HSBC and the city have won this round, but hard work lies ahead

The writer is the author of several books about the city and Wall Street

SVB UK’s rescue last weekend was a victory for HSBC and the City of London at a time when they both needed it. Pressured by Chinese insurer Ping An to split its Asian and Western operations, HSBC used the confidence instilled by a balance sheet built on one continent to support an acquisition in another. It’s not a definitive answer to the call for HSBC’s breakup, but it certainly helps.

The city has been under pressure in other ways, losing market share to Wall Street and the European stock exchanges and being criticized for its failure to list and keep growth companies on the London Stock Exchange. The collapse of SVB UK, a specialist in financing start-ups and scale-ups, or its sale to a foreign bank with no branch in the UK, would have been another blow.

Instead, HSBC, a London-listed, Asia-focused world bank, rapidly teamed up with Rothschild, an Anglo-French investment bank with an office a stone’s throw from the Bank of England, and the British authorities. Global, agile and using the old economy to build the new, that’s how the city should work and it succeeded. But the bank that made the deal and the authorities that helped it have more to do if they want to build on a good weekend job.

In a 72-hour period, HSBC, a bank not known for its fluency, quickly assessed SVB UK’s loan portfolio of £5.5bn; weighed the possible maturity mismatch between that and its £6.7bn deposits; and estimated – it couldn’t have been much more – the likely damage of the West Coast parent company’s troubles to the London bank’s equity value of £1.4bn. With a $3 trillion global balance sheet to absorb any damage, HSBC decided to take a chance.

What about the competition? HSBC knew that SVB UK’s importance to the government’s growth agenda gave domestic buyers the edge. Although most of its money is made in Asia, HSBC operates a regulated segregated bank in the UK and can play the home card whenever it wants.

Bearing in mind that Lloyds and RBS, recent divisions of the state, were unlikely to take the risk, it might have seemed that Barclays, a market leader in banking for growth companies and Lehman-sized in buying distressed assets, would are the likely rival.

But there was a surprising lack of interest from Barclays headquarters. Further down Canary Wharf, HSBC executives thought they had the stage to themselves. They offered a £1 token, won a good deal for their own shareholders and saved SVB’s UK clients and employees massive disruption.

The regulators of the city and the British government can also be satisfied. The institutional architecture put in place after the 2008 global financial crisis has passed its first major test. Unlike the tangled tripartite arrangements of the early 2000s, No 10, the Treasury and the Bank of England have clearly defined roles and worked effectively together. Ringfencing, detested by the industry but a prominent feature of the regulatory landscape since 2019, helped lead to a neat solution in this case.

This was also the first banking crisis since the Government’s December 2022 financial services package known as the Edinburgh Reforms. These gave regulators, among other things, a target for growth and international competitiveness. Combining supervision and growth has not worked in the past and can still lead to grief, but here the government had apparently listened. By smoothing out potential bumps in the road for HSBC, including the removal of certain foreclosure requirements, regulators helped close this deal. It won’t be a material factor in HSBC’s thoughts on whether or not to keep a London listing, but the counterfactual would certainly have been. So the authorities can be satisfied with their work, but now have to resist industry lobbying to lighten things up even more.

For HSBC, the hard work starts here, starting with the intricate task of valuing the loan portfolio. The turnaround last weekend was so rapid that due diligence in Rothschild’s virtual data room cannot have been complete. HSBC, a bank with a checkered deal history, will hope its latest acquisition’s equity buffer is thick enough to absorb the results of an old-fashioned credit risk analysis.

Which brings us to the biggest risk of this takeover, the culture clash. SVB UK banks to 3,300 growth companies in sectors such as technology and life sciences. Growth companies are optimistic, entrepreneurial and opportunistic; big corporate bankers are not. The fault line is probably not working from home, dressing up or free beer on Thursday, but risk taking.

Will HSBC be able to handle the high-risk, high-reward tradeoffs inherent in banking for growth? How it handles this will be a challenge to retain and motivate staff and customers, one that you can bet HSBC’s competitors, including Barclays, will try to exploit.

Leave a comment