It’s a testament to the size and heritage of HSBC (LSE: HSBA) that the news that it was appointing a new chairman of the board garnered front page headlines in the likes of Bloomberg and the Financial Times. But does this mean anything for investors?
In this case, the answer is a resounding ‘yes’.
First off, incoming chair Mark Tucker has built his career in Asia, with successful spells at insurance giants Prudential (LSE: PRU) and Hong Kong-based AIA. In this regard, his appointment suggests that the board intends to continue the strategy of outgoing CEO Stuart Gulliver and re-orient the bank back towards its core region, Asia.
Gulliver’s plan has been to cut $290bn in risk-weighted assets from under-performing regions and redeploy the bulk of the freed up cash to Asia. This makes complete sense, as the region provided all of the group’s pre-tax profits in 2016, is where it has competitive advantage over competitors, and is set to benefit from very favourable economic and demographic trends.
Another important detail that shouldn’t be skimmed over is that Tucker is the bank’s first chairman found from outside the bank. To me this signifies that the board is looking for a fresh set of eyes, one thatwon’t be afraid to get rid of operations that the bank would be better off without. And he will have plenty of targets, as the bank is looking to cut $6bn in annual operating expenses.
Before he decides to take the axe to certain operations Tucker will first have to lead the search for a new CEO. With Gulliver intent on stepping down by 2018, this will be a critical search given the headwinds all banks are facing as regulatory costs rise, global economic growth remains anemic and interest rates stay close to rock bottom.
HSBC is moving in the right direction, but there is still plenty of work to do, as evidenced by the bank’s miserable 0.8% return on equity in 2016. Tucker and his new CEO will have their work cut out for them.
The benefits to not being a bank
In better shape is Tucker’s old firm, Prudential. Like HSBC, the insurance giant is pinning its future growth on Asia. In H1 2016 the insurer made a full 33% of its operating profits from Asian operations. This percentage will only continue to grow as the region’s increasingly wealthy middle class consumers turn to the Pru for insurance and asset management.
In the same period, profits from Asia as a whole rose 17% on a constant currency basis, as a full 7 of the 11 countries it operates in posted double-digit profit growth. A particular bright spot was Hong Kong — the country’s operations grew profits 32% year-on-year, despite headwinds in the mainland Chinese economy.
And unlike HSBC, Prudential has the benefit of non-Asian operations that are more than pulling their weight. In H1 its US business recorded £887m in operating profits and the UK business posted £436m. These countries are unlikely to provide as much growth as Asia over the long term, but they’re highly profitable and relatively stable. With its shares trading at an attractive 14 times forward earnings while offering high growth prospects and a solid 2.4% yielding dividend I think Prudential is a great option for investors looking to up their exposure to Asia.
