Pedestrians walk past Hang Seng Bank headquarters in Hong Kong.
Hang Seng Bank can offer some advice to its ailing parent, HSBC Holdings: Stay local, stick to retail and commercial banking, and serve your customers snake soup. From its base in Hong Kong, Hang Seng tops Bloomberg Markets’ ranking of the world’s strongest banks for the second year in a row—by being everything HSBC isn’t. While the two share roots in Hong Kong, HSBC embarked on a global expansion to become Europe’s largest lender. It moved its headquarters to London in 1993 and set up shop in almost every major country.
Now, HSBC is struggling to reduce costs. The 150-year-old bank, which bought its first stake in Hang Seng in 1965 and today owns 62 percent, has announced about 87,000 job cuts since 2011. “The time of the global financial conglomerates is coming to an end,” says Ismael Pili, a Hong Kong–based analyst at Macquarie Group who rates Hang Seng underperform. “What you should really be doing is trying to be strong in your domestic market.” Gareth Hewett, an HSBC spokesman in Hong Kong, declined to comment.
Hang Seng is embracing that strategy, Bloomberg Markets magazine reports in its September issue. It has peppered Hong Kong’s subway stations and malls with its lime-green signage. More than half of residents 18 and older bank at its 240 outlets in Hong Kong. That presence makes Hang Seng Hong Kong’s No. 2 bank in terms of branches and provides a solid base of deposits from which to expand corporate lending and wealth management. CEO Rose Lee, 62, caters to her most-valued clients in the company’s 24th-floor dining room over a broth infused with five kinds of finely chopped snake meat. Hong Kongers swear the brew nourishes their blood.
The invigorating powers of snake soup aside, Hang Seng is benefiting from rising wealth in Hong Kong and mainland China. It’s one of six Asian banks in Bloomberg’s top 20—five of them in the top 10. Japan’s Norinchukin Bank repeats in second place, after having tied for that spot a year ago. Singapore’s Oversea-Chinese Banking is No. 3. Two other Singapore banks are ninth and 10th.
Across Asia, the IMF expects gross domestic product growth to average 5.6 percent this year, triple the European Union’s 1.8 percent. And Asia’s rich are getting richer. The 4.69 million individuals in the Asia-Pacific area with at least USD1 million in assets boosted their combined wealth 11 percent last year to a total of $15.8 trillion, the fastest pace in the world, Royal Bank of Canada and Cap Gemini say. “Asian banks stand out because of the huge wealth creation in the region,” says Arthur Kwong, head of Asia-Pacific equities at BNP Paribas Investment Partners in Hong Kong. “A lot of the banks are well capitalized.”
Asia’s strongest lenders, and their global counterparts, are improving the quality of their capital. Cooperative bank Norinchukin lost 572 billion yen ($4.6 billion) in the fiscal year that ended in March 2009 when it bet the cash of its members, mostly farmers and fishermen, on toxic U.S. mortgage- backed securities. Today, CEO Yoshio Kono is investing in high- grade bonds at home and abroad, including sovereign debt. “Our goal is to keep capital at a level that’s sufficiently above what is required globally,” says Shinichi Saitoh, a senior managing director at Norinchukin. The bank has a 17.6 percent ratio of Tier 1 capital to risk-weighted assets for the ranking period, putting it fifth in the high-quality-capital category that includes equity and some subordinated debt.
The Basel Committee on Banking Supervision has been pushing all banks to improve capital standards. The latest measures, known as Basel III, more than triple the minimum amount of core capital lenders need to at least 7 percent of their risk- weighted assets. National regulators can set stricter rules. Bloomberg’s ranking considers capital strength among its five ranking criteria. The others are nonperforming assets, loan-loss reserves, deposits, and efficiency. Bloomberg is displaying a bank’s assets in the chart for the first time this year.
If Hang Seng has a weakness, it’s mainland China. Its Shanghai-based unit has about 50 outlets in major cities. The bank focuses largely on Hong Kong companies that want to do business on the mainland rather than on retail customers. Those companies are facing slowing growth: China’s GDP increased 7.4 percent last year, down from an average of 9.8 percent during the past four decades. Chinese banks’ bad loans surged in the first quarter by the most since at least 2004, with defaults spreading to state-owned giants. Because of China, Hang Seng more than doubled its provision for bad loans last year to HK$1.14 billion ($147 million). Even so, it isn’t retreating from the world’s second-largest economy. “We won’t scale back our China business,” Lee said during an earnings press conference in February. “Instead, we will focus more on customers that are doing business in both China and Hong Kong.” She declined to comment for this story.
Oversea-Chinese Banking Corporation, Southeast Asia’s second-largest lender by market value, has ambitions beyond plain banking in Asia. It operates in 18 countries and territories from Malaysia to China and was among the first to reopen a branch in Myanmar this year after 49 years of military rule. “Our strategic direction is to become a leading, well-diversified Asian financial services group with a broad geographical footprint,” CEO Samuel N. Tsien says. He says the ability to get funding and revenue from both developed and emerging Asian markets helps stabilize the bank’s capital base when regional economies fluctuate.
Yet top banks in Asia face undeniable risks. Sluggish credit growth, rising competition, nonperforming loans, and the challenge of maintaining high-quality capital are potential problems, BNP’s Kwong says. Macquarie’s Pili attributes his underperform rating on Hang Seng to its declining interest margins and shrinking market share in non-consumer loans, among other things.
For Rose Lee and Hang Seng, such issues might mean it’s time to reach out to clients over a few more bowls of strength-promoting snake soup. By Alfred Liu and
Elena Logutenkova, Bloomberg
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