HSBC (LSE: HSBA) (NYSE: HSBC.US) is in the process of selling off non-core and low-return assets in an attempt to improve the quality and predictability of its earnings. Further, the bank is looking to reduce its exposure to risky assets, as well as boosting its capital cushion.
The banking giant’s latest disposal, announced just a few days ago, is the sale of 400,000 British pensions.
Sold off but still able to profit
HSBC has sold these pension to Admin Re, a subsidiary of Zurich-based international reinsurance giant Swiss Re. The assets are a mix of both corporate and individual pensions with a total value of around £4.2bn.
HSBC will be able to use the cash received from the deal to bolster its capital cushion. Shifting the pensions off the balance sheet will also reduce the bank’s liabilities.
However, the day-to-day management of the pension assets will still be the responsibility of HSBC Global Asset Management. So, HSBC has managed to shift these assets off its balance sheet but will still receive an income for managing them: a win-win situation for HSBC and a shrewd business decision by management.
Actually, this deal should allow HSBC to improve its return on equity as well. Return on equity is a key metric used to measure banking profitability. For example, as the bank has disposed of the pension liabilities, but is still generating an income from management, HSBC is using less capital to produce more income — great news for shareholders.
Waiting for approval
Still, this deal is not signed and sealed just yet. HSBC is waiting for regulatory and court approval before the transfer can go ahead.
Nevertheless, an agreement between the two parties means that any gains or losses booked on the pension assets between now and the date of deal completion, will be transferred to Swiss Re. Of course, HSBC will still receive its management fee for the funds.
Essentially, the bank has already shifted this risk off its balance sheet and the deal is expected to be finalised during the second half of 2015.
While the disposal of these assets is likely to impact revenue, HSBC’s balance sheet should benefit and the company will continue to profit from the management of the funds.
