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HSBC oversold risks of $35bn Asian spin-off, investor Ping An Insurance Group thinks: report

HSBC said a break would mean a potential long-term impact on the bank’s credit rating and tax bill.

Hong Kong/London:

HSBC exaggerated the risks of splitting its Asian unit when it rejected such a proposal from shareholder Ping An Insurance Group, a source familiar with the Chinese insurer’s thinking said, adding that the move could unlock up to at $35 billion in value.

HSBC, which derives the bulk of its sales and profits from Asia, came under pressure in April from Ping An, its largest shareholder, to explore options including listing its core business in Asia to raise the shareholder returns.

The detailed rebuttal as described by the source with knowledge of Ping An’s thinking represents the investor’s most detailed denial to date of HSBC’s strategy and signals Ping An’s intention to pursue the dispute.

Details of Ping An’s internal discussions come after HSBC on August 1 itself rejected the Chinese investor’s proposals while releasing its half-year results. Ping An has not publicly confirmed or commented on the proposed breakup.

HSBC said a breakup would mean a potential long-term impact on the bank’s credit rating, tax bill and operating costs, and pose immediate risks in the execution of any split or merger.

Ping An declined to comment, while an HSBC spokesperson said the bank had nothing to add to comments made by its executives last week.

While activist investors sometimes acquire a stake in a major bank and confront management over how it is run, it is unusual for a Chinese company such as Ping An, whose major shareholders include state-backed entities, to take such a proactive stance.

Ping An believes a spin-off would generate an additional $25 billion to $35 billion in market value and free up more than $8 billion in capital, the source said, citing an “external” analysis.

The source declined to be identified due to the sensitivity of the issue.

HSBC’s current market capitalization is approximately $133 billion.

Responding to HSBC’s argument that splitting off its Asian business will lead to global synergies, the source said HSBC would remain a major shareholder in the unit post-separation and the two parties could enter into cooperation agreements.

Ping An has an 8.3% stake in HSBC, worth about $11.4 billion, according to Refinitiv data.

HSBC shares rose 0.6% on Thursday, while the benchmark FTSE 100 index fell 0.26%. Shares of the British bank have fallen by around a quarter since Ping An announced on December 7, 2017 that it had acquired a stake of more than 5% in HSBC.

HSBC shares have plummeted since Ping An lifted its stake: https://fingfx.thomsonreuters.com/gfx/mkt/gdpzyomlwvw/HSBC shares.jpg


Asia is HSBC’s biggest profit center, with the region’s share of the lender’s profit rising to 69% in the first half, from 64% a year ago.

The row between HSBC and Ping An shows the challenges the British bank faces as it tries to navigate geopolitical tensions between the US, Britain and China amid criticism from Western lawmakers over the bank’s activities in Hong Kong.

HSBC chief executive Noel Quinn said on Aug. 1 that the bank’s dialogue with Ping An “has been purely around business issues”, without any political aspect.

The source said HSBC performed better than expected in the second quarter, but almost all of its revenue growth was dependent on “a staggered, short-lived and out of control cycle of rising interest rates”.

The bank’s underperformance has yet to be “fundamentally resolved” and it was in dire need of radical change, the source added.

Dual-listed HSBC reported pre-tax profit of $9.2 billion for the six months to June 30, up from $10.84 billion a year ago but beating the average estimate of 8.15 billion dollars from analysts compiled by the bank.

(Reporting by Selena Li in Hong Kong, Lawrence White in London and Anshuman Daga in Singapore; Writing by Sumeet Chatterjee; Editing by Kim Coghill, Kirsten Donovan)

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