How Will The China Slowdown Affect HSBC Holdings plc?

Yesterday, in a move that stunned markets around the world, China devalued its currency. The move, designed to stimulate economic growth sparked fears that the country’s economy is in worse shape than official figures suggest — bad news for HSBC (LSE: HSBA).

Indeed, two months ago HSBC unveiled its new strategy, which involves a pivot to Asia and southern China. Simply put, the bank is planning to increase its exposure to China over the next few years. 

But as China struggles, HSBC will find it difficult to achieve the sort of growth management needs to hit profit targets. What’s more, as Chinese economic growth slows, there’s a chance the financial troubles could spill over into HSBC’s most profitable market, Hong Kong. 

Overweight China 

HSBC has long been ‘overweight’ China. The bank generates a large chunk of its income in Hong Kong and has become reliant on this market to produce group growth. 

In particular, for the first-half of 2015, HSBC’s profit jumped 10%, thanks to an investing frenzy in Hong Kong among individual customers prompted by China’s soaring markets earlier in the year. Unfortunately, sluggish growth in other markets, such as the UK, Europe and the US held back the bank’s growth. 

Asia is HSBC’s largest market. During the first-half, 69% of group pre-tax profit came from HSBC’s Asian arm. However, only 36% of HSBC’s assets are located in Asia. Nearly 50% of HSBC’s assets are based in Europe, although Europe as a whole only generated 16% of group pre-tax profit during the first-half. 

Low returns at HSBC’s European division are a direct result of the region’s high costs. HSBC’s European operations reported a cost efficiency ratio of 78% during the first-half, and 111% at the end of 2014. In comparison, the group’s Asian operations reported a cost efficiency ratio of 39% for the first-half and 47% for full-year 2014. Throughout 2014, HSBC’s management was targeting a group cost efficiency ratio in the mid-fifties. It’s clear that HSBC’s European operations have been holding the group back. 

Nevertheless, with such a high dependence on Asian economic growth, HSBC stands to take a huge hit if China’s growth hits a wall. Many Asian economies feed off China’s success, and any slow-down will reverberate across the region. 

Lack of growth 

If sales at HSBC’s Asian division start to slow, the group will struggle to grow. HSBC is currently undergoing a broad restructuring, selling off non-core assets and businesses. These sales will reduce the bank’s global footprint and impact sales.

However, for the most part, the assets HSBC is selling are low-return assets. The money raised from selling the assets could achieve a better return by being invested elsewhere. 

Still, as HSBC sells off international assets and refocuses on Asia, the bank is reducing its international diversification. Over the next few years, HSBC will become a more Asia-focused bank, and as a result, the bank’s growth will become highly correlated to China’s economic success.