Lloyds might command the highest trading volume on the FTSE 100 but HSBC (LSE: HSBA) remains the largest bank by market cap. The core of its operations, however, go far beyond the shores of Ol’ Blighty.
Today, its Canary Wharf HQ casts an imposing shadow over London. But it started life as a far more humble outfit in Hong Kong in 1865. After branching out across Asia, it eventually incorporated in London in the 1990s and quickly became the largest bank in the UK.
Now, after 159 years of expansion into 62 countries worldwide, it plans to split its business between East and West.
Why was this decision made – and what does it mean for the UK economy and HSBC shareholders?
Reasons for the split
The decision to split the business was primarily driven by rising trade tensions between Asia and the West. It feels the new structure will simplify its geographical governance. However, it also noted the cost-cutting benefits of the move. It believes the restructuring will allow the two businesses to focus on their respective markets without the constraints of a single corporate structure.
“The new structure will result in a simpler, more dynamic and agile organisation as we focus on executing against our strategic priorities, which remain unchanged,” said recently appointed CEO Georges Elhedery, speaking to the BBC.
The eastern markets division will include the Asia-Pacific region and the Middle East, while western markets will cover the UK, continental Europe and the Americas.
Pros and cons
There’s a possibility the restructuring could lead to job losses in the UK, particularly in areas where HSBC has a significant presence. This could have a negative impact on local economies and the overall labour market. A smaller presence in the UK could reduce economic activity, as the bank is a major player in the financial services sector.
On a broader scale, this could impact consumer spending, investment and overall economic growth. Additionally, the decision to shift its focus away from the UK could be seen as a loss of prestige for the country’s financial sector. London has long been a global financial hub, and the presence of major international banks like HSBC has contributed to its reputation.
On the plus side, the split could unlock value for shareholders. It reduces exposure to global risk and challenging economic and regulatory environments.
An uncertain future
The implications of the split for the UK economy and its shareholders are complex and uncertain. While the move could provide opportunities for growth and value creation, it also carries risks, particularly in terms of job losses and potential economic impacts.
Following the news, the share price closed up 1% on Tuesday (22 October), bringing yearly gains above 8%. The bank maintains an attractive valuation, with a forward price-to-earnings (P/E) ratio is 7.2 and a 7.1% dividend yield.
As a shareholder, I’ll certainly be keeping a close eye on developments. New investors considering the stock should carefully assess the potential benefits and drawbacks before making any decisions.
