HSBC chief executive Stuart Gulliver has an ambitious plan. He wants to cut annual costs by $3.5 billion by selling off non-core businesses and focusing on markets that promise growth.
As part of that plan, Europe’s biggest bank announced yesterday that it had agreed to sell some of its property and casualty insurance units in Asia and Latin America to French insurer Axa Group and Australia’s QBE Insurance Group for $914 million as it focuses on more profitable businesses.
Axa will pay $494 million for HSBC’s property and casualty insurance business in Hong Kong, Singapore and Mexico. QBE will pay $420 million for HSBC’s property and casualty insurance business in Argentina, and the general insurance unit of Hang Seng Bank, which is 62%-owned by HSBC.
In addition, Axa and QBE will benefit from a 10-year exclusive bancassurance agreement with HSBC in these countries, and for Axa that agreement will extend to India, Indonesia and China. Bancassurance agreements call for the bank’s staff and tellers, rather than an insurance salesperson, to sell to the customers. Both the bank and insurance company share the commission. Insurance policies are processed and administered by the insurance company.
“From HSBC’s perspective, these businesses were obviously deemed to be non-core,” said Arjan van Veen, Credit Suisse’s Hong Kong-based insurance analyst, commenting on the sale. “You need a certain amount of specialist skills and critical mass, so partnering up makes sense.”
“This is a further step in the execution of our strategy. It will enable us to focus our capital and resources on the growth of our core businesses, including the building of our broader wealth management capabilities,” Stuart Gulliver, HSBC group chief executive, said in a statement where he coyly managed to divert attention away from businesses HSBC no longer wants to focus on and recast it on one it wants to excel at — private banking in non-Japan Asia. After all, the number of Asia-Pacific millionaires rose 10% to 3.3 million last year, just behind the 3.4 million in North America and ahead of Europe’s 3.1 million, according to a Merrill Lynch/Capgemini Asia-Pacific wealth report.
But at the same time, HSBC can’t abandon its core retail business. And to that end, Gulliver said: “These long-term collaborations with Axa and QBE will broaden and strengthen the suite of general insurance products available to our retail banking and commercial banking customers in Hong Kong, mainland China, Singapore, India, Indonesia, Mexico and Argentina.”
So far, HSBC has cut 11,000 jobs and disposed of or closed 16 businesses in 2011, plus a further three in 2012 before this deal. These all should cut nearly $50 billion in risk-weighted assets. In Asia, it sold its private bank in Japan to Credit Suisse in December for an undisclosed amount (that deal is expected to close in the second half of this year). In January it sold its Thai retail banking business to Bank of Ayudhya for $112 million.
Axa’s angle
The deal makes Axa the biggest insurer in Hong Kong (with a 13% share of the market) and Mexico (with a 16% market share) and it helps solidify its second position in Singapore (with a 12% market share).
“For Axa there are obviously synergies in Hong Kong where it makes them number one, but they also have ambition to be bigger in Asia and the 10-year bancassurance agreement gives them key access to a customer base in markets it didn’t already have,” said van Veen of Credit Suisse.
Indeed, in a statement, Francois-Valery Lecomte, regional chief financial officer of Axa Asia said: “With this agreement we are making a huge step towards becoming the leading property and casualty insurer in Asia. I am delighted that with this agreement we are able to extend and widen our footprint in Asia and further enhance our bancassurance capabilities in this area.”
That said, Credit Suisse analysts wrote in a report issued yesterday: “This deal is in line with strategy and is incrementally positive for growth and washes its face in terms of economics, but it is not a game-changer in terms of Axa’s growth profile. Overall we continue to see Axa as too heavily discounted relative to key peers.”
The deals are subject to regulatory approvals and are expected to close in the second half of 2012.
HSBC was advised by HSBC Global Banking and Markets and co-advised on the sale of its Latin American assets by Goldman Sachs. Citi was the sole financial adviser to Axa.
