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The Bond Between East and West

HSBC Holdings plc, is well placed to capitalize on the economies of Hong Kong and emerging Asia. After a period of inertia the owner of Hongkong and Shanghai Bank, Midland, Marine Midland, and others is making headway. Outwardly John Bond, the group’s CEO, appears serene about the region’s future—-but he’s watching it very closely.

In Quicksilver Capital: How the Rapid Movement of Wealth Has Changed the World, Richard McKenzie and Dwight Lee, both adjunct fellows at the Center for the Study of American Business at Washington University, remark that capital itself has undergone a metamorphosis of major proportions. It has “become more like a butterfly-flighty and elusive, much more capable of evading the grip of governments, and the charges they try to exact.” This globalization of capital was captured somewhat poignantly by former Citicorp CEO Walter Wriston: “Borders that were once the cause of wars are now becoming porous. Money moves over, around, and through them with the speed of light. The flows of capital are now in the range of 30 to 50 times greater than world trade. The world’s capital market that moves along this electronic highway goes where it is wanted and stays where it is well-treated.”

Although Wriston’s Citicorp is a dominant conduit for global capital in the emerging markets, it is closely followed by HSBC Holdings, the London-based group with a strong capital base and long pedigree in Asia. With £237 billion ($402 billion) in assets and after-tax profit of £3.1 billion ($4.9 billion) at year end 1996-a 26 percent increase over 1995-the group is one of the largest banking and financial services organizations in the world. Hong Kong accounts for 31 percent of the group’s assets and 39 percent of its pre-tax profits, and HSBC Group’s presence in China-as that country’s leading foreign bank-continues to grow. The group comprises more than 5,000 offices in 78 countries, operating under a number of well-established names, including Hongkong and Shanghai Bank Corp. in Asia-Pacific, Midland Bank in the U.K., Marine Midland in the U.S., and British Bank of the Middle East.

HSBC Investment Banking rebrands the operations of James Capel and Samuel Montagu, which it had previously acquired. The purchase of J.P. Morgan’s international U.S. dollar-clearing operation in 1996 secures HSBC Financial Institutions among the top five participants in CHIPS, the New York interbank clearing house, a less than glamorous, but essential service with about 1,600 customers globally. In 1989, HSBC teamed up with Wells Fargo to form a California-based trade bank and non-equity alliance providing access to banking services through more than 1,900 Wells Fargo branches in 10 Western states. A pioneer in electronic banking, HSBC’s automated teller machine network enables customers to access their accounts in more than 100 countries, while its Hexagon system allows individuals and corporate subscribers around the world to conduct international banking transactions via PCs.

Salomon Brothers’ John Leonard expects the group, which has posted strong volume gains in Asia and at least modest increases in Europe, to demonstrate strong earnings momentum. Lehman Brothers’ Robert Law reckons HSBC shares look cheap. Shareholders’ average returns increased from 20.7 percent in 1995 to 21.3 percent in 1996, with after-tax return on assets moving up from 1.28 percent to 1.45 percent during the same period. A reputation for cost consciousness is reflected in cost-to-income ratio of 52.9 percent-a 3-point increase since last year.

Both the group chairman, Sir William Purvis, and the group CEO, John R.H. Bond, are British yet steeped in Asian experience. Bond, 55, joined Hongkong Bank in 1961 and worked in Asia for 25 years and in the U.S. for four years before coming to London in January 1993 as CEO. He became executive director of Hongkong Bank in 1988, assumed responsibility for the group’s commercial banking operations two years later, then returned to the U.S. in 1991 as president and CEO of Marine Midland. An American executive who worked with him in New York reports that, “he read more and learned more about the history of the U.S. and New York State than any American I ever knew.” Seeking a perspective on emerging markets, particularly China and Hong Kong, CE visited with him in HSBC Holdings’ Lower Thames St. headquarters in London.

What do you consider the global business consequences of Hong Kong being restored to the Chinese? Will your firm operate differently?

Hong Kong may well be entering a new era where it manages its own relationship with Beijing, which could lead to further business success for Hong Kong. It’s going to be important for Hong Kong to maintain English as the language of business, which is something that we and other companies have focused on. It makes sense if you want to expand your business into China to have a Chinese partner.

At HSBC, every year we hope to operate with sharper pencils and more customer focus, but other than that we regard it as Hong Kong as usual. We see Hong Kong-and developing our business in China-as key long-term areas.

What advice would you give to Western investors with interests in China now?

The first thing to understand about China is that you must take a long-term view. The fatal mistake is to see China through Western eyes. You must understand how the Chinese people feel about international issues and developing their economy, and then dovetail with those feelings.

That’s straightforward in banking, because banking is essentially the same around the world, though with different levels of sophistication and bankable population. The progress we make will be gradual. The Chinese authorities would not wish to have foreign banks dominate their financial sector. However, they’re comfortable with them as 10 percent or 20 percent of the system. We have good relationships, particularly at People’s Bank of China and Bank of China, which are both competitors and friends, and have made progress developing our business there; it’s profitable.

Which of Asia‘s other little tigers would you advise businesses to pursue?

People tend to think of Asia as one entity, and it’s not. It’s composed of a series of different countries in different phases of economic evolution and with different cultures. The danger is to view them as homogeneous markets. One of the fascinating things from an investor viewpoint is Asia‘s complementary economies. Within Asia you’ve got the raw materials and the low labor economies for a complete-although God forbid it should happen that way-self-sustaining economic block.

After Malaysia and Singapore, we see the biggest opportunities as India, the Philippines, Thailand, and Indonesia. The headline that captures attention about Asia is the enormous thirst for capital. I think we will be surprised by how much of that capital will be generated from within. The governments there consume far less of the national income, which is a huge influence, as high growth rates tend to occur where more money stays in private hands.

Do you see some business sectors that might fare better than others?

Infrastructure is clearly the call of the moment. Transport-aircraft and, to a lesser extent, ships. Cars will grow with purchasing power in countries like Indonesia, the Philippines, and China. Western people missed the rapid increase in purchase power in Hong Kong, Singapore, Taiwan and Japan. A lot of these other Asian countries will make the same transition.

What is your strategy for growth?

Geographically, we see opportunities in three main areas: Asia; U.K. and Europe; and North America-in the U.S. and Canada. Latin America is also interesting.

We look carefully at the position of commercial banks within the financial systems around the world, because in some countries-America is an example-their share of the financial system has declined. We look for areas where it has growth, which brings us almost inevitably to Asia and, to a lesser extent, Latin America.

Do you have predetermined hurdle rates for acquisitions?

Hurdle rates are fine when considering a bolt-on acquisition to an existing business. You can see clearly how quickly you can make it earnings-enhancing. New areas-geographical or product-don’t always lend themselves to slide rule analysis. You put out your best case and your worst case, do customer research, and then decide.

What are your plans for the States?

Marine Midland is an important part of our group. You cannot be an international banking group and not have a decent size dollar capability. We never debate whether we should be there or not. The only debate is what size should our U.S. presence be? Right now, we’re comfortable. We will only grow it if we can do it in a way that makes sense looking at the world as a whole, rather than the U.S. in particular.

It comes back to our core strategy. We don’t want to be large for largeness’ sake, we want to be large because there are things we can do for the customer base that we acquired through an acquisition and because it makes sense for our shareholders. Priced at rates that we find acceptable, those transactions are few and far between in America.

What are your plans for your Wells Fargo joint venture and other alliances?

A lot of Wells Fargo’s clients in California do business in Asia, and we have masses of clients in Asia who do business in California. It’s a win-win without having to get into exchange of equity, which has never been on the agenda. It also has other, intangible benefits. We looked carefully at how Wells Fargo uses technology and they look at how we do things.

We recently announced an alliance with Wachovia, which has a strong global cash management capability that we are interested in for our clients in the U.K., Europe, and Asia. Equity has never been discussed.

You don’t want to complicate these relationships; you just want to look at what you can do for each other’s client base, and whether it makes economic sense.

How does Mondex work. What are you trying to do there?

Mondex is a substitute for cash that has the capacity to become universal. The debit card can only deliver value in a fairly narrow area. It requires big machinery, a point-of-sale terminal, that you don’t find in low-value transactions. Any Mondex customer can do a money transaction with any other Mondex customer. It can also carry six currencies. We’re pilot testing it in two U.K. locations, one in Hong Kong, and with Wells Fargo’s pilot in San Francisco. It’s main use will ultimately be at the consumer end  in the early phases for relatively low-value sales, such as by coffee vendors, news agents, or taxi drivers.

Long-range, it will make us more efficient. Handling cash accounts for an estimated 25 percent of total bank costs in the U.K. Mondex offers convenience and security for our customers, and lower costs and greater efficiency for our shareholders.

At the World Economic Forum, Andy Grove and Bill Gates both argued that technology will revolutionize certain businesses-banking perhaps. What’s your view?

It would be foolish not to understand the challenge programs like Quicken and Microsoft Money represent. But the main challenge is more on the asset side, where the mutual fund industry is a major competitor for the individual’s savings. No client worries much about where they borrow money from, as long as the price is right, but they think long and hard before depositing money. People joining banks 20 years ago looked for security and not a lot more. That life has changed dramatically. And that’s why banks must become more professional and more client-oriented every day. Banking is conceptually fairly simple. There aren’t a lot of original strategies. It’s a battle about execution; it’s the person who does it effectively and efficiently who wins. So, is the world getting more competitive? Yes, no question. Are banks dinosaurs? Definitely not.

How does your extremely global orientation -and Asian heritage-fit in?

One of our challenges is in bringing Asian productivity and service into Western markets, and taking Western products and delivering them in Asia. The service and productivity of our operations in Asia is the best in our group. Yet, the U.S., and then Europe, are the banking labs of the world, where a lot of the products, like Mondex, or the credit card originally evolved from.

The only way to have a universal standard is to have a lot of core training. We attach tremendous importance to bringing together the executives from around the world right at the start of their careers, and then at regular intervals thereafter. The biggest unseen benefit is that it creates a network of people who know each other.

What is your personal challenge as a chief executive?

My role as CEO is to plant the seeds of tomorrow’s revenues. We inherited an excellent business that wasn’t made an excellent business by standing still. It was made by people at the top thinking about how the business should be grown.

A CEO also has a day-to-day responsibility for controlling the main risks we run around the world and setting the ethical values and management style of the organization. I firmly believe those are set from the top. We’re fairly parsimonious here. We set a standard by driving secondhand cars and travel economy on trains.

We’ve all learned a tremendous amount from working in Asia. A knowledge of Asian culture, from small points of etiquette to the more general ethos in Asia that it’s smart to be clever with money, is invaluable in other parts of the world.

During your career, what was your most formative experience?

It’s been my lot in life to spend nearly a third of my career fixing parts of our group that weren’t doing well. From that experience you learn what you shouldn’t do, because it’s easy, once things have gone wrong, to see how they went wrong. My most formative experiences have come out of difficulties that we faced, while the most exciting part of the job is building. I can’t claim troubleshooting is a pleasurable occupation, because it isn’t. The fun part of the job is building for tomorrow.

About JP Donlon

JP Donlon is the Editor-in-Chief of Chief Executive magazine.