LONDON HSBC's (HSBA.L) ambitions to establish an investment banking franchise in China have hit a roadblock, with the bank still waiting for approval for its partnership with a state-owned fund more than a year after it announced the venture.
The partnership is a key part of the bank's ambition to grow annual profits in the fast-growing southern region of China from $100 million (£81.50 million) to $1 billion in the medium term, and as growth in China slows, HSBC has delayed other expansion plans it said would help achieve that goal.
HSBC announced on Nov. 2, 2015 the proposed venture with Shenzhen Qianhai Financial Holdings Co Ltd, with HSBC set to own a majority 51 percent stake while foreign peers are currently capped at a maximum of 49 percent in Chinese partnerships.
The bank is expected to get the go-ahead for the venture eventually, sources familiar with the matter said, but the delay has reduced the advantage HSBC could have stolen over rivals as China relaxes rules on foreign players in its markets.
A spokesman for HSBC in Hong Kong said the bank continues to seek the required approval, declining to comment on the timing.
The proposed HSBC-Qianhai firm would be able to trade as well as underwrite stocks and bonds for Chinese firms, unlike foreign rivals who operate under more restrictions.
"HSBC a year ago was saying 'here we go', it was all guns blazing but we are still waiting...," said a Hong-Kong based consultant who works with the bank.
HSBC did not publicly set out a timeline for when it expected to receive the go-ahead but the process is taking longer than analysts expected.
Chirantan Barua of Bernstein research wrote in April last year that he expected approval by the July-September quarter.
The HSBC joint venture has had the longest wait of any pending Sino-foreign securities joint venture, and two such ventures have received approval since HSBC submitted its application, according to data compiled by Hong Kong consultancy firm Quinlan & Associates.
LOSING THE EDGE
Qianhai is a free trade zone in Shenzhen, a fast-growing city neighbouring Hong Kong that China has earmarked for development as a financial hub.
HSBC has a potential edge over foreign bank rivals in China thanks to its ownership of a Hong Kong-based banking subsidiary, The Hongkong and Shanghai Banking Corporation Limited, allowing it to own and control its planned new Chinese joint venture.
But now banks including Morgan Stanley and Credit Suisse are set to raise their stakes in their securities joint ventures to the current 49 percent limit in anticipation of being able to have majority control soon, sources told Reuters on Monday.
On December 30, China unveiled plans to allow more foreign investment in banking, insurance, securities and credit-rating firms, paving the way for HSBC's rivals to enjoy controlling stakes despite the lack of a Hong Kong base.
CHINA STRATEGY DELAYED
The slow progress of HSBC's investment banking ambitions comes alongside other setbacks in China for Europe's biggest bank. Decelerating economic growth in the country has delayed HSBC's plans to hire 4,000 new staff and do more business in the country's southern region.
HSBC in June 2015 announced it would invest in China's southern Pearl River Delta region, banking on the country's rapid growth and its own Hong Kong heritage to reinvigorate profit growth after years of restructuring.
But HSBC has since revised its ambitions for the scale and speed of that investment as China's growth slowed.
Gulliver said in February last year the bank's plans to hire
4,000 new staff in the region will happen over five years instead of three.
"The June update... was prior to changing views on where the renminbi would be, and China's GDP has slowed, so all we are saying is the redeployment will take longer," Chief Executive Stuart Gulliver told Reuters by phone in August.
HSBC in April last year took analysts and investors on a tour of its operations in the Pearl River Delta (PRD), in a sign of how important the investment there is to the bank's strategy.
"HSBC's foray into the PRD is not a choice but a necessity to stay relevant as Hong Kong connects with the mainland," Bernstein's Barua wrote in a report following that April trip.
(Reporting By Lawrence White, additional reporting by Michelle Price and Sumeet Chatterjee in Hong Kong; Editing by Elaine Hardcastle)