Article by Gilbert Abela
HSBC Global has been steadily preparing to exit its European and U.S. markets, strategically divesting assets that no longer align with its long-term objectives. By placing its non-core holdings into dedicated companies, HSBC has made it easier to offload these operations. The bank has shifted its focus to its home market, Asia, which it views as a higher-growth region with superior returns. HSBC has already reduced its exposure to markets outside Asia to about 30%. The writing for the Maltese subsidiary of HSBC is on the wall as it is now under strategic review.
For years, the Maltese HSBC subsidiary has been rumoured to be on the chopping block, though local management has consistently denied this, citing the subsidiary’s profitability. However, the recent uptick in HSBC's share price has intensified speculation, making a sale more attractive from the perspective of HSBC Global. The subsidiary is still in a formal strategic review process, and no final decision has been made. The scoop that APS Bank is at an advanced stage in discussions to acquire HSBC Malta has taken many by surprise. Such a significant deal would typically require earlier market disclosure to prevent insider trading concerns. Additionally, it would require the nod of the regulator considering the systematically important tag of both banks and the decreased banking competition the deal will result in.
One potential outcome that would likely reassure stakeholders is the acquisition of HSBC Malta by another large international bank. This option would maintain the current market structure and offer clients, employees, and the wider Maltese market peace of mind. The bank would remain part of a global network, ensuring continuity of services and operations while benefiting from the resources and expertise a new international parent could bring.
Given the scale of this deal, it’s natural for local financial professionals to feel uneasy. HSBC Malta has long been a pillar of stability in the financial sector, benefiting from the backing of one of the world’s largest banks. This connection has helped shield the Maltese economy during times of uncertainty. For example, when Malta was placed on the FATF's grey list, local banks faced significant hurdles in maintaining international payment services, particularly in the U.S. market. If Malta were to face similar challenges again, without the support of a global banking giant like HSBC, the consequences could be more severe.
While this is not a reason for alarm, it does mean that Malta will need to step up its game in managing the financial landscape. Just as individuals face new challenges when leaving the safety of their parent's home, the country would need to adapt quickly to life without the implicit protection of a global banking powerhouse. This will require proactive action from the government and local regulators to reassure the public and ensure the financial system remains robust.
The deal is undeniably attractive for APS. HSBC Malta holds significant deposits, key assets for any bank looking to expand its lending capacity. This would substantially boost the lending capacity of APS, which is currently funding the loan book growth primarily with bonds and shares, resulting in a lower net interest income than larger institutions like HSBC. However, acquiring HSBC Malta would require a phased approach. To put things into perspective, APS’s market value is less than half that of HSBC Malta. Financing such a deal would likely involve issuing bonds and shares in addition to the €150 million bond program currently in place. Even then, the capital raised might not cover the full cost. Another scenario might involve HSBC Global lending APS the funds needed to finance the acquisition, allowing APS to repay the loan using the profits generated by HSBC Malta itself. This would spread the deal's cost over several years and minimise the upfront financial burden on APS. In either case, there’s a strong possibility that the public will be allowed to invest in APS, as any offer made to HSBC Global for the majority holding would need to be extended to other shareholders.
An alternative approach could be for HSBC Malta to buy back shares from HSBC Global and gradually cancel them. The Dutch bank ABN AMRO is currently using this strategy: buying back shares from the government and cancelling them. HSBC Malta could follow this model by purchasing its shares from its parent company, reducing HSBC Global’s stake while increasing local ownership and the public float. Although it can be considered a courageous move, it will preserve the current banking competitive landscape and preserving the current culture that local entrepreneurs can bank on.
In conclusion, there is no immediate cause for concern about the lack of a buyer for HSBC Malta. Should the deal with APS fall through, HSBC Malta has the financial strength to repurchase itself, ensuring it remains locally controlled. Regardless of the outcome, this will be a fascinating deal to watch unfold, especially as other potential buyers might enter the fray, attracted by the bank’s high profitability.
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi & Partners Ltd is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.