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Hongkong & Shanghai Vs. The World


Finance: BANKS

HONGKONG & SHANGHAI VS. THE WORLD

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 and New York's Marine Midland Bank, Citibank and other rivals were busy carving out formidable retail banking empires in Asia.

Now, HSBC is fighting back to hold its home turf. In what is shaping up as a battle royal over Asia's consumers, HSBC's Hongkong Bank is launching a $180 million drive to sell consumers across Asia everything from credit cards to mutual funds. In particular, it is chasing 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 an ambitious goal. But securing a more solid retail-banking 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 makes it the seventh-largest global banking group in the world. HSBC is counting heavily on Asia to maintain its long record of solid profit growth. While only 40% of the group's assets are in Asia, the region accounted for 60% of last year's $2.45 billion in profits.

STOCK GAIN. To preserve its lead, HSBC has spent the past three years designing a sweeping overhaul of its Asian operations. With $5 billion in cash on the group's books, no one doubts HSBC's resolve to bolster its brand name and protect its playing field. Says CEO John R.H. Bond: "We've got to make damn certain that we maintain our competitive advantage."

So far, investors like what they're seeing. With analysts such as Morgan Stanley & Co.'s Karen Udovenya predicting that HSBC's profits will grow 14% annually for the next three years, the group's shares have risen 27%, to $13.25, since Mar. 1, neatly beating the 13% advance of the Hang Seng Index in Hong Kong.

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. Now, deregulation of interest rates and increasingly aggressive local competitors are squeezing the bank's retail profit margins.

Meanwhile, Citi's pursuit of wealthier customers has created a hugely profitable consumer business across Asia. According to NatWest Securities Corp. analyst Stephen Berman, Citi shelled out a huge $600 million between 1991 and 1993 alone to expand in emerging markets. A "significant" portion of the sum was earmarked for Asia, where Citi already 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. But Berman thinks that with the Asian middle class growing by 8% per year, the region over time could produce a return of 2%--nearly double what Citi earned worldwide in 1994.

SMART CARDS. Thanks in part to Citi's inroads, HSBC now realizes that the retail market in Asia contains immense profit potential. The bank hopes to grab a 10% share of the market of Asians outside Japan earning more than $30,000 annually, a group that it says may reach 69 million as soon as 1998. To do so, it is launching a marketing blitz for 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.

HSBC is also launching a fleet of new branches specially designed for upscale customers. Its Select Personal Finance Center in downtown Hong Kong is reserved for customers with special AssetVantage accounts that require a minimum balance of $26,000. Upon entering, clients are greeted by smiling attendants and offered coffee, tea, and chocolates. The sales staff is trained to give clients 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 to serve more than 100,000 AssetVantage customers. Hongkong Bank is also offering 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.

Hongkong Bank also has begun planting its flag around the region, where many governments have started liberalizing their financial markets. It is offering credit cards in Thailand, where Citi already has more than half of the market, and will soon be in Taiwan and Indonesia. It's also targeting upper-income consumers in New Zealand and Singapore by opening special AssetVantage branches there. And in Kuala Lumpur, the bank is trying to build the sort of long-term brand loyalty that Citi already has by rolling out a program called Partner. HSBC will let middle-class customers in the door for a more modest initial deposit of $2,500. But it's hoping that they will stick with HSBC as their incomes--and their need for banking services--expand.

ONE-STOP SHOPPING. HSBC's retail push to best Citi is coming at the same time as it is strengthening its corporate and investment banking businesses in Asia and worldwide. The idea is that the bank will offer one-stop shopping for wealthy Asian entrepreneurs who need both personal and business banking services--an approach quite similar to Citi's in the region.

The two-pronged 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, Singapore-based marketing director for Citi's Asian retail business. For now, though, he maintains there's more than enough growth in Asian markets for two giants to thrive side by side.

Will such efforts enable HSBC to leapfrog its U.S. and Asian competitors? As the Hong Kong heavyweight tries to spread its brand name across the region, the likes of Citi and Bank of China show little concern. "From our perspective," says Citi's Norris, "they still aren't going far enough." But few doubt that HSBC will be the next major player. And with HSBC on the march, expect some furious battles to erupt before long on Asia's shores.

Big Banks Duke it Out

HSBC'S STRENGTHS

-- Overwhelming market share and biggest branch network in Hong Kong

-- Longtime presence throughout Asia, especially in India, Malaysia,

and Singapore

-- Richest and most technologically advanced Asian financial group

CITI'S STRENGTHS

-- Strongest brand name in Asian retail business, especially among

upscale consumers

-- More extensive presence in markets outside Hong Kong

-- Ability to offer Asian business executives global electronic banking servicesBy Pete Engardio in Hong Kong, with Paula Dwyer in London


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