When HSBC announced its record-breaking $21bn pre-tax profit for 2005, it almost went unnoticed that the region that accounts for the smallest portion of the group’s bottom line was also the one that showed the strongest growth for the year. Latin America’s contribution to profit soared by nearly 50% to 3.1% of the total from 2.3% in the previous year.
The world’s second largest bank has been quietly building up its Latin American network with an eye on a booming domestic consumer banking market as well as growing demand by multinational customers for services in the region. In the past few months, HSBC has acquired Italian bank BNL’s Argentina operations for $155m. In February, HSBC bought UK bank Lloyds TSB’s assets in Paraguay for $15m, while a few weeks later it applied for a permit to operate in Peru’s banking system.
Unfamiliar territory
Why is a bank whose historical roots are firmly embedded in Asia, which went to great expense to consolidate its European presence through the acquisition of Midland Bank, and which now operates nearly 2000 branches in the US, embarking on the expansion trail in Latin America?
“We have had a presence in Latin America for more than a century, but the movement that started in 1997 sprung from a network of representative offices of Midland Bank,” says Youssef Nasr, HSBC Group managing director for South America.
Mr Nasr explains that when the region started allowing debt-for-equity swaps, Midland Bank used its network of representative offices to promote bilateral business with other parts of the group. It turned some of these loans into minority equity participations in a number of banks around the region. One of these was Banco Banmerindus in Brazil. When this bank ran into financial difficulties, the Brazilian government offered HSBC the opportunity to buy out the other shareholders and take over the bank.
Global ambitions
The acquisition took place in 1997 and it was the bank’s first major non-passive investment in the region. This was followed a few months later by a similar situation with the Roberts Group in Argentina. The Roberts family, who were the majority shareholders, decided to sell their 70% stake to HSBC. The idea, as Mr Nasr explains, was to start putting together a South American operation to complete HSBC’s global network.
It was not the ideal time for building up an emerging markets business, with the Asian crisis in 1997, followed by Russia in 1998 and the Argentina meltdown in 2001. But from 2003, when the dust had settled from the turbulence that occurred around the time of the Brazilian presidential election, the bank took another look at South America.
HSBC came across two sets of observations. First, that a number of countries had by then shown a period of stability and positive changes in their macroeconomic policies. Second, the group was impressed by the fact that several countries had achieved peaceful and democratic changes of government, had years of primary surpluses in their fiscal accounts and were now moving towards trade surpluses, while adopting policies of floating exchange rates.
That view is gradually being confirmed and it is reflected in the views of the rating agencies. Some countries are now rated investment grade and others are a few steps away from being awarded that rating.
At the time, HSBC had added some new capabilities that it thought could be particularly relevant to its South American business. As it started developing its corporate and multi-national banking business, the bank was increasingly being asked if it could service them in South America with products such as payments and cash management, trade services and project finance.
Strategic acquisitions
Then in 2002 came two strategic acquisitions in North America. HSBC acquired Household International, which put it very much in the consumer finance business. The acquisition had two components. On the one hand, it gave HSBC additional scale in the US, Canada and the UK.
“We also took the view that consumer finance probably has a very strong future in emerging markets,” says Mr Nasr. “Over a period of time our intention was to take technology and savoir-faire from Household International and move it into these markets. South America struck us as being very well suited for exporting a consumer finance model.”
Around the same time, the bank acquired the Bital Group, which became HSBC Mexico. This gave them critical mass in terms of Spanish-speaking talent, systems and technology, added to which were the growing trade links between Mexico and South America.
The strategy was to expand the business in the countries in which the bank had a presence by adding new products in the corporate banking market and consumer finance area.
In order to provide those cross-border services, HSBC decided to set up shop in some of the smaller countries. While it does not expect these countries to make a very significant contribution to the bottom line, they will become important in terms of being a credible provider of services to corporate customers in each country, as the group has a growing number of international investors who are diversifying into the emerging markets.
On a regional basis, HSBC sees Santander, BBVA and Citigroup as its peer group. But the UK bank believes it differentiates itself from the competition by having a more significant presence in a number of countries, a view the bank’s competitors would disagree with.
Santander is the top foreign bank in Brazil, but HSBC is larger than Citigroup, while BBVA exited the market a few years ago.
Critical mass
“In some countries we have more critical mass,” says Mr Nasr. “We are also seen as having a stronger connection with Asia. As more exports, fund and investment flows take place between Asia and Latin America, we become the premier organisation to do this business.”
At this stage, HSBC is sticking to a mainly organic growth strategy in South America, although the bank acknowledges that there will be opportunities to enter or build more critical mass in some parts of the region.
“Down the road, if acquisition opportunities open up, we may be able to significantly increase that 3.1% contribution to group profit,” says Mr Nasr. “But today, if you look at the valuations of the domestic banks in most of the region, they are extremely high. It would be difficult to justify an acquisition of size in the region from a shareholder return point of view.”
