Hsbc's Internationalization and Growth Strategy

HSBC'S Internationalization and Growth Strategy

[pic 1][pic 2]Loizos Heracleous

[pic 3]Warwick Business School

WEATHERING THE ECONOMIC STORM

Set up in 1865 as the "Hongkong and Shanghai Banking Corporation," HSBC has become one of the most successful international banks. By January 2012, HSBC was ranked as the fourth largest bank in the world by market capitalization, with a market value of US$150.9 billion, after the Industrial and Commercial Bank of China at US$240.95 billion, China Construction Bank at US$195.85 billion, and Wells Fargo & Co. at US$160.72 billion.' HSBC had dropped to the fourth position from the top spot it occupied in 2008 when it was listed as both the world's largest banking group and the world's largest company according to Forbes magazine,' with a market value in June 2008 of US$173 billion.'

By January 2009, however, the global credit crunch precipitated by the systemic effects of toxic debts, deficient risk management, and lax supervision in the banking industry had affected bank market capitalizations around the world. HSBC's market capitalization had fallen to US$100.9 billion, but it still had the highest bank market capitalization, excluding Chinese banks, followed by JP Morgan Chase with a value of US$90.8 billion (the top global bank by market capitalization was the Industrial and Commercial Bank of China, valued at US$167.2 billion). Bank of America was sixth, with a market value of US$53.2 billion, and Citi was not even in the top ten, with a market value of US$20.9 billion, a decline of 92% from the previous year.'

It seemed that HSBC had withstood the economic storm more effectively than most banks, and in early 2009, when most banks were withdrawing their lending products even after receiving government aid

[pic 4]This case was prepared by Professor Loizos lieracleous solely for instructional purposes and not to illustrate effective or ineffective handling of an administrative situation.

funds, it was still willing to lend to worthy borrowers and provide liquidity in the financial markets, an approach it was still following as at 2012.

[pic 5]HSBC'S INTERNATIONALIZATION AND GROWTH STRATEGY

HSBC expanded globally mainly via acquisition, completing numerous major takeovers from 1959 onward, including Midland Bank in the United Kingdom, CCF in France, Bamerindus in Brazil, Grupo Financiero Bital in Mexico, and Household in the United States. From 2004, the firm's acquisition strategy reflected its growing interest in emerging market economies, particularly China and India. It purchased 19% of the Bank of Communications limited (China's fifth largest bank) followed by a minor interest in Ping An Insurance group in 2005, before becoming one of the first foreign banks to incorporate locally under the name HSBC Bank (China) Company Ltd in 2007. In India, it acquired a large retail brokerage and started an insurance joint venture in India, and in 2010 it acquired RBS' retail and commercial banking operations in India.' Alongside these moves it also made acquisitions in Central America (Grupo Banistmo S. A.) and Vietnam (Bao Vet).

John Bond joined HSBC in 1961 and retired in mid-2006 after serving as chief executive officer (1993-1998) and then as chairman (1998-2006) of the company. Bond aimed to make HSBC the most profitable bank among its main competitors, to overtake Citigroup, to raise shareholder returns significantly and to balance earnings equally among developed and developing countries. Bond pushed cross-selling among the bank's offerings, and led ambitious acquisitions aimed at expanding HSBC's

[pic 6]Case 16 HSBC'S Internationalization and Growth Srategy

reach and capabilities in high-growth segments such as wealth management, investment banking, and consumer finance.'

In 2003, led by Bond, HSBC acquired Household International, a company involved in subprime lending, for US$14 billion, at 1.71 times the book value (Citigroup had paid 2.94 times book value one year earlier for Associates First Capital, a large competitor in subprime lending). Household was the second largest consumer finance firm in the United States after Citigroup's CitiFinancial. Household's most valuable asset was its multiyear database of consumer spending habits based on credit card usage, credit reference agencies, and other sources, used to develop a risk profile for every adult citizen of the United States. Personality traits and lifestyles were inferred based on spending habits, and risk profiles developed and updated accordingly. Lending decisions were, therefore, not strictly asset based, but based on the propensity to repay as indicated by the risk profiles. Household, for example, used 300 variables to make decisions on a mortgage, as compared to other banks' average use of 15 variables.

The bold move into this US market was part of the "managing for growth" strategy under Bond, which involved specific expansion strategies for each of its four main customer groups. Broadly, this included investing further in the brand, investing in people development, linking pay to performance; maintaining its conservative attitude toward risk management, improving organisational efficiency levels, and maintaining its geographical organisation but focusing efforts on specific areas where high business growth was possible.

Several analysts were sceptical of the Household acquisition given the high proportion of subprime lending in its portfolio (40%), the pending lawsuits related to predatory lending, and the differences in culture between the two organisations. In spite of the critics, HSBC completed the acquisition and planned to transfer the Household model to several emerging markets so that it would penetrate these markets more effectively and further diversify the geographic basis of its earnings.

In March 2009, then chairman of HSBC, Stephen Green, said that "with the benefit of hindsight, this is an acquisition we wish we had not undertaken." An HSBC shareholder said that "they have owned up to the fact that Household was a rubbish business. They have been in denial since they bought it. It's the reason they are raising the money they need today."'

Green, who was chairman from 2006 to 2010, focused on moving "HSBC's centre of gravity back to the East after two decades focused on the West."8 In a strategy update to investors in November 2007, he noted that emerging economies had faster growth than developed ones and that world trade was growing faster than the gross domestic product.9 In order to align itself with global trends, HSBC would focus more on emerging markets and on connectivity, or facilitation of international trade by being present internationally. HSBC divided its businesses into personal financial services, commercial banking, corporate, investment banking and markets, and private banking. Each of these had a clear strategy focusing on internationalization and growth, via exploiting synergies across businesses and leveraging on existing scale economies and local knowledge.