Monday, May 09, 2005

Banking_How much money HSBC prepare to buy Chinese companies?

HSBC said today that it will pay US$1.1 billion to double its stake in Ping An Insurance (Group) Co. the second-largest insurer in the nation. Its share will reach 19.9 percent, the maximum permitted under Chinese law, reported Bloomberg.

The bank also had plans to buy another 4 percent stake in the near-future IPO of Bank of Communications, the fifth-largest bank in China. The stake will cost almost US$400 million, making HSBC's shares reach 24%.

Amy is confused that how HSBC have so much money in buying shares. Isn't that suggesting the bank's dividends to the shareholders will be less in the near future, because most of th money are spent to buy stakes?


Anonymous said...

Amy, it will reduce money that HSBC could give to shareholders as dividends if it wanted to. The profits they make each year (I would guess they would make at least several billion US) will partly be paid out as dividends, but if the company is able to invest them successfully, they will also retain the money instead of paying it out.

(In theory, the investors get the same return when this happens, because the share price will be higher by the amount not paid out in dividends.)

So if they remove $400m from dividends and spend it buying shares in Ping An instead, we hope that the market capitalisation of HSBC will be at least $400m higher than if it had paid out the dividend. (If people think it's a good investment, the price will go up more than $400m.)

Of course they could also just borrow money to buy the shares (from banks or investors) and still pay out a dividend if they wanted to.


Amy or koala said...

hoho, thanks for sharing, Dave. Which bank do you think HSBC would borrow money from? Do you think there is chance that it just borrow money from its own pocket, to say, the consumer saving?

Anonymous said...

Consumer savings *are* basically loans to a bank (then it lends out the money again at a higher interest rate.)

It's not their own money though - when people deposit money in a bank, it's a loan to the bank. Usually they lend it out again at a higher interest rate, and that's how they make money.

(They will have some of their own money - usually a little more than 12% of all the loans they have will be made with their own money (instead of depositors money))

If they wanted to raise $400 million quickly and they didn't already have it, they would probably ask a number of banks and other financial institutions to lend them money.

However, there are rules about how much money a bank can borrow (take as deposits), unlike other companies who can borrow as much as they like, because people expect banks to be a safe place to lend to. So if they were at the limit of their allowable borrowing, it just wouldn't be possible to borrow any more.

(The way banks work is very different to industrial companies, because their business is borrowing and lending money.)


Victor said...

Hi Amy,

HSBC had total assets and net assets of US$1265 billion and US$86.6 billion in 2004. The US$1.1 billion purchase of Ping An Insurance is therefore not a big deal for the world's local bank.

At the moment, the group is still investing in the PRC. I share with chairman John Bond that the PRC will be a big market in the future, as he said earlier that he would only invest in a business that has bright prospects over the next twenty-five years. Personally, I also think that the life insurance industry in the PRC has huge potential.

The penetration rate remains low, around 3%. Although one may argue that only people in affluent cities will buy a policy, Ping An is a pioneer in Shanghai and Beijing. Its market share in these cities was even higher than the industry leader China Life. Better corporate goverance is also the reason why HSBC is interested in Ping An rather than China Life.

For HSBC, it has strategic value to increase its stake in Ping An. Bancassurance will be an important income stream for the Bank of Communications, and I also believe that cross-selling of products between these two associates will deliver stable return in the future.

Priced at 2.1x embedded value, the acquisition of Ping An Insurance is not particularly appealing. Yet, HSBC is having its eyes in the future.

HSBC has a huge deposits base in HK. In 2004, its loan-to-deposit ratio in the territory was only 48.9% -- implying for every two dollars of deposits, HSBC can only lend out one dollar. So the source of fund is not a concern for the bank, and thus it is reasonable for the bank to find more fruitful investments in order to boost its returns. Deposits in HK are virtually costless.

Yes, the bank lowered its dividend payout. Dividend per share, however, rose because of the increase in profitability. Therefore, shareholders should not worry too much on its dividend policy, as long as it can pay over 60% of its earnings to shareholders. The point is that whether the deal is EPS-enhancing. If yes, absolute dividends will also increase, for those who are looking for stable dividends.

Amy or koala said...

hoho, Victor, you are such a professional on this. I would be quite interested on how HSBC promote the cross selling of the products from the two Assosiates, which is Ping An and Bank of Communications.