How HSBC’s gamble on China failed to pay off

The group publicly backed Beijing’s controversial Hong Kong security law, angering critics in the west. Welcome to life on a geopolitical fault line, writes James Moore

The bank outraged shareholders in Hong Kong by suspending its dividend (Getty)

HSBC rounded off the UK banking season with a gut punch. In common with its London listed peers, its provisions against bad loans surged, to $3.8bn (£2.9bn). That brought the total to $6.9bn on the year.

The problem is that the second quarter contribution to that unpleasant looking total, a seven-fold increase on the previous year, was around $1bn more than the analysts had expected and all but wiped out the bank’s net profits in the process. There will be more coming too.

The market was braced for something unpleasant but the scale of HSBC’s problems caught it on the hop and the shares duly sank like Donald Trump’s re-election chances.

The bank’s response? Throw some red meat to the investors. It's ramping up the cost-cutting plans that are expected to result in the loss of 35,000 jobs across its businesses as it seeks to get the headcount down to 200,000.

Redundancies that were put on hold at the height of the pandemic when the bank played nice will now burn through the business.

The markets tend to like that sort of thing, but they also know that chief executive Noel Quinn has some very big problems that may ultimately eclipse even the pandemic.

HSBC has for years focussed hungry eyes on China, shifting focus and resources from Europe and the US to the world's hottest economy, with the aim of capitalising on the boom.

Stuart Gulliver, the last CEO but one, used to make his results presentations into paeans to the Pearl River Delta. Print copies of the results statements contained a bingo card so you could tick off each mention, with a free Pearl River snow globe for the winner.

Well, not really. But HSBC’s intentions were clear: it jumped into the economic hotspot with both feet and made a big fuss about it in the hopes of quieting investors who liked to grouse about the bank being a big lumbering beast with disappointing returns.

Now it has found itself in the (very) hot water bubbling up from the global fault line that's opened up as a consequence of Trump's bellicose stance towards China, and the latter's "wolf warrior" diplomacy.

When Beijing forced its controversial and repressive new security law on Hong Kong, the bank that proudly bears the territory’s name was forced to kowtow, with a public declaration of support that understandably had its critics in the west crying “shame”.

HSBC will find a path through the pandemic. It’s a strong bank, made more so by the decision to cancel its dividend. But that created another source of east-west tension. The dividend was put on hold as a result of pressure from regulators in the UK, infuriating its substantial shareholder base in Hong Kong.

The (no) dividend policy will, we are told, be reviewed at the end of the year. How it develops will depend on how robust its provisioning has been, and how the virus develops, which no one can easily predict.

One thing that can be predicted: with Trump seeking to tighten the screw on China, life isn't getting any easier for western headquartered banks that play there.

The results statement contained statements about the bank “increasing the frequency and depth of our monitoring activities” in response to geopolitical tensions.

Trouble is, there’s a high chance that the people doing that are going to tell their bosses that this is what’s coming, it’s going to leave us in a near impossible situation and there’s not a hell of a lot we’re going to be able to do about it.

Poor Noel Quinn. The smart and energetic CEO was installed to inject some vim into the bank after John Flint was ushered out. Turns out he was handed a hospital pass.

Its now the Hobson’s Choice & Shanghai Banking Corporation. We’re out of Pearl River Delta snow globes. Instead we’ll be offering tin hats and HSBC branded face masks.