Ping An calls for HSBC break-up

This is an audio transcript of the FT News Briefing podcast episode: Ping An calls for HSBC break-up

Marc Filippino
Good morning from the Financial Times. Today is Thursday, May 12th, and this is your FT News Briefing.

[MUSIC PLAYING]

US inflation, you guessed it, it’s still at a 40-year high and it’ll cost Europe a pretty penny to cut itself off from Russian gas. Meanwhile, Turkish officials are pressuring banks to limit foreign currency transactions to try and stop the lira from its free fall. Plus, one of the world’s biggest global banks is under pressure from a Chinese company to break itself into.

Tabby Kinder
This is genuinely one of the most significant events in recent history for HSBC.

Marc Filippino
I’m Marc Filippino. And here’s the news you need to start your day.

[MUSIC PLAYING]

The Turkish lira has fallen nearly 50 per cent in the past year, and Turkish authorities are trying another tactic to prop it up. The FT has learned that Turkish officials are pressuring banks to limit foreign currency purchases by corporate clients. One senior Turkish banker says officials have to call to ask who the buyer is, even on one or $2mn purchases. Bankers say they have little choice but to comply with demands to seek advance approval from the central bank for large foreign currency purchases. And in some cases, commercial banks have been ordered to refuse to make foreign currency purchases for their clients altogether.

[MUSIC PLAYING]

Stocks fell hard yesterday after the latest report on US inflation. Consumer prices in April rose at a pace at 8.3 per cent annually. Inflation was actually lower than it was in March, but was higher than economists expected. The price hikes were driven by food, new vehicles, plane tickets and shelter.

Colby Smith
Even more worrying, we saw a pretty substantive jump in underlying services inflation.

Marc Filippino
That’s our US economics editor, Colby Smith.

Colby Smith
So that’s excluding energy as well. Now, that rose and it’s been steadily increasing over the past couple of months. So this was again another sign that inflation is very much becoming a persistent problem.

Marc Filippino
Now on top of all this, the latest jobs report came out last week and it showed that the labour market is still pretty tight. Colby, how might this affect the thinking of the Federal Reserve?

Colby Smith
It’s certainly an important factor for the Fed. Labour market shortages are something that Jay Powell, the chair, has again and again pointed to as a very worrying development in terms of the actual trajectory of inflation over time. And the issue is that when you have a very tight labour market, you have quite a lot of upward pressure on wages as employers are having to compete for workers. So long as that tight labour market persists, you’re gonna have this underlying upward pressure on inflation that the Fed is actively trying to counteract.

Marc Filippino
Now, could this latest inflation report undermine what the Fed has said about, you know, keeping rate rises to 50 basis points or below?

Colby Smith
So that’s a big question for investors is, you know, is 75 basis points fully off the table? And from Powell’s indication, it’s going to take quite a lot for the Fed to move in that direction. We’d have to see probably a much more substantive increase in inflation, further evidence that it is increasing from here and settling at a much higher level. So it seems as though the bar is quite high for that type of aggressive move. But more than anything, it’s probably adding another half point increase to the docket this year and pushing back the time in which the Fed moderates back to quarter point percentage increases.

Marc Filippino
Colby Smith is the FT’s US economics editor.

[MUSIC PLAYING]

Europe’s plan to stop using Russian oil and gas will cost the bloc nearly €200bn. That’s according to a draft plan from the European Commission seen by the FT. It lays out the cost of extra investment over the next five years to move away from Russian energy. That cost is on top of existing plans to spend more on carbon reduction. The EU will also have to lower energy consumption to meet ambitious targets by 2050. Russia’s war on Ukraine has been a wake-up call for Europe about the dangers of its dependence on Russian energy. The EU plans to publish the plans next week.

[MUSIC PLAYING]

A big drama in global banking is the effort by a Chinese company to break up HSBC, one of the world’s biggest banks. The Chinese company is Ping An. It’s China’s biggest private insurer, and it wants HSBC to split into two operations, one focused on Asia and one in the West. And Ping An can do this because it’s one of HSBC’s biggest shareholders.

Tabby Kinder
Ping An would be effectively forcing HSBC to return to its roots. I mean, it started as the Hong Kong and Shanghai Bank.

Marc Filippino
The FT’s Asia financial correspondent Tabby Kinder is following this.

Tabby Kinder
I think we got to this point because Ping An has got to a moment of utter frustration with HSBC’s share price. But also the fact that in the beginning of the pandemic, the Bank of England’s forced UK banks to stop paying dividends. And in this part of the world in Asia, so many retail investors and big investors rely on dividends as part of their income, as part of their retirement planning, etc. And Ping An’s one of those that uses the HSBC dividends to offset the liabilities in its life insurance reserves. So to have a regulator thousands of miles away in the UK ban HSBC, which for all intents and purposes has become a very Chinese and Hong Kong focused bank. To have a UK regulator prevent you as a 9.2% shareholder from receiving quite a significant dividends that you, you know, reliably have been using every year, is going to really affect your business and your financial planning, etc. So I think that was the kind of the last straw for Ping An.

Marc Filippino
So Tabby, are there political or you know, geopolitical motivations as well?

Tabby Kinder
Ping An thinks that an HSBC that is an Asia-focused bank headquartered in Hong Kong, it’s not under the regulatory control of the Bank of England. It thinks that that bank would be more nimble, it would be more autonomous. And it also thinks, which is debatable, that an HSBC that was entirely in Asia, a kind of China-focused bank, would be less vulnerable to sanctions. The geopolitical context has been that for years we’ve had this issue where the US is imposing sanctions on Chinese companies. So there is some speculation that Ping An thinks an HSBC that is China-friendly and ringfenced in Hong Kong would be protected from that. But we just don’t know if that’s clear. Lots of shareholders have said that it would still be vulnerable to sanctions.

Marc Filippino
That doesn’t make business sense to split up the bank. I mean, HSBC has already been shifting its operations to Asia and shrinking its operations in the US and Europe. Most of its profits come from Asia. Would shareholders support a break-up?

Tabby Kinder
I think people think that at the very best, Ping An calling for this will force HSBC to speed up its “pivot to Asia”. Maybe have to do some kind of consultation that ends up in cutting more costs and doing all the strategic moves more quickly. But from a business perspective, I mean, it’s hard to see how it makes sense. It would be hugely costly. There is no real plan yet. So we’ve had some shareholders, quite significant shareholders speaking privately to us, tell us that they think the idea is certainly worth exploring so that HSBC should get consultants in to start mapping out whether a break-up would be possible, while the costs would be, etc. But everyone’s keeping a low profile so far, so we’re waiting to see if any shareholder comes out and calls for a vote on whether this should happen.

Marc Filippino
Just out of curiosity, what do you think’s gonna happen, Tabby?

Tabby Kinder
If I was putting money on it, I’d say that it’s not going to happen. Maybe that would be famous last words, but I think, I don’t think it’ll go nowhere. I think HSBC will have to take this seriously. So they will, I imagine, have some kind of consultation or serious review that they will be forced into that will look at a full break-up, but also other measures that they’ve considered in the past, such as staying as one bank but relocating headquarters to Hong Kong. And I think that’s probably a more likely outcome.

Marc Filippino
Thanks, Tabby. Tabby Kinder is the FT’s Asia financial correspondent.

[MUSIC PLAYING]

Before we go, high inflation and rising interest rates are kicking just the absolute snot out of tech stocks, and Apple is no exception. The iPhone maker’s share price is down nearly 20 per cent this year. It’s gotten so bad that Apple is no longer the world’s most valuable company. That title now belongs to Saudi Aramco. Rising oil prices have helped Saudi Aramco’s valuation hit $2.42tn on Wednesday, $10bn more than Apple.

[MUSIC PLAYING]

You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

[MUSIC PLAYING] 

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.