HSBC to privatise Hang Seng Bank in surprise bid for efficiency amid real estate loan woes.

HSBC Holdings announced a plan to privatise its Hang Seng Bank subsidiary, drawing the curtains on half a century of the unit’s publicly traded status in an unexpected move to simplify its structure amid worsening real estate loans in Hong Kong. The London-based bank would buy all outstanding Hang Seng Bank shares for HK$ 155 each in cash, or a premium of 30% over the stock’s Wednesday closing price of HK$ 119, according to a statement to the Hong Kong exchange on Thursday. The Hang Seng shares would be cancelled after the purchase, according to the plan.

“The benefit of HSBC as a 100% shareholder is it gives Hang Seng Bank even more flexibility to tout its capital and its ratios more efficiently under the aegis of HSBC”, the group’s CEO Georges Elhedery said during a Thursday media round table in Hong Kong. “The plan is a long-term strategic investment for growth, which we see as value-accretive for all shareholders in the long term”.

Hang Seng Bank, which traces its establishment to Hang Seng Ngan Ho in 1933, will retain its brand, its branch network, its 11-member board, its license under Hong Kong’s banking ordinance and its “proposition” to customers, Elhedery said. Hang Seng Bank was sold to HSBC in 1965 after a bank run wiped out almost a quarter of its reserves. Over time, HSBC increased its ownership in Hang Seng Bank to almost 63%, from the initial 51% controlling stake. Hang Seng Bank was listed on the Hong Kong stock exchange in 1972.

The privatisation would cost HSBC about HK$ 106.16 billion (US$13.64 billion) in cash payout, according to the plan. Hang Seng Bank’s shareholders would still be entitled to their third interim dividend, expected on October 21. Hang Seng Bank’s shares ended Thursday’s trading at HK$ 149.70, after jumping by as much as 41% in their biggest intraday surge on record. HSBC’s shares fell 5.7% to HK$ 104.30, regaining from their 7.3% intraday loss.

“Parent-subsidiary double listings are inherently problematic in terms of governance, and in this sense it’s a positive and long-overdue move”, said Morningstar’s senior equity analyst Michael Makdad. “HSBC will need to pay a premium, so it would be unlikely to be positive in terms of fair-value estimate for HSBC, but there should be some opportunities for cost synergies”.

Change had been abreast at Hang Seng Bank before, and after the July 30 announcement of a 30% plunge in its interim profit; The bank carried out a surprise lay-off in May, shedding a fifth of staff in some departments, while the hardest-hit teams were cut in half, according to sources familiar with the plan. Hong Kong’s property prices had plunged by 30% from their peak in 2021. The slump in residential and commercial property was felt by Hang Seng Bank, the largest among the city’s locally incorporated lenders.

Impaired real estate loans soared 85% from last year to HK$ 25 billion as of June, forcing Hang Seng Bank to make extra provisions to shield its loan book from the rising bad loans that had reached 6.69% of total lending at the end of June. The provisions weighed on the bank’s first-half profit, which fell to HK$6.88 billion. Still, the move to privatise one of Hong Kong’s most fabled financial institutions, whose name is on the city’s benchmark stock index and a private university, took the market by surprise.

Elhedery said the privatisation had “nothing to do” with the bad debt. “We see the recent challenges in Hong Kong as credit cyclical challenges, and we have started to see stabilisation, including normalisation, in certain segments of commercial real estate. Measures taken by the government should change the supply-demand dynamics and improve the situation. So, these will be short-term cyclical credit considerations”.

Still, the group reshuffled its leadership last month, transferring HSBC’s Hong Kong head Luanne Lim to run the subsidiary, while Hang Seng Bank’s CEO Diana Cesar moved back to the parent bank as vice-chairwoman of Hong Kong. Maggie Ng took over Lim’s role as head of HSBC’s Hong Kong CEO, adding to her existing duties as head of retail banking and wealth for the local unit.

“Hang Seng Bank is financially a very strong bank. It does have a higher debt, but let’s not lose sight of its very strong capitalisation at about 21% of the so-called common equity Tier 1 (CET1) ratio, as well as a very strong liquidity position. So, Hang Seng Bank can sustain some of the credit challenges in the short term”, Elhedery said.

HSBC said that by privatising Hang Seng Bank, it could greatly simplify the structure of its Hong Kong operations, increase its investments in Hang Seng Bank, leverage both brands while simplifying and streamlining decision-making processes to be more agile.

The group will “continue to invest in head count in Hong Kong”, Elhedery said. “Growth opportunities are unique across both brands, inherent to Hong Kong being a major international financial centre that may become the largest cross-border wealth hub worldwide”, he said. “We can achieve synergies over time, through redeployment, training, redeployment in growth opportunities and natural attrition”.

HSBC Asia-Pacific said it intended to use the group’s internal resources to finance the privatisation.

“The HSBC Group has conveyed to us its commitment to further invest in Hong Kong and the region, and that the current initiative is aimed at streamlining its organisational structure and resources to enhance its operational efficiency and performance”, Financial Secretary Paul Chan Mo-po said in response to the Post’s inquiry.

BofA Securities and Goldman Sachs are acting as joint financial advisers for HSBC Holdings and HSBC Asia-Pacific. The Hong Kong Monetary Authority said it was aware of the proposed privatisation and “has been in communication with the banks concerned regarding the relevant regulatory approvals in accordance with established mechanisms and procedures”, according to a statement.

Team Maverick