HSBC Holdings plc (HSBA) Ordinary USD0.50

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The $13.6bn proposal represents around a 30% premium to yesterday’s closing price for Hang Seng Bank, which currently trades on the Hong Kong Stock Exchange.

HSBC already has majority ownership and operating control over the bank, and the proposed deal values the entire entity at around $37.4bn.

The deal will be funded with existing capital, with buybacks put on hold for three quarters post-completion to help bring capital back to target levels. There is no planned change to the dividend policy.

The proposal will be subject to usual regulatory and shareholder approvals.

The shares fell 6.1% in early trading.

Our view

HSBC’s plan to fully acquire Hang Seng Bank has sparked concern over capital allocation. Buybacks would give a more immediate boost to earnings, and it adds exposure to Hang Seng’s bad debts. Management argues that this is a depressed asset with room to grow. There’s logic in that, but with HSBC already in control, we’re not convinced this is the best use of its capital buffer.

July’s second-quarter results were skewed yet again by one-off items, including an impairment of its Hang Seng holding. But underlying performance was good, with pre-tax profit beating expectations thanks to solid growth in wealth management.

The slight niggle came from guidance comments that suggested medium-term expectations may not be hit, given the impact of tariffs on global economic conditions.

Efforts to refocus the business on higher growth areas continue. HSBC has already made several changes, including selling its retail banking operations in France and completely exiting Canada and Argentina. Latest plans involve reducing costs by around $3bn in the coming years, with around half passing through to the profit line and half reinvested.

Traditional banking is the key driver of income, but finding growth has been a bugbear. As the interest rate environment softens, interest income is under pressure and needs to be supported by loan growth. But that’s unlikely to happen this year, with tariff uncertainty impacting borrowers' confidence.

Fee income is also key, from areas like trading and wealth management. Interest rates and consumer confidence still impact some income streams, but not to the extent of more traditional banking operations. The diversification is welcome, but there are still question marks over the strong growth seen in wealth management and whether it can be sustained.

The Asian focus is a positive when it comes to areas like wealth management, with this being a high-growth part of the market. HSBC has leadership positions, so looks well placed to benefit.

If approved, the Hang Seng deal will dent capital levels, and buybacks will be on hold while that’s rebuilt. We are also keeping an eye on non-performing loans; HSBC has historically been seen as a leader among its Asian peers, but a tick higher in recent years has eroded that position. We aren’t concerned, but it’s something to monitor.

The global focus is a differentiator from many of its peers, and HSBC is our preferred UK-listed name for Asian exposure. That said, we think UK focused banks have a much clearer path to growth over the medium term.

Environmental, Social and Governance (ESG) risk

The financials sector is medium-risk in terms of ESG. Product governance is the largest risk for most companies, especially those in the US and Europe with enhanced regulatory scrutiny. Data privacy and security is also an increasingly important risk for banks and diversified financial firms. Business ethics, ESG integration and labour relations are also worth monitoring.

According to Sustainalytics, HSBC’s management of material ESG issues is strong.

HSBC faces risks from business ethics and product governance due to its involvement in related lawsuits and investigations. Its policies against money laundering, bribery, and corruption also have gaps. Although HSBC's credit and loan standards generally meet industry norms, its approach to client engagement on climate issues, particularly in Asia, lacks sufficient evidence.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.

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