporate clients in commercial banking have asked us to open bank accounts for them in other countries as they expand their operations. And that level of ask is up 13% in the first six months of this year. So despite the geopolitics and the challenge and economic circumstances, our customers are asking us to help them expand their businesses, not just with import-export.
HSBC has been reorienting businesses for some time now – selling a few as in the US and France, while adding in Singapore and India. What is your view of HSBC by 2030?
In the US, we sold mass market retail because we didn’t have competitive differentiation, but we do have competitive differentiation on wholesale banking. About 95% of our capital of America is now wholesale banking related. We are doing a very similar thing in continental Europe where we have agreed to sell our retail bank in France. That will mean the majority of our capital and balance sheet in Europe will be wholesale banking. But we are different in the UK, where we are a full-service bank – banking everything from start-ups and SMEs and students through to the top in private banking and large corporates.
The same is true of Hong Kong and Mexico. In the other markets in which we operate in, we are typically an international wholesale bank, banking clients in multiple geographies, and we’re an international wealth bank. There’s press commentary about our joint venture here in India, on the insurance side, about one of our joint venture partners. Our acquisition strategy now is very much aimed at growing our wealth, and insurance business, the broader definition of wealth, wealth products, insurance products and asset management, across Asia – with the four important pillars of India, Singapore, Hong Kong and China.
Some observers believe the problems in China’s real estate now are similar to what happened in the US in 2008. What is going to be the fallout of that on the global financial markets?
The commercial real estate market in China is coming through a massive policy correction that has caused a lack of confidence in international capital markets to provide capital for that sector. That policy correction is still underway and nobody can fully predict how it is all going to land and work out. My view is it will take two or three years before we fully understand the new policy framework and how financeable the new policy framework will be. We are working through with them but I don’t think it is going to be a quick solution. It is going to take time.
Chinese financial conglomerate Ping An has sought the breakup of HSBC.
We have dialogues with all of our shareholders. There has been press speculation that Ping An is keen for us to consider alternative structural options to create value enhancements. We have evaluated those options in the past. There has been speculation that we have been asked to consider partial separation or listing and other forms of structural change. The management team and the board are fully confident in the strategy we are currently pursuing. It’s the right one and the fastest and the safest route to higher returns, which you saw in our half-year results where we have upgraded our market guidance so that our return on tangible equity will be 12%-plus next year. The transformation we have embarked upon in the last two or three years has improved the operating leverage of HSBC by 400 basis points. A fundamental corporate restructuring of the holding structure of the group will lead to significant revenue de-synergies and cost de-synergies and massive uncertainties for the next three to five years with no certainty of getting any of these proposals approved by shareholders or regulators. We would require 25 regulators around the world to approve such a structure and we don’t believe it’s the right answer. We believe we are following the right strategy.