HSBC: spin off the UK bank

Medieval cartographers oriented their maps by putting Jerusalem at the top. HSBC’s drafters have done something similar with Beijing. Europe’s largest bank will shift resources to fast-growing Asia. Chief executive Noel Quinn is on the right track. But he must do more. He should give serious consideration to spinning off a UK unit worth about £13bn.

Quinn’s plans for $6bn of additional investment in Asia in coming years make sense. Asia accounts for most of HSBC’s global revenue. Last year profits from the region were 146 per cent of a group total weighed down by Europe. Opportunities are proliferating in Asian wealth management.

Despite having the right strategies, HSBC’s profits before tax fell 34 per cent to $8.8bn last year. The lender has given up on achieving a return on tangible equity of 10 to 12 per cent. Instead, it is aiming for 10 per cent over the medium term, defined as three to four years.

On closer inspection, plans for increasing the capital allocation to Asia are not as dramatic as they first appeared. HSBC wants to increase the percentage of group tangible equity to 50 per cent in the medium to long term, compared with 42 per cent last year.

More focus is needed. A complete withdrawal from US retail banking and from Mexico would be a good start. Spinning off the UK retail and commercial unit in the UK would make an even bigger difference. Here, despite holding almost a third of its total value of customer accounts, the outlook is weak.

UK interest rates are below those in Hong Kong. The UK loan book is conservatively managed, with a loan-to-deposit ratio of 85 per cent. UK financial instruments classified as substandard and impaired are more than double the amount in Asia.

HSBC shares trade at 0.6 times trailing tangible book value, according to S&P Capital, a steep discount to Asian peers such as Hang Seng Bank. Indeed the former holds a majority stake in Hang Seng. A UK spin-off, possibly via a demerger or sale, would lift them. The unit should be worth more than £13bn, applying the price to book value for local rival NatWest from S&P Global.

Shedding the dragging anchor of the UK would appal City traditionalists and many UK politicians. It would increase the heavy political risks created by HSBC’s dependence on China. The riposte to such objections is simple. The clue to HSBC’s identity is in its full name: the Hongkong and Shanghai Banking Corporation.

The Lex team is interested in hearing more from readers. Please tell us what you think of HSBC’s Asia strategy in the comments section below.