Why Is HSBC Leaving Brazil and Turkey?

The world’s local bank is about to get a little less local. HSBC is going on a cost-cutting tear, trimming branches in major markets and selling off entire operations in emerging ones. The bank’s leadership says they’re narrowing its business to improve profitability, but there’s a much bigger message — and possibly an important twist — in its new approach.

To understand HSBC’s decision, it helps to think about its business model. Retail banks that serve consumers and businesses make their money primarily through loans and fees. For loans to be profitable, local businesses have to be strong and, if possible, growing; if that’s the case, then clients are numerous, demand for lending is strong, and default rates are low. Fees can evaporate as demand for lending rises, since the banks need deposits in order to make loans. But regardless of loan volumes, fees are more plentiful when banks have high-value customers doing a lot of transactions with different kinds of accounts.

Naturally, banks with lower overhead can charge lower fees and offer less interest on loans, which is why online banks have started to pick up market share in the past several years. So in part, HSBC’s push to slim down and tech up is a response to market forces. The reorientation of its business has much deeper roots, however.

In the past two decades, as the global economy has become more integrated, retail banks have been markers of expectations for growth. In Brazil, HSBC ramped up its operations with a series of acquisitions. First, it purchased Banco Bamerindus for $1 billion as part of a Latin American buying spree in 1997. Then it picked up Lloyds TSB’s operations for $815 million in 2003. The bank followed a similar path in Turkey, expanding holdings it acquired with Midland Bank in 1992 by absorbing a distressed Demirbank in 2001.

Now HSBC is leaving both of those markets. Once the darlings of investors, Brazil and Turkey have fallen into an economic rut of late. In Brazil, the vast inflows of capital that came seeking a safe haven during the global financial crisis have started to dry up, with the economy bogged down by corruption and bureaucracy. In Turkey, a similar spike in growth during 2010 and 2011 was followed by a string of comparative disappointments. This year, the Turkish economy — which felt the chill of the AKP’s continuing clampdown on basic freedoms (until the party lost its parliamentary majority this week) — may expand by less than 2 percent, adjusted for inflation.

In short, HSBC placed long-term bets on the growth of big emerging economies, and now some of those bets are being scraped off the table. But it wasn’t just the rates of growth in Brazil and Turkey that cut into their profitability for banking — it was also how that growth was distributed.

Brazil’s economic path has been remarkable, as one of the few countries able to globalize in recent times without increasing inequality. Though a rising tide may lift all boats, the rising tide of globalization has tended to lift some boats a lot more than others; poverty may have declined, but the change in the wealth of people at the top is much greater. In Brazil, assiduous redistribution by the governments of Luiz Inácio Lula da Silva and Dilma Rousseff has, for all their faults, evened out the income distribution to a historic degree. In Turkey, income inequality is also lower than it was when HSBC made its big acquisitions.

In both of these countries, there are more potential customers for HSBC than ever before. The problem is that they’re not the most lucrative customers. People just starting to climb the economic ladder don’t need a lot of special services, and their savings are so small that their accounts are relatively expensive for a bank to maintain; most banks would rather manage one account worth $100,000 than 100 accounts worth $1,000. Moreover, with high benchmark interest rates in both countries, borrowing from banks is a tough proposition for most businesses.

None of those things are true in the high-powered economies of East Asia, where HSBC will now refocus its business 150 years after the Hongkong and Shanghai Banking Corporation Ltd. first put out its shingle. In Hong Kong, China, Singapore, and Malaysia, growth is steady, interest rates are low, and inequality is high — and may still be rising. Big companies are getting bigger, as are the services they need and the fees they pay — it’s a banker’s paradise.

But here’s the kicker: Chinese banks might be the ones to scoop up HSBC’s assets in emerging economies. Industrial and Commercial Bank of China is reportedly negotiating for HSBC’s operations in Turkey, and China Construction Bank Co. may also be interested in the Brazilian arm.

This shouldn’t come as a surprise. Both banks are owned by the state, and the Chinese government has a much longer time horizon than HSBC or any of its competitors. Brazil and Turkey may not have grown fast enough or unequally enough for HSBC, but China can wait for the payoff. And it’s not the only payoff, either — it’s also yet another opportunity for China to spread its influence by filling the gaps left by players from the major markets.

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