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HSBC, Citigroup and the end of the World Bank

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Twenty years ago, returning from summer vacation, HSBC Holdings Plc employees began moving into their gleaming new global headquarters in London’s Canary Wharf. Designed by Norman Foster, the building was one of two new towers to sprout to the east of the city. The other housed Citigroup Inc., whose employees had moved out a few months earlier. At the time, they were jointly the second tallest buildings in the UK. They reflected the confidence of their occupants: each vying to be the largest and most imposing bank in the world.

Two decades later, the buildings are now monuments to a bygone era. The global ambitions of HSBC and Citigroup have been reduced, replaced by a closer focus on core markets. HSBC has reduced the number of countries and territories in which it operates to 64 from 88. Its largest shareholder, China’s Ping An Insurance (Group) Co., has campaigned for a spinoff from its operations in Asia. Last year, Citigroup announced its exit from 13 markets in Asia, Europe and the Middle East and is trying to sell its Mexican business, Banamex.

The change in strategy of the two banks follows the arc of globalization.

In 2002, HSBC coined the slogan “the local bank of the world” to describe its strategy. Over the previous 10 years, it had made a series of acquisitions – in the UK, Brazil, the US, France and Mexico – as part of a “three-legged stool” strategy to establish a presence in Asia, North America and Europe.

Founded in Hong Kong in 1865, it outgrew its domestic market and began investing excess capital overseas. The strategy was devised by Michael Sandberg, its chairman between 1977 and 1986. “If you stand still these days, you’re actually stepping back,” he said.

The strategy followed the path set by Citi. In 1967, Citi promoted Walter Wriston, head of its overseas business, to president. Wriston had already made his ambitions clear at a dinner party a few years earlier: “The plan for the overseas division was first to set up a Citibank branch in every commercially important country in the world. The second phase was to start tapping into the local deposit market by setting up satellite branches or mini-branches in a country. The third phase was to export New York’s retail services and know-how.

Like HSBC, the bank has deployed capital all over the world. At its peak, it had operations in over 140 countries. (The United Nations currently has 193 Member States).

By the time they moved into their new offices, HSBC and Citi were the most globally diversified of the major international banks. “We fought like dogs and cats,” said William Purves, who succeeded Sandberg as president, “but in some ways we were pretty close.” As global trade boomed, banks profited as financial intermediaries in the wake of post-Cold War global economic integration.

But with the global financial crisis of 2008, the dominant model of globalization began to break down. As countries became inward-looking and regional trading blocs became more dominant, the expansion of global value chains slowed. After rising in a straight line from 29% of global gross domestic product in 1993, merchandise trade – the sum of merchandise imports and exports – peaked at 51% in 2008. (By 2021, it had fallen to 46%.)

As with many important turning points, the change was not obvious at first. Citi promoted a strategy to become an “urban bank, serving customers in the world’s top 100 cities.” Its post-crisis CEO, Vikram Pandit, argued that “the people of these big cities have a lot more in common as customers than they necessarily have by nationality: from a banking perspective, São Paolo has more in common with London than with San Juan. .” Until 2016, HSBC continued to display its “global local bank” slogan on the jet bridges of major airports.

But as the profitability of their outposts declined and the cost of running remote organizations rose alongside tougher post-crisis regulations, banks began to shed their global aspirations. Pandit’s successor as CEO, Mike Corbat, left a number of markets and his successor, Jane Fraser, doubled down, leaving several others, including Mexico, Citi’s largest self-consumption franchise outside of the United States.

HSBC was also withdrawing from several markets. Last year, he sold his French operations to private equity firm Cerberus Capital Management for 1 euro. Hong Kong is back to contributing 30% of its loan portfolio, a level not seen in over 20 years.

Now the group faces its biggest test: a call to dismantle what remains of its “three-legged stool”. Ping An estimates that splitting off its Asian business could free up $8 billion in capital and create between $25 billion and $35 billion in additional market value. In its interim results presentation earlier this month, HSBC countered that “structural change risks diluting the economics of our international business model”.

But with declining globalization, the value of an international banking network is diminished. From its global headquarters in Canary Wharf, HSBC’s global strategy is a throwback to another era.

More from Bloomberg Opinion:

• Globalization is not dead, it’s just more global now: Wang Huiyao

• Will Western banks move away from Russia? : Mark Rubinstein

• HSBC Split is a surefire way to destroy value: Paul J. Davies

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Marc Rubinstein is a former hedge fund manager. He is the author of the weekly financial newsletter Net Interest.

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