• The London Financial

Becoming the World’s Local Bank

By Yogen Mudgal, BSc Accounting and Finance Student at Warwick Business School

Just a few weeks ago, I was flipping through old photo albums – immersing myself in the nostalgic moments of the pre-2008 era and reminiscing of the age when the world still made sense. Economies almost everywhere were booming, politics was boring, people were optimistic about the future, and HSBC’s television advertisements called it the “World’s Local Bank,” a reminder of the success of globalisation. Headlines from this past month, however, makes one wonder how far we have come from that golden era of economic liberalism and political consensus – principal of this being the decoupling of US and China, a trade relationship that has underpinned global economic expansion for decades.

After dragging its feet for years, HSBC has finally shifted the centre of gravity of its business to its second home in Hong Kong. The US and French retail business will be exited, capital will come out of the markets and banking business in Europe and North America to contribute cash to invest in Asian commercial and wealth management operations and key people will be moved from its headquarters in London to China. Alongside its business in China, Europe’s largest lender will also focus on fast-growing markets like India and Singapore. HSBC had given up on its branding as the “World’s Local Bank” quite early on in the 2010s, now it’s putting it into action.

Once the restructuring is complete, HSBC will maintain its global markets and banking business in Europe, America and Asia (the latter already accounting for 50% of investment banking revenues), its retail business in the UK, and commercial and wealth management in Asia. Proponents of the Asia pivot are further pushing for HSBC to exit its retail bank in the UK and operate as a global investment bank with commercial and retail operations in some parts of Asia. At least in the near term though, the bank will keep its UK retail bank and has refused to move its headquarters out of London’s Canary Wharf.

For Europe’s largest bank, the ‘Asia Pivot’ is not a scurried reaction to the trade war but has been years in the making. Even until recently, HSBC was one of the only two truly global banks alongside Citi. But alas, even as multinational investment banking is common practice, retail banks that operate in multiple nations were far and few before 2008 and have largely disappeared since. The retreat from global retail operations has gone so far that RBS, once the world’s largest bank, doesn’t even serve the neighbouring Irish market anymore. Citi is under similar pressure as HSBC to begin simplifying its business by keeping its large global investment and corporate banking businesses but getting rid of the complex network of consumer services that are weighing down the Wall Street giant.

Before the crisis, global retail banks appeared on the scene to provide world-class financial services to consumers in a sector largely dominated by national oligopolies. The advantage of scale was expected to be enormous, particularly in technology that is integral to running the financial system in the 21st century. As the crisis forced them to restructure, those exact global operations that were a source of pride became a drag on business. Ruthless cutting on investment left them vulnerable to FinTech ventures and local competition that was catching up on technology. Unlike technology giants or manufacturers with vast global supply chains, banks have never been able to command such a multinational business.

Another argument is that banking in the developed world no longer has good enough margins, especially compared to fast-growing Asia. It could definitely be a potent one in the case of HSBC or Standard Chartered. However, once we factor in banks like Barclays whose retail and commercial operations in the UK generate greater returns than its global investment bank or Citi, for whom the Asian consumer business is the source of pain, this argument no longer seems valid. Perhaps it comes down to regional strength and expertise over growth or interest rates in across different parts of the world. For HSBC, that strength lies in Asia and for Citi, it lies in America.

The one thing that’s clear is that it’s been virtually impossible for even large global investment and corporate banks to boast similar fortunes in other services. Governments across the world like to run a tight shift on their financial sectors, more so since the financial crisis. The regulatory burden is one of the primary reasons why banks have a hard time navigating global operations and keep running into scandals. But as FT’s Robert Armstrong explains, that’s not the full story. The extreme cyclicality of the industry makes it nearly impossible for banks to invest in downturns – the very time when investment for them is so crucial. This is something that can be seen playing out very thoroughly here.

Those who argue that the next generation of FinTech companies will take up the mantle to ‘go global’ needn’t look further than the crushed dreams of Ant Financial or Monzo, that latter of which cast doubt upon its ability to continue as a going concern in summer 2020 because of aggressive international expansion. The one question that remains unanswered is what the right way for banks is to take their retail and commercial services global. Alas that shall remain a mystery until some enterprising organisation is able to achieve this feat. The debate draws strong opinions on how acquisitions should be structured and how investments should be planned out but there’s no validation to them until we see active experimentation.

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