HSBC Sticks With China as RBS, UBS Sell Investments

Jan. 16 (Bloomberg) -- HSBC Holdings Plc, the biggest investor in China among global banks, is sticking to its bet on the world’s fastest-growing major economy as rivals sell out and analysts say the lender may need fresh capital.

Established in 1865 in Shanghai, HSBC has more than $12 billion invested in Chinese financial companies, including Bank of Communications Ltd. and Ping An Insurance (Group) Co. The London-based company has kept its holdings, while Royal Bank of Scotland Group Plc and UBS AG sold shares of Chinese lenders in the past month.

HSBC’s commitment to China, where it owns more branches than any foreign bank, may pay off should the country’s economy skirt the recession roiling the U.S. and Europe. The strategy also puts pressure on Chief Executive Officer Michael Geoghegan to come up with cash to cover a funding shortfall that analysts at Morgan Stanley estimate to be as much as $30 billion.

“China has got to be the right place to be in the longer term,” said Julian Chillingworth, chief investment officer at London-based Rathbone Brothers Plc, which manages about $21 billion and holds HSBC shares. “In the next five years, HSBC’s business in China is going to grow.”

HSBC fell 7 percent in London trading yesterday to the lowest in almost a decade. The stock has dropped 14 percent since Jan. 13, when Morgan Stanley analysts, led by London-based Michael Helsby, said HSBC may need to sell shares and cut the dividend by 50 percent to shore up its balance sheet.

Goldman Sachs Group Inc. today downgraded HSBC to “sell” from “neutral,” citing the deepening U.S. economic slump.

China Ties

Among HSBC’s Chinese investments is a 19 percent stake in Bank of Communications, the nation’s fifth-largest. The holding was worth $6.7 billion at yesterday’s closing price, after BoCom dropped 44 percent in the past year. HSBC also owns 16.8 percent of Ping An, China’s second-biggest insurer; 8 percent of closely held Bank of Shanghai; and 49 percent of a fund-management venture with Shanxi Trust & Investment Corp. Ping An and Bank of Communications shares aren’t subject to lockup restrictions.

While 55-year-old Geoghegan faces pressure to raise funds, he may balk at eroding ties with China, where HSBC was the first bank to win approval to invest in a local lender. The company bought its stake in Bank of Shanghai in 2001.

“A presence in China is core to HSBC’s strategy,” said Sandy Chen, a London-based analyst at Panmure Gordon & Co., who recommends clients sell the stock. “Beginning to signal a pullback from China is directly opposite to market perceptions of what makes a safe haven.”

‘Long Haul’

HSBC reaffirmed its commitment to China on Jan. 8, when the company said there are no plans to reduce its holding in Shanghai-based Bank of Communications. HSBC made the statement after Hong Kong billionaire Li Ka-shing sold a $511 million stake in Beijing-based Bank of China Ltd.

David Hall, an HSBC spokesman in Hong Kong, declined to comment on the bank’s other Chinese assets.

HSBC has “a very long-term view of China and wants to be here for the long haul,” said Cameron Odgers, a Beijing-based analyst at China International Capital Corp.

Paring the Bank of Communications stake would probably damage HSBC’s business in China, said Bonnie Lai, a Hong Kong- based analyst at CCB International Securities Ltd. HSBC is awaiting government approval for a planned credit card joint venture with Bank of Communications, and also wants permission to raise its holding in the Chinese lender beyond the regulatory maximum of 20 percent.

“If they sell this time, the likelihood of approval will be smaller,” Lai said.

Banks Cash Out

HSBC and BoCom have close ties, said Zhu Kepeng, head of Bank of Communications’s board office. The banks’ chairmen have met twice a year since 2003, and senior executives from the companies get together monthly, he said. Bank of Communications Chairman Hu Huaibang has met with senior HSBC managers, including Chairman Stephen Green, three times since taking the job on Oct. 10, Zhu said.

HSBC, Royal Bank of Scotland, Bank of America Corp. of Charlotte, North Carolina, Zurich-based UBS and Goldman Sachs in New York were among foreign banks that spent a combined $22 billion between 2004 and 2006 to purchase stakes in Chinese lenders.

The overseas firms touted the strategic nature of their investments and pledged to work with their Chinese counterparts on everything from risk management to information technology systems.

As the deepening global financial crisis coincides with the end of so-called lockup periods for their holdings, some banks are cashing out. Edinburgh-based Royal Bank of Scotland sold its $2.37 billion stake in Bank of China on Jan. 13, two weeks after UBS divested all its shares. Bank of America sold $2.8 billion of shares in China Construction Bank Corp. on Jan. 7.

Sticking with BoCom may produce longer-term benefits for HSBC, said fund manager Leo Gao.

“HSBC’s commitment won’t go unnoticed by the Chinese government,” said Gao, who oversees the equivalent of $2.3 billion at APS Asset Management in Shanghai. “They would be rewarded big in the future.”