A Third of HSBC’s US$12 Billion China Property Exposure Impaired

HSBC Holdings Plc said it will take further charges against its more than US$12 billion of exposure to China commercial real estate as a third of those assets are “substandard” or “impaired,” according to Chief Financial Officer Ewen Stevenson.

“There is really only one portfolio globally that we are paying close attention to. That is the offshore book of our China commercial real estate exposure,” Stevenson said in an interview with Bloomberg Television on Monday. “We are some quarters away from saying we are through the worst of it.” HSBC took US$142 million of expected credit losses related to China’s commercial real estate sector in the second quarter. That adds to a US$160 million charge set aside in the first quarter.

China’s deepening real estate crisis has roiled Asian credit markets, hit the nation’s 400 million middle class, and ensnared not only local lenders but also global banks including HSBC and Standard Chartered Plc. The nation’s top 100 developers saw home sales slump further in July, indicating a mortgage boycott crisis across more than 90 cities has further weighed on buyer confidence as authorities struggle to contain the turmoil.

In a worst-case scenario, S&P Global Ratings estimated that 2.4 trillion yuan (US$356 billion), or 6.4% of mortgages, are at risk while Deutsche Bank AG is warning that at least 7% of home loans are in danger.

Stevenson said in a separate interview that HSBC doesn’t have “significant” exposure to any of the unfinished properties that have sparked the nationwide boycotts. He also added that as a percentage of its overall book, China commercial real estate is “very modest” and manageable.

Meanwhile, HSBC is in talks with its biggest shareholder Ping An Insurance Group Co. but continues to push back at suggestions that the banking giant should be split up.

Ping An has held talks with HSBC on the idea of spinning off the bank’s Asian operations and listing them separately in Hong Kong, Bloomberg reported in April. China’s largest insurer owned more than 8% of London-headquartered HSBC at the end of 2021. A majority of HSBC’s profit before tax comes from Asia, compared to roughly a fifth from Europe.

HSBC takes Ping An’s views seriously and is “definitely” continuing to talk to the Chinese company about its demands for some kind of structural change, HSBC CFO Ewen Stevenson said in an interview on Bloomberg Television shortly after the bank announced second-quarter earnings.

“We are definitely talking to Ping An and continue to talk with them,” Stevenson said. “When we look at all of the various structural alternatives, a combination of upfront costs, a lot of complexity, (it) would take us three to five years to implement any form of material structural alternative.”

But the banking giant doesn’t see the structural alternatives for HSBC as stacking up, and thinks it would be hard to find value for shareholders in any split.

“Based on what we can see today, it’s very hard to find any value case that we can put in front of shareholders,” he said.

Ping An has held talks with HSBC on the idea of spinning off the bank’s Asian operations and listing them separately in Hong Kong, Bloomberg reported in April.

HSBC Is Under Attack From China Upstart It Put on the Map

The lender subsequently started an internal review to help push back at the break-up suggestion, with bankers from Goldman Sachs Group Inc. drafted in to help with the review.

Still, a break up could unlock substantial value, according to a June report by In Toto Consulting Ltd., which said the analysis was commissioned by “an independent third party.” – Bloomberg