Homecoming Of The Century

You could have written a wonderful book on the history of HSBC. How it got its start in Shanghai and then HK, then shooed out of China, then in HK for a while, got scared of 1997, shifted HQ to London, pissed off Beijing even more. Nurtured ties gradually over the last ten year, finally in Beijing's good books, and now planning a Shanghai listing. Its gotta be the homecoming of the century (as it started some 144 years ago in Shanghai and HK) for this storied Asian banking giant. Accepted in Asia as the strongest and most reliable, its brand equity is unparalleled in Asia. Has slowly made its mark in global markets but Asia is still its base.

China accounts for 8% of its business. Once it is listed in Shanghai, you can expect more approvals for HSBC to open more branches. The name still evokes a strong premium to most Chinese citizens. This could very well be the re-transformation for HSBC. Now, maybe they can truly revert to their original name and call themselves the Hongkong & Shanghai Bank.

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Aug. 4 (Bloomberg) -- HSBC Holdings Plc, vying to be the first foreign company to sell shares in Shanghai, hired China International Capital Corp. and Citic Securities Co. to advise on an offering, two people with knowledge of the matter said. Europe’s biggest bank by value may raise $5 billion in the second half of 2010, one of the people said, declining to be identified because talks are private. HSBC’s Hong Kong-based spokesman David Hall said advisers have been chosen, without elaborating.

A share sale may help HSBC, founded in Hong Kong and Shanghai 144 years ago, increase yuan loans and expand what is already the biggest network of any foreign bank in China. Companies have raised 56 billion yuan ($8.2 billion) in Shanghai and Shenzhen since a nine-month moratorium on IPOs ended last month.

“Raising yuan in China will help HSBC fund expansion in the loans and credit card markets faster,” said Tat Auyeung, who helps manage $400 million at Apex Capital Management in Hong Kong. “The bank can also take advantage of the higher multiples in China to raise cheap capital.”

Shares in Shanghai typically trade at a premium to those on the Hong Kong stock exchange. The Shanghai Composite Index, which includes 897 Chinese companies listed in the city, is trading at an average of 37.7 times earnings, while the Hang Seng China Enterprises Index, which tracks 43 Hong Kong-listed Chinese shares, is at 19 times.

Valuations

Shares of China Petroleum & Chemical Corp., the nation’s largest oil refiner, are valued at 18 times in Hong Kong and at a multiple of 44.8 times in Shanghai. Everbright Securities Co. said yesterday it plans to sell shares at 19 yuan to 21.08 yuan apiece, valuing the brokerage at 59 times 2008 earnings.

The Shanghai Composite Index’s 91 percent gain this year compares with a 65 percent plunge in 2008, bolstering confidence that the equity market can withstand added supply of stock. The five companies that went public in China this year jumped an average 112 percent on their first trading day. All sold shares at the top end of the ranges they marketed to investors. China’s investors opened 566,937 stock trading accounts in the week through July 22, the most since the period ended Jan. 18, 2008, according to data from the country’s clearing house. A total of 108,932 new mutual fund accounts were opened, the most since the five days ended Feb. 22, 2008, the data showed.

Overseas Companies

HSBC is not alone in tapping mainland investors. Standard Chartered Plc, the U.K. bank that gets almost all of its profit from emerging markets, said in June it plans to raise as much as 3.5 billion yuan from selling yuan-denominated bonds on the nation’s interbank market.Coca-Cola, GE and Walmart are among U.S. companies that may seek to list on China’s stock exchanges, UBS AG said in a note to clients in June.

China Expansion

HSBC has said it wants to list in China as soon as regulations permit, adding to listings in Hong Kong and London. Selling shares to Chinese investors may help London-based HSBC increase its profile in the world’s fastest-growing major economy. The bank targets 100 outlets in China by year-end, HSBC Chairman Stephen Green said yesterday. It has 87 now, Asia- Pacific Chief Executive Officer Sandy Flockhart said in an interview in Hong Kong today. HSBC yesterday posted an unexpected first-half profit of $3.35 billion as earnings at its securities unit more than doubled. Asia accounted for 52 percent of earnings.

Margins

The proposed mainland listing isn’t aimed at bolstering capital as HSBC already raised $17.8 billion in a rights offering to shore up capital in April, one of the people said. HSBC has seen “significant” pressure on loan margins in the nation as interest rates fall and domestic rivals boost lending, Flockhart said today. Banks in China extended a record $1.1 trillion of loans in the first half as the government encouraged them to support its economic stimulus. The lending spree by domestic banks has added to pressure on loan margins, said Flockhart.

Falling interest rates in China have narrowed the difference between what HSBC can charge for loans in the nation and what it pays on deposits, hurting profitability, Flockhart said. The one-year deposit rate has fallen by 1.89 percentage points from last year’s peak, while the lending rate has declined by 2.16 percentage points. China accounted for about 8 percent of HSBC’s overall revenue in the first half after certain adjustments, he added.

p/s photo: Deborah Priya