The recent announcement by HK authorities that digital banking licences are set to be issued to 6 companies including Tencent, Ant Financial and Xiaomi is troubling news indeed for the UK global bank stalwarts (HSBC & SCB). While HSBC has at least got the UK as another major “home market”, SCB is very dependent on HK for bolstering results in extremely challenging times.
Pre global financial crisis (GFC) there were 4 UK global banks active in Asia, (HSBC, SCB, RBS, BARC) and a 5th (LLOYD) present in Wealth Management. Since then RBS and LLOYD have retreated to UK / Ireland and BARC has focused on UK / Transatlantic opportunities. While HSBC and SCB have slightly sharpened their international focus they have struggled to adapt to higher capital requirements, lower returns, out-dated legacy platforms and most importantly, high and inflexible costs. The cloud of conduct and compliance fines will take more time to fully clear.
The 2018 FY earnings results are now out for all UK, EUR and US GSIB’s. ( Link to FinTorque analytics UK, EUR, US GSIB’s FY18. They confirm just how difficult it is for UK GSIB’s to lift returns to cover the costs of capital circa 9-11% and the high costs of maintaining large international networks including many countries that drag down overall returns.
It is going to get tougher still with the big Chinese tech companies entering the fray in HK - but don’t expect an overnight revolutionary change as the authorities are much too savvy to allow an overly hasty transition that could amplify systemic risk or cause market dislocation. However, it is going to compel UK’s Asia focused global banks to direct more resources at defending the HK crown jewel and this will require more radical cuts elsewhere. This is a tipping point. Bold actions are needed.