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HSBC Group

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HSBC is one of the world's largest financial services companies, with an international network that still spans the globe, although several under-performing territories have been exited since 2011. Until the 1990s the group was best-known as Hong Kong's biggest financial institution, originally founded 150 years ago to finance trade between Asia and the West. But a string of acquisitions around the globe, starting with the UK's Midland Bank, transformed the business into arguably the world's most broadly based financial institution, with significant operations on every continent. Later purchases included US bank Republic New York, consumer finance lender Household International, CCF in France and Grupo Bital in Mexico, all absorbed into the main HSBC umbrella brand. Though less badly affected by the 2008 banking crisis than some competitors, the former Household operations in the US proved a massive drain on otherwise strong performance. A series of regulatory problems have led to other concerns, and the bank began pulling out of less profitable territories to refocus its attention on Asia and only more lucrative international markets.

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Brands & Activities

HSBC has earned its position as one of the world's most admired financial institutions for the skill with which it constructed a truly global brand virtually from scratch in the space of less than two decades from 1990 onwards. (That feat was matched, possibly surpassed by Santander a decade later). The group offers a full range of retail, corporate and investment banking services in each market in which it operates, now under a single worldwide banner. Until the 2008 it drew its profits equally from North America, Europe and Asia, providing an international footprint unrivalled by any other bank. HSBC was in an especially strong position to benefit from the growing economic strength of developing regions, especially China, where it has equity alliances with three of the country's biggest financial services organisations, and to a lesser extent India and Latin America. On the negative side, although the acquisition of Household consumer finance added an important new service to HSBC's overall offering, it was one that proved in hindsight to be the group's most serious strategic error, exposing the bank to huge losses from the subprime credit meltdown of 2008. This led to a gradual withdrawal from both consumer finance and also less lucrative international markets.

As a result of a series of major acquisitions since the late 1990s, HSBC is arguably the most broadly spread of the world's major banking and financial services organisations, with very significant operations on all continents. At the end of 2010, the group operated a network of more than 7,500 branches in 87 countries. That footprint had reduced considerably by the end of 2016 as a result of the group's revised global strategy.

Until comparatively recently, HSBC was a collection of separate financial businesses in different markets, acquired over a period of several years and operating to a certain degree independently of each other. However the group gradually consolidated its various subsidiaries in the 2000s to offer a single worldwide brand. The first step was to establish the HSBC name as the parent brand, with local brands gradually phased out. In 2002, a global marketing campaign launched to position HSBC as "The World's Local Bank", with the result that it was named Global Bank of the Year for an unprecedented four consecutive years from 2002 to 2005 by The Banker magazine and Top World Bank in 2008. It was ranked as the most valuable retail banking brand in Interbrand's Best Global Brands 2011 survey, although it was behind American Express and JP Morgan in the overall financial services category. The "world's local bank" slogan was eventually dropped in 2012.

The group is structured as four main divisions: HSBC Retail Banking & Wealth Management (or RBWM), HSBC Commercial Banking, HSBC Global Banking & Markets and HSBC Global Private Banking.

Retail Banking & Wealth Management

By far the biggest is RBWM, although performance plunged dramatically in 2007 and 2008 because of exposure to low income customers in the US. This area has now been largely eliminated. More recently, the group has begun exiting smaller or less profitable global markets, including Thailand, Pakistan and several Central and South American countries.

Despite problems in the US, and to a lesser extent in Europe, this business has continued to perform strongly in other markets. It provides retail banking and related services to around 36m customers worldwide (down from over 50m in 2014). It is in turn sub-divided into separate business units. HSBC Premier, for example, serves the top level of personal customers, with around 4.4m clients worldwide in 47 countries. A second-tier preferential service, HSBC Advance, for "emerging mass affluent" customers, was introduced in 2010, and rolled out to 4.6m clients in 34 key territories. Other services within the Personal Financial Services division include insurance, investments and banking and pension fund services compliant with shariah Islamic law, under the HSBC Amanah brand.

However performance has been dented by the gradual disposal of weaker markets and also by a string of fines or provisions for future litigation. Net operating income halved between 2014 and 2016 to $17.75bn, although pretax profits have remained resilient at $5.33bn.

In the US, the core of the Personal Financial Services division was for several years provided by HSBC Consumer Finance, previously Household International, acquired by HSBC in 2002. At the time of that purchase, Household was America's second-largest consumer finance company (behind Citigroup), with 1,400 offices in 46 states, trading mainly as HFC Bank or Beneficial, and specializing in consumer loans and mortgages for low-to-middle income markets, and especially what the bank described euphemistically as customers with "less than perfect credit". Household had already established operations in the UK for several years under the HFC Bank brand, and also extended its consumer finance services into other markets, including Brazil and Mexico.

However, the consumer finance business brought with it some significant risks. The division began to witness a sharp rise in credit delinquencies during 2006 and these grew steadily worse over the next two years, culminating in massive losses for 2008. Luckily for HSBC, its early exposure to the sub-prime slump caused it to scale back in this sector during 2007 at a time when most other banks were piling in. As a result, it was able to avoid the worst effects of the 2008 collapse. It began to phase out the HFC and Beneficial bank networks in early 2009 as part of its withdrawal from this sector, and suspended all further high-risk lending. In 2010, it sought to reduce its exposure further by selling on a large portfolio of car loans with a combined value of $4.3bn to Santander of Spain for a small loss. It took further steps to reduce its presence in the US in 2011, selling 195 bank branches in upstate New York to First Niagara Financial for $1bn in cash.

HSBC is still one of the world's biggest credit card issuers. It is a leading provider of private label credit cards and store cards in the US and UK. In 2003 it won the contract to run the storecards of UK retailer John Lewis Partnership, and acquired the financial services division of Marks & Spencer in 2004, which now operates as M&S Money. However, in 2011, HSBC began pruning its card operations to eliminate unprofitable businesses. The most significant of these was in the US, where the portfolio consisted of a mixture of prime and sub-prime credit card brands, as well as store cards for Neiman Marcus, Saks and Best Buy, and the co-branded GM card. The entire business, with outstanding loans of around $30bn, was sold to Capital One for around $33bn.

Commercial Banking

HSBC is also a major force in Commercial Banking, servicing large and medium sized businesses with a range of products including cash management systems, corporate insurance, trade services, leasing, finance and factoring. The division has around 3.6m customers worldwide, although the majority are based in Europe, Hong Kong and the rest of Asia. It contributed pretax profits of $6.05bn in 2016 on operating income of $11.89bn.

Global Banking & Markets

The Global Banking & Markets division is HSBC's investment banking arm and provides tailored financial solutions to major government, corporate and institutional clients worldwide. These include treasury and capital markets services; corporate, institutional and investment banking; and asset management services. It is one of the foremost investment and corporate banking specialists in Asia, where most of its activities are concentrated. After being the most profitable part of the business in 2010, performance has fallen since 2011 as a result of the slowdown in investment activity. For 2016, pretax profits were $5.60bn on operating income of $14.46bn.

Private Banking

Finally, HSBC Private Bank is one of the world's leading international wealth management groups looking after some $390bn of client assets by the end of 2010. This umbrella brand absorbed the group's various high-net-worth customer divisions in late 2003, including Republic Bank of New York, Banque Eurofin in France, Bank of Bermuda and others. German bank HSBC Trinkaus & Burkhardt continues to offer private banking services to wealthy clients under its own brand. Income was $1.76bn in 2016 with pretax profits of just $289m. In 2015, the group was embarrased by revelations that its Swiss private banking division had actively assisted wealthy customers in avoiding tax, and even that CEO Stuart Gulliver had himself previously hidden his bonuses in a Swiss account to keep them secret from colleagues.

All of these various financial services are supplied by a global network of interlocking businesses. HSBC Bank plc is the division responsible for mainstream banking and financial operations in the UK and mainland Europe, primarily in France. In the UK, HSBC is one of the big four principal UK clearing banks, offering a full range of personal and business banking services through a network of 1,430 branches in Britain, as well as offices in 28 other countries. First Direct, a division of HSBC in the UK, was the country's first and still the leading 24-hour telephone bank, with over 1m customers. However UK performance slumped in 2012 because of several charges and provisions, including a huge allowance for "customer redress" - rebates to customers mis-sold PPI insurance protection products. The UK business alone reported a $5.0bn loss. At the end of 1Q 2016, HSBC/FirstDirect was the UK's #5 bank group with 10% share of the personal current accounts market, according to the Gfk NOP/ JGFR barometer ranking. It is the smallest of the major lenders for mortgages, ranking 6th in 2015 with less than 6% share.

HSBC acquired a continental European footprint in 2000 through Credit Commercial de France (CCF), which had a nationwide network of around 760 branches catering mostly to a wealthier clientele. CCF also owned several regional banks including Banque de Picardie, Banque de Savoie and Societe Marseillaise de Credit. In 2005 the group finally began rebranding CCF as HSBC, although many regional branches retained their original names. The unbranded regional networks were sold on in 2008 to Banque Populaire, netting HSBC a handsome $2.4bn profit.

Traditionally, Hong Kong was the core of the group's operations, and it still plays a central role in HSBC's overall profile. The group has long controlled the tiny island's two biggest local banks, The Hongkong & Shanghai Banking Corporation (now HSBC Hong Kong) and the Hang Seng Bank. The former is one of Asia-Pacific's biggest financial institutions, with some 170 offices in 20 countries and territories. Hang Seng, in which HSBC has a 62% stake, is based principally in Hong Kong, with 145 local branches. It is Hong Kong's second-largest home-grown bank, and is among the six largest publicly-listed companies in Hong Kong.

In 2001 the group acquired a small stake in the Bank of Shanghai in mainland China, followed in 2002 by a holding (later raised to 16%) in Ping An Insurance, the country's #2 life insurer. The arrangement allowed HSBC to market other products to Ping An's 20m policy holders and 250,000 sales agents. However, the Ping An shares were sold again in 2012 for $9.4bn. In 2004 HSBC purchased a 20% stake in the Bank of Communication (BoCom), China's fifth largest lender, for $1.7bn. The two companies subsequently jointly launched the Pacific credit card, which allows dual currency purchasing in Chinese renminbi as well as US dollars. The number of cards in circulation had exceeded 11m by the end of 2008. Other divisions in Asia include a strategic equity partnership with Bank UTI of India, HSBC Investment Bank Asia and HSBC Australia.

The group has worked hard to increase its presence in North America, and the acquisition of Household was a major step in this direction. However the consumer finance business remains separate from the main HSBC Bank USA retail division, concentrated in the state of New York. As a result of the merger with Republic National Bank of New York, the organization became the third largest depository institution, and until the sale of branches in 2011 also the largest branch network in New York State. Wells Fargo HSBC Trade Bank is a joint venture based in California, which provides trade finance and international banking services in the western United States through Wells Fargo's 32 regional commercial banking offices. The group operates several subsidiary businesses in Canada. Hongkong Bank of Canada was already the country's largest foreign-owned bank, and has now been absorbed under the HSBC brand. In late 2003 the group also acquired Bank of Bermuda, which specialises in private banking as well as corporate and insurance services, for $1.3bn. In 2002 the group moved into Mexico with the acquisition of Grupo Financiero Bital, then Mexico's fifth-largest retail bank, with 1,400 branches and 6m customers. This became HSBC Mexico, and is the country's most extensive banking network.

HSBC Latin America has been until recently a third geographic division. The group's main area of operations was Brazil, with an additional presence in Argentina. HSBC Bank Brasil - Banco Multiplo was established in Brazil in 1997. The bank has its head office in Curitiba with an international network of some 1,500 branches and sub-branches. It is the largest international bank in Brazil and the third largest private bank. In 2003 it paid around £490m to acquire Losango, a consumer finance operation in Brazil, from Lloyds TSB. In 2006, it agreed to acquire Grupo Banistmo, the biggest privately owned bank in Central America, for around $1.8bn. Based in Panama, it also had operations in El Salvador, Mexico and Brazil. However, most of the bank's operations in Central America were sold off during 2013, and two years later HSBC announced plans to sell its Brazilian business to rival Bradesco for $5.2bn. As a result, although it plans to maintain a small office in the country to represent international clients, it will in effect withdraw from Central and South America altogether.

The group has a large portfolio of sports sponsorships. In the past these have included Formula 1 and even surfing events in Australia. In 2011, though, the group announced plans to focus its attention on golf and rugby. It sponsors several golf championships including the Open and Abu Dhabi tournament. In rugby it supports the British and Irish Lions teams and Rugby World Sevens. It is also the official banking partner of the Wimbledon tennis championships and of British cycling.

Financials

The group's performance has been affected by a series of challenges since 2007, not least large provisions against bad debt in its US consumer finance business in 2008 and 2009, followed by a string of regulatory investigations and their ensuing fines. Performance for 2012, for example, was dented by a huge fine imposed by the US Department of Justice at the end of 2012 after the bank admitted that it had handled money on behalf of Iranian organisations, in violation of US laws, and also deliberately concealed their identity in communications with regulators. It also accepted huge cash transfers from its subsidiary Mexico to the US, despite the fact that these clearly related to illegal activities by clients suspected of representing drug gangs. In December 2012, HSBC agreed to pay $1.92bn to settle these charges. A succession of similar penalties followed over the next two years, including a $618m fine in 2015 relating to HSBC's involvement in fixing of interest rates. At the same time, the group has sold off a succession of different international subsidiaries, in some cases at a loss.

For 2014, reported pretax profits fell 17% to $18.68bn, their lowest level since 2010. Total operating income (effectively revenues) has also steadily reduced, in part as a result of disposals. After peaking in 2011 at almost $83.5bn, it has gradually eroded each year, falling 5% in 2014 to $74.59bn, and then $71.10bn for 2015.

Slowing growth in Hong Kong and the UK and divestments caused net operating income to fall by another 8% in 2016 to $44.57bn, the lowest level since 2004. A $3bn impairment against private banking, a $1bn loss on the sale of the Brazilian business and high tax charges prompted net profit to plunge by 77% to $3.45bn. Total assets were $2,375bn. Topline began to grown again in 2017.

Net operating income for 2018 was $52.01bn, while net profit jumped by more than a quarter to $15.03bn. Profits for 2017 had been depressed by higher insurance payouts as well as a higher tax charge. However the group warned of a "collapse" in revenues in the final weeks of the year as a result of the uncertainty surrounding Brexit and the threat of escalation in the trade war between the US and China.

Management

Stephen Green became executive chairman of HSBC in 2006 following the retirement of Sir John Bond. In summer 2010, he resigned to pursue a political career as minister for trade in the UK's coalition government. Shortly afterwards, group CEO Michael Geoghegan also offered his resignation, reportedly after he was informed that he would not be appointed as chairman, breaking a longstanding tradition within the company. Geoghegan left at the end of 2010. This constituted an unprecedented public dispute within HSBC's C-suite. Following the departure of both men, group finance director Douglas Flint became chairman. Stuart Gulliver, previously chairman, global banking, markets, insurance & private banking, was named as CEO. Flint stepped down towards the end of 2017 and was succeeded as chairman by Mark Tucker, former CEO of AIA. He will be the first chairman in HSBC's long history not to be recruited from within the existing executive team. Gulliver too retired in Feb 2018, and was replaced by John Flint (no relation to Douglas!), previously chief executive, retail banking & wealth management. However, Flint was removed from his role in summer 2019 after a steady decline in HSBC's share price. Noel Quinn, head of commercial banking, took over as CEO.

Background

Although HSBC is headquartered in London, its roots lie firmly in the island of Hong Kong. Core business the Hong Kong & Shanghai Banking Corporation was founded in 1865 by Thomas Sutherland, the Hong Kong superintendent of shipping company P&O, in order to facilitate trade between China and Europe. The bank quickly expanded over the next 80 years, opening branches throughout China and the Far East and spreading to India, Japan and North America. But the global conflict of the Second World War brought significant disruption. The bank moved its head office to London, and was forced to rethink its core business when the Communists seized power in China in 1949, restricting almost all trade with the rest of the world. The bank quit the mainland, but developed its position in Hong Kong, financing the rapid expansion of the island's economy as wealthy Chinese fled there for safety.

During the 1950s, HSBC looked to Asia and the Middle East as a new focus of its business, buying the Gulf-based British Bank of the Middle East and India's Mercantile Bank in 1959. The former is now the Middle East's most widely-represented bank, and is affiliated to the Saudi British Bank, in which HSBC has a 40% stake. The group bolstered its Hong Kong business with a majority stake in Hang Seng Bank in 1965. As China gradually opened its doors to foreign business in the 1980s, with Hong Kong as the gateway, HSBC concentrated on moving into those markets where it was not yet fully represented. Hongkong Bank of Canada was established in 1981 and Hongkong Bank of Australia in 1986. In 1987 Marine Midland Bank, based in New York State, became a wholly owned member of the Group and its principal subsidiary in the United States. It was renamed HSBC USA in early 1999.

Following the 1984 agreement to hand Hong Kong back to the Chinese, HSBC set about developing its UK business, buying investment house James Capel in 1986. HSBC Holdings plc was established in 1991 with its shares quoted on both the London and Hong Kong stock exchanges. The acquisition in July 1992 of Midland, then the UK's third biggest bank, created one of the largest banking and financial services organisations in the world.

The 1990s saw further expansion and consolidation of the various businesses of the HSBC Group. The group took a 21% stake in the Cyprus Popular Bank, Hongkong Bank Malaysia Berhad was established, and the group moved back onto the Chinese mainland with branches of Hang Seng and HSBC. In the United States, a joint venture, the Wells Fargo HSBC Trade Bank was formed in 1995. In South America, the group spent $1bn on the banking operations of Banco Bamerindus do Brasil (now HSBC Bank Brasil - Banco Multiplo), acquired Roberts SA de Inversiones in Argentina for $600m, and bought a 20% interest in Mexico's third largest bank Grupo Financiero Serfin for $300m. In the UK, HSBC's 24-hour telephone banking service First Direct, a subsidiary of Midland Bank, was a notable success.

In 1998, the group's performance was dented by the economic problems in the Far East, with provisions for bad debt rising to £1.6bn. In 1999, HSBC began talks to acquire a controlling stake in South Korea's Seoulbank, one of that country's biggest commercial banks, and suggested that it would look at further acquisitions in the region, as a result of the fall in local share prices. However that deal later fell through after months of negotiation. Another deal to take a stake in Thailand's Bangkok Metropolitan Bank also later collapsed. Instead, the group surprised the market by paying $10.3bn for US banking group Republic New York Corporation, and its sister company Safra Republic Holdings, both founded in 1966 by Lebanese-born Edmond Safra. Combined with HSBC's existing Marine Midland business, this made the group the third biggest banking chain in New York after Chase Manhattan and Citibank. The acquisition doubled HSBC's banking business, adding 30,000 clients holding a total of $56.6bn in assets, equivalent to an average $1.9m per client.

But a series of shadows fell across the deal at the end of the year. Japanese financial authorities complained of potentially criminal irregularities in the marketing and pricing of one of Safra Republic's investment funds (the so-called Princeton Note Matter). HSBC subsequently negotiated a reduction in the sale price to $9.85bn, with Safra himself absorbing the sum from his own shareholding. A few months later, in December 1999, in an unrelated incident, Safra died during a bungled burglary in his Monaco apartment.

HSBC turned its attentions back to Europe in 2000, plugging a gaping hole in its European network with the purchase of Credit Commercial de France for €11.1bn. CCF in turn acquired state-owned Banque Hervet from the French government in 2001. Among other acquisitions that year were UK rival Barclays' business in Greece, Demirbank in Turkey; NRMA Building Society of Australia, and number of asset management and investment companies in Spain, Taiwan and other countries. At the end of 2001 HSBC was the first foreign bank since 1949 to acquire a shareholding in a mainland Chinese rival, agreeing to buy an 8% stake in the Bank of Shanghai for $62.6m.

Mid-2002 the group agreed to acquire Mexico's Grupo Financiero Bital for $1.15bn in cash. A few months an even bigger deal bolstered the group's US assets when it acquired the country's second-largest consumer finance company, Household Industries, for more than $14.2bn in shares. First founded in 1878 by Frank Mackey to lend cash to lower income workers, Household was one of the country's oldest financial institutions, and gave HSBC its first national branch network in the US. In 2004, the group consolidated its entire worldwide marketing budget, estimated at around $600m, with a roster of WPP agencies, led by J Walter Thompson.

In Spring 2005, members of one of the largest unions within the bank's UK division voted in favour of a one-day strike to coincide with the group's AGM. This move, the first industrial action in the UK banking sector since 1997, was to protest over below-inflation pay increases, despite the record profits reported by HSBC for the year.

In 2013, HSBC announced the results of a long and difficult review of advertising assignments. Media was reassigned to Mindshare, but the group's advertising business was split. JWT, which had managed the whole account, was reappointed to global branding and the US retail business. However retail banking in the UK, Europe and Latin America was shifted to Grey, and Bates CHI & Partners was appointed to assist JWT with Asia. Saatchi & Saatchi was added to the roster to handle global sponsorship. However it became apparent after a few months that Grey was struggling to manage the sheer weight of its new assignment and the UK account was abruptly transferred back to JWT mid-year.

Last full revision 22nd December 2017

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