London-based HSBC Holdings plc (LON:HSBA) (NYSE:HBC) said during an announcement on Monday, that it is planning to sell its stake in China's second largest insurer, which is currently valued at $9.3 billion. Amid the sovereign debt crisis and global economic slowdown, the British bank has been rethinking its portfolio.
During the third quarter, HSBC Holdings plc (LON:HSBA) (NYSE:HBC) earnings growth was lower than analysts' estimates. The company's CEO Stuart Gulliver is under pressure to revive the profitability during some of the company's most troubled times. Stuart Gulliver took over at HSBC's chief executive in the beginning of 2011, and he has sold more than 40 non-core businesses for about $4 billion.
Gulliver plans to cut $3.5 billion in costs by 2013, and increase returns by selling non-core assets to focus on emerging markets. In March, HSBC Holdings plc (LON:HSBA) (NYSE:HBC) sold its general insurance units in Singapore, Hong Kong and Mexico for $494 million. Ping An contributed 4.2 percent of HSBC's net profits in the first half of 2012.
HSBC Holdings plc (NYSE:HBC) acquired 10 percent stake in Ping An Bank Co Ltd (SHE:000001) for $600 million in 2002, and the value of this initial investment has grown nine fold over the last ten years. Later, the British firm kept adding more shares in the Chinese company. Now HSBC Holdings owns a 15.6 percent stake or 1.23 billion Hong Kong-traded shares of Ping An Insurance (Grp) Co of China Ltd. (HKG:2318) (SHE:000001) (SHA:601318), currently valued at $9.3 billion, according to the Hong Kong Economic Journal.
Selling the Ping An Insurance (Grp) Co of China Ltd. (HKG:2318) (SHE:000001) (SHA:601318) stake may give HSBC a short-term gain, but the move will dilute its earnings in the long-run because HSBC has a return on equity of just 10 percent, whereas Ping An has a ROE closer to 15 percent. However, Investec Securities says in a research report today, that it should not be seen as potential disposal of 15.6 percent stake in Ping An, rather, investors should look at it as the end of a long and painful downgrade cycle for HSBC.
“There is no strategic reason for HSBC to hold Ping An,” says Ian Gordon, an analyst at Investec. “It was bought as a play on the Chinese economy and it has paid off. It’s a positive for HSBC as it shows greater strategic clarity and it will book a profit.” Investec has a buy rating for HSBC stock with a price target of 630 pence.
Shares of Ping An Bank Co Ltd (SHE:000001) declined sharply after the news that HSBC Holdings plc (ADR) (NYSE:HBC) may sell its stake. Ping An closed 1.9 percent down to HK$58.45, the lowest level since September 26. HSBC shares gained 2.6 percent to 611 pence in London trading.