HSBC tortoise will outpace Barclays hare

August 3, 2009

REUTERS— Margaret Doyle is a Reuters columnist. The opinions expressed are her own —
Barclays’ and HSBC’s interim results are a study in contrasts. Barclays has used the credit crunch to make a bet-the-farm move into the investment banking big-league, a bet that has so far paid off. HSBC, in comparison, chastened by its flawed move into the U.S. subprime market, has returned to its conservative roots.
John Varley, Barclays’ chief executive, gives the usual guff about “staying close to our customers and clients”. In truth, Barclays’ 3 billion pounds of profit in the first half owes much more to its investment banking division, enlarged by its opportunistic acquisition of Lehman Brothers’ North American unit last autumn, than to its traditional banking businesses.
Barclays Capital (BarCap) more than doubled revenues to 10.5 billion pounds, and doubled pre-tax profits to 1 billion pounds. As with rivals, the star performer was fixed income, currencies and commodities where banks are profiting thanks to their access to very cheap central bank funding.
This is just as well, because Barcap is still carrying plenty of toxic assets left over from the credit boom. These cost it 4.7 billion pounds in gross writedowns and impairments in the first half. Given that it still has other dodgy exposures, including assets worth more than 7 billion pounds guaranteed by ailing monoline insurers, further losses seem likely. Barclays cannot rely on other parts of the bank to come to its rescue: profits in traditional retail and commercial banking businesses all collapsed as impairments soared.
HSBC’s global banking and markets (GBM) division also delivered a record performance, more than doubling its first-half profits, to $6.3 billion. However, HSBC has long resisted the charms of investment banking, and runs GBM as a complement to its existing global commercial banking franchise. Despite the juicy returns currently on offer, this is unlikely to change.
HSBC has its own sizeable bit of historical baggage in the form of Household, the U.S. consumer lender that is now being expunged from the record, though not without considerable additional losses.
Many suspected that HSBC would use its bumper $17.8 billion rights issue this spring to acquire divisions of ailing rival banks at bargain basement prices. So far, it has resisted, instead bolstering its tier 1 capital ratio to 10.1 percent.
Rather, it is building on its position as the world’s leading international bank (especially now with Citi holed under the waterline) organically. While cash-strapped rivals retreat from China, HSBC is investing in its Chinese operations. It has been the first international bank to settle cross-border trade in renminbi (yuan). It is on track to have 100 outlets, including many in rural China, by year end, more than any other international bank. Such loyalty will not go unnoticed in Beijing.
Which bank is better positioned for the new environment? That depends partly on the speed of the recovery. Barclays has so far performed a dazzling high-wire act, avoiding state capital by spreading its losses over a number of years and by selling its Barclays Global Investors arm. But this is hard to sustain if the downturn turns out to be prolonged. Meanwhile, once banking conditions return to normal, central banks will cease to flush investment banks with cheap cash and investment banking profits are bound to tumble. The HSBC tortoise looks set to leave the Barclays hare far behind.


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Neither would make the mark if it were not for the cheap money which is being passed along to their customers at a higher rate, together with the curtailed or none existant dividend. And no doubt fixed income would rise with such low cost of funding.

There is no evidence of the wider community benefiting, only closures and layoffs. The authorities need to mark-up these cheap rates for such banks which claim to be independent and with exemplary tier 1 capital ratios.

Posted by Joshi | Report as abusive

As your site said “The opinions expressed are her own” I honestly believe she would consider more the all scenario and not only said that the “crises” could extend for more time than usual and the banks are gonna loose strength (no way.. this banks are strong and have a responsible policy to look after their own). Out there are more economy’s like BRICS responsible and strong enough to boost the economy absorb the bad credit and sustain the world to going around. All banks have in their hands bad credit (it come from our hands to their hands but it is also another point for discussion). A truly and trick question is why the journalist are so confuse about what their are writing? One day the world is backing on tracks the day after we are close to the end of the world or one step to go in the abysm. Please better evaluation about what you’re gonna to write. Sorry for my English is not my first language.

Posted by Sergio | Report as abusive

You’re view is absolutely correct. Barclays always looks for the quick fix and to the short term. It is a trade off as usual, to keep the shareholders content, especially their new Middle Eastern ones. This “short termism” has long been a misguided vision by Barclays, especially in Banking.

Posted by Jaime | Report as abusive