HSBC Holdings plc

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HSBC Holdings plc

10 Lower Thames Street
London EC3R 6AE
United Kingdom
(071) 260 0500
Fax: (071) 260 0501

Public Company
Incorporated: 1865 as Hongkong and Shanghai Banking
Company, Ltd.
Employees: 99,148
Sales: £2.58 billion
Stock Exchanges: London Hong Kong
SICs: 6711 Holding Companies; 6111 Financial Institutions;
6012
Recognized Banks; 6411 Insurance Agents, Brokers, and
Service

A significant force in international banking, HSBC Holdings plc operates in some 60 countries and offers a comprehensive financial service encompassing not only commercial and merchant banking but also capital markets, consumer finance, securities, investments, and insurance. Despite a high international profile—the group’s corporate customer base includes one-third of the world’s 200 biggest companies—HSBC Holdings’ principal asset remains its original one: Hongkong and Shanghai Banking Corporation, known colloquially as Hongkong-Bank.

The history of HSBC may be traced through the Hongkong and Shanghai Banking Corporation (HSBC). In the early 1860s, Hong Kong’s financial needs were served by European trading houses called “hongs.” This system proved increasingly inadequate as the colony’s bustling trade—primarily in tea, silk, and opium—burgeoned. By 1864, the first proper banks had been established, but as these were based in London or India and controlled from abroad, there was a growing feeling that a local bank was needed in the colony.

Dissatisfaction led to action when it was discovered that a group of Bombay financiers intended to set up a Bank of China in Hong Kong, and that this bank, chartered in London, was to offer only a small proportion of its shares to China coast businesses. Thomas Sutherland, the Hong Kong Superintendent of the Peninsula and Orient Steam Navigation Company, proposed the foundation of a new bank modeled on “sound Scottish banking principles.” The proposal was promptly taken up by others of the Hong Kong business community; within days a provisional committee—comprised of Britons, other Europeans, and Americans—was set up and the total capital of the new venture set at HK$5 million. The move effectively preempted the proposed Bank of China, whose representative, when he arrived later in Hong Kong, could find no market for his shares.

The Hongkong and Shanghai Banking Company, Ltd. opened on March 3, 1865, with a second branch inaugurated in Shanghai one month later. A London office was opened later in the year. The new bank was welcomed by both the foreign business community and Chinese compradores—native businessmen who acted as intermediaries with the Chinese community. HongkongBank’s timing could have been disastrous, coinciding as it did with the international financial crisis of 1865-66, but this event actually worked to the new bank’s advantage, as it recruited staff and customers from the banks that had failed.

Initially, the bank was established under the local Companies Ordinance as the Hongkong and Shanghai Banking Company, Ltd. Under the colonial law of the time, a bank had to incorporate either under a royal charter in compliance with the Colonial Banking Regulations or else according to British banking legislation. However, the bank’s founders objected to these options, as they had particularly designed their enterprise as a local concern. Eventually a deal was struck with the Treasury whereby the renamed Hongkong and Shanghai Banking Corporation, under a unique ordinance, could retain Hong Kong headquarters while complying with the Colonial Banking Regulations.

HongkongBank expanded rapidly throughout the nineteenth century. By 1900, it had branches in Japan, Thailand, the Philippines, Singapore, and the countries now known as Malaysia, Myanmar, Sri Lanka, and Vietnam. In some Asian cities, HongkongBank was the first to usher in principles of modern Western banking and was indeed Thailand’s very first bank, printing that country’s first bank notes. In the United States and Europe, HongkongBank branches opened in San Francisco in 1875, New York in 1880, Lyons in 1881, and Hamburg in 1889. Except in New York, where a Canadian bank already operated, HongkongBank was the first foreign bank in each of these cities.

In Hong Kong, operations experienced a setback in the 1870s when the bank made some unwise investments in local Hong Kong industry—its reserves fell from HK$1 million to HK$ 100,000—but the company soon regained its footing under the leadership of a new chief manager, Thomas Jackson, who brought the bank back to a renewed emphasis on its field of expertise, trade finance. By the end of Jackson’s reign, in 1902, HongkongBank’s paid-up capital stood at HK$10 million, and its published reserves at HK$ 14.25 million, with additional estimated inner reserves of HK$10 million.

The bank had, however, developed another lucrative role—that of banker to governments. By the 1880s, HongkongBank was operating in this capacity to the government of Hong Kong and had acquired the Treasury Chest (the British government’s military and foreign service) business for China and Japan. In addition, the HongkongBank issued bank notes for Hong Kong and for the Straits Settlements (Singapore and Penang). Since these notes were not, at the time, legal tender, their popularity reflected the public’s trust in HongkongBank. Perhaps the bank’s greatest success was in mainland China: it financed that country’s first public loan in 1874 and, by 1910, had become the foremost bank and clearing house for the national groups of the multinational China Consortium.

World War I proved a difficult time for the international bank both diplomatically and financially, as nationalistic fervor gripped the world. HongkongBank was censured by Britain for its ties with nations that were now enemies, and Germany was similarly dissatisfied—all the bank’s German directors resigned. Business did improve to some extent after the war, with the bank opening new offices in Hankow, Bangkok, and Manila, but operations in an increasingly hostile China suffered; although the bank moved into Manchuria, its activities were limited to foreign trade activities. Furthermore, the rise of an indigenous Chinese banking industry curtailed the influence of HongkongBank. The bank also experienced disappointments in other Asian markets, incurring losses in the Philippines and the Malayan Peninsula, and found its branches in Java, Saigon, and Haiphong neglected in favor of Dutch and French colonial banks.

As hostilities mounted at the onset of World War II, Hongkong-Bank just managed to ship its reserves (previously silver, now British sterling standard) to London before Japan invaded Hong Kong on December 8, 1941. During the war, most of the bank’s European staff working in Asia were taken prisoner by the Japanese. Many were subsequently sent home, but some were held, including the bank’s chief manager and his appointed successor, both of whom died during incarceration.

During this time, operations shifted to London, where the head office was moved. The London manager became chairperson and chief manager of the bank, and the London Advisory Committee took on the powers of the board of directors. When the war ended, HongkongBank was held liable for some HK$16 million in bank notes which it had issued under coercion during the occupation.

The bank soon recovered its losses, however, in the boom years after the war. Headquartered again in Hong Kong, Hongkong-Bank was prominent in the effort to rebuild the colony after the war, providing financial aid to revitalize commerce and the economy. The bank also looked outward, establishing its presence even more firmly throughout Asia. However, as mainland China became increasingly volatile both politically and fiscally, HongkongBank began closing its branches in China soon after the war and by 1955 retained a presence only in Shanghai.

Nonetheless, the political situation in China also worked to the bank’s advantage, as business in its home market of Hong Kong was boosted by unrest on the mainland. Refugees and industrialists pouring into the colony from China brought with them manufacturing skills and experience. HongkongBank was there to finance them, and thus played a significant part in helping to establish Hong Kong as one of the world’s most prominent manufacturing centers.

HongkongBank also retained its interest in international operations, initiating a new policy of establishing or acquiring foreign subsidiaries incorporated in their country of operation. In 1959, HongkongBank purchased the Mercantile Bank of India, London, and China and the British Bank of the Middle East. The bank also consolidated an already strong position in Hong Kong with a friendly takeover of the extensive interests of the Hang Seng Bank in 1965.

HonkongBank’s renewed interest in expansion was matched by a diversification in the banking services it provided. The bank formed a hire-purchase finance subsidiary, Wayfoong, in 1960, to deal with such operations as installment loans for consumer goods and financing motor vehicle purchases. This trend to offer a more comprehensive service continued, with the bank forming Wardley Ltd. in 1972, a subsidiary involved with merchant and investment banking, and the establishment of an insurance subsidiary, Carlingford.

In 1980, the bank acquired 51 percent of the New York-based Marine Midland Bank Inc. This was a highly significant move for the bank—the total assets of the acquisition represented 62 percent of the assets of HongkongBank—and a controversial one, sparking American fears (leading to congressional hearings) that the control of a major U.S. bank would move from the country. HongkongBank managed to placate these fears and indeed acquired the remaining interest in the American bank in 1987. Hongkong Bank of Canada was established in 1981, and, nine years later, HongkongBank acquired Lloyds Bank Canada. Moreover, the bank attempted to move cautiously back into China, as that country eased its economic restrictions on foreign financiers.

However, HongkongBank’s expansionist policies were not always successful. Its acquisition of the U.S. Marine Midland, said initially to have boosted the bank’s assets from HK$125.3 billion to HK$243 billion, soon proved a debacle. Ill-advised forays into real estate and Latin American lending led to significant losses, prompting the parent company in 1991 to completely overhaul its subsidiary—at a purported cost of $1.8 billion. Other high-profile failures of the 1980s include the bank’s financing of an Australian tycoon, Alan Bond, who went bankrupt, and its support for London’s ultimately unsuccessful Canary Wharf development, undertaken by the Canadian firm Olympia & York. Nevertheless, as Pete Engardio commented in Business Week: “Booming Hong Kong provides HSBC with a cornucopia of cash.”

By 1991, HongkongBank had over 500 subsidiaries in 50 countries. In fact, its portfolio had become so expansive and complex that a new umbrella organization was formed. HSBC Holdings plc was incorporated in the United Kingdom, while its headquarters were established in Hong Kong. As a condition of its 1992 acquisition of Britain’s Midland Bank pic, however, HSBC was required by the regulatory Bank of England to move its head office to London.

The acquisition of Midland was a coup, providing HSBC with the significant presence in Europe it had previously lacked. Variously described as a merger and a takeover, the amalgamation virtually doubled HSBC’s assets and work force. The venerable Midland, the U.K.’s third largest bank, was not performing to standard at that time, being the least profitable of Britain’s “big four” banks. However, the financial health and the international experience of the parent company began attracting larger corporate customers to Midland. In addition, many individuals were subsequently won over by the telephone banking service, First Direct, introduced by Midland just before the amalgamation and strongly backed by HSBC. HSBC’s lead in technology—used, for example, to automate credit decisions and limit staff expenditure—also played a part in Midland’s recovery.

As of 1994, HSBC ranked 10th in the financial world in terms of capitalization, 15th in assets, and among the top ten in profits. Its U.S. and Australian subsidiaries, which had experienced losses, were again returning profits. Future expansion in America, Europe, and Asia was planned/According to the Investors’ Chronicle, the group’s international success continued to be substantially fueled by the “phenomenal profitability of its Far East base [which] has given HSBC the strength necessary to pursue international expansion.” Indeed, HongkongBank was so securely established in Hong Kong that it was known locally simply as “the Bank.” Although the company faced some uncertainty regarding its future, as Britain was due to relinquish all control of the territory to China by 1997, HonkkongBank noted that it had received assurances from Peking that its future would be safeguarded. Optimistic for the company’s future, chief executive John Bond commented: “In Chinese, ‘threat’ and ‘opportunity’ are the same character.”

Principal Subsidiaries

British Bank of the Middle East; Carl-ingford Insurance Co. Ltd. (Hong Kong); Concord Leasing Inc.; Hang Seng Bank Ltd. (Hong Kong; 61%); Hongkong and Shanghai Banking Corporation Ltd. (Hong Kong); Hongkong Bank of Australia Ltd.; Hongkong Bank of Canada; James Capel & Co. Ltd.; Marine Midland Bank; Midland Bank pic; Samuel Montagu & Co. Ltd.; Wardley Ltd. (Hong Kong); Way-foong Finance Ltd. (Hong Kong).