Hsbc Case Study

WEEK 2 CASE ANALYSIS

Under the influence of subprime-mortgage, the share price of HSBC’s investment banking plummeted as a result of an infeasible strategic direction, money-consuming incentive arrangements and unsatisfied management governance.

In 1993, HSBC launched aggressive acquisition of several well-established investment banks worldwide. With a long-honored history and high ego as ‘Tier 1’ commercial bank, HSBC ambitiously stated to be a leading global investment bank. However, HSBC overestimated its investment bank’s synergy and competitive advantages with giants like JP Morgan, etc, as it targeted unfamiliar market with relatively-weak networks. What’s worse, HSBC moved its attention at a wrong timing to Europe and USA from China mainland and Hongkong who thrived fast as emerging markets. Additionally, HSBC set out a plan to become a localized bank in every single market but people didn't see it fit into local markets as it asserted.

Investment banks are supposed to cater to special needs and preferences with expertise. Specifically, through issuing and underwriting securities in an international scope, they inject resilient dynamism into transactions related to the off-balance sheet rather than presenting strong assets in the balance sheet. Moreover, by mergers and acquisitions advisory, they make the restructure of balance sheet easier for clients get returns. However, under HSBC’s Managing for Growth plan, performance in its merger and acquisition advisory and some other core investment banking businesses remained less strong in that HSBC allocated much more capital on the credit-driven mortgage and exotic financial instruments.

It can be seen from HSBC’s incentive arrangements that it lost balance between the shareholders return of equity and the interest of senior management. Big money and bonus were overly-generously offered to senior management, yet the underperformed share price provoked criticism from shareholders. As for some top executives, they lacked entrepreneurial spirit because of self-interested and self-centered values.

It can be seen from above that shareholders of HSBC faced some risks in creating a global investment banking business. To start with, the uncertainty of the market challenged shareholders’ reputation in this industry. More importantly, their investment in HSBC can be a failure if the bad performance of the share price impacts HSBC’s achievements as a leading commercial bank.

There are three solutions as far as I am concerned. Firstly, doing a revaluation of its capabilities to build a global leading investment bank and then look at its deficiencies in governance, management and strategy. For example, strengthen networks and leaderships. Apparently, it cannot be a quick success but offering