As the Covid-19 pandemic continues to ravage the global economy, a French union leader described the bidding war for HSBC France’s retail bank as “caught between plague and cholera”.
The two plagues that Force Ouvriere’s Eric Poyet denounced are private equity groups AnaCap and Cerberus, which are competing to take over 230 HSBC branches in the country.
Cerberus is likely to win the race, paying around €500m from HSBC to take the bank off its hands, according to people familiar with the matter. That’s a far cry from the €11.1 billion HSBC spent buying it in France in 2000.
French union leaders are not known for being understated, but this deal has caused even sober investment bankers to lament HSBC France as a ‘fallen angel’.
However, the bank that HSBC bought in 2000, Crédit Commercial de France, is very different from the one HSBC is launching today. And not just because she made a loss of 22 million euros in 2019. At the time of acquisition, CCF was a full-fledged, albeit limited, lender with a handful of regional banks under its umbrella and was able to offer services ranging from wealth management to investment banking. It was high end, with a customer base to match.
It’s not easy to rate the rest, especially since we don’t know the exact details of the sale. HSBC is currently planning to stick with private banking and asset management.
What we do know is that HSBC France sold CCF’s regional banks for 2.1 billion euros in 2008, flogged CCF’s old prestigious headquarters on the Champs-Elysées for 400 million euros and merged some of its operations with those of HSBC . It has helped generate profits abroad and paid 7.1 billion euros in dividends to the group, according to HSBC figures.
Unions and some insiders point to a lack of investment by HSBC in its French division, blaming a cultural divide between the UK and France which they say has left the bank weak with an outdated IT system. But the banking world has also changed a lot since the year 2000.
The fall in interest rates has hit French banks hard and squeezed credit spreads. They face one of the most competitive markets in Europe and have very little pricing power. Union power remains impressive and explains why France overtook Spain in 2019 as the top European market with the highest number of stores per capita.
That means it was a different world in 2000 when HSBC bought CCF at 3.5 times price-to-book — a valuation metric that compares a company’s market value to its net worth. This compares to Société Générale’s price-to-book ratio of 0.3 and BNP Paribas’ 0.6.
Some have wondered why HSBC France doesn’t just invest and restructure itself. But, as one person familiar with the bank’s mindset argued, the totals aren’t accurate.
As of today, HSBC will partially pay Cerberus to cover much-needed investments in IT systems and some restructuring. From HSBC’s perspective, it’s better to let someone else do the heavy lifting. Though painful, the sale could now coincide with a strategic move to Asia.
HSBC France is also not profitable. According to UBS, the return on tangible equity – a measure of profitability – is between 1 and 2 percent, while the group is targeting a ROTE of 10 percent.
Cerberus, on the other hand, is getting a near-free option, according to one banker, as it deepens its bet on European banking. The group is an experienced financial player. It is a shareholder in Deutsche Bank, Commerzbank and Hamburg Commercial Bank. It bought an Austrian lender before the financial crisis and is already in France, having bought GE’s banking business in 2016 and renaming it MyMoneyBank.
There are levers Cerberus can pull to add value to HSBC France, including building synergies with MyMoneyBank, but the real key to turning the tide is out of its hands: interest rates need to go up.
If Cerberus pulls through the deal and timing it right, we could look back on this sale as a kind of low point for European retail banking. But as Jérôme Legras, head of research at Axiom Alternative Investments, pointed out, this may not be a free option. “If the whole thing goes broke or undercapitalized, don’t just walk away like you would an IT company,” he said.