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This question is central to my case study of HSBC. A bank’s capital ratio is a strong indicator of failure (Federal Reserve Bank of New York Economic Policy Review July 2000). The fact that HSBC has the strongest Tier 1 ratios of any of the big banks (Forbes April 2008) is key to the fact that it has stayed strong when other banks have been unsuccessful. The HSBC Group is named after its founding member, The Hong Kong and Shanghai Banking Corporation Limited, which was established in 1865 to finance the growing trade between Europe, India and China. The inspiration behind the founding of the bank was Thomas Sutherland, a Scot who was then working for the Peninsular and Oriental Steam Navigation Company. He realized that there was considerable demand for local banking facilities in Hong Kong and on the China coast and helped establish the bank which opened in Hong Kong in March 1865 and in Shanghai a month later. Soon after its formation the bank opened agencies and branches around the world. Although that network reached as far as Europe and North America, the emphasis was on building up representation in China and the rest of the Asia-Pacific region. HSBC was a pioneer of modern banking practices in a number of countries (Wikipedia, HSBC). HSBC’s core businesses are divided into four categories – Personal Financial Services (including consumer finance), Commercial Banking, Global Banking and Markets (formerly Corporate, Investment Banking and Markets), and Private Banking. Personal Financial Services provides more than 100 million customers world-wide with a full range of personal financial services, including current and savings accounts, mortgage loans, car financing, insurance, credit cards, loans, pensions and investments. Commercial Banking provides financial services to small, medium sized and middle-market enterprises. The group has almost 2.5 million of such customers including sole proprietorships, partnerships, clubs, and associations incorporated businesses and publicly quoted companies. Global Banking and Markets provides customized financial services to corporate and institutional clients. Business lines comprise Global Banking, Global Markets, Global Asset Management, Global Research and Principal Investments. This division was formerly known as Corporate, Investment Banking and Markets. Private Banking is the marketing name for the private banking 1
business conducted by the principal private banking subsidiaries of the HSBC Group worldwide. HSBC Private Bank, together with HSBC Guyerzeller and the private banking activities of HSBC Trikaus & Burkhardt, known collectively as Group Private Banking, provides services to high net worth individuals and their families through 93 locations in some 42 countries and territories in Europe, the Asia Pacific region, the Americas, the Middle East and Africa. HSBC Premier is the groups' premium financial services product. The product requires deposits of at least $100,000 or a mortgage of at least $500,000. Customers have a dedicated relationship manager, global 24 hour access to call centers and preferential rates. HSBC Bank International is the offshore banking arm of HSBC Group; it focuses on providing offshore solutions to expatriates and migrants. It provides a full range of multi-currency personal banking services. HSBC net is a global service that caters to local business needs by offering specialized functionality ranging from payments to Cash Management to trade services features as well as foreign exchange and money markets trading for different regions of the world. HSBC Direct is an online direct banking operation that offers high interest savings accounts and no service charges or minimum account balance requirements. It was first launched in USA in 2005 and now is available in Canada, Taiwan and South Korea (Wikipedia, HSBC). HSBCs strategic initiatives involve maintaining a strong capital base and liquid balance sheet. Capital ratio as measured as the absolute amount of capital over the absolute level of risk. Tier 1 Capital is defined as common stock surplus, retained earnings and some perpetual preferred stock. It has the most conservative approach among banking circles. Remarkably, it has emerged least damaged from the recent American financial turmoil of all the big banks, and maintained involvement in Investment Banking. Investment banks help companies and governments raise money by issuing and selling securities in the capital markets as well as providing advice on trading such as mergers and acquisitions (Wikipedia, Investment Banking). HSBCs competitors are other big banks such as Bank of America, Citigroup, and investment banks such as JP Morgan. HSBC invested an estimated $1 billion into starting an investment banking business from scratch. But after three years the business still had not led to huge gains. Today it is ranked 16th among investment banking firms. JP Morgan is ranked number one. The bank has moved up only five places since 1998 but not become a leader in the business as it is in other businesses. HSBC has 2.7 million commercial
banking customers, putting it on roughly equal footing as Bank of America. But Bank of America’s customers are mostly domestic. HSBCs top three managers have all been with the bank for over 25 years. Although this has been criticized by some as insularity in the organizational structure of the bank it has worked for the bank and so cannot be held against it. HSBC has never hired an executive from outside to run the bank. It also operates in accordance with British corporate governance rules. The rules require strict division between Chief Operating Officer and Chairman. In 2005, Stephen Green was promoted from Chief Operating Officer to Chairman. Mr. Green took over the position from Sir. John Bond and his predecessor was Sir William Purves who had both worked at HSBC for over 30 years. The bank is regulators vary based on the country in which it operates. It is based in London, England but its current expansion is into emerging markets. HSBC has around 10,000 offices in 83 countries and territories. It has a staff of 330,000 employees worldwide (HSBC.com). It is 50% more profitable in emerging markets than in mature markets. Currently it is expanding internationally at a rapid pace. It has plans for Russia, Sub-Saharan Africa and South Korea. It is the first foreign bank to open a branch in rural China; it has 62 retail outlets there, up from 39 a year ago. In 2001 it made a buy into the Bank of Shanghai. In conclusion, HSBCs conservative approach to banking, staying focused on keeping its capital base strong and liquid balance sheet have prevented its failure. Today HSBC is the world’s most valuable Banking brand according to Bankers Magazine February 2008, the world’s largest company, and the world’s largest banking group according to Forbes April 2008. In 2007, it reduced its wholesale mortgage operation, and its earnings rose 13% last year. Its shares are down 10% in New York since the credit crisis began, while shares of rival Citigroup have slid 50% and those of the Swiss UBS 45%. Those price changes, plus net income disasters at Citi and UBS, explain why the number one slot on the Forbes Global 2000 has changed hands. Citi had it for the first four years of this survey. Now HSBC has it.
List of Sources: 1) Arturo Estrella, Sangkyun Park, and Stavros Peristiani; Capital Ratios as Predictors of Bank Failure; Federal Reserve Bank of New York Economic Policy Review July 2000 2) Parmy Olsen; Better Safe than Sorry; Forbes April 2008 3) Wikipedia; HSBC 4) Wikipedia; Investment Banking
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