HSBC Holdings Plc (5) is in talks to sell its $9 billion stake in Ping An Insurance (Group) Co. (2318), China’s second-largest insurer, as Chief Executive Officer Stuart Gulliver comes under pressure to revive profitability.
Europe’s largest lender by market value “is in discussions which may or may not lead to the sale of the shares,” HSBC said in a statement today that didn’t identify the buyer. The London-based bank valued the stake at $6.37 billion at the end of December, according to its annual report.
Gulliver is seeking to cut costs by as much as $3.5 billion by 2013 and boost returns by selling assets to focus on growing economies in which the bank has the greatest market share. The London-based lender agreed to sell its general insurance units in Hong Kong, Singapore and Mexico for $494 million in March. Ping An generated 4.2 percent of HSBC’s first-half pretax profit, according to analysts at Goldman Sachs Group Inc.
“There is no strategic reason for HSBC to hold Ping An,” said Ian Gordon, a London-based analyst at Investec Plc (INVP) who rates the bank a hold. “It was bought as a play on the Chinese economy and it has paid off. It’s a positive for HSBC as it shows greater strategic clarity and it will book a profit.”
HSBC advanced 3.8 percent to 618.3 pence in London trading, bringing its gain this year to 26 percent. Ping An (2318) fell 1.9 percent to HK$58.45, the lowest close since Sept. 26.
The British bank plans to sell all of its 1.23 billion Hong Kong-traded shares in Ping An (2318), which represents about 40 percent of the insurance company’s shares that trade there and 15.6 percent of all Ping An stock, the Hong Kong Economic Journal reported earlier today, citing people it didn’t identify.
Charoen Pokphand Group, controlled by Thai billionaire Dhanin Chearavanont, is interested in buying the stake, according to the HKEJ report. Dhanin’s net worth is estimated at $6.1 billion as of Nov. 16, according to the Bloomberg Billionaires Index. An official at Charoen Pokphand declined to comment by e-mail.
Sheng Ruisheng, a Shenzhen-based spokesman for Ping An, said the company doesn’t have any information relating to changes of shareholders. HSBC bought 10 percent of the insurer for $600 million in 2002 before buying a further 9.9 percent stake for $1.04 billion in 2005 from Goldman Sachs and the buyout unit of Morgan Stanley. The stake fell to 16 percent after Ping An’s $2.5 billion stock offering in 2011.
While selling the stake may generate a short-term gain for HSBC, it may dilute earnings in the long-term because Ping An has a return on equity of 15 percent compared with HSBC’s 10 percent, London-based RBC Capital Markets equity analyst Patrick Lee wrote in a note to clients today.
The insurer’s third-quarter profit rose 21 percent to 2.13 billion yuan ($342 million) as its banking unit contributed more revenue and premium income expanded. An 18 percent increase in Ping An Bank Co.’s profit helped Ping An Insurance Chairman Peter Ma buffer the effect of a slump in the value of the insurance company’s equity holdings as China’s economy cooled.
“It’s not reasonable for them to dispose of Ping An because first of all, this is a key profit contributor to HSBC,” said Steven Chan, an analyst at Citic Securities International Co. in Hong Kong. The gain in HSBC shares signals that some investors are betting “there could be a special dividend if they dispose of Ping An.”
U.K. regulators are pressing banks to raise capital to guard against potential residential mortgage losses, increase lending, and remove bad loans and unwanted assets from their balance sheets. Regulators’ demands for more capital are prompting European banks to sell assets to raise money.
The latest round of the Basel Committee on Banking Supervision’s capital rules will also make it less attractive for lenders to own insurers because banks won’t be able to pool capital between the two businesses.
In March, HSBC said Paris-based Axa SA (CS) will pay about $494 million to acquire its general insurance business in Hong Kong, Singapore and Mexico. Sydney-based QBE Insurance Group Ltd. (QBE) will pay about $420 million for operations in Argentina and a unit of Hang Seng Bank Ltd. (11), a 62 percent-owned subsidiary of HSBC.
The British bank is still unlikely to sell its stake in Bank of Communications Co., China’s fifth-largest lender, Gordon said. The holding gives HSBC access to the country, a market it can’t address through its own 120 branches, he said.
HSBC, which wants to expand its branch network in China or boost its stake in BoCom, paid about $1.7 billion in March to maintain its 19 percent stake. Foreign banks are limited to owning less than 20 percent of Chinese lenders and must get regulatory approval to open new branches.
HSBC’s earnings growth missed analysts’ estimates in the third quarter, figures showed this month. Underlying pretax profit, which excludes acquisitions and disposals as well as accounting losses on the fair value of HSBC’s own debt, rose to $5.04 billion from $2.24 billion a year earlier, failing to match the $5.6 billion median estimate of eight analysts surveyed by Bloomberg.
The U.K. bank said this month it may face criminal charges from U.S. anti-money-laundering probes and the cost of a settlement may “significantly” exceed the $1.5 billion the bank has set aside. HSBC also earmarked $357 million in the period to compensate U.K. clients wrongly sold insurance to cover loan repayments.
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