In a groundbreaking move that has been six decades in the making, HSBC’s Chief Executive Georges Elhedery announced plans to acquire full control of Hang Seng Bank for $13.6 billion. This announcement marks a significant milestone in the longstanding relationship between the two banks, particularly given that Elhedery was not yet born when HSBC first acquired a stake in the Hong Kong-based lender.
While the news initially triggered a 6 percent dip in HSBC’s share price, it is essential for investors to adopt a long-term perspective on the implications of this deal. A primary concern among shareholders stems from the financing strategy, as Elhedery intends to pause share buybacks for the next three financial quarters. Share buybacks have long been a favored approach for bank investors, especially for HSBC’s retail shareholder base, which favors substantial capital returns through cash distributions and guaranteed earnings per share growth.
The immediate market reaction suggests discomfort with the decision to prioritize an acquisition over buybacks. However, it’s crucial to reconsider the motivations behind share repurchases. Typically, these transactions indicate that a company lacks more profitable investment opportunities. When HSBC shares were trading at a significantly low valuation relative to their book value, share buybacks effectively boosted earnings per share. However, with the stock having more than doubled in value over the past three years, the justification for repurchases has notably shifted.
In this light, HSBC’s acquisition of minority shareholders’ interests in Hang Seng presents an attractive alternative. Analysts at Citigroup had anticipated that the bank would allocate approximately $8 billion to buybacks over the next three quarters, which could potentially lower the share count by over 4 percent and enhance earnings per share correspondingly. Comparatively, the takeover of Hang Seng, which currently contributes almost $1 billion annually to profits attributable to minority shareholders, is expected to boost HSBC’s earnings per share by nearly 4 percent without the need for share buybacks.
Despite the current challenges facing Hong Kong’s market, particularly in the commercial property sector, a prospective recovery raises a hopeful outlook for HSBC’s decision. Elhedery framed the deal as a demonstration of “confidence in this market and commitment to its future.” Furthermore, a more streamlined Hong Kong operation could be beneficial if HSBC decides to separate its eastern and western divisions in the future, a move that has been advocated for by shareholder Ping An.
Before HSBC’s offer, Hang Seng’s shares had already appreciated by approximately 25 percent year-to-date but were still trading at levels comparable to three years ago. As the market recovers, the timing of this acquisition could be seen as a strategic maneuver to secure value before prices rise further.
As share buybacks continue to dominate the strategies of large banks, rising valuations—particularly in Europe—are reshaping the landscape. This situation may diminish the attractiveness of capital returns through buybacks, thus lowering the threshold for pursuing acquisitions of rivals trading at more competitive prices. Elhedery’s bold step in this direction may signal a shift in strategy that other banks could follow in the near future.
