HSBC sent shockwaves across the Islamic finance industry when it announced this month that it will cease to offer Shariah compliant retail products and services in key Muslim markets such as Bahrain and the UAE. Despite being a conventional lender, the bank has carved a name for itself as a leading provider of Islamic banking services; building its Shariah compliant business, offered via HSBC Amanah, into a recognizable brand in the Islamic finance space and developing its profile as a frontrunner in arranging Sukuk transactions globally.
However, HSBC’s strong participation in landmark Sukuk issuances – especially in the last 12 months, where it has been involved in key sovereign Islamic bond offerings from Dubai, Indonesia, Malaysia, Qatar and Saudi Arabia, in addition to its role in bringing corporate issuers to the Sukuk market – appears to have allowed the flagging performance of its retail Shariah compliant offerings to slip the market’s attention.
Speaking to Islamic Finance
news Patrick Humphris, a spokesperson for HSBC, said that the bank’s decision to scale back its retail Islamic banking business, which will also be carried out in Bangladesh, Mauritius, Singapore and the UK, follows a review of the business in tandem with the restructuring of the group’s entire portfolio.
“We cannot continue to support areas which are sub-scale, or where returns are not acceptable,” he said, stressing that the move does not however represent HSBC’s withdrawal from Islamic banking; with the group to retain 83% of its Islamic banking revenues.
The close of its retail Islamic banking business in the six countries will be effective immediately and follows earlier consultations with Shariah scholars and regulators, said Humphris. While it will not take on any new business, existing accounts will be maintained until the bank completes the closure of its business in the respective markets. In the UK, for example, existing products will be put into run-off, said Humphris. It is also unlikely that the bank will convert Shariah compliant accounts to conventional.
A point to note is that HSBC will maintain its wholesale Islamic banking business in the affected countries, and globally, through HSBC Saudi Arabia. Its restructuring will also see the bank focusing its Islamic finance offering in Malaysia and Saudi Arabia, while maintaining a limited presence in Indonesia. “We will be focusing our activities in Islamic finance in areas where we have sufficient scale; and where the returns and future prospects are strong,” said Humphris.
Clearly, it would not have been difficult for the banking group to choose to retain its wholesale Islamic banking operations, which has led in the market for arranging Sukuk in recent years. According to data from Dealogic, HSBC arranged 28 Sukuk transactions worth US$10.13 billion in the last 12 months to the 9th October 2012, topping the data provider’s league tables for top managers of Sukuk. During the same period HSBC’s Saudi unit, SABB, arranged six Islamic financing facilities valued at US$1.68 billion, also leading its league table for top arrangers of Islamic financing.
Group-wide measures
HSBC’s Islamic banking haircut comes on the back of a group-wide restructuring instituted in May 2011 aimed at improving the banking giant’s profitability and cutting as much as US$3.5 billion in costs, under a strategy expected to take at least another two years to complete.
Humphris noted that the group has since closed or exited 40 business lines since Stuart Gulliver, the group CEO of HSBC, announced the plans last year; with affected areas including its insurance business and retail lines in central US, Thailand and South Korea. When announcing the strategy, Gulliver said that HSBC possessed insufficient scale in 39 retail markets covering 420 branches, which together reported a pre-tax loss of US$244 million in 2010.
Nonetheless, Humphris said that the group has not ruled out future entry into new markets, although its operations will have to be put through its “five filter” test which covers future economic potential, connectivity across the group, return on equity, cost efficiency and loan/deposit ratio.
Investment in existing markets
The banking group will also continue to invest in the business lines that it is maintaining. In a separate response to Islamic Finance
news, HSBC Amanah Malaysia said that it plans to grow further with the opening of four additional branches in Malaysia by the end of the year, bringing the total size of its footprint in the country to 26 branches. According to the bank, the new branches comprise one each in the states of Sarawak, Negeri Sembilan and Malacca at the end of November and one in the state of Kelantan in December.
It added that: “The HSBC group believes Islamic finance will continue to increase its relevance in the Malaysian economy and the group’s Shariah compliant operations in Malaysia will remain an important contributor to the group.”
As at the end of June this year, its Malaysian Shariah compliant unit recorded RM12.74 billion (US$4.15 billion)-worth of assets. It also reiterated that Shariah compliant products will continue to be offered in the country, with an aim of ensuring the sustainability of the Islamic business in addition to targeting strong return on equity for its investors. — EB