President & CEO, HSBC China
2009-04-01, China International Business (CIB) www.cibmagazine.com.cn
By Mina Choi | From CIB April 2009 Print Edition
FACE TO FACE INTERVIEW
It’s been a tough year for the Hong Kong and Shanghai Banking Corporation (HSBC). After fending off widespread criticism that it was undercapitalized for nearly a year, HSBC stunned the market last month with a USD 18 billion private equity rights issue, the biggest rights issue in history.
With profits down 62% in 2008, and its Hong Kong share price falling to a 13-year low on March 10 following a 70% drop in the last six months, the 143-year old bank, originally founded in Shanghai and Hong Kong, faces tough challenges, along with just about everyone else in the banking sector.
CIB sat down with Richard Yorke, the head of HSBC China, to learn why China might be the bright spot in HSBC’s expansion – and why tight regulation is not necessarily a bad thing. With his impeccable manners and even-handed speech, Yorke might just be the man to help HSBC regain its supremacy as it refocuses on its home turf 143 years on from its founding in the region.
When did you join HSBC and where did you work prior to coming to China?
I’m an HSBC lifer – I joined 19 years ago, recruited straight out of university. I spent two years in Hong Kong, from 1990 to 1991, before being seconded out to Wells Fargo Bank in San Francisco, where I spent two years right in the middle of the early 90s real estate crash in the US. There, I learnt the good and the bad side of lending.
Then I got a call from London saying: ‘You’re going to Batam, Indonesia.’ I was basically sent there as a branch manager to either make it make money or close it. It was a very interesting learning experience because in Hong Kong we have such a dominant presence, whereas in Indonesia we had to do much more cold-calling. And yes, the branch is still there.
After that, I went back to Hong Kong, to the offshore trading department, providing financing to big sourcing companies who were based in Hong Kong. I left Hong Kong for Jersey, in the Channel Islands, in 1998, where I ended up initiating and launching HSBC’s pilot internet business for our offshore banking customers. We launched this successfully at the end of 2000.
By 2003, I was back in Hong Kong as head of trade finance services for Asia-Pacific. There was one place I wanted to work, and that was China, because it’s an interesting and dynamic country and I thought our business was very well-positioned to grow there. I mentioned this to my boss, and within three months, at the beginning of 2004, I found myself packing my bags, and I’ve been here ever since. In fact, this is the longest I have ever worked in a place.
How has it been so far?
Fantastic. There’s no more interesting country than China, both in terms of culture and development. The biggest surprise for me was the speed at which things developed. Every year, we look back, and say: ‘My word, a lot of stuff has happened in the last 12 months.’ There’s no concept that something can’t be done. That’s one of the things I love about the team here – people are always up for doing different, difficult challenges and there’s an incredible enthusiasm. We started with about 1,000 staff in 2004 and have built it up to 5,500 now and the quality of people we hire is exceptional. They are inexperienced, which is the biggest challenge, but they’re very bright, committed and hardworking; they’re really the perfect people to work with. They are always looking to see what the opportunity is rather than what the obstacles are.
What is HSBC’s strategy in China?
China is very competitive for any industry, and banking is no exception. We knew we couldn’t be everything to everybody – we’re not like ICBC (????) with 24,000 branches. So we had to identify specific customer segments and competitive advantages and make sure we offered the best products and services in these areas. China is so big that if you’re focused, you’re going to find business.
I am pleased with the way the business has developed and the way we’ve maximized the opportunities. We have the largest branch network of all foreign banks in China and we’re the most profitable. We have the widest scope in terms of business, the most complete foreign banking proposition, and we also have rural banking initiatives and strategic co-operations. And the numbers speak for themselves.
What are the numbers?
HSBC China contributed USD 320 million profit [out of a total profit of USD 5.7 billion worldwide] to the group last year. We now have 82 outlets in 19 cities across China, from 11 outlets five years ago.
What are your competitive advantages over other foreign banks operating in China?
Having been in China since 1865 and having a very consistent strategy have been our key drivers. Having the support of the group on a regional and international level is also very important. Stephen Green, our group chairman, comes five-to-six times a year. [Our Asia-Pacific chairman] Vincent Cheng comes two-to-three times a month.
We also have an unrivalled international network. Being able to help multinationals is very important, so that they can go to the same bank [whichever country they are operating in]. We are also helping emerging Chinese multinationals to engage abroad.
What are your future development plans in China?
Although we’re making a profit, we’re still in the investment phase in China. We’re very clear that there is no market more important to HSBC than China and we will continue with our existing investment and development strategy. Last year, we opened two branches and 16 sub-branches. This year, we’re opening in four more cities and getting 21 more sub-branches, so we’re accelerating the rate of growth. We’re also looking to open four new rural banks.
Despite HSBC’s recent capital offering, some shareholders are calling for the group to sell off some off its assets. How does this affect your China operations?
It doesn’t affect our China strategy at all. Our group chairman [Stephen Green] made it very clear when other international banks were selling their stakes in Chinese banks that we have no intention of selling our stakes in any of our strategic investment partners. We have a long-term commitment to our strategic partners, and we mean long-term.
Actually, this year, the rate of growth which I’m tasked to deliver is bigger than last year. Continuing to maintain a strongly profitable position in China is a key part of any management team’s goals. In April 2007, when we locally incorporated in China, we took in our own capital of RMB 8 billion (USD 1.16 billion). So, given our capital ratio, you can say that we’re overcapitalized locally.
Do foreign banks in China have less access to deposits than their local counterparts?
No. In April 2007, foreign banks were given five years to achieve the Chinese minimum asset-to-loan ratio of 75%. We met that ratio in 2007 because our businesses are focused on transactional banking. We generate a lot of deposits from our corporate and personal banking businesses. We have a significant surplus in both RMB and USD.
What are the major challenges of managing a banking operation in China?
One of the biggest tests for any management team here is that you really have to understand all the economic drivers of the business, because the external environment changes so quickly, both in terms of overall growth and regulatory changes. If you don’t understand the key drivers of your business, you’re never going to be able to cope with the external changes that are happening. We focus on a limited number of businesses where we fully understand our competitive advantages.
Because of my experiences in the US and managing the branch in Indonesia, I feel fortunate to have done enough jobs where I’ve got my hands dirty, so now I’m at a higher level, I understand how the business actually functions.
How do you deal with the speed of regulatory change?
We spend a lot of time engaged with our regulators. If you choose to engage them, they are very open and clear about what they want. Sometimes regulations are introduced that may not necessarily have the impact foreseen, but you can give feedback and they adapt. I just came back from Dalian, where we saw our regulators, the PBOC and the PBRC. We briefed them on what we’ve done and what we hope to do this year and we got their feedback. We have a lot of interaction with the regulators to get a strong understanding of what the policy structures are.
How difficult has it been to cope with the financial crisis?
Because of the way our businesses are put together and the fact that we have a very significant surplus of deposits over loans — we’re very highly liquid — we’ve been able to manage our business very effectively during the downturn, demonstrated by the fact that in 2008 we had a record year for profit.
Has the downturn in exports affected your lending practices?
We have a big trade finance business here, and our volume has gone down, but we tend to be conservative in the ways we manage credit risk. One of the big advantages of transactional banking is that you get to see how your customers are doing on a daily basis, which allows you to get a much better insight into the way your customers are performing than just looking at their annual accounts once a year.
Have you changed your lending standards in China in light of the global financial crisis?
We are continually refining our lending practices. The introduction of lending quotas at the end of 2007 led many banks to focus on their key relationships in China. This is one of the factors that will allow the banking system to come out of the present challenges in much better shape than people would expect. You do get ups and downs in any economy, so it is important to really understand your customer so you can understand how their businesses will be affected by the slowdown, and so that you are properly supporting your long-term customers in line with your risk-management processes.
Is it more difficult to evaluate risk in China than in other markets?
I don’t think it’s any more difficult or easier to evaluate risk in China than any other country. What about Parmalat? Enron? In any country, for any company you do business with, you have to understand that company, and that’s more than just looking at the financial statements: it means going to see their factories, understanding their industry, understanding their business and dealing with a range of customers in the industry so you can cross-reference. Why is this customer having these challenges when another customer with the same business model does not have the same challenges? You need to be inquisitive and make an effort to understand.
What effect will the Chinese government’s RMB 4 trillion (USD 586 billion) stimulus package have on HSBC China?
I think it will be very positive. Our business has become domestically focused, because our customers are now more domestically focused. Ten years ago, our average customer was a foreign multinational company (MNC) setting up a manufacturing center here. These people are still coming, but increasingly more and more MNCs in China are focused on the domestic market, so the stimulus package will be more positive for our customers. For international companies, we want to be their local bank, and for Chinese customers, we want to be their international bank, so the stimulus package will be very positive for us because we can also help Chinese companies in the process of becoming multinationals.
How much of an impact will the stimulus package have on the wider economy?
One of the great positives about the Chinese economy is the rate at which the stimulus can be implemented. Every city and province already has a list of projects for the next five years, and they’ve been told to accelerate them. So instead of doing it in two years’ time, they can do it now. Here it is ready, whereas in other countries they will have to go away and think about how to [spend the money].
How does the Chinese financial system compare to others you have worked in?
If you look around at other financial systems at the moment, the [Chinese] financial system is holding up very well. It’s kept some fundamental criteria, such as a 75% asset-deposit ratio, which in hindsight is incredibly smart. What used to be 75% loan-to-value on properties is also very smart, rather than 110% loan-to-value [in many Western markets].
Should reform of the Chinese financial system have been pushed through more quickly?
I’m not a believer that the market should have opened up more quickly than it has. Opening up has happened as quickly as the market can cope with. I also think it’s being done in a measured way. If you now look at the way this economy and the financial markets are dealing with existing challenges, you’d be hard-pressed to find someone who would say it hasn’t been done properly.
HSBC is an Asian bank that is listed on the London stock exchange. What is its identity?
HSBC’s identify has always been the world’s local bank. Everywhere we go, we try to behave like a local bank. We have a strong tradition for our franchise in China and we have an interesting position because we’re not seen as wholly local or wholly international, and that to me, is the perfect positioning.
Finally, you’ve been in China for five years now. Where do you think your next port of call will be?
There’s so much going on in China that I’d like to stay
focused on what I’m doing here. You’d have to ask our chairman