Over the past few years, Ping An has operated behind the scenes in attempting to persuade HSBC to spin off its businesses in Asia. The Chinese insurer seems to be changing tack.
Until now, Ping An has focused on private talks with the bank over a structural revamp, in the hope that unshackling Asia from the rest of the global group will unlock higher returns. The bank’s largest shareholder made a rare public comment last November to back its case.
The polite dialogue took a turn last week when both parties locked horns in a public back-and-forth over whether HSBC’s Asia operations should be partially divested and listed in Hong Kong.
The dispute will play out in the public arena again at HSBC’s annual meeting next week.
Ping An, which has an 8 per cent stake in the bank, is planning to support resolutions put forward by Hong Kong retail investors, calling on the lender to commit to a regular review of its structure and an annual dividend of at least 51 cents per share. HSBC’s board, as well as shareholder advisers Glass Lewis and Institutional Shareholder Services, have urged investors to vote against the proposals. Unless Ping An is able to garner support for a structural overhaul from other significant shareholders, its chances of success are limited.
But a failure to win enough votes will not spell the end of Ping An’s pursuit of structural change, despite the bank’s hopes that the meeting will bring down the curtain on the saga.
Far from it. If last week is anything to go by, Ping An is more likely to escalate its demands in the form of public statements. The annual meeting could mark the start of a new chapter in which a more vocal Ping An emerges.
At the heart of the issue is what Ping An believes is HSBC’s underperformance and the decline in dividend payouts — anathema to an insurer reliant upon a steady income.
The Bank of England’s decision to freeze dividends during the pandemic in order to shore up the UK’s banking system probably seemed alien to Shenzhen-based Ping An and HSBC’s loyal following of Hong Kong shareholders, many of whom are retirees dependent on the payouts.
Ping An also points to the bank’s return on equity of 9.9 per cent, which it says has lagged behind the 12.5 per cent delivered by its global peers.
In its defence, HSBC has made clear it is targeting a return above 12 per cent this year. Dividends are also on the rise, set at 32 cents a share for 2022, up from 25 cents the previous year. The bank added that it was “confident” dividends would return to pre-pandemic levels. The last time HSBC paid 51 cents a share was for 2018.
Still, Ping An seems intent on a structural revamp as the solution. It has proposed that HSBC undertake a partial spin-off while remaining a controlling shareholder. This would see HSBC Asia listed in Hong Kong under the watch of the local regulator, the Hong Kong Monetary Authority.
A structural overhaul could help resolve what Ping An sees as a misallocation of capital. It argues that superior returns from the Asia businesses subsidise the rest of the group, which takes up more than half of the overall risk-weighted assets.
The idea has been dismissed by HSBC as value destructive. The bank evaluated “structural options” for its Asia businesses last year, concluding that costs and execution risks would damage revenues. Ultimately, it believes the whole is greater than the sum of its parts.
It seems this outright rejection, without the offer of an alternative solution, has irked — and possibly even offended — the Chinese insurer. Even though both sides have discussed the issue in more than 20 meetings, the sense is that Ping An feels its suggestions have been ignored. Michael Huang, Ping An Asset Management’s chair, said as much last week, adding that HSBC “should at least respect their shareholders”.
Perhaps HSBC could avoid an escalation of the argument should returns consistently improve and Ping An’s annual dividend income once again reach $1bn. HSBC has benefited from rising interest rates with its vast $1.3tn worth of customer deposits. But even this tailwind might be temporary.
If Ping An is insistent upon structural reform of some sort to shift more capital to Asia, the chances are there will be a protracted battle that stretches far beyond HSBC’s annual meeting. And it will not be behind closed doors.