Thursday, December 08, 2005

HSBC, Example of How Cdn Banks Missed the Boat

The Globe and Mail, Eric Reguly, Thursday, December 8, 2005

Vancouver -- Ever the diplomat, Sir John Bond, the outgoing chairman of HSBC, the world's third-largest bank, politely declines to comment on the growth strategies -- or lack thereof -- of the Canadian banks. "Thirty-two million people have a finite demand for financial services," is all he'll say.

When the stars align, banks are presented with opportune moments to make transformational decisions. Lose the moment and the bank can get stuck for years, maybe forever; seize it and a new world can open up.

HSBC knew this. The Canadian banks apparently did not. They did too little too late and the result is a no-show among the top players.

It's hard to say when HSBC decided to shed its status as a regional player. Trawl through its archives and you could argue the decision came on day one. It began as Hongkong and Shanghai Banking Corp. in 1865; within a year, it was operating in a dozen countries.

For more than a century after its founding, HSBC was a bit player, globally speaking. In 1961, the year Sir John joined the bank, it had a market value equivalent to $80-million (U.S.). In 1988, when he became an executive director, HSBC was worth $4-billion. That made it smaller than the Canadian banks.

About that time, HSBC decided to go on a takeover binge that vaulted it into the international big leagues. Sir John ramped up the growth strategy when he became group chairman in 1998. He made close to $50-billion of acquisitions, pushing especially hard in the United States, China and Western Europe. Household International, the consumer finance company bought in 2002 for $14.2-billion, was his biggest deal. In 2000, HSBC paid $11-billion for France's Crédit Commercial.

Sir John retires as chairman in the spring, when he turns 65. He leaves behind a bank with a market value of about $185-billion, assets of $1.5-trillion and more than 260,000 employees in 77 countries and territories, including Canada. "Half of the profits of this bank come in when I'm asleep," he says.

Only Citigroup and Bank of America are bigger. Royal Bank, Canada's largest financial services company, is a little more than a third the size of HSBC.

Why didn't the Canadian banks do the same? They could have made their move as late as the 1980s, when they, relatively speaking, had the financial heft to make a splash outside the country.

At the time, banks were fairly cheap and expansion opportunities were rife, especially in the United States. HSBC knew this: It bought Marine Midland Bank of Buffalo, N.Y., virtually in the shadow of the Canadian bank towers in Toronto.

Sir John won't say why the Canadian banks didn't move faster to expand internationally. "HSBC is resolutely international and 'international' is a mindset," he says.

The implication is that the Canadians never had it in them, possibly because life was comfortable in the home market and the profits never failed to roll in.

The Canadians did make an effort, to be sure. Bank of Montreal bought Michigan's Harris Bank in the mid-1980s, but failed to make it the platform for a broad U.S. expansion; it's still No. 3 in the Chicago market. RBC used a scattergun strategy that left it with relatively insignificant market shares in the United States. CIBC has largely retreated from the United States. TD Bank found that its Waterhouse discount brokerage wasn't big enough to survive among the U.S. giants and sold it. It is now buying regional banks in the U.S. Northeast. Scotiabank, which has been called a "mini-HSBC," had the most success outside of Canada, although it's a non-entity south of the border.

None of them has the potential to become an HSBC at this stage. The opportunity is gone. Values are too high and the big-bang takeovers have become the preserve of giants, such as HSBC, Citigroup and Wachovia.

Sir John was in Vancouver this week for his last official visit to HSBC Bank Canada. Trim and fit, and sporting his trademark banker-blue pinstripe suit, Sir John looks and sounds like the classic imperial banker. His English is precise and measured.

He travels constantly -- not surprising for someone atop an operation with 9,700 offices. "What's amazing is that he never looks tired for someone who lives on a plane," says Peter Godsoe, the former Scotiabank CEO.

Mr. Godsoe says Sir John's retirement after 45 years marks the "end of an era." Sir John is the classic boots-on-the-ground banker, as familiar with his own employees in far-flung lands as he is with heads of state, finance ministers and regulators. He can name cabinet ministers in countries you never heard of and has detailed knowledge of local economies, right down to which products are made in which factories.

"Did you know that one-third of the socks produced on the planet are made in Datang, in China?" he says. "Datang has gone from 1,000 people to 100,000 people in about 10 years."

Asia in general and Hong Kong and China in particular are closest to Sir John's heart. He spent almost three decades in that part of the world before moving to London, where HSBC is now based, in 1993. It's doubtful any banker on the planet knows what's going on there as well as he does.

China's economic miracle, he says, "is real" in spite of suggestions from various fund managers and economists that the country's growth rate of 9 per cent is unsustainable, at best, and possibly headed for a crash, at worst.

If anything, he says, GDP growth might even accelerate. That's because the 450 million Chinese in the coastal areas and main industrial centres are driving the growth. "Now, imagine what China would look like if the rural incomes started rising," he says. "You would have a massive boost to consumption. . . . So you have major potential boosts to the economy."

Sir John has made China a priority in recent years. One of his last acts as chairman was buying a stake in China's Ping An Insurance. In 2004, he bought 19.9 per cent of Shanghai's Bank of Communications, the country's fifth-largest bank and one of the few with a national banking licence. It was the biggest investment in a mainland Chinese bank by a foreign bank.

But even as HSBC is moving closer to its Chinese roots, it has no intention of being a "Chinese" bank. Its intentions are global -- it calls itself "the world's local bank."

Sir John will not fade into the sunset. He has already agreed to become chairman of Britain's Vodafone, the world's biggest mobile phone company. Vodafone went after him because, like HSBC, it intends to become global brand and wants to exploit his connections.

Canada's bankers must look at Sir John with amazement. Not long ago, he was one of them -- a smart executive at a middling bank. Then Sir John realized there was a whole world out there.