Diversification of HSBC

1
Introduction

The Hongkong and Shanghai Banking Corporation Limited (HSBC Group) has an

international pedigree which is unique. Many of its principal companies opened for

business over a century ago and they have a history rich in variety and achievement.

The bank owed its origins to the business communities of the China coast in the

1860s. At that time, the finance of trade in the region was not well developed and

most transactions were still handled by the European trading houses rather than by

professional banks. By the early 1860s, local businessmen needed larger and more

sophisticated facilities. In Hong Kong, in particular, business leaders required

specialist banking services — preferably from a bank that was locally owned and

managed. Today, the HSBC Group is one of the largest banking and financial services

organizations in the world, with total assets of nearly US$2,354,266 million in 2007,

HSBC occupies a leading position in the world of banking and finance. Its

international network comprises some 10,000 properties in 83 countries and territories

in Europe; Hong Kong; Rest of Asia-Pacific, including the Middle East and Africa;

North America and Latin America.

The History of HSBC Group

The reason for a small local bank becomes the largest international financial institute

in the world is its strategy. HSBC Group has been using strategy of diversification to

achieve the largest and profitable financial institute. Diversification refers to a

strategy that a firm is involved in the production or provision of a number of different

2
goods and services. There are three different types of diversification. First, there is the

product extension as firms move into familiar or related activities. The second type is

market extension as a firm seeks to gain from its expertise in a given technology or

product by exploiting new markets, as well as new geographic areas. The third type is

pure diversification and where a firm moves into unrelated activities. It is known as

conglomerates.

In the late 1970s, HSBC group approach was a key factor in the strategy for

expansion in markets where The Hongkong and Shanghai Banking Corporation was

not well represented previously, particularly in North America and Europe. In the

United States, this expansion centred on the purchase of a 51 per cent shareholding in

Marine Midland Bank in 1980. This purchase, at a cost of US$314 million, nearly

doubled the Group’s assets, from HK$128 billion to HK$243 billion. The remaining

shares were purchased in December 1987, making Marine Midland the Group’s

principal subsidiary in the United States.

In Europe, The Hongkong and Shanghai Banking Corporation sought a partnership

similar to its investment in Marine Midland. HSBC Holdings announced that it would

make a recommended offer for full ownership of Midland. HSBC announced its final

offer in June 1992, valuing Midland at £3.9 billion. The offer became unconditional in

July, lifting the Group’s total assets from £86 billion in 1991 to over £170 billion in

1992. HSBC’s acquisition of Midland created one of the largest financial

organizations of its kind in the world.

In the late 1990s and early 2000s, HSBC vigorously developed its role as one of the

3
world’s leaders in banking and financial services. It emphasized the Group’s unique

balance of business and earnings between the older, mature economies and the faster-

growing emerging markets. The creation of new subsidiaries in South America in

1997, for instance, extended HSBC’s reach in emerging markets, as did the

announcement of the acquisition of all of Lloyds TSB’s onshore and offshore assets

related to Brazil in 2003. The Group’s commitment to these markets was also

reflected in the increasing number of countries where HSBC was represented; this

total has grown from 51 countries in 1991 to 79 in 2003.

On the other hand, the acquisition in 1999 of Republic New York Corporation and

Safra Republic Holdings S.A. for US$9.85 billion reinforced HSBC’s presence in the

highly developed markets of the United States, Switzerland and Luxembourg. The

third-largest deposit-taking bank in the New York metropolitan area and a leading

name in private banking, Republic matched HSBC’s aim of delivering wealth

management in key financial centre around the world. A further major investment in

mature economies followed when HSBC announced in April 2000 a US$11 billion

recommended offer for Crédit Commercial de France (CCF). Established in 1894,

CCF brought into the Group a network of 650 branches in France and long experience

of personal, corporate, investment and private banking, greatly strengthening HSBC’s

presence in the euro zone. These acquisitions and other initiatives contributed to a

continuing improvement on HSBC’s performance, in which profits attributable to

shareholders grew from US$4,318 million in 1998 to US$6,239 million in 2002.

Acquisitions were also essential to a larger role in North America. In 2002, HSBC

acquired and recapitalized Grupo Financiero Bital in Mexico at a total cost of US$1.9

4
billion. This new member of the Group was scheduled to change its name to Grupo

Financiero HSBC, S.A. de C.V. in early 2004. In 2003, HSBC’s purchase of

Household International, Inc. added substantially to the Group’s business and profile

in the United States; Household’s network of over 1,300 branches in 45 states

provided consumer finance to 53 million customers. In October of the same year,

HSBC announced its agreement to acquire the Bank of Bermuda in a transaction

valued at US$1.4 billion.

The Hongkong and Shanghai Banking Corporation acquired 19.9% of Bank of

Communications Limited, China’s fifth largest bank. In 2005, HSBC acquired 9.91%

of Ping An Insurance (Group) Company of China Ltd, which together with the 10%

stake acquired in 2002, has brought HSBC’s stake in China’s second largest life

insurance operation to 19.9%.

In 2007, the Group placed emphasis on investing in fast moving emerging markets in

Asia-Pacific, the Middle East and Latin America.

The methods of HSBC diversification

HSBC Group has mainly been using two methods of achieving diversification. They

are internal growth and acquisition or merger. HSBC prefers the acquisition or merger

to the internal growth. There were only two major events using the internal growth.

One was that The Hongkong and Shanghai Banking Corporation established

HongkongBank of Australia Limited (now HSBC Bank Australia Limited) in 1986,

Another was Hongkong Bank Malaysia Berhad (now HSBC Bank Malaysia Berhad)

was formed in 1994. Apart from the major key events used the internal growth, the

5
other expansion events used acquisition or merger.

Internal growth

HSBC Group does not prefer the internal growth because it is a relatively slow

method of growth when the firm grows from zero in overseas market. This method

used by HSBC only in some less competitive and not maturity markets. One can

discover that portfolio asset or businesses of HSBC are mainly found in USA and

Europe that are mature and developed market. Internal growth is less risky than other

methods, since the firm is on a learning process and can correct its mistakes found

when the business is going on. Also, because of a gradual growth, the costs are only

incurred only in development process. Therefore it is less disastrous if the desired

results are not achieved, then the losses are less than other methods. Compared with

HSBC acquisition of the Household International Inc, the downturn of economic in

USA, HSBC needs to reserve for huge amount in that business.

Acquisition or merger

Acquisition or merger is one of the most popular methods for corporate development.

Why does HSBC prefer to use this method? First, the original business of HSBC is

banking that resulted in making HSBC to gain a relative lower cost to make

acquisitions. In other words, it can increase the profit margin. Second, all acquisitions

are related to financial service industries with which HSBC is familiar and has

excellent preferment in these industries. After acquisition or merger, HSBC can use its

experience and management to do better in the new acquired company. Third,

financial services become more globalization. For example, global investment fund

becomes more popular. Acquisitions all over the world can make HSBC create a

6
synergy effect in fund management. In 2004, HSBC acquired The Bank of Bermuda

Limited, a leading provider of fund administration, trust, custody, asset management

and private banking services. It can create benefit to HSBC clients and promote value

on HSBC. Fourth, there is little competitive reaction in the market by acquisition in

comparison to new firm entering the market. For example, acquisitions were essential

to a larger role in North America. In 2003, HSBC’s purchase of Household

International Incorporation added substantially to the Group’s business and profile in

the United States.

Advantages of related diversification for HSBC

Acquisition of oversea market

It is the effect of oversea acquisition that HSBS seeks to take over the control of

oversea market of financial services. The advantage is that the firm does not need to

be a new entrance in oversea market because there are many barriers or threats created

by the existing rival. Clients’ database is so important that financial institute provides

services rather than physical products to clients. Through oversea acquisition, HSBC

can directly provide services to the existing oversea client from the acquired

company.

Access easily to information

It can be achieved through taking over oversea company, operating the existing

company in the other markets. The existing company has more information regarding

the client database, faster and more reliable information on the demands in the

marketplace. It enables the firm to have a competitive advantage over creating a new

7
company in the other markets to accumulate client database and market information

from the beginning. In addition, different areas or countries’ company can share the

information with one another. For example, they can share the management and

operation experience and information.

Cost saving

Diversification into related areas through taking over oversea company can provide

cost saving as the activities of the firm can be directly operated. Because financial

services becomes more globalized than ever before. The services can be operated

across several countries. If no oversea branches or offices, then some services need to

be outsourced, making the profit shared by other company. Second, HSBC does not

need to put many expenses to accumulate the client database since the acquired

company has already brought the client database to continue to do business for HSBC.

Otherwise, it will cost much and need a lot of time to collect and accumulate client

database. Third, to create new branches or offices need to recruit new staff. The cost

of recruiting the experienced staff may be higher than the market salary, otherwise the

people will not be willing to change their original position.

Profit of growth

Diversification in related areas is the appropriate way in which to grow the size of the

company. The revenue and the asset of HSBC have a highly increase through

acquisition. For example, after acquiring Midland, HSBC’s total assets were from £86

billion in 1991 to over £170 billion in 1992, making profits highly increased as the

total asset increased. Second, HSBC can get higher profit growth rate by acquiring

companies in the developing markets. For instance, having acquired 9.9% of Bank of

8
Communications Limited and 19.9% Ping An Insurance (Group) Company of China

lead to bringing a higher profit growth for HSBC as the stock prices of the companies

have grown several times.

Resource utilization

The world trade and globalization makes HSBC utilize the different area’s business

platform for the international transactions. For example, Hong Kong investors would

like to invest in USA stock market, and then Hong Kong HSBC can pass to USA

HSBC to complete the transaction. It can be profit maximization by not outsourcing

the services to other companies.

Spreading of risk

The operation of HSBC is not just in one area or country. It is a method of spreading

risk. The business of one area is in recession, but another can provides profit. HSBC

will not be insolvent caused by one area business recession. The geographic

diversification reduces the political risk and business risk. The exchange rate risk can

also be reduced by the geographic diversification. Since HSBC international network

spans six continents, there is less influence by exchange rate risk.

Conclusion

HSBC puts much portion of capital in mature market. For example, USA and Europe

that are highly competitive and the profit margin is relative low compared with

developing countries. Besides, the profit contribution comes from the emerging

9
markets is relative low now, but emerging market will be economic locomotive in

future. HSBC should use their network and experience to do more acquisition or

merger in these markets.

HSBC should not mainly use the acquisition or merger as diversification. Product and

service diversification or innovation is also important when HSBC wants to maximize

the long-run profit.

Finally, HSBC has already created a geographic diversification all over the world. Its

main business is banking and finance. Therefore HSBC should expand aggressively to

other related financial services such as life insurance and investment. As life

insurance business can create stable cash flow for the company in the long-run, and

the premium can be used for investment. It can make HSBC become kingdom of

financial services.

10
 Reference

1. Annual Report of HSBC

2. Besanko, D Dranove, D Shanley, M and Schaefer, S (2007) Economics of

3. Chambers, Gillian Hang Seng, The Evergrowing Bank

4. Holmes, A R and Green, Edwin Midland: 150 Years of Banking Business

5. Johnson, G and Scholes, K (2006) Exporing Corporate Strategy (prentice Hall)

6. Jones, Geoffrey The History of The British Bank of the Middle East, (Cambridge
University Press, 1986-87)

7. King, Frank H H The History of The Hongkong and Shanghai Banking

8. Lipczynski, J and Wilson, J (2004) The Economics of Business Strategy (FT

9. Muirhead, Stuart Crisis Banking in the East: The History of the Chartered
Mercantile Bank of India, London and China, 1853-93

10. Oster, S (1994) Modern Competitive Analysis (oxford University Press)

11