Exclusive-HSBC to improve ties with Hong Kong unit Hang Seng to mitigate risk, say sources By Reuters

By Sumeet Chatterjee, Engen Tham and Selena Li

HONG KONG/SHANGHAI (Reuters) –

HSBC plans to tighten risk management at Hong Kong unit Bank due to worries about a potential rise in bad loans amid growing economic headwind and property sector crisis in China, said two people with knowledge of the matter.

Hang Seng’s top executives will be more closely involved in its parent’s Asia-Pacific risk management discussions regarding corporate, retail, wealth and private banking, the people said.

The initiative comes as HSBC’s pivot toward Asia coincides with economic turmoil in mainstay market China, where a stock rout and developer debt defaults have triggered concern about financial sector health in the world’s second-biggest economy.

Exposure to the mainland property sector, which has lurched from one crisis to another since 2021, has pushed up Hang Seng’s bad loans ratio in recent quarters.

The plan to share expertise and best practices by HSBC Asia Pacific’s risk management operations with Hang Seng is still under discussion but is likely to be implemented this year, said one of the people.

Both people declined to be identified as the matter is not public.

“HSBC recognises the importance of a strong risk culture. Active risk management helps us to achieve our strategy, serve our customers and communities and grow our business safely,” said a spokesperson for the bank.

“HSBC Group entities stand to benefit from the strengths of the Group.”

Hang Seng, 62% owned by HSBC, did not immediately respond to a request for comment.

A slowing Chinese economy, protracted property sector crisis and local government debt travail have raised concern about exposure and resilience of foreign financial firms and affiliates, and impact on their balance sheets.

Still, while the property crisis has hit performance at peer Standard Chartered (OTC:), HSBC CEO Noel Quinn in November said that his bank was “well provisioned” against China real estate loss.

Hang Seng, on the other hand, at its 2023 interim earnings reported an increased non-performing loan ratio caused by decline in gross loan balance and new bad loan downgrades.

Its gross impaired loans and advances ratio was 2.85% as at June-end versus 1.92% in the year-earlier period and 2.56% at the end of 2022, its January-June financial report showed.

ECONOMIC CHALLENGE

HSBC has doubled down on Asia while divesting from less-profitable businesses elsewhere.

It committed $3.5 billion worth of investment to the region in 2021 to boost market share in banking, insurance and securities, whereas other foreign firms and investors have held off or even retreated from the country.

The London-headquartered bank generates more than half of its pre-tax profit from Hong Kong and mainland China and has a sizeable presence across the rest of the region, while Hang Seng earns almost all its income in Hong Kong and mainland China.

Under the new initiative, Hang Seng’s top executives will regularly participate in HSBC Asia Pacific’s risk management meetings to discuss business-specific issues and key market developments, said one of the people.

The country, regional and group-level risk management meetings support targeted insight and discussion of lapses in risk appetite and mitigating action, according to a recent HSBC report.

The approach allows risk to be “promptly identified and mitigated, and informs risk-adjusted remuneration to drive a strong risk culture”, HSBC said in its 2022 annual report and accounts.

Closer involvement of Hang Seng will also aid the sharing of information related to regulatory or other developments in major Asian markets that may have an impact on the Hong Kong unit, said one of the people.

“The growing economic challenges and rapid regulatory changes make it imperative for banks, even those that have limited geographical focus, to have the ability to get much wider read-across,” said the person.

“It will be a win-win for both HSBC and Hang Seng.”