In the wake of the massive penalties from U.S. authorities levied over money laundering, HSBC (HBC) is now considering selling its 15.6% stake in the second biggest Chinese insurance firm, Ping An Insurance. Although the exact total exacted by U.S. authorities remains anybody's guess, they are expected to top the $1 billion mark at a minimum. The bank has already set aside more than $1.5 billion and it can generate $9.5 billion (or $2.8 billion in pretax gains) through a complete sale of its stake in Ping An. Last year, when the bank was implementing its austerity policy, its executives announced that they are not going to sell Ping An, and this reversal speaks volumes as to what the board feels is their potential exposure to litigation expenses which now pose a threat to its drive towards profitability.
UK-based HSBC has a dominating presence in China's financial industry. Ping An is one of HSBC's most prized possessions that it bought for $1.7 billion in a series of transactions in 2002 and 2005. It has delivered outstanding performance recently that saw a 21% YoY rise in net profits for Q3 despite the overall decline seen by its Chinese peers. But HSBC has an even bigger share - 19.9% - stake in the Bank of Communications and a relatively smaller - 8% - in Bank of Shanghai.
However, given the enormous size of its stake, HSBC will follow in Bank of America's (BAC) footsteps that sold its shares in China Construction Bank (CCB) to a group of investors, simply because it's almost impossible to find a single buyer. BAC has its own legal troubles. Meanwhile HSBC is also phasing out its operations from its non-core business areas and its current decision will be in line with that strategy. It has already moved out from the insurance business in Argentina, Hong Kong, Singapore and Mexico. It is also looking for buyers for its 18% stake in Vietnam-based insurer Bao Viet Holdings. But exiting from China is a little trickier because the government only permits other financial institutions as buyers of its insurers, which reduce the pool of possible buyers.
On the other hand, cash rich Asian organizations are eager to spend their reserves through acquisitions which is evident in the string of deals struck recently such as Japan's Softbank looking to buy a 70% stake of Sprint Nextel (S) or the sale by BoA of CCB that brought capital in from Singapore. American financial institutions had done the same when they were loaded with cash previously and the relatively lower cap of their Asian peers made them an attractive acquisition targets. But the times they have a'changed, as Bob Dylan would say. The stringent capital requirements in the U.S. and Europe coupled with falling revenues from traditional banking in a zero interest rate environment, means that more and more American and European firms will leave Asia by shedding non-core assets.
Earlier this year, Citibank (C) sold its 9.9% stake in India's largest mortgage firm HDFC (HDB) for $1.9 billion and later, after failing the Fed's stress test, sold its 2.71% stake in Shanghai Pudong Development Bank. Similarly GE (GE) sold a quarter of its shares - 7.6% - in Thailand's most lucrative bank, The Bank of Ayudhya for $466 million.
By divesting themselves of their lucrative insurance businesses in the fastest growing area of the world for the insurance industry speaks to just how big the problems are within the Western banking system. The fact that the major U.S. banks are not being prosecuted for fraud but only asked to pay nominal fines that amount to less than 1% of the fraud itself, while London-based banks are bearing the brunt of the political backlash with firms like HSBC, Standard Chartered and Barclays (BCS) on the receiving end of massive fines implies that regulators are frightened of bank runs in the U.S. and are attempting to shift public ire at the banks towards London. Either way, this makes the entire sector very difficult to invest in regardless of Fed policy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.