To start with a simple definition, retail bank is a bank that provides credit and investment products to individual customers: individuals, the professions, small businesses (merchants, craftsmen, etc.) or medium-sized companies (SMEs, SMIs), local authorities and associations. These banks are thus opposed to banks working with large companies, in contact with other banks and on the financial markets. Nearly a year after starting the sale of its French retail bank, HSBC is still desperately looking for a buyer for its retail bank.
Formerly Crédit Commercial de France, bought €11 billion 20 years ago, HSBC France's retail banking sector is now a problem. Indeed, even before the Covid-19 crisis, the British juggernaut had shown weaknesses, and had announced the elimination of 35,000 positions. Coupled with the aggravation of tensions between the United States and China and the tensions in Hong Kong, these events have only strengthened HSBC's will to restructure, and thus to get rid of their French retail bank.
The investment fund Cerberus would have proposed to buy the brand from the 800,000 retail customers and 60,000 corporate customers for "a symbolic €1" in exchange for a contribution by HSBC of €500 million. The most surprising thing is not the proposal, but that this proposal would be seriously considered on the side of HSBC.
But then, why pay to sell your retail bank? In 2019, the French subsidiary of HSBC announced a net loss of €39 million, and the Covid-19 crisis, which contributed to the loss of €499 million in the first half of 2020 alone! Even if the sale was subsidized, it would be interesting for HSBC. Will it really have to pay to get rid of its retail bank? This question is necessary, because if the Société Générale and the Postal Bank seem to have abandoned the idea of a potential takeover, Les Echos asserts that JC Flowers would be a credible candidate alongside Cerberus.
Why is HSBC’s retail banking in trouble?
The sale by HSBC of its retail banking activity in France can be explained for mainly cyclical reasons, linked in particular to the macroeconomic context.
First of all, the banking sector is being shaken by a digital wave. Indeed, traditional retail banks are competing with the advent of online banking. Let's take the example of Boursorama. The bank now has more than two million customers according to estimates, a figure that has tripled in four years. Online banking is all the more threatening to the so-called traditional retail banks because they have a higher customer satisfaction rate. According to the Deloitte barometer, it stands at 94% against 83% for traditional banks. The entrance of new digital challengers is an existential threat for these businesses, according to a Goldman Sachs Group Inc. executive. These FinTech startups are expected to divert $4.7 trillion in annual revenue from the traditional banks. Many financial institutions are forced to create partnerships with the new entrants as a stop-gap measure. In order to maintain a competitive advantage, traditional banks need to learn from FinTechs that owe their success to providing an easy and intuitive costumer experience.
Another reason that may explain the current difficulties experienced by HSBC and more generally by the retail banking sector is the level of interest rates. The low and negative interest rate policy pursued by the European Central Bank (ECB) over the last five years has strongly affected banks. This policy in fact directly affects the profitability of banks on their lending activity by reducing each time more and more the margin between the interest rate at which they lend and the interest rate at which they refinance themselves. This is particularly true for retail banks, which generally collect short and liquid deposits and grant longer term loans.
In addition, the increasing regulation of the banking sector by the European authorities is weighing on HSBC and more generally on all French retail banks. This is particularly the case for the European MIFID II directive. This directive, which comes into force in 2018, sets the rules for financial institutions that provide investment and/or ancillary services, i.e. distributing financial instruments and structured deposits. By strongly reinforcing the concept of transparency and customer protection through stricter rules, it forces retail banks to thoroughly review the way they operate. The implementation of new financial regulations such as Basel 3, also have harmed in a significant way HSBC France. The ECB (European Central Bank), after conducting the SREP (supervisory review and evaluation process) analysis of HSBC economic model, has ordered the bank to maintain a level of reserves equal to 13.75% of assets thus decreasing net interest income. Furthermore, due to low growth rate in Europe and the uncertainty that Brexit is causing, the central bank is keeping interest rate at a level close to 0%, thus arming even more the profit of retail banks. As a matter of fact, HSBC has much larger and stronger retail banking branches in non-European markets, such as in Hong Kong where capital requirements rules are softer, however HSBC France has served as central point for HSBC’s activities in the Eurozone.
These various points are the main causes of HSBC's decline in recent years, aggravated by the coronavirus crisis and Sino-American tensions. In 2020, the collapse is particularly marked in the second quarter, during which the bank made a net profit of $192 million, down 96% compared to the second quarter of 2019, when it came out at $4.4 billion. The British banking giant HSBC reported on Monday a net profit down 77% in the first half of the year, under the combined effect of the health crisis and the worsening of Sino-American tensions. Over the six months, the group posted a net profit of 1.97 billion dollars, against 8.50 billion in the first half of 2019. But even before the epidemic spread from China to every continent, HSBC was facing major geopolitical difficulties linked to the Sino-American trade war and Britain's exit from the European Union. HSBC makes 90% of its profits in Asia, with China and Hong Kong being two of its main growth markets. In February, before the coronavirus became a pandemic, HSBC had announced the loss of 35,000 jobs in three years and a drastic reduction in the US and Europe in order to focus more on Asia.
HSBC France retail branch is not the only retail bank that is in trouble. Across Europe many retail banks are resorting to job cuts in order to stay afloat. For example, BNP is closing almost half of its branches (40%) and Deutsche Bank is cutting 18,000 jobs in Germany.
Why are banks not interested in buying HSBC’s retail banking division?
The first surprising fact, while having a glance at the different actors in the race for acquiring the retail division of HSBC, is that conventional banks are missing. If Société Générale and La Banque Postale were said to be interested in this operation, both French banks finally stepped back. Other French banks such as BNP Paribas, Crédit Agricole, BPCE - Banque Populaire et Caisse d’Epargne -, CIC or Crédit Mutuel Arkea are even not mentioned in the list of potential acquiring companies. At first sight, we could think of a cost-effective operation with the opportunity to widen the network of clients, allowing synergies between the different segments, and to gain increasing commission revenues from wealth management activity.
The reasons why these traditional banks are not eager to take over HSBC’s retail operations, and then to swallow a historic competitor for upscale clientele in France, are multiple. We must point out that these banks already need to restructure their own retail banking divisions, as explained previously in the article, and think about the overhaul of the agency network. The ongoing losses incurred for most of French banks because of credit defaults related to the crisis and all-time-low interest rates, seem to be a priority for them. Potential extra costs, despite the €500 million that should be injected by HSBC to finance the restructuration, scare away these organisations in which administrative and restructuring costs are often quite heavy. Similarly, the planned 35,000 jobs cut should be costly for the acquiring company in terms of allowances and professional guidance redirection costs.
But is it a missed opportunity? The outlook of gaining the 2% HSBC’s retail banking market share in France and obtaining the assets under management of wealth clients for one symbolic euro is a real bargain. However, Jean Beunardeau, Chief executive of HSBC France has dismissed the idea of a partial sale, which “would not be viable in terms of visibility and depreciation of the cost base”, meaning that an acquirer could not buy only the wealth management branch for example. This condition seems to be problematic for the potential acquiring French banks which prefer not to be burdened with the whole heavy retail structure from HSBC. Yet, it has been a while since HSBC France has been trying unsuccessfully to spin-off its retail division and the pressure is intensifying. Some private equity firms, as we will see in the following paragraph, are working towards the acquisition of the branch but negotiations might be complicated between both parties. A new deadlock could lead HSBC to decide a partial sale, leaving opportunities for French banks.
A spin-off for investment funds?
Despite the disadvantages of the spin-off detailed above, some investment funds have expressed an interest in it. Indeed, they might find new opportunities for their activities. Oddo BHF was the first one to show an interest in the retail banking of HSBC but has given up for now. The potential buyers today are Cerberus and JC Flowers, two American investment funds managing respectively $45 billion and $6 billion of assets. The advantages to be found in the spin-off for these funds are various.
First, HSBC has many clients in France (813,000 retail customers): these clients can be directed towards the wealth management activities of the fund that would acquire HSBC retail bank. Most importantly, 350,000 from the 813,000 clients are “premier” clients, meaning that they have available assets of at least 75,000 euros annually and/or a monthly income of at least 6,000 euros for a couple. Therefore, the clients from HSBC retail banking are valuable clients, who are eager to ask for wealth management services. Acquiring HSBC retail banking would mean acquiring these clients and expanding the wealth management activities of the fund.
Secondly, the funds might have more flexibility than the HSBC group to restructure the retail banking and make it have a surplus again. As a reminder, HSBC is present in 84 countries and has 60 million of clients around the world. Its size prevents it from adapting in times of crisis such as these times. Smaller companies such as investment funds are more likely to be able to take radical action to turn the business around.
Finally, these funds have a lot of money to invest, given the increase of savings during lockdown in many countries, and lack opportunities of investment. These days, retail banking in a country such as France for the price of one symbolic euro (and a recapitalization of €500 million) is a rare opportunity.
Thus, the spin-off of HSBC retail banking in France could be a strategy for Cerberus or JC Flowers to expand their customer base by integrating new premium customers ready to invest the money they have saved during lockdown.
Hector de Vergeron, Dongho Shin, Philippe Cardinaletti, Ethan Stofize & Leo Clément