🛩 HSBC Looks To Exit Canada

This is The Level Ups. Modern business news for the future business leader (in plain-Jane English).

Today:

• HSBC reviews leaving Canada.

• The British bank is facing pressure from its largest shareholder, Chinese insurance company Ping An.

• How likely is it to happen?

• Review of the latest U.S CPI numbers.

Let’s get into it.

Estimated reading time: 3 minutes & 16 seconds.

HSBC Reviews Leaving Canada:

In unexpected news, HSBC explores selling their Canada unit.

• It’s currently the 7th largest bank in Canada by assets.

• Most of their operations are in British Columbia after purchasing the Bank of British Columbia in 1986 (came with 41 branches).

• Also the leader in banking for Canadian immigrants with its newcomer's program.

• The British lender has approached JPMorgan to help source buyers.

This may feel random, but the numbers support it.

According to last year's annual report, Canada accounted for about 4% of HSBC’s pretax profit and 3% of its global customer accounts.

But, Canada is third largest contributor to commercial banking profits ($490M last year). Good, but not a make-or-break amount in HSBC’s big picture.

These commercial profits may demand a premium price. More on this later.

Where did the ideal to sell even come from?

Serious Pressure:

Chinese insurer Ping An Insurance Group is HSBC’s largest shareholder.

They’re pressuring the lender to ramp up returns to shareholders.

This potential sale is to satisfy Ping An’s demands. It’s one of many steps taken until now.

Here’s a summary.

• Sold full-service investment advisory business for $206 million in cash to National Bank in 2011.

• Announced reducing costs, streamlining operations, and cutting costs in April as part of a “transformation plan.”

• (Mostly) exited US retail banking in February and wants to do the same in France.

• Launched HSBC Pinnacle - aimed at ultra-high net worth individuals in China.

That last move is part of their new strategy focused on China, HSBC’s most profitable region.

Ping An wants to split HSBC’s less profitable units from the main unit.

Selling the Canadian business is to avoid a potential split.

Why The Pressure?

The short version of a long story: times are tough in China.

• Ongoing real estate crisis leaving doubts about growth at home.

• Covid Zero policy impacts all parts of their economy.

• Investors are leaving China amid this uncertainty.

More here.

Pressure in one country is overflowing into another.

Don’t be surprised if other western companies with majority Chinese shareholders make similar moves.

Is A Sale Likely?

No, it’s probably not going to happen. Not in this market.

While it’s true that HSBC’s commercial banking success may demand a premium price, commercial markets typically have a delay catching up to market conditions.

Businesses (usually) can’t get out of a locked-in lease until it expires or they go bankrupt. As leases expire, companies may not renew. Many companies react to their earnings (or lack thereof) weeks after their official reports.

Remember, we’re in a recession. People are typically short on funds in times like this. Can’t buy much from these businesses when short on cash, can they? That’s the delay, but things will catch up sooner than later in this market.

Sure, commercial leases and land loans are a thing, but many offices are going remote to save money anyway. Not looking so hot now.

Plus, everyone knows HSBC is desperate. It has to sell, or the big shareholder will make them split. Not many can afford that price point, and a Chinese company can’t buy it because they’ll get slapped with regulations.

Even if the sale might look okay right now, that doesn’t mean someone will come through.

You can Google the price of your car and like what you see. Doesn’t mean you’ll sell it. Even harder to get that price when buyers know you’re desperate.

Curious to see how this plays out.

I’m going to say it again:

Don’t be surprised if other companies with majority Chinese shareholders look at making the same move.

CPI Numbers Are Out:

They’re pretty ugly.

The average price of goods and services in September is up 8.2% YoY compared to the same time last year.

I published how this gets measured if you want more details.

That’s the average. It’s not an even spread.

• Food at home (groceries): +13% (eggs are +30%).

• Gasoline: +18.2%

• Shelter: +6.6%

• The Level Ups: Still free (just saying)

Now we’re all wondering if this will get better or worse.

Major events will create clarity soon. Pay attention to these dates:

• October 15th → 30th. Companies will announce earnings from their end of September quarter.

• November 2nd. The fed meets again and (may) announce another rate hike.

• November 8th. Midterm elections in the U.S.

Another factor most missed: OPEC+ announced oil production cuts to stabilize prices. It’s likely to make filling up your tank more expensive in the short term.

Buckle up. All signs point to a rough ride ahead. If you haven’t made your budgets expecting higher rates, now’s the time (just in case).

Thanks for reading!

See you on Monday,

Darwin