The battle for Asia’s preeminent financial institution will be fought with the Federal Reserve providing ammunition — to both sides. Just how much profit each can squeeze out of US monetary tightening may end up deciding if Hong Kong’s biggest bank, HSBC Holdings Plc, stays whole and dominant. Or if Singapore’s largest lender, DBS Group Holdings Ltd., gets a shot at staging an upset.
Rising interest rates are shoring up net interest margins for banks everywhere. For the June quarter, Singapore’s DBS reported a better-than expected 7% jump from a year earlier in net income to S$1.82 billion ($1.3 billion) on Thursday, with Chief Executive Piyush Gupta garnering a return on equity of 13.4%. Noel Quinn, his counterpart at HSBC, is only targeting 12%-plus return on tangible equity by next year.(1) While that would be the best performance for the London-headquartered lender since 2011, it may not be enough to quell demands by its largest shareholder, Ping An Insurance Group Co., to split off the Asian operations.
The call is finding increasing support among Hong Kong’s mom-and-pop shareholders, who’re upset with dividends that are just half what they were in 2018 — after they were scrapped for a year under UK regulatory instructions in 2020 when the pandemic hit. Any breakup of the bank would put at risk the $1.1 billion of first-half revenue that came from global banking and markets clients in Europe and America but was booked in Asia. Not only is this amount a chunky 14% of the division, it’s grown twice as fast as the overall pie, according to Quinn’s presentation.
Which is why it’s important for him to hit next year’s target of $37 billion in net interest income, up from $26.5 billion last year. Practically the entire increase is expected to come from margin improvements: HSBC needs the Fed’s help to earn more, reinstate its quarterly dividend and raise the payout ratio to 50% to pacify investors. DBS will also benefit from higher rates, but Gupta has one added advantage. His home market of Singapore — especially the buoyant property market — is less at risk from higher interest burden on homebuyers. Hong Kong’s real-estate sentiment is much weaker, while exposure to commercial real estate of mainland Chinese developers is a big threat to lenders.
In other words, the relative fortunes of HSBC and DBS may come down to what the global interest-rate cycle does to the two rival Asian financial centers that have powered their rise. “Credit charges are most likely to swell for the Hong Kong banks we cover” in the second half of 2022, according to Bloomberg Intelligence analyst Francis Chan. With the Hong Kong economy headed for its third contraction in four years, mortgage demand and wealth-management fees could disappoint, even as higher interest rates lead to markdowns on insurance and bond portfolios. “Weaker-than-expected growth in lending and non-interest income may offset our optimistic assumptions for margins,” Chan writes.
DBS, too, has exposure to Hong Kong and China, and its wealth management fees also slumped in the first half of 2022 because of subdued markets. But it has a sizeable loan-loss cushion. More importantly, it will be a net gainer from being the No. 1 bank in Singapore. When it comes to drawing in capital, talent and trade, the city-state’s rapid post-pandemic reopening has placed it at a far more advantageous position than its rival. Even before Covid-19, Hong Kong — and HSBC — found themselves in the crossfires of the U.S.-China cold war. Now it’s the Chinese special administrative region’s isolationist travel restrictions that are forcing it to abdicate its historical role as a global financial center. This shift alone may be powerful enough to alter the pecking order of Asian banking.
Does DBS need a footprint outside Asia to challenge HSBC, which is almost six times bigger by total assets? Not really, especially if the latter itself capitulates to pressure from Ping An and decides to deglobalize and split up. DBS is bulking up within the region: Citigroup Inc.’s exit from retail operations in Asia outside Singapore and Hong Kong has already given Gupta the keys to the Taiwan consumer bank he wanted to buy. When the integration is complete, a greater China loan book approaching $100 billion would give the Singaporean lender significant heft in North Asia, complementing its already solid presence in Southeast Asia and India.
Still, it’s entirely possible that aggressive Fed action will spoil the party for both HSBC and DBS. Gupta’s post-earnings presentation was cautious. His base case is for US interest rates to peak at 3.5%-4%, tempering inflation and causing only a mild recession. Ripple effects on Asia will likely be contained, he says, with manageable depreciation in local currencies. Those assumptions are all up for grabs — as is the contest for Asia’s banking supremacy.
More From Bloomberg Opinion:
• HSBC’s Promises Are Unlikely to Satisfy Ping An: Paul J. Davies
• Singapore’s Beverly Hills Shows Sign of Froth: Andy Mukherjee
• Fed Can’t Stop Bond Traders’ Wishful Thinking: Jonathan Levin
(1) For both banks, the return on tangible equity has been roughly 1 percentage point higher than the return on common equity in the recent past.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.
More stories like this are available on bloomberg.com/opinion
©2022 Bloomberg L.P.