CHAPTER 13

Riding the Asian financial crisis

THE DECADE FROM THE EARLY 1990s to the early 2000s was for the Asia-Pacific region a tale of two parts – with the dramatic onset of the Asian financial crisis in July 1997 as the watershed. The first part saw a continuation of the long boom in which the region achieved real growth, averaging over 7 per cent per annum. This robust economic environment was generally conducive to good performance on the part of Hongkong Bank’s Asia-Pacific operations, though each country had its own story. During these years the bank’s retail business saw significant initiatives to meet what the 1993 Annual Report called ‘growing expectations of customers in Asia for more sophisticated banking products and services’.¹ But with the onset of the Asian crisis, the bank’s business focus shifted to retrenchment. By 2000 the storm had passed and the region was on the road to recovery.

‘Traditionally, the four most important jobs at HSBC were, first, the chairman in Hong Kong, and second, the general manager of Hong Kong. The third and fourth were manager in Singapore and Malaysia,’ recalled Zed Cama, who served as manager in Malaysia and India.² Indeed, the Asia-Pacific region had been the principal focus of the bank’s international expansion for most of its history, and by the early 1990s, in addition to the branches in Hong Kong and China, there were offices in seventeen further Asian countries. In many of these countries HSBC was a long-standing member of the banking scene; in some it had begun business decades before the local banks − hence it was sometimes referred to as a ‘foreign-local’ bank.³ However, past performance was no guarantee of future prospects, and by the early 1990s it was proving difficult to expand this presence. Banking and financial-market liberalisation was still on the back burner in most countries, which made the acquisition of a local bank out of the question, though occasionally it was possible to add a few branches when a foreign bank exited a market. ‘Growth was largely organic,’ commented Cama. ‘Acquisition was very difficult because of the rules. So you had to find every which way to grow your business within the rules. We could do things like private banking or asset management. The insurance sector took off. Whenever an opportunity arose we took it.’⁴

Zed Cama, the first Indian to head HSBC’s operation in his country, pictured here in 1998.

Table 3 HSBC Asia-Pacific country contributions to attributable profit, 1994

	Attributable profit (HK$ million)	per cent of Asia-Pacific countries
Singapore	909	35
Malaysia*	593	23
Brunei	243	10
Thailand	228	9
Japan	183	7
India	156	6
Australia†	138	5
Indonesia	124	5
Total	2,574	100
Hongkong Bank	7,477

*Hongkong Bank Malaysia Berhad

†HongkongBank of Australia

Source: HSBC Holdings plc Group Operating Plan 1995

At the beginning of the decade, HSBC’s offices in the Asia-Pacific region were mainly branches of Hongkong Bank. The powerful and largely autonomous country heads reported to the general manager for International Operations in Hong Kong, and ultimately to the bank’s CEO. These country heads periodically drew up strategic plans that were negotiated and agreed with head office, as well as submitting annual performance projections. ‘Implementing the strategy on the ground was up to local management who had been involved in the strategy,’ noted Cama. ‘It was not as if it was imposed on you from somewhere else.’⁵

The country contributions of HSBC’s eight largest Asia-Pacific operations to Group profits in 1994, a boom year for the region, are shown in Table 3. In total they amounted to HK$2.6 billion, equivalent to a third of the profits in the region (Hong Kong contributed most of the rest). There were also offices in Guam, Mauritius, New Zealand, Pakistan, the Philippines, South Korea, Sri Lanka, Taiwan and Vietnam, but at that point these generated relatively little in the way of profit.

Singapore and Brunei

Singapore’s impressive contribution, achieved by 1,800 staff, reflected the bank’s strong and historic ties there, as well as the city-state’s importance as an international banking and financial centre and its dynamic economic growth, averaging more than 8 per cent a year from the mid-1960s to the mid-1990s (see Chapter 5).⁶ Singapore was an attractive location for the conduct of banking business − stable, free from corruption and well-regulated − with a skilled workforce and excellent communications. However, the domestic market was dominated by four local banks, each of which had around forty branches, and foreign banks were very restricted in what they could do. Hongkong Bank’s foremost foreign bank competitors in Singapore, as in much of Asia, were Standard Chartered and Citibank. Standard Chartered had twenty branches in Singapore, while Hongkong Bank had eleven – strikingly, the same number as at independence in 1965. Citibank had only three branches, but as the foremost US international bank it attracted safe-haven funds and its deposits exceeded those of both Hongkong Bank and Standard Chartered.⁷

Hongkong Bank’s business in Singapore comprised around 60 per cent commercial and corporate banking, plus 40 per cent personal and private banking, with two dimensions: the domestic market and the offshore market.⁸ As a long-established foreign-local bank, Hongkong Bank had numerous Singaporean corporate and commercial clients, especially businesses engaged in international trade, as well as foreign companies. Investment banking services were provided by Wardley Singapore, which had grown from its establishment in the late 1970s into one of the leading merchant banks in the country.⁹ Securities custody was successfully targeted for development, in line with HSBC’s region-wide strategy, and by the mid-1990s Hongkong Bank was Singapore’s leading custodian.¹⁰ With a perennial surplus of deposits over loans because of regulatory restrictions and the limited local market, skilled treasury operations were a significant, though fluctuating, source of profit. As for offshore activities, the bank conducted a substantial ACU (Asian Currency Unit) business which took foreign currency deposits (mostly US dollars) that were used to make foreign currency loans.¹¹ ACU deposits came from all over Southeast Asia, but notably from Indonesian and Taiwanese businesses, the latter being unwilling to place funds in Hong Kong for fear of political risk.¹² In fact, a significant part of the lending side of this business was conducted in Hong Kong, an instance of Hongkong Bank’s regional synergies.¹³ ‘There was a splendid phrase in use, “the imperial benefit”,’ remembered Richard Hale, Singapore manager between 1986 and 1995, ‘which meant that we were working for the Group as a whole. So if the business spanned two branches, and both agreed, it made sense to book it where the benefit to the Group was greatest. We did not have individual targets which would affect our own prospects but if one did good work this was noted at the top.’¹⁴

The development of retail business was impeded by being unable to open additional branches or relocate branches, as well as by other restrictions, for instance the prohibition on out-of-branch ATMs.¹⁵ To surmount these obstacles, the bank had to be inventive and develop non-branch-based initiatives, such as the introduction of a telephone banking service in 1997. Hongkong Bank was also a pioneer in the development of internet banking in Singapore, its website winning awards in 2000 and 2001 as Asia’s best bank website.¹⁶ Private banking services for wealthy individuals began in 1989 and were developed in ‘evolutionary’ fashion during the 1990s.¹⁷

Koh Kah-Yeok, CEO of HSBC’s investment bank in Singapore in the 1980s and 1990s, subsequently recited a number of notable features of HSBC’s corporate culture which supported its success: rapid response; lack of internal politics; strong client relationships; strong compliance orientation, with excellent relations with the Monetary Authority of Singapore; absence of friction between expatriates and locals – in fact, localisation had gone so far by the 1990s that almost all the departments in the investment bank were headed by local staff.¹⁸ So it was a happy ship, but the restrictions and competitive pressures made it very difficult to grow the business or even retain market share. ‘It was a useful exercise because it made you think,’ recalled Connal Rankin, who oversaw the preparation of a new strategic plan after taking over as country head in 1995. Well aware of the constraints on business development, he urged colleagues to ‘think out of the box’ to identify new ways forward. ‘And we came up with – Nothing! Just more organic growth.’¹⁹ ‘No radical initiatives are advocated for the main business lines,’ observed a head office commentary on the review, though a number of organisational changes were proposed to ‘provide the framework for a more focused and professional approach to the business’.²⁰ The submission to the Group Operating Plan for 2001 by Eric Gill, Singapore manager from 1999, argued that HSBC Singapore had been gradually losing market share for a decade and that investment would be required to turn this round. In his response, Group chairman John Bond did not disagree, realising that it was time to catch up.²¹

Staff newspaper, 1997.

Hongkong Bank Singapore had close relations with the bank’s branches in nearby Brunei, the source of 10 per cent of Asia-Pacific profits (see Table 3). With a presence stretching back to 1947, HSBC was the oldest and largest bank in the country, with thirteen branches and 540 staff by 2000.²² Singapore’s surplus deposits were profitably used in lending to the oil industry and other companies in Brunei; whilst, in keeping with its position as the country’s leading bank, Hongkong Bank enjoyed a close relationship with the Brunei Investment Authority and the royal family.²³ The branch’s fiftieth anniversary celebrations in 1997 included a reception attended by the Sultan and his brothers – ‘a major gesture of support’, noted the bank’s appreciative board.²⁴

Malaysia

‘The one thing that struck me when I went to Malaysia, going to the branches and meeting the customers, was that it was very clear that the history of the bank and Malaysia were very intertwined,’ recalled Zed Cama, who became Malaysia general manager in 2002 (see Chapter 5). ‘That feeling was still very strong in the country.’ Following operational amalgamation with Mercantile Bank in 1977, Hongkong Bank had thirty-six branches in Malaysia with 3,000 staff. By the 1980s the number of expatriate executives permitted by Bank Negara, the central bank, was just eight and the vast majority of branch managers and other senior executives were local. Traditionally, in many branches, deposits exceeded local lending opportunities, with surpluses being placed with head office in Kuala Lumpur. As for lending, the established pattern followed HSBC’s traditional focus on business banking: 80 per cent corporate, 20 per cent personal.²⁵ As in Singapore, many borrowers were long-standing clients to whom loans were provided on a non-collateral ‘name’ basis, with corporate borrowers predominantly operating in the commodity sectors of rubber, palm oil, timber and tin mining, though manufacturing was increasingly important, notably of toys and electronics.²⁶ As elsewhere in Asia, business expansion was difficult because of government restrictions on foreign banks. ‘The playing field was not very even,’ remembered Yeong Toong Fatt, in charge of Corporate Banking in Kuala Lumpur. ‘Sometimes the goal posts got moved.’²⁷ Government departments and agencies were forbidden from placing deposits with foreign banks and lending targets were imposed for Bumiputra (Malaysian) businesses, the problem being that many were new firms with such a slender trading record that credit evaluation was almost impossible.

Meanwhile, eleven local banks and thirteen foreign banks made for a crowded business environment. Hongkong Bank regarded Standard Chartered, with an almost matching number of thirty-five branches and a similar client base, as its nearest competitor. Citibank, the other leading foreign bank rival, had only three branches, but they were well located and it had strong deposits. The opening of new branches by foreign banks was prohibited from the 1960s − as was branch relocation − which led, after the amalgamation between Hongkong Bank and Mercantile, to the unfortunate situation of the bank having branches opposite each other in the same street in downtown Kuala Lumpur. Other branches in Malaysia had been established decades earlier − mostly in provincial towns to serve rubber and palm oil planters, as well as other commodity producers – and were now in the wrong locations to provide consumer banking services for the rapidly growing urban industrial population. Moreover, consumer research revealed that the bank was popularly perceived as an upmarket Chinese bank. Although this last factor may have held back expansion of mass market services, it also suggested potential for the development of private banking services – but as with any service, it would take time to persuade new customers to shift their business to the bank.

More successful was the bank’s pioneering endeavour to develop new Islamic banking services for Malaysia’s majority Muslim population. In 1994, with government encouragement, it launched interest-free Islamic current and savings accounts to service the growing Muslim middle class. The idea of Islamic banking was taken up at Group level in 1998 with the establishment of an Islamic Banking Unit in London.²⁸ By 2002, a new subsidiary, Amanah Finance, had scored some notable successes in Malaysia including providing the country’s first Islamic charge card and lead-managing the world’s first global Islamic bond for the Government of Malaysia.²⁹

In the early 1990s, the Malaysian government stipulated that foreign banks should be locally incorporated rather than operating as branches of a bank incorporated elsewhere. ‘A very sensible thing to do, both from the country’s point of view and, indeed, from a multinational bank’s point of view,’ recalled country manager Chris Langley, who handled the transformation.³⁰ ‘What it meant was that the prime regulator for the local bank became the local regulator. It also meant that capital had to be brought into the country to support the local operation.’ Langley determined that Hongkong Bank would be the first to comply with the new requirement and, despite the exercise being ‘difficult and complex, to put it mildly’, on 1 January 1994 it became Hongkong Bank Malaysia Berhad (subsequently HSBC Bank Malaysia Berhad). ‘The main cost to us,’ commented Langley, ‘was management time, but I saw it as a team-building and a public relations exercise. It strengthened what were already good relations with Bank Negara, and reinforced HSBC’s genuine commitment to Malaysia.’³¹

Industrial relations

One area where good relations were sometimes in short supply was the relationship between Hongkong Bank and staff unions. Foreign banks were targeted by trade union militants in many countries across Asia-Pacific in the 1980s and 1990s, with Singapore a notable exception.³² Governments were often sympathetic to the bank and sent confidential messages of encouragement to management, but for political reasons held back from making public statements of support. HSBC encountered industrial relations difficulties in Indonesia, Malaysia, Mauritius and South Korea, but especially in the Philippines. On 22 December 1993, a long-running dispute over job re-evaluations flared into a surprise staff walkout from the Manila branch on one of the busiest banking days of the year.³³ Intimidating picketing held sixty bank officers hostage for two days and nights in the bank. ‘Staff very scared and confused as to what to do,’ country head David Hodgkinson wrote in his diary.³⁴ The expectation was that the bank would capitulate so that everyone could go home for Christmas.

Instead, the executives decided to take a stand. The airlift rescue of staff from the roof of the bank by helicopter on Christmas Eve received international media coverage. The wildcat strike, without a Strike Notice filing, was declared illegal early in 1994, and strikers who refused to return to work were dismissed and replaced by new staff.³⁵ Advised by a specialist law firm, whose senior partner was a former Secretary of Labour and who had the Communist Party of the Philippines as a client, Hodgkinson successfully resisted reinstatement of the strikers and restrained the conduct of militant pickets through the courts.³⁶ Hongkong Bank sent in a twenty-five-strong ‘task force’ to help keep the branches functioning, with picketing continuing for a year.³⁷ ‘Customers understood and stood with us and the business actually did pretty well,’ commented Hodgkinson, and ‘with the staff we took on – there was a whole change in attitude.’³⁸

Extract from David Hodgkinson’s diary, 24 December 1993.

An acrimonious dispute would also blow up in Malaysia in the wake of the Asian financial crisis. There, large losses necessitated staff cuts that resulted in a strike by part of the workforce.³⁹ Dyfrig John, who took over as country manager in 2000 in the middle of the dispute, recalled people outside branches ‘wearing black bandanas and black bin liners, with whistles. Every fifteen minutes they would blow a whistle very loudly. Every night, around 3.45 am, the house phone would go. It would just ring and ring. We were threatened with metal bars, weird things happened, fires would start in the branches.’ But he refused to re-hire the sacked strikers, and eventually the disruptions subsided.

Such episodes were the exception rather than the rule; and despite them and the ongoing restrictions on business, the vision for Asia – the heartland of HSBC − remained bullish.

Visions of expansion

‘Economically, almost every country in Asia is highly promising (except Japan),’ stated HSBC’s Group Strategic Review of January 1995. ‘Expansion in Asia is now more possible than for a generation. Since the late 1980s a number of Asian economies (notably China, India and Indonesia) have liberalised their financial markets, which had previously been closed to foreign banks … The opportunities across Asia, as rapid growth and liberalisation continue, are very considerable for HSBC; its name is known across the continent and it has an infrastructure in place which permits organic growth. Although the emphasis will be on organic growth, liberalisation may open the opportunity of acquisition.’

In fact, in terms of earnings (rather than assets) HSBC had continued to be predominantly an Asian bank, the region contributing two-thirds of Group earnings in the early and mid-1990s. And there was a recognised tendency for the Group’s assets to tip back towards Asia as a natural consequence of its faster growth rates, higher productivity and healthier borrowers. ‘The fact that the Group straddles two very different regions is both a strength and a constant dilemma,’ observed the Strategic Review. ‘The higher-return and – apparently – higher-risk markets of Asia should be balanced by the lower-return and lower-risk markets of the OECD countries, in order to produce an overall blend of risk and reward that creates the greatest shareholder value. In practice, the right blend to be achieved is not obvious. The Group still has a comparative advantage in Asia. It is proposed that the bias of future allocation of capital and resources should be towards Asia, but not Hong Kong.’

Realisation of the Strategic Review’s ambitions in the Asia-Pacific region was discussed at the Annual Group Planning Conference at Bricket Wood in September 1995.⁴⁰ Andrew Dixon, general manager international operations at Hongkong Bank, advanced a range of reasons for ‘substantial expansion’ of activity in the Asia-Pacific region. HSBC was over-reliant on profits from Hong Kong, which was likely to be less certain as a profit-generator in future. There was the bank’s public and professional image: ‘Historically and culturally we have portrayed ourselves as an Asian bank. We risk losing that image if we fail to expand outside Hong Kong. Instead we risk being seen as a Chinese bank, which is NOT necessarily to our advantage in much of Asia. Citibank is regarded as the leading and innovative bank in much of our market and we are arrogant if we don’t recognise and counter this.’ There was strong demand for corporate banking services in Asia’s fast-growing emerging markets, while in mature markets such as Hong Kong the bank faced tougher competition from non-banks and financial markets. Finally, the bank was failing to take advantage of opportunities arising from Asia’s high-speed economic growth, the beginnings of deregulation in the region, and ‘the rise of an Asian middle class: especially on the retail/consumer finance side, where margins are potentially much higher’.

It was private and personal banking that offered the glittering prizes. They would be won, Dixon went on, by designing appropriate and appealing products that were not dependent on the branch network but ‘skew towards self-service and offsite delivery’. Thus investment in good cost-effective technology was essential, as was the need to ‘build a marketing culture with strong emphasis on retail banking. (This has been recommended but has moved slowly.) Commercial banking tends to look down its nose at retail side, despite retail profitability.’ Dixon proposed focusing on four market segments: (1) very wealthy: ‘Served through Private Banking, with strong units in Hong Kong and Singapore, and growing business elsewhere in Asia’; (2) professional/managerial class: currently 50 million across Asia and growing. ‘Singapore and Malaysia are the two places we’ve made good inroads into this market segment. Offers high profitability because are heavy users of banking services’; (3) broad middle class: ‘Hard to reach but growing quickly: should equal 400 million in Asia by year 2000’; (4) specific subgroups: ‘e.g., overseas Indians, and others, whom we are now courting’. While the whole region had potential, countries that were deregulating – India, Indonesia, the Philippines, Taiwan and Thailand – were identified as the most attractive, and possibly offered scope for expansion by acquisition.

Dixon’s analysis could not be faulted and echoed, in its emphasis on the need to segment and focus on particular customer groups, successful initiatives in other parts of HSBC. But despite the clear recommendations of the Review and its focus on expansion via acquisitions in Asia, those acquisitions remained for the time being an aspiration rather than a reality. Then came the onset of the Asian financial crisis, which transformed the bank’s performance and possibilities.

Onset of the Asian financial crisis

On 2 July 1997, by curious coincidence the day after Hong Kong’s transfer of sovereignty to China, Asia’s financial markets were cast into chaos by the Bank of Thailand’s decision to stop defending the baht. It promptly lost half its value, triggering slumps in asset prices and a spate of bank failures. Stuart Gulliver, head of treasury in Hong Kong for the Asia-Pacific region, witnessed the trading turmoil ‘as each Asian currency in turn came into play. We had the busiest day ever.’⁴¹ In fact, the problems in Thailand and other countries of East Asia were ‘an accident waiting to happen’, as the Financial Times’s Lex had put it earlier in the year, and had been building up for some time.⁴² Throughout the summer, Malaysia, Indonesia and the Philippines also suffered currency, banking and asset crises, and by October the Hong Kong dollar was under attack (see Chapter 12). Despite support packages totalling more than $100 billion from the International Monetary Fund − $17 billion for Thailand, $42 billion for Indonesia, and $58 billion, the largest-ever to date, for South Korea − the region skidded into recession.

Hongkong Bank was not entirely unprepared, however. A month before the onset of the crisis, in light of the deteriorating outlook for Asian currencies, it had already been putting in place selective hedges of its structural foreign exchange exposures, and the programme was extended to all Asian currencies in October.⁴³ It also kept a careful watch on customers’ exposures. ‘In view of recent volatility in South East Asia currencies, a detailed review had been conducted to determine whether any customers are likely to encounter difficulties,’ the board was informed in July, shortly after the crisis had begun. ‘Although a few customers had been identified as potential problems, there were no particular concerns, but this would continue to be closely monitored.’⁴⁴

By August the focus had moved to the banking sector, initially to HSBC’s exposure to Thai finance companies, fifty-eight of which had become insolvent, owing the bank $7 million. Fortunately the bulk of the bank’s exposure to the sector was to the thirty-three that remained in business, though these lines were subsequently cancelled.⁴⁵ ‘The majority of our relationships will be affected to some extent by the downturn in the local economy and exposure to US$ borrowing; most accounts are being downgraded one step at review,’ reported Richard Cromwell, Thailand country head, towards the end of the year. His analysis revealed that the bank had no significant exposure to the hard-hit residential and commercial property markets and that its loans to the construction sector were mostly to large construction companies primarily undertaking public sector projects. Lending to automotive distributors was a cause for concern, since the market was suffering from a ‘dramatic drop’ resulting from devaluation, the suspension of the finance companies and the recession, ‘but we remain confident that the Japanese parents/joint venture partners will continue support’. As regards the 800 general commercial accounts, they were ‘well spread with main focus being on middle market manufacturers and exporters, many with multinational partners. No new lending other than to existing low-risk customers and strong export companies is currently being entertained.’⁴⁶

While Hongkong Bank grappled with the continuing effects of the crisis on its retail and commercial customers, its treasury operations sought to make the most of a bad situation. ‘Indonesia was one of the last countries to get smashed,’ recalled John Flint, treasurer there at the time. ‘We could see what was coming and we were getting guidance from Stuart [Gulliver] in Hong Kong so we were positioned correctly. We were a credible counter-party, one of the most credible counter-parties as the market collapsed, and we remained open for business and made prices all the way through. So that year the trading room in Indonesia made bigger profits than London.’⁴⁷

With the crisis deepening, in November 1997 the Hongkong Bank board received a report entitled ‘The Impact of the Asian Currency Crisis’, based on a survey of the views of the bank’s senior executives and ‘other analysts’.⁴⁸ It concluded that:

Many areas have struggled to assess the impact on their business due to violent fluctuations and pace of events. But the most immediate impact will be on net profits when converted from local currency into HK$/GB£. This will be offset, to a greater or lesser extent, by one-off boosts to Treasury and Securities income from wider spreads and high turnover respectively. This income is not expected to recur in 1998.

It is likely that business growth and profit growth in all areas will be slower in 1998 and that areas such as Indonesia and Thailand will show a drop in profits in HK$/GB£ terms on a year-on-year basis.

Corporate Banking will have increased non-performing loans and higher provisioning requirements in 1998. Staff will be trained to cope with the increased portfolio monitoring requirements in terms of numbers and skills.

All business lines are likely to see a slowdown in customer/balance sheet growth in 1998 but there will be opportunities to acquire business from other banks or to acquire whole portfolios. Our long-term approach to markets and customer relationships should enable us to enhance our reputation in markets where other banks are withdrawing.

Asia’s financial and economic difficulties inevitably affected the bottom line: HSBC posted a 55 per cent increase in bad debt provisions for 1997 and contributions to profit from Asia-Pacific were down 46 per cent.⁴⁹ ‘Yesterday’s results did nothing to confirm the doomsters’ view that Asia will produce a bottomless pit of bad debts,’ observed Lex. ‘But they did not entirely dispel doubts either. If there is comfort to be had, it comes from the fact that HSBC’s business in Asia other than Hong Kong is pretty small − not something it would previously have boasted about. The concern is that the worst lies ahead.’⁵⁰

‘Listing to the East’

The recession in East Asia deepened during 1998, with GDP contracting that year by 6 per cent in South Korea, 7 per cent in Malaysia, 8 per cent in Thailand and no less than 14 per cent in Indonesia. An internal review of the crisis in July 1998 reported that ‘from the data we are seeing, the economies of the “problem” countries, i.e. Thailand, Indonesia, Malaysia, Korea and the Philippines, and others, clearly show that they are still declining. Corporates continue to become insolvent weekly and customers in these areas continue to default on debt which will require further provisioning in the second half of 1998 and also in 1999.’ But with an eye on the upturn, whenever it might come, the review proposed ‘a centralised strategy to handle our substandard debt on a regional basis’ to ensure that the bank derived maximum benefit from any recovery.⁵¹

‘We did not appreciate the effect the crisis would have,’ observed Baldev Singh, financial controller at Hongkong Bank Malaysia Berhad, ‘because Malaysia had always been perfectly OK. We did not bother too much.’⁵² In fact, Malaysia achieved a profit in 1997; but then ‘everything collapsed’, and in 1998 and 1999 it made large losses and had to be recapitalised by HSBC Holdings. Singh remembered the ‘pin drop silence’ when they had reported the loss to the central bank. Paradoxically, the crisis also led to a surge of deposits at the Malaysian branches − a flight to quality in the absence of deposit insurance. ‘We had to keep the bank open until 9 or 10 o’clock,’ recalled Mohammed Ross, then based in Malacca, ‘people were just coming in and we could not close the door. The customers of local banks were coming to us and we were opening accounts by hundreds every day.’⁵³ Consolidation of financial institutions by the authorities to strengthen the system led to the cancellation of the licence of HSBC’s Malaysian finance subsidiary that had offered car and other consumer loans. The quid pro quo was that the bank was, at last, allowed to relocate four branches − helping that expansion into retail banking which had been one of the strategic aims prior to the crisis.

Singapore, meanwhile, escaped the worst of the financial turmoil, though activity was depressed by the regional downturn. A side effect of the crisis noted by Connal Rankin, country head, was the demise of the traditional practice of borrowing on the basis of a personal guarantee.⁵⁴ Heightened concern about credit quality meant that even longstanding clients had henceforth to provide collateral for loans.

‘Even the sturdiest of ships takes a beating in rough seas,’ commented Lex beneath the headline ‘Listing to the East’ on the August 1998 interim results. ‘So it is with HSBC.’⁵⁵ The bank’s Asia-Pacific operations reported a 41 per cent fall in profits and sharply higher provisioning charges for Indonesian and Thai loans.⁵⁶ ‘You feel you can’t touch the bottom of the swimming pool at the moment,’ said a banking analyst at Dresdner Kleinwort Benson. ‘Is this a 12-month or a three-year downturn?’⁵⁷ Six months later the scale of the damage was clearer. For the first time in the bank’s history, Asia was overtaken as the principal source of profit: the respective proportions for 1998 as a whole were Asia 38 per cent; Europe 44 per cent.⁵⁸ While this occurred mostly as a result of the downturn in Asia, a surge in profits at Midland was also a factor. Keith Whitson commented that ‘the results have clearly vindicated our strategy of diversification’.⁵⁹

The region was starting to recover by late 1998. In November, ‘in light of the growing stability of Asian currencies and the improved medium-term outlook’, Hongkong Bank decided that it no longer needed the structural hedges and began to wind them down.⁶⁰ By the following year the worst was past. ‘HSBC has emerged unscathed from the ongoing effects of the Asian economic crisis,’ declared the Financial Times, which reported a 21 per cent increase in profits for 1999.⁶¹ Significantly, profits from the bank’s Asian operations overtook profits from Europe, respectively 42 per cent and 41 per cent, restoring the natural order of things. ‘The Asia crisis is officially over, to judge by the halving of HSBC’s net new bad debt provisions and by the bank’s decision to release 40 per cent of the £193 million special provision it set aside three years ago to tide it over the bad times,’ asserted Lex in August 2000. ‘In the last three testing years, its return on equity never dropped below 15 per cent and has now returned to 20.2 per cent, a comforting proof for investors that the HSBC battleship is indeed armour-plated.’⁶²

Dyfrig John, chief executive of HSBC Bank Malaysia Berhad, opens the Bintulu, Sarawak branch, 2000.

Acquisition opportunities

The Asian financial crisis resulted in state rescues of troubled banks across the region. Governments were subsequently eager to sell these inadvertent acquisitions to sound buyers in order to reduce public indebtedness, and in some cases to meet the conditions of IMF loans. ‘The major potential benefit to emerge from the crisis is the increase in acquisition opportunities,’ Hongkong Bank’s crisis assessment had noted as early as November 1997. ‘Regulators in previously tightly restricted markets such as Thailand and Indonesia are being forced to open their finance sector to foreign investors. This and the collapse in equity values create a unique opportunity to acquire banks in the region at historically low prices.’⁶³ Hongkong Bank had been monitoring regional acquisitions since the onset of the crisis, when possible candidates in Thailand, Indonesia and Mauritius were discussed, while opportunities in Japan, Korea and the Philippines were also kept under review.⁶⁴ ‘We were always looking for things and kept our eyes open,’ reflected Andrew Dixon subsequently, but the bank was loath to overpay. ‘That meant very little came along.’⁶⁵

In April 1998 it was decided to concentrate efforts on Bangkok Metropolitan Bank (BMB).⁶⁶ It was Thailand’s eighth-largest lender, with 171 branches clustered around the Thai capital, and had been taken over by the government in January 1998 to stem a run on deposits. Discussions got under way at the level of Deputy Prime Minister, with HSBC’s chairman, Willie Purves, acting initially as the bank’s emissary. ‘I said that we were only interested in 100% and would have no interest if ownership was to be curtailed,’ Purves reported. ‘He confirmed that 100% was OK and ownership would be “Grandfathered.”’⁶⁷ This was a promising start, but progress was agonisingly protracted. At last, in April 2000, agreement was reached in principle at a price of $920 million.⁶⁸ For HSBC, the potential deal would transform its handful of offices in Thailand into a major presence, while for the government it would further the overhaul of the battered banking industry and fulfil undertakings to the IMF.⁶⁹ However, signature of the agreement was persistently delayed, and with the dissolution of the government in November, HSBC executives decided there was ‘no chance of a successful conclusion’, with ways of ‘exiting amicably’ being explored.⁷⁰ ‘We tried very hard,’ recalled Hongkong Bank’s chief executive Aman Mehta. ‘Acquisitions only happen when they happen quickly. Our best acquisitions were those which were finalised in a matter of days with a minimum of fuss.’⁷¹

While the BMB saga ran and ran, the possibility arose of acquiring Seoul Bank from the government of South Korea.⁷² In February 1999, HSBC signed a memorandum of understanding to acquire 70 per cent for $900 million.⁷³ A due diligence review in May, however, revealed that its balance sheet was in a much worse condition than expected, and it was predicted that negotiations with the government would be ‘difficult’.⁷⁴ So it turned out, with HSBC soon looking for a way of withdrawing from the talks without damaging good relations with the government.⁷⁵ And despite the disengagement from the acquisition, HSBC announced that it remained committed to the development of business in Korea.

Modest acquisitions were achieved in the Philippines and Taiwan. PCIB Savings Bank was acquired in January 2001 for $22 million and renamed HSBC Savings Bank (Philippines).⁷⁶ It provided financial services to middle-market customers through a network of sixteen branches around Manila and complemented the five existing branches that undertook corporate and commercial business, as well as providing private banking services to an affluent clientele.⁷⁷ In Taiwan, liberalisation of the asset management market, with the aim of attracting international expertise, now allowed foreign ownership of firms; and in May 2001 HSBC took a 53 per cent stake in China Securities Investment Trust, a leading Taiwanese fund manager, for which it paid $103 million. The deals were useful in boosting HSBC’s presence in their markets, but were a long way short of the strategic planning visions of 1995 for Asia-Pacific expansion.

How did Citibank and Standard Chartered, HSBC’s foremost foreign bank rivals in the Asia-Pacific market, respond to the acquisition opportunities thrown up by the Asian financial crisis? For Citi, the focus of executive attention was the execution of the merger of the bank with Travelers Group, a financial conglomerate whose businesses included consumer finance and insurance, to form the world’s largest financial services organisation, announced in April 1998.⁷⁸ Overseas, there were significant acquisitions in the UK, Poland and Mexico; in Asia its investments were much more modest, comprising a joint venture with Nikko Securities in Japan and the acquisition of a 15 per cent stake in a Taiwan financial services group.⁷⁹ Thus the pattern of its international expansion over the years 1997–2002 was distinctly similar to HSBC’s, with a predominance of European and Western hemisphere acquisitions over the Asia-Pacific region.

‘While HSBC has spent the three years since economic crisis hit Asia building up its activities in the Organisation for Economic Co-operation and Development,’ observed Lex in April 2000, ‘Standard Chartered has stuck to its emerging markets roots.’⁸⁰ A string of acquisitions began with Nakornthon Bank, Thailand, in 1999.⁸¹ The following spring it struck a deal to acquire Grindlays, ANZ Bank’s substantial South Asian and Middle East subsidiary with 5,000 staff, for $1.3 billion, 2.3 times net asset value.⁸² As a result, with a combined customer base of 2.2 million, Standard Chartered advanced from fifth to first among international banks in India, Pakistan and Bangladesh.⁸³ ‘Standard Chartered continued its Asian shopping spree yesterday,’ noted the Financial Times in September 2000, announcing the acquisition of Chase’s card and retail banking businesses in Hong Kong.⁸⁴ At 4.5 times net asset value, the price was substantially higher than HSBC was prepared to pay for acquisitions. Reports circulated that Standard Chartered was also pursuing deals in Indonesia and Taiwan. ‘When Rana Talwar first took the helm at Standard Chartered, he warned investors to expect more investment. He has been as good as his word, with a spate of acquisitions,’ commented the FT that summer. ‘In fact, the bank has the chance to steal a march on HSBC and Citibank, whose top managements are now less focused on their emerging markets franchises.’⁸⁵ In retrospect, various HSBC senior executives considered that their own bank had missed acquisition opportunities thrown up by the Asian crisis, with Grindlays the most tantalising of the might-have-been scenarios.

Poised for the Asian century

In the mid-1990s, HSBC’s operations in Asia-Pacific outside Hong Kong generated 15 to 17 per cent of total Group profits − respectable but not spectacular (see Table 4). The bank had long found it difficult to expand its presence in the region, but recent developments in deregulation led to a sense of optimism and plans for growth. However, this buoyancy was punctured by the swift onset of the Asian financial crisis, causing profits to plummet, so that by 1999 the region only contributed 4 per cent of total profits. The Strategic Review of the previous year, conducted in the midst of the crisis, emphasised the silver lining: ‘It is fair to say that we have not built the Group’s presence in Asia outside Hong Kong as much as we intended, but this has turned out to be a blessing.’⁸⁶

In the post-crisis world there were new opportunities to purchase troubled banks. Yet despite concerted efforts, there were to be no transformative acquisitions as potential deals became too troublesome, or too costly, to pursue. Although profits in the region recovered strongly from 2000, they were only contributing some 13–14 per cent of the Group total in the early 2000s, as the new acquisitions in the Americas and Europe started to make their own mark. This inability to grow in Asia – at a time when the market for banking services was growing among the burgeoning middle classes – did not go unnoticed. As Bond conceded in 2001, ‘HSBC has completely missed the rise of consumerism in Asia. Not just in Singapore but also in Malaysia and Indonesia.’

Table 4 HSBC Asia-Pacific region (excluding Hong Kong) contributions to Group profits, 1994–2002

	Pre-tax profit (£ million)	Contribution to Group profit (per cent)
1994	350	17
1995	371	15
1996	530	17
1997	270	8
1998	357	9
1999	206	4
2000	855	13
2001	745	14
2002	788	13

Sources: Group Operating Plans, 1996, 1997, 1998, 2001; HSBC Holdings Annual Report and Accounts, 1998, 1999, 2000, 2001, 2002

Although the bank had not been quick out of the blocks, there was no doubt that it saw its growth in the region in terms of a marathon rather than a sprint. Bond himself took the long view. ‘I went to Asia in 1963 and we have seen forty years of unprecedented growth,’ he told Finance Asia in 2001. ‘We had a blip in 1997 and 1998 where, quite frankly, what happened was that the economic and political infrastructure caught up with forty years of growth. The fundamentals remain in place. You have good primary and secondary education systems, hard-working people, strong family units, high savings – all of those ingredients that contributed to the success of Asia’s growth remain in place. What we needed was time to make sure the financial system – and in some countries the political system – had caught up with economic growth. Does Asia have a huge pool of talented people, with aspirations for higher living standards; does it represent one of the major pools of demand in the next twenty years – the answer is unequivocally, yes.’⁸⁷