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HSBC tortoise will outpace Barclays hare

August 3, 2009

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 US 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 business 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 the fixed income, currencies and commodities areas 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 £4.7bn in gross writedowns and impairments in the first half. Given that it still has other dodgy exposures, including assets worth more than £7bn 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 US 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. 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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  • About Margaret

    "Margaret Doyle is a Reuters Breakingviews columnist, based in London. She writes about investment banking. She has been a journalist for over 14 years. She has written for The Daily Telegraph and The Economist and presented various radio programmes for the BBC. She began her career as a consultant at McKinsey & Co. She has an economics degree from Trinity College, Dublin and an MBA from Harvard Business School, which she attended as a Fulbright scholar. She is a Conservative Member of Westminster City Council."
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