It has not been on many people's radar screens but in the past five years the contribution of HSBC's banks in Latin America to the world's third biggest banking group's pre-tax profits has soared from 2.3% of the total in 2004 to "an annual average of 10% today", says Emilson Alonso, group managing director and head of HSBC Latin America since June 2008.
When viewed over a longer period, HSBC's expansion in Latin America is, if anything, even more striking. Starting with fewer than 10 offices a little over a decade ago, the UK-based bank now has a presence in 14 countries with 2500 branches (or 4000 distribution points if offices, sub-branches and other sales points are included), and 55,000 employees.
In June 2009, HSBC ranked fifth among banking groups in Latin America, behind Brazil's Itau-Unibanco and Bradesco, and Spain's Santander and BBVA banks.
Emilson Alonso, group managing director and head of HSBC Latin America
Work in progress
In view of such scale it might be expected that the integration of all the banks acquired by HSBC in the region (and almost all of which have been re-branded) is still very much a work in progress, especially concerning the integration of bank offices and systems, says Mr Alonso.
Nevertheless the group's organisation is clear, with the region's two economic poles - Mexico and Brazil - also being the countries where HSBC has by far its biggest operations and where the bank's Spanish-speaking and Portuguese-speaking talent is based, along with it's technology platforms and systems. All the other HSBC banks in the region share these platforms, but CEOs of banks in individual countries have considerable independence.
Next in importance to Brazil (where HSBC bought Banco Bamerindus in 1997, now Brazil's sixth biggest privately owned bank) and Mexico (where it acquired Grupo Bital in 2002, now the country's fifth largest bank) comes Argentina, where HSBC added 90 branches of Italian bank BNL to its operations in 2006 after buying Grupo Roberts in 1997).
Then comes Panama. In 2006, HSBC paid $1.8bn for Grupo Banistmo, central America's leading regional financial services group, with 20 branches that includes one of the top two banks in Panama, a leading bank in Honduras, El Salvador's third biggest bank, a medium-sized bank in Costa Rica and a small unit in Nicaragua.
The only main central American country where HSBC does not have a presence is Guatemala, the region's biggest economy, but also one of the area's poorest nations. However, HSBC is on the point of opening a representative office in Guatemala and "if something appears in Guatemala that makes sense in terms of strategic position, the quality of the asset and the price, I am sure we will look at that", says Mr Alonso.
As such, HSBC's criteria for making an acquisition in 2009 appear similar to those when the bank started its expansion in Latin America in 1977, with the difference that back then "there were some good opportunities for acquisitions in Latin America and at a good price", says Mr Alonso. For example, Brazil's Banco Bamerindus and Argentina's Grupo Roberts, which were both in financial difficulties at the time of purchase.
Organic growth
In a much more competitive environment and with the international economic crisis not yet over, the head of HSBC Latin America says he wants to make the group's operations in the region more efficient and he is also interested in expanding in Peru, Chile and Colombia.
In all three countries, HSBC has recently started building up small retail banking operations alongside its global banking and commercial banking businesses. Such organic growth is often necessary so long as the opportunities for buying banks at prices "that make sense" remain "scarce", believes Mr Alonso. Thus in Peru, where HSBC started from scratch and now has 24 branches and $1bn in assets, the plan is to have more branches in about two years. Similarly, more branch growth is planned in Chile, "but it will be a very small, very upmarket [retail] operation. And the bulk of the Chilean operation will continue to be with corporations and institutional investors."
As Latin America's biggest economies - Argentina, Mexico, Brazil and Chile - develop and obtain higher investment grades, HSBC's confidence in lending to these countries' corporations increases, especially as some of them are becoming multinational corporations. "In Latin America, there will be an increase in our global banking and markets business," says Mr Alonso. This will include wholesale banking, loan and capital-markets finance and payment and cash management services. In 2008 this business grew 24% and accounted for 31.5% of HSBC's profits before tax in the region on income of just $580m.
By comparison, the share of HSBC's commercial banking business in the region in terms of pre-tax profits was 34.7% , slightly less than a year before, on income of $1.6bn.
The share of the bank's personal financial services (PFS) business (which includes mortgages) also amounted to about one-third of the total pre-tax profits for the region, or 32.8%, but this was 25% down on the year before, on income of $4.5bn.
Profit warning
The sharp decline in profits in the bank's PSF business reflects significantly higher loan impairment charges, mainly because of defaults on credit card loans, particularly in Mexico, but also loan deterioration in Brazil in the personal and car finance categories.
Mr Alonso comments that, with a 2500-branch network and 20 million personal financial services clients in Latin America, it is inevitable that the bank should focus a lot on consumer finance and residential mortgages. He adds: "In Latin America, unlike in Asia, banking is a business for individuals more than anything else. So I think we follow the market. The opportunity was there. But maybe this year, because of the major impact of the crisis, we will make some losses."
As a consequence, this year 50% of HSBC Latin America pre-tax profits is expected to come from the bank's global banking and markets business, 40% from its commercial banking business and just 10% from the PFS division because of loan impairment charges on the PSF side, Mr Alonso states.
Separately, HSBC is convinced that it is uniquely placed among its competitors because of its roots and strong connections with Asia, to be the leading organisation servicing the growing international trade, capital flows and investments between Asia and Latin America. "We have the right qualifications for that," says Mr Alonso, emphasising that such trade flows are becoming important, are mainly in the southern cone of South America and related to commodities trading with China and Japan.
