HSBC opens huge gap on British rivals

Figures yesterday showing pre-tax profits up 28 per cent to $5.2bn (£3.5bn) underlined how big a gap has opened up between HSBC and the rest of the pack of mainly domestically oriented banks.

Figures yesterday showing pre-tax profits up 28 per cent to $5.2bn (£3.5bn) underlined how big a gap has opened up between HSBC and the rest of the pack of mainly domestically oriented banks.

With Asia rebounding strongly and the North American contribution boosted by last year's $10bn acquisition of Republic Bank, the travails of the UK mortgage market that have exercised City analysts these past few weeks hardly register as a pimple on the financial performance on this powerhouse of a bank. One banker said yesterday: "You cannot compare this to any other UK bank: there is only Citigroup and HSBC who look like this in the world."

Once Sir Brian Pitman,the outgoing Lloyds TSB chairman, could sneer that while HSBC were bigger in absolute terms, the market valued Lloyds more because of its higher profitability. But that is no longer the case.

Two years ago Lloyds TSB was bigger in market capitalisation terms. Today, at £82bn, HSBC is the second-biggest bank in the world after Citigroup. It is two-and-a-half times the size of Lloyds and twice the size of UBS, the Swiss bank, making it one of the select band that can call themselves truly global banks.

While Lloyds has been criticised for not having seized the opportunity to buy a continental European bank when its share rating was higher and its reputation untarnished, HSBC sailed in earlier this year to snap up Crédit Commercial de France, the most highly rated of the French banks, from under the nose of ING, the Dutch bancassurance giant.

Keith Whitson, chief executive, believes the fact that HSBC is a genuinely global bank has made it easier to do deals. "In order to do deals you have to having someone who is willing to sell as well as some who is willing to buy. We are able to offer someone the opportunity to be part of a truly global organisation. That is not the same when you are offering UK mortgage assets," he said.

Its size and global reach gives HSBC a range of options few other banks can even imagine having. Whereas the other UK banks have junked their international pretensions, pulled out of investment banking and concentrated on their domestic retail franchises, HSBC has remained stubbornly diversified, both geographically and in terms of business areas.

Mr Whitson adds: "We have resources, both financial and human, which enable us to pursue growth."

Time was when HSBC was something of curiosity among banks - a colonial outpost of the British empire run by expatriate Scots, with a patchy track record of overseas expansion.

That started to change in 1992 when after nearly a decade of searching for an escape route before the 1997 handover of Hong Kong to China, HSBC won control of Midland, then the sickest of the big four UK clearing banks.

HSBC was ruthless about cutting costs. Critics say the bank is still a shadow of the old Midland, which in its prime was the biggest of the British banks. But it is making profits again and - unusually for a mainstream bank - is increasing its share of bread-and-butter current-account business.

But the real sea change in perception came after Sir John Bond took over as chairman from Sir William Purves two-and-a-half years ago. Sir William may not have been known for wasting money, but he ran the bank as his own fiefdom. He had little time for the notions that shareholders deserved more than a dividend in return for investing in the company. Not surprisingly, HSBC shares had never been among the sector's best performers.

Sir John took a radically different view. As well as ushering in a period of glasnost, he adopted a policy called managing value, which fixed an explicit target of doubling total shareholder return in terms of both profits and share price growth over five years. The target is buttressed by a demanding executive and employee share options package. He has also sought to weld HSBC's traditionally loose federal structure into a single global organisation operating under one single HSBC brand.

To outsiders, however, the most visible sign of change has been the aggressive acquisition spree since Sir John took the hot seat. Last year he paid more than $10bn to buy the Republic and Safra Banks from Edmond Safra,the Syrian jewish financier who was later to die in a fire at his Monte Carlo flat. That was followed this year by the 11bn euro purchase of CCF and a 50/50 joint venture with Merrill Lynch to develop an online wealth management business.

Sir William lived up to the stereotype of the tight-fisted Scot, only buying businesses at knock-down prices. Sir John, by contrast, is ready to pay up for what he believes is the right strategic deal. So far he appears to have got away with it.Whereas US and UK banks have seen share prices slump dramatically this year, HSBC is up 4.5 per cent.

The common thread behind all these deals is wealth management - access to the wallets of the well heeled, rather than the traditional low growth banking business.

"They put their foot on the accelerator at the right time, just as Asia started to turn around," said one banker yesterday. "They were helped by the sheer size of the business. They now have the resources; if they see a problem they need to fix, they fix it."

Mr Whitson said yesterday that the priority for the group was organic growth, although it is in the rare position of being able to move pretty quickly if another acquisition opportunity comes up. He dismissed the idea that HSBC would take advantage of the breakdown of merger talks between Dresdner and Commerzbank to expand in Germany. Merrill Lynch insiders say David Komansky, the Wall Street bank's chairman, is keen to develop the relationship with Sir John Bond.

Mr Whitson yesterday played down suggestions that HSBC was thinking of developing the Merrill relationship beyond the current joint venture, but he was careful to say that this was HSBC's thinking "at this stage."

Merrill would bring a credible global asset management business and an equity research and sales capability that HSBC currently lacks. One observer is convinced the two are the perfect fit. "I would see the merger with Merrill as inevitable.That is the next move these guys will make. They have taken retail banking as far as it can go."