HSBC on Firmer Footing to Lead in Core Markets

We see HSBC's strong positions in the banking systems of Hong Kong and the UK—as well as its ability to link these two to support global business—as its main source of competitive advantage. Its broad scale of global operations leaves it subject to higher capital requirements than if it were more narrowly focused, although the diversification also reduces profit volatility compared with peers, as seen during the global financial crisis. Given that China, Hong Kong, and Singapore are important hubs of wealth and growing trade corridors, the bank's pivot toward Asia—which generates around 75% of its pretax profit—is strategically sound, in our view. 

In recent years, HSBC has restructured and exited unprofitable markets and low-returning regions. Its initial changes were insufficient, prompting the bank to announce a new restructuring plan at the end of 2019. The costs removed from 2020 to 2022 now seem to put HSBC in a better position to generate return on equity at or above its cost of capital.

The restructuring plan allows HSBC to focus on its strengths in Asia and the UK, in our view. The Asia region is becoming increasingly important for global trade, urbanization, and a growing middle class. The bank’s strengths in Hong Kong place it in an excellent position to take advantage of growth in the Pearl River Delta, as it is the leading international bank in China. HSBC has achieved this status through its long operational history and investments in China. As a result, the bank is well positioned to capture economic growth in asset management, yuan internationalization, and consumer and corporate lending.

Business Strategy & Outlook

We believe that HSBC does not enjoy an economic moat overall. 

The group's business in Hong Kong is quite moaty, in our view, with a return on risk-weighted assets of around 6%, far exceeding the group level of 1.6%. This is based on HSBC's funding cost advantage in the local market, where it has long been the largest bank. Sticky retail deposits in Hong Kong not only help fund local loans but also help to fund trading activities that generate noninterest income.

In the past, Morningstar had assigned moat ratings to HSBC in part due to the value to clients with cross-border financing needs of its extensive global footprint, which has few rivals in the number of countries it reaches. However, not only have capital requirements tightened globally after the 2008 financial crisis introduced the Basel III regulatory framework, but costs to comply with increasing know-your-customer rules from various jurisdictions have risen. Citibank, which previously shared some similarities with HSBC in terms of global reach, has seen its returns decline compared with pre-2008 and opted to sell out of most of its Asian markets. Standard Chartered, another geographically dispersed UK-domiciled bank with large operations in Hong Kong, also saw returns decline significantly after the early 2010s. 

Though not quite as large as some of its peers, HSBC is one of the leading banks in the United Kingdom, and Morningstar also previously assessed that its position in the UK had some moaty attributes, noting its ability to gain market share when other UK banks were more negatively affected by the global financial crisis. However, the introduction of the bank levy in the UK has increased costs and HSBC's returns in the UK in recent years have been below its cost of capital, in our assessment.

None

Economic Moat

HSBC Holdings

HSBC Holdings Plc engages in the provision of banking and financial services. It operates through the following business segments: Retail Banking and Wealth Management, Commercial Banking, Global Banking and Markets, Global Private Banking, and Corporate Centre. The Retail Banking and Wealth Management segment consists of retail banking, wealth management, asset management, and insurance. The Commercial Banking segment offers banking products and services. The Global Banking and Markets segment includes transaction banking, financing, advisory, capital markets, and risk management services. The Global Private Banking offers transaction banking, financing, advisory, capital markets and risk management services to high net worth individuals and families. The Corporate Centre segment is comprises of central treasury, including balance sheet management, other legacy businesses, interests in associates and joint ventures, central stewardship costs and the UK bank levy. The company was founded on January 1, 1959 and is headquartered in London, the United Kingdom.

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HSBC Holdings Plc engages in the provision of banking and financial services. It operates through the following business segments: Retail Banking and Wealth Management, Commercial Banking, Global Banking and Markets, Global Private Banking, and Corporate Centre. The Retail Banking and Wealth Management segment consists of retail banking, wealth management, asset management, and insurance. The Commercial Banking segment offers banking products and services. The Global Banking and Markets segment includes transaction banking, financing, advisory, capital markets, and risk management services. The Global Private Banking offers transaction banking, financing, advisory, capital markets and risk management services to high-net-worth individuals and families. The Corporate Centre segment involves in central treasury, including balance sheet management, other legacy businesses, interests in associates and joint ventures, central stewardship costs and the UK bank levy. The company was founded on January 1, 1959 and is headquartered in London, the United Kingdom.