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Hongkong & Shanghai Vs. The World (Int'l Edition)


International -- Finance: BANKS

HONGKONG & SHANGHAI VS. THE WORLD (int'l edition)

For two decades, Hongkong & Shanghai Banking Corp. focused on conquering new continents. But even as the group was spending $7 billion gobbling up London's Midland Bank PLC and New York's Marine Midland Bank Inc., Citibank and other rivals were busy carving out formidable retail banking empires in Asia.

Now, HSBC is fighting back with a vengeance to hold its home turf. In what is shaping up as a battle royal over Asia's consumers, Hongkong Bank is launching a $180 million drive to sell consumers across Asia everything from credit cards to mutual funds. In particular, it is attacking Citi's stronghold: the region's swelling pool of newly rich. Says Warner G.N. Manning, senior manager for banking services: "We're going to make a run at Citi."

That's a lofty goal. But securing a more solid foothold in the world's fastest-growing region is critical to the future of HSBC Holdings PLC, the London-based owner of Hongkong Bank and its affiliates, whose $315 billion in assets make it the seventh-largest global banking group. HSBC is counting heavily on Asia to maintain its long record of solid profit growth. Forty percent of the group's assets are in Asia, but the region accounted for 60% of last year's $2.45 billion in profits. By contrast, Europe and the U.S. are mature markets, jam-packed with banks and unlikely to provide anywhere near Asia's momentum.

To preserve its lead, HSBC has spent three years designing a sweeping overhaul of its Asian operations. And not just in retail. The group also is merging a welter of far-flung subsidiaries into giant global trading and investment banking units (page 56) that should be better able to compete with Wall Street firms, which are snaring deals with HSBC's Hong Kong corporate clients. With $5 billion in cash on its books, no one doubts HSBC's resolve to protect its domain. Says CEO John R.H. Bond: "We've got to make damn certain we maintain our competitive advantage."

Investors like what they see so far. With analysts such as Morgan Stanley & Co.'s Karen Udovenya predicting that HSBC's profits will grow 14% for each of the next three years, the group's shares have risen 31% in Hong Kong, to $13.50, since Mar. 1.

The consumer focus is a sharp departure for 130-year-old HSBC. The group has long regarded its Hong Kong branches as a source of cheap funds it could lend to fast-growing local corporations. That simple formula made Hongkong Bank among the world's most profitable institutions and also gave it the luxury of remaining laid-back in the rest of Asia. But deregulation of interest rates is squeezing the bank's retail profit margins. So are competitors. In Hong Kong, rivals such as Dao Heng Holdings, International Bank of Asia, and the Beijing-owned Bank of China are adding new branches and coming out with credit cards and high-yield savings plans targeted at the middle market.

GROWTH FOR TWO? Citi, meanwhile, is going after wealthier customers across Asia. According to NatWest Securities Corp. analyst Stephen Berman, Citi shelled out a huge $600 million from 1991 to 1993 alone to expand in emerging markets. Much of that was earmarked for Asia, where Citi has 4.2 million account holders and 3 million credit-card customers. Last year, Berman figures, these affluent customers helped Citi earn a tidy 1.4% return on its Asian assets. Over time, he thinks, the region could produce a return of 2%--nearly double what Citi earned worldwide in 1994. Says Berman: "The Asia-Pacific region is probably the most important for the company in terms of future profitability."

If that's true for Citi, it's even more critical for HSBC, with its immensely larger stake in the region. Some 48 million Asians outside Japan now earn more than $30,000 annually. Hongkong Bank estimates that this group may reach 69 million as soon as 1998. The bank hopes to grab a 10% share of this market by adding special branches across the region and by marketing credit cards, mutual funds, and high-tech "smart cards" that carry electronic cash balances and let customers pay for everything from restaurant tabs to cable-TV programs.

The campaign is already making Citi sit up and take notice. "We definitely are seeing Hongkong Bank become more aggressive and more focused on retail than they have ever been," says Steven Norris, marketing director for Citi's Asian retail business. For now, though, Norris maintains that there's more than enough growth in Asian markets for two giants to thrive side by side.

For a glimpse at Hongkong Bank's new look, drop by its Select Personal Finance Center in downtown Hong Kong. Such centers are reserved for customers with special AssetVantage accounts, which require a minimum balance of $26,000. With its gentle hues and designer furniture, the center looks more like an airline lounge, first-class. Upon entering, clients are greeted by smiling attendants and offered coffee, tea, and chocolates. After calling up records on computers, the sales staff is trained to give personal advice on everything from mutual funds to currency swaps.

So far, the bank has opened three Select centers in the territory and plans to have 10 by yearend. It claims more than 100,000 AssetVantage members, who also get higher interest on savings, easier lines of credit, and special operators to help them bank by phone. For other segments, Hongkong Bank offers PowerVantage, an account with fewer frills aimed at Asian yuppies who need consumer credit, and BusinessVantage for small entrepreneurs. Officials say these programs have helped Hongkong Bank hold on to its market share and have even prompted some clients to shift funds from competitors.

LIKE A SHOPPING MALL. Hongkong Bank also has begun planting its flag around the region, where many governments are liberalizing their financial markets. It is offering credit cards in Thailand, where Citi already has over half of the market, and will begin soon in Taiwan and Indonesia. In the Philippines, the bank plans to boost the number of branches from two to eight by yearend. It's also targeting upper-income consumers in New Zealand and Singapore by opening special AssetVantage branches. And in less affluent Kuala Lumpur, the bank is trying to build long-term brand loyalty with a program called Partner, which lets middle-class customers in the door for a more modest minimum of $2,500. HSBC hopes they'll stick with the bank as their incomes and banking needs expand.

Just as it's trying to revamp its retail business in the face of Citi's challenge, HSBC is consolidating its often-overlapping wholesale banking units to become a one-stop shop for all of a corporation's financial needs--from loans, bond issues, and currency swaps to pension fund management and trade finance. "There is a sea change taking place here," crows Stuart T. Gulliver, head of treasury and capital markets at eight-month-old HSBC Markets, as he looks out over a host of computer terminals and more than 100 traders in his new Hong Kong dealing room.

In fact, the 44-story Hong Kong headquarters is even starting to look like a shopping mall of financial services. Getting off the elevator on the 12th floor, visitors ascend via escalators from one big wall-free floor after another specializing in trustee services, private banking, securities and currency trading, and investment banking. A few floors down, Hongkong Bank dispenses loans.

But as the Hong Kong giant tries to spread its brand name across the region, the competition is hardly sitting on its hands. "From our perspective," says Citi's Norris, "they still aren't going far enough." Still, few believe the deep-pocketed HSBC will allow itself much slack. Now that the bank is on the march, expect some furious battles to erupt before long on Asia's shores.

HSBC's Global Strategy

CONSUMER BANKING

STRATEGY Spend $180 million over next three years to push aggressively throughout Asia with a full range of products aimed at affluent consumers.

PROSPECTS Good in stronghold Hong Kong, despite intensifying competition. Beating Citibank and local lenders elsewhere in Asia will be tough.

DERIVATIVES AND CURRENCIES

STRATEGY Become Asia's top foreign exchange and futures trader by combining operations of other units into giant HSBC dealing rooms.

PROSPECTS Already achieved rapid gains in Hong Kong forex and futures but making little progress in other key markets, such as Singapore.

INVESTMENT BANKING

STRATEGY By combining merchant banking arms of Hongkong Bank, Midland Bank, Samuel Montagu, and Wardley into HSBC investment bank, try to lure longtime corporate customers away from Wall Street firms.

PROSPECTS Difficult in Europe, where HSBC is small fry in bonds and equities. Minor presence in U.S. In Asia, can become a power in small deals but hobbled in snaring big global deals by lack of distribution in the U.S.

TRADE FINANCE

STRATEGY Use already dominant role as top financier of booming import-export business in Hong Kong and China to expand in the rest of Asia and the West. Handle more of companies' trade-related paperwork.

PROSPECTS HSBC is a formidable player in East Asia. But it must expand elsewhere to compete against big U.S. banks for greater share of trade flows between U.S. and Asia and among Southeast Asian nations. By Pete Engardio in Hong Kong, with Paula Dwyer in London


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