United Kingdom

ALEX BRUMMER: HSBC is banking on an Asian miracle

Some might question HSBC’s retreat from continental Europe and the United States at a moment when economies are fizzing as they bounce back from Covid-19. 

It might also seem an inappropriate moment to focus on its core markets in Hong Kong and China at a time of deteriorating diplomatic and economic relations with Washington and London. 

Nevertheless, the clue is in the bank’s name, the Hong Kong & Shanghai Banking Corporation. This has seen the franchise survive the opium wars, chairman Mao, Tiananmen Square and much more. 

Some might question HSBC’s retreat from continental Europe and the United States at a moment when economies are fizzing as they bounce back from Covid-19

By those standards, the current tightening of political control over Hong Kong may be despicable, but barely matches up. Nor should anyone underestimate the value of HSBC’s reach across the fast-growing Pacific region. 

HSBC’s doubled pre-tax profits in the first half of the year at £7.5 billion have little to do with the underlying enterprise. All they show is that HSBC was supercautious in the same period of last year when it set aside £5 billion to cover potential losses from pandemic era lending. In the first half, it has been able to write back £575 million. 

The better outcome for loans made in the pandemic, together with the lack of new impairments, disguises a fall in overall revenues and a sub-octane performance from its investment banking arm compared with Barclays and Wall Street competitors. 

HSBC’s explanation is that after over-exuberance in previous financial booms, it is being more cautious this time and has steered clear of fashionable activity such as special purpose acquisition vehicles (Spacs). It is concerned about comeback from regulators should it all go horribly wrong. 

The bank is vulnerable to regulatory foul-ups after its troubles with money laundering in the past, and new scandal could endanger its US banking licence. That would be a disaster as it is the main conduit for dollar transfers between Hong Kong and New York. 

As far as its UK ring-fenced bank is concerned, HSBC is more hopeful than most that the long period of super-low Bank of England interests rates could end sooner rather than later, by midway through 2022. That would be an immediate boost to margins especially if chunks of the rest of the world were to follow. 

The jury is still very much out on when interest rates will have to rise. The official view of the IMF, the Bank of England and now the UK forecaster, the NIESR, is that the step up in inflation is temporary. But the NIESR cautions that if the Federal Reserve in the US fears the inflation genie is out of the bottle, then it will tighten and interest rates could rise. As good as higher interest rates may be for HSBC margins, exposure to emerging markets might not produce the endowment gains it desires. 

Hey big spender 

Much will depend on how financial markets eventually react to President Biden’s effort to replicate the big spending achievements of Democratic predecessors Franklin D Roosevelt and Lyndon B Johnson. The passage by the Senate of a sweeping $1trillion (£719 billion) infrastructure bill should not trouble the scorers too much as renewal of rail, roads, bridges and the creation of an electric charging network is seen as long overdue and as capital spending, which will be spread over time. 

More controversial, because of its impact on current spending, is the effort by Democrats on Capitol Hill to pair it up with a $3.5trillion (£2.5trillion) bill for social infrastructure which would pour cash into education, childcare, climate change and other immediate disbursements. 

Jack Dorsey’s purchase of Afterpay will be watched closely in Sweden, home to European equivalent Klarna

The Democrats want to pay for this with a levy on the wealthy, defined as people earning more than $400,000 (£292,000 a year), which Republicans abhor. If a huge spending boost becomes reality without any tightening of fiscal policy, the Fed may have no choice but to raise rates. 

Pay dirt 

The purchase by Twitter founder Jack Dorsey’s fintech group Square of Aussie buy-now, pay-later lender Afterpay for £21 billion will be watched closely in Sweden, home to European equivalent Klarna. At its last fundraising, Klarna, which has been considering a London float, was valued at £33.5 billion. The Afterpay deal raises the intriguing question as to whether there might be a trade buyer in the wings. It could be a big, but fascinating morsel for one of the Silicon Valley giants seeking to bolster financial reach or even an established bank wanting to buy into the digital revolution.       

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