Reports that HSBC may spin-off its retail division could be the first of many such changes, says Edge Consulting COO Ryan Mendy.
By Michael Ide, Staff Writer at ValueWalk:
Earlier this year The Edge Consulting Group COO Ryan Mendy said that we see diversified banks spin off their retail banking divisions in the next year or two, and it looks like the first such deal could be around the corner. The Sunday Times reported yesterday that HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA) is considering selling its retail division worth around $30 billion as part of a broader strategic rethink. After a difficult first quarter, the rumored spinoff and the official consideration of re-domiciling in Hong Kong has given HSBC two strong trading days in a row, jumping from 610p to 630p on Friday, and again to 649p in trading today.
HSBC may need to slim down before heading to Hong Kong. Mendy’s argument has been that tough new regulations, shareholder pressure, and weak fee income will force diversified banks to break up, all of which does seem to be in play in the HSBC story. But decision to explore re-domiciling in Hong Kong may be the catalyst for divesting from retail sooner rather than later. On Friday, Morgan Stanley (NYSE:MS) analysts Anil Agarwal, Chris Manners, and Fiona Simpson wondered whether a move to Hong Kong was even feasible.
Valuing big banks on a SOTP basis. Splitting the bank into divisions could alleviate this problem by reducing both HSBC’s size and complexity. While the catalyst might be unique, Mendy stands by his thesis that current conditions (strict regulations in particular) will continue to exert pressure on banks to spin-off their retail divisions. “The big investment bank model is over as we know it. Global banks are worth much more to investors if split-up,” he writes, noting that Bank of America, JP Morgan, Citi, Credit Suisse Group AG (ADR) (NYSE:CS), Deutsche Bank AG (NYSE:DB) (ETR:DBK) (FRA:DB), and UBS AG (NYSE:UBS) are all headed down a similar path.