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What are the pros and cons of HSBC?s ?Managing for Growth? strategy??
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In-Depth Integrative Case 4.1
HSBC in China
After years of negotiations, China finally acceded to the
World Trade Organization (WTO) in December 2001 (see
Exhibit 1). This development was a significant milestone
in China?s integration with the global economy. One of
the most important and far-reaching consequences was the
transformation of China?s financial sector. China?s banking, insurance, and securities industries were long due for
a major overhaul, and the WTO requirements guaranteed
that the liberalization of China?s economy would extend
to the important financial sector. China?s banking sector
had become a casualty of the state. Banks and other financial institutions haphazardly extended loans to stateowned enterprises (SOEs) based not on sound credit
analysis but favoritism and government-directed policy.
As a consequence, crippling debt from bad and underperforming loans mounted, with no effective market disciplines to rein it in.
China recognized that opening up the banking sector
could bolster its financial system. Foreign management
would help overhaul the banking sector and put the focus
on returns, instead of promoting a social agenda. This
fiscal agenda would ultimately lead to a stronger and
more stable economy. Yet after years of direction from the
state, Chinese bank managers did not have the necessary
skills to transform the banks on their own. Guo Shuqing,
shortly after being promoted to chairman of China Construction Bank, admitted that, ?more than 90 percent of
the bank?s risk managers are unqualified.?1
Immediately upon accession to the WTO, China?s
banking sector began to open to foreign banks. Initially,
foreign banks were allowed to conduct foreign currency
business without any market access restrictions and conduct local currency business with foreign-invested enterprises and foreign individuals. In addition, the liberalization of foreign investment rules made Chinese banks
attractive targets for foreign financial institutions. Sweeping domestic changes have followed. Strong emphasis has
been placed on interest rate liberalization, clearer and
more consistent regulation, and a frenzy of IPOs of state
owned banks has followed. It was in this context that
HSBC rapidly expanded its presence in China.
China?s WTO Commitments
General Cross-Sector Commitments
Reforms to lower trade barriers in every sector of the economy, opening its markets to foreign companies and their
exports from the first day of accession.
Provide national treatment and improved market access to goods and services from other WTO members.
Undertake important changes to its legal framework, designed to add transparency and predictability to business dealings and improve the process of foreign market entry.
Agreement to assume the obligations of more than 20 existing multilateral WTO agreements, covering all areas of trade.
Licensing procedures that were streamlined, transparent, and more predictable.
Commitments Specific to the Financial Services Industry
Allow foreign banks to conduct foreign currency business without any market access or national treatment limitations.
Special rules regarding subsidies and the operation of state-owned enterprises, in light of the state?s large role in
Under the acquired rights commitment, agreed that the conditions of ownership, operation, and scope of activities for
a foreign company under any existing agreement would not be made more restrictive than they were on the date of
China?s accession to the WTO.
Allow foreign banks to conduct local currency business with foreign-invested enterprises and foreign individuals
(subject to geographic restrictions).
Banking services (with a five-year transitional plan) by foreign banks:
Within two years after accession, foreign banks would be able to conduct domestic currency business with Chinese
enterprises (subject to geographic restrictions).
Within five years after accession, foreign banks would be able to conduct domestic currency business with Chinese
individuals, and all geographic restrictions will be lifted.
Foreign banks also would be permitted to provide financial leasing services at the same time that Chinese banks
are permitted to do so.
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In-Depth Integrative Case 4.1 HSBC in China
HSBC, known for its international scope and careful,
judicious strategy, made a series of key investments
between 2001 and 2005 that arguably gave it the most
extensive position in China of any foreign financial group.
These investments included two separate transactions that
resulted in a 19.9 percent stake in Ping An insurance, and,
in June 2004, a $1.8 billion successful tender for a 19.9
percent stake in Bank of Communications, the fifth largest
bank in China. HSBC had a long history in Asia, and was
uniquely positioned to take advantage of China?s vast
population and mushrooming middle class, high savings
rates (in the range of 40 percent), and huge capital investments (US$50 billion FDI in 2005). HSBC recognized
that the current banking system was not capitalizing on
this vast opportunity, and sought to get in on the ground
floor in this new environment. Perhaps, with further liberalization, however, China would allow future investors
to establish even greater claims to Chinese banks. Citigroup?s successful effort to gain a controlling stake in
Guandgong Development Bank appeared to undermine
earlier investors who had been limited by China?s rule that
allowed foreigners to own no more than 19.9 percent of
domestic financial institutions. Did the huge potential
rewards of being an early mover in China mitigate the
promise of uncertainty and risks of doing business in an
emerging market? After being burned in Argentina, could
HSBC relax its conservative philosophy in its China strategy? If the economy took a turn for the worse, HSBC
could face heavy losses. On the other hand, could HSBC
afford not to be an early mover in a region where it had
a longstanding presence?
Background on HSBC
Thomas Sutherland founded the Hongkong and Shanghai
Banking Corporation (Hongkong Bank) in 1865 to finance
the growing trade between Europe, India, and China.2
Sutherland, a Scot, was working for the Peninsular and
Oriental Steam Navigation Company when he recognized
a considerable demand for local banking facilities in Hong
Kong and on the China coast. Hongkong Bank opened in
Hong Kong in March 1865 and in Shanghai a month later.
The bank rapidly expanded by opening agencies and
branches across the globe, reaching as far as Europe and
North America, but maintained a distinct focus on China
and the Asia-Pacific region. Hongkong Bank helped pioneer modern banking during this time in a number of
countries, such as Japan, where it opened a branch in 1866
and advised the government on banking and currency, and
Thailand, where it opened the country?s first bank in 1888
and printed the country?s first banknotes. By the 1880s,
the bank issued banknotes and held government funds in
Hong Kong, and also helped manage British government
accounts in China, Japan, Penang, and Singapore. In 1876,
the bank handled China?s first public loan, and thereafter
issued most of China?s public loans. Hongkong Bank had
become the foremost financial institution in Asia by the
close of the 19th century.3
After the First World War, the Hongkong Bank anticipated an expansion in its Asian markets, and took a leading role in stabilizing the Chinese national currency. The
tumultuous Second World War, for its part, saw most of
the bank?s European staff become prisoners of war to the
The Postwar Years
In the postwar years, Hongkong Bank turned to dramatic
expansion through acquisitions and alliances in order to
diversify. The acquisitions began with the British Bank of
the Middle East (Persia and the Gulf states) and the
Mercantile Bank (India and Malaya) in 1959, and were
followed by acquiring a majority interest in Hong Kong?s
Hang Seng Bank in 1965. The 51 percent controlling interest in Hang Seng Bank was acquired during a local banking crisis for $12.4 million. As of 2002, HSBC?s interest
in the bank was 62 percent and was over $13 billion. Hang
Seng, which retained its name and management, has been
a consistently strong performer. The bank made further
acquisitions in the United Kingdom and Europe (from
1973), North America (from 1980), and Latin America
(from 1997), as well as other Asian markets.
Under Chairman Michael Sandberg, Hongkong Bank
entered the North American market with a $314 million,
51 percent acquisition of Marine Midland, a regional bank
in upstate New York. In 1987, the bank purchased the
remaining 49 percent, doubling Hongkong Bank?s investment and providing the bank a significant U.S. presence.
As a condition of the acquisition, however, Marine
Midland retained its senior management.
Move to London and Acquisitions
In 1991, Hongkong Bank reorganized as HSBC Holdings
and moved its headquarters in 1993 to London from Hong
Kong. Sandberg?s successor, William Purves, led HSBC?s
purchase of the U.K.?s Midland Bank in 1992. This acquisition fortified HSBC?s European presence and doubled
its assets. The move also enhanced HSBC?s global presence and advanced the bank?s reputation as a global financial services company.
Other major acquisitions of the 1990s included Republic
Bank and Safra Holdings in the United States, which doubled HSBC?s private banking business investments moves
in Brazil and Argentina in 1997, and acquisition of Mexico?s
Bital in 2002. In 2000, HSBC acquired CCF in France. By
2006, HSBC had assets exceeding $1,860 billion, customers
numbering close to 100 million, and operations in six continents. In recent years, HSBC has made a major commitment to emerging markets, especially China and Mexico,
but also Brazil, India, and smaller developing economies.
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Part 4 Organizational Behavior and Human Resource Management
The World?s Local Bank
HSBC holding company set up a group policy in 1991 that
established 11 quasi-independent banks, each a separate
subsidiary with its own balance sheet.4 The head office
provided essential functions, such as strategic planning,
human resource management, and legal, administrative,
and financial planning and control. This setup promoted
prompter decision making at a local level and greater
accountability.5 HSBC portrays itself as ?the world?s local
bank,? recognizing the importance of globalization, flexibility, and local responsiveness.
As of 1998, HSBC established distinct customer groups
or lines of business that would overlay existing geographic
designations. This encouraged maximizing the benefits of
its universal scope, such as sharing best practices of product
development, management, and marketing. The geographic
perspective was melded closely with a customer group perspective, demanding both global and local thinking.
Traditionally, HSBC?s culture has embraced caution,
thrift, discipline, and risk avoidance. The bank looked at
long-term survival and considered markets in 50-year
views. Thrift manifested through the company, and even
the chairman flew economy class on flights less than three
hours.6 In 2005, incoming Chairman Stephen Green recognized the company?s rule ?to follow the letter and spirit
of regulations? and signaled his intention to protect the
bank?s reputation as it extends into consumer finance.7
Bond?s Rein and Move to ?HSBC?
Sir John Bond became CEO of HSBC in 1993, and chairman in 1998, bringing with him a hands-on entrepreneurial
style and exceptionally ambitious goals.8 He pursued acquisitions beyond HSBC?s traditional core, in pursuit of such
attractive financial segments as wealth management, investment banking, online retail financing, and consumer finance.
Bond considered shareholder value and economic profit in
deciding when acquisition premiums were in order, which
was in contrast to his predecessor?s ?three times book value?
rule.9 By 2001, Bond had authorized investments of over
$21 billion on acquisitions and new ventures.10
In 1998, Bond adopted the HSBC brand, and preserved
?The Hongkong & Shanghai Banking Corp.? name only for
its bank based in Hong Kong. HSBC branded its subsidiary
banks across the world with the parent bank?s acronym and
greatly expanded marketing efforts in 2000. In March 2002,
HSBC?s marketing message became ?the world?s local
bank,? which would help the brand become one of the
world?s top 50 most recognizable brands by 2003.11
In 2003, a $15.5 billion acquisition of Household International,12 the U.S. consumer lending business, became
the basis of HSBC?s Consumer Finance customer group.
Household utilized a unique system to forecast the likelihood that customers would repay debt, which used a
13-year database of consumer behavior. Household was
controversial and yet presented great opportunity. HSBC
desired to leverage this new skill in developing countries,
yet was unable to find all demographic and credit data
that Household normally relies on in the United States.
HSBC particularly looked to extend the Household model
into China and Mexico. However, the subprime mortgage
crisis hit the United States hard in 2007?2008 and had a
major impact on Household operations.
Six years after acquiring Household International,
HSBC effectively conceded that the deal was a mistake.
In March 2009 HSBC made public that it would close all
800 remaining branches of HSBC Finance Corp., the former Household Financial, resulting in 6,100 job cuts
nationwide. HSBC had already closed about 600 HFC and
Beneficial branches over the past two years.13 ?High levels of delinquency, given rising levels of unemployment,
mean that the business model for subprime home equity
refinancing is not sustainable,? said Niall Booker, HSBC
Finance chief executive during one of the media conferences.14 HSBC Finance said it would retain its credit card
business, and HSBC Holdings would keep its New York?
based HSBC Bank USA. HSBC officials also said that
the bank would continue to help mortgage customers with
loan repayments and foreclosure-prevention efforts.
The HSBC Finance (Household) executives pointed out
that it was hard to predict in 2003 that global financial crisis and the recession would occur. When the crisis hit hard
in 2008, the subprime mortgage market led to more than
$1.15 trillion of credit losses and writedowns at financial
institutions and government bailouts of companies ranging
from Citigroup Inc. to Royal Bank of Scotland Group Plc
of Edinburgh as noted by Bloomberg analysts. HSBC was
one of the first banks to acknowledge the possibility of
upcoming subprime mortgage problems, and set aside about
$53 billion to cover bad loans during the past three years.15
Economic Crisis and Financial Performance
The consequences of global economic crisis were severe
for the world?s banking system, prompting thousands of
banks to seek financial assistance from their local government. Many banks were burdened with highly overvalued
?bad loans? and suffered huge losses. Unlike many global
players, HSBC reported a profit for 2008 but it still took
a hit: Its pretax profit of $9.3 billion was 62 percent below
the $24.2 billion reported for 2007. The bank also cut its
dividend for the full year by 29 percent to 64 cents per
share. The slide in profits was largely the result of a goodwill impairment charge of $10.6 billion in the United
States.16 In spite of the bitter loss in North America, HSBC
performed much better in the other parts of the world. For
example, in Europe, pretax profit rose to $10.9 billion
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In-Depth Integrative Case 4.1 HSBC in China
from $8.6 billion. Profit from Hong Kong fell to $5.46 billion from $7.34 billion, while earnings from the rest of
Asia rose to $6.47 billion from $6.01 billion.17 HSBC is
still considered one of the world?s strongest banks by some
measures. The bank?s market value of $68.2 billion in
early 2009 ranked it behind only Industrial & Commercial
Bank of China Ltd., China Construction Bank Corp., Bank
of China Ltd., and JPMorgan Chase & Co.18
To the credit of HSBC management, the bank avoided
taking U.K. government ?bailout? funding unlike other
big banks. Instead, HSBC made plans to raise ?12.5 billion ($17.9 billion) in capital to prepare for further deterioration of the global economy.19 Also, responding to
growing public anger over the scale of bonuses paid to
many senior bankers, HSBC said no performance share
awards would be made for 2008 and that no executive
director would receive a cash bonus.20
Managing for Growth
HSBC?s strategic plan, ?Managing for Growth,? was
launched in the fall of 2003. This strategy builds on HSBC?s
global, international scope and seeks to grow by focusing
on the key customer groups of personal financial services;
consumer finance; commercial banking; corporate, investment banking, and markets; and private banking.21 ?Managing for Growth? is intended to be ?evolutionary, not revolutionary,? and aims to vault HSBC to the world?s leading
financial services company. HSBC seeks to grow earnings
over the long term, using its peers as a benchmark. It also
plans to invest in delivery platforms, technology, its people,
and brand name to prop up the future value of HSBC?s stock
market rating and total shareholder return. HSBC retains its
core values of communication, long-term focus, ethical relationships, teamwork, prudence, creativity, high standards,
ambition, customer-focused marketing, and corporate social
responsibility, all with an international outlook.22
As part of the growth strategy, HSBC identified eight strategic pillars:
Brand: continue to establish HSBC and its hexagon symbol as one of the top global brands for customer experience and corporate social responsibility.
Personal Financial Services: drive growth in key markets
and through appropriate channels; emerging markets are
essential markets with a burgeoning demand.
Consumer Finance: offer both a wider product range and
penetrate new markets, such as the emerging country
Commercial Banking: leverage HSBC?s international
reach through effective relationship management and
improved product offerings.
Corporate, Investment Banking, and Markets: accelerate
growth by enhancing capital markets and advisory
Private Banking: a focus on serving the highest value
People: draw in, develop and motivate HSBC?s people.
TSR: fulfill HSBC?s TSR target by achieving strong competitive performances in earnings per share growth and
Focus on Emerging Markets
In 2000, HSBC had half of its assets in developing countries.24 Most earnings, however, stemmed from mature markets, such as Hong Kong and Britain. All but 5 percent of
group profits came from five economies, while India and
Latin America each added only 1 percent to group profit.25
In 2005 incoming Chairman Stephen Green underlined
HSBC?s focus on the potential of emerging markets: ?There
is a general rule of thumb that says the emerging markets
grow faster than mature markets as economies and the
financial services sector grows faster than the real economy
in emerging markets because you are starting from very
low penetration of financial services in general.?26
Specifically in consumer finance, Green recognized the
importance of importing HSBC?s model into markets
starved for credit cards and loans, saying, ?Any analysis
of the demographics of emerging markets tells you that
consumer finance is going to be an important part, and a
rapidly growing part, of the financial-services spectrum
for a long time to come.?27
The Draw of Emerging Markets
Recognition of the impact of emerging markets is an
essential thread running throughout the elements of the
?Managing for Growth? strategy. Since 2000, many of
HSBC?s emerging markets? profits have increased dramatically (see Exhibit 2). Across the board, HSBC?s pretax
profits in emerging markets have increased from $905 million in 2000 to $3,439 million in 2005. In January 2010,
HSBC Global Asset Management reported that despite
high volatility throughout 2009, Asian and emerging market equities gained around 100 percent. The Brazilian
equity market was the best performer with a return of over
140 percent in 2009. In contrast, major markets such as
the U.S., Europe, and Japan were all up between 39 and
82 percent for the same period. Meanwhile, HSBC Global
Asset Management expects the pace of economic growth
in global emerging markets to be faster than that of developed markets over the medium to long term.28
China?s Banking Sector
China?s Banking Sector Pre-WTO
Before the WTO accession negotiations, China?s banking
industry operated as a cog in China?s centrally planned
economy. The state commercial banks performed a social
function, during China?s post-Mao drive to industrialize,
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Part 4 Organizational Behavior and Human Resource Management
HSBC Emerging Markets
Pretax Profits 2005 vs. 2004, 2000
Pretax Profits 2005 vs. 2006
instead of operating for economic return. Consequently,
the banks adhered to directed lending practices from the
government and in turn created some of China?s most
successful enterprises, but also supported thousands of
other inefficient and unprofitable state-owned enterprises.
This practice left state commercial banks with massive
amounts of debt that were largely unrecoverable and
hordes of nonperforming loans.
In addition to widespread losses, instability ensued in
the banking system overall. To make matters worse, corruption and mismanagement ran rampant throughout the
sector, sapping away consumer and investor confidence.
Following 15 years of negotiation and two decades of
economic reform in China, December 11, 2001, marked
China?s accession to the World Trade Organization. The
main objective of the WTO agreement was to open China?s
market up to foreign competition. The deadline for complete implementation was December 11, 2006.
China made a number of implementations immediately.
To begin with, foreign banks were allowed to conduct foreign currency business without any market access restrictions. Also, foreign banks were allowed to conduct local
currency business with foreign-invested enterprises and
foreign individuals (with geographic restrictions). Within
two years of accession, China agreed to allow foreign
banks to conduct domestic currency business with Chinese
enterprises (geographic restrictions). Within five years, foreign banks could conduct domestic currency business with
Chinese individuals (no geographic restrictions); and foreign banks were able to provide financial leasing services
at the same time as Chinese banks. Under the WTO investment provisions, China agreed to allow foreign ownership
of Chinese banks (up to 25 percent), with no single foreign
investor permitted to own more than 20 percent.
?Bank reform has become the most crucial task for the
government in pushing forward economic reforms,? said
Yi Xianrong, an economist at the Chinese Academy of
Social Sciences in Beijing.29 Indeed, bank reform is critical to stabilizing and advancing the Chinese economy.
China has undertaken a number of domestic reforms in
order to overhaul the banking industry. China has engaged
in interest rate liberalization by removing certain interest
rate and price controls. Instead of being pegged to the
U.S. dollar, as it once was, China?s currency exchange
rate is now pegge...
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