HSBC to Vend off Stake in Ping An

HSBC Holdings plc ( HBC - Analyst Report ) is considering the divesture of its stake in the Chinese insurance giant Ping An Insurance (Group) Company of China, Ltd for an estimated $9 billion (£5.7 billion). The sale is part of the company’s strategy to rationalize its operations and enhance profitability.

Background

In 2002, HSBC initially purchased a 10% stake in Ping An for an amount of $600 million. In the period 2002–2005, HSBC acquired another 5.6%, totaling 15.6% stake in Ping An for a sum of $1.7 billion. It is noteworthy that the 15.6% stake in the company reflects 40% of its Hong Kong-traded shares held by HSBC.

The potential sale seems to be a lucrative deal, given the massive profit it will generate upon sale. The proceeds are likely to strengthen the company’s balance sheet and are expected to be useful when the bank settles money-laundering charges.

However, the stake sale may not be that easy after all. The Chinese government has conventionally allowed only financial institutions to bid for stakes in the country’s major banks and insurers. This will narrow the list of possible buyers. Further, the initial public offering by another Chinese insurer, Pacific Insurance Company of China Group, could steal strategic buyers who may otherwise have opted to buy a stake in Ping An.

Similar Divestments

Earlier this year, HSBC vended off its general insurance businesses in Asia and Latin America for $914 million. The company is divesting its general insurance units in Hong Kong, Singapore, Argentina and Mexico to Australia's QBE Insurance Group Ltd. and France-based AXA Group in two separate deals.

HSBC is also looking to sell its 18% stake in Vietnamese insurer, Bao Viet Holdings. Moreover, it is assumed that eventually the company might sell its 19% stake in Bank of Communications, the fifth-largest bank of China (in terms of assets).

Now, HSBC is not the only company disposing its non-fundamental operations. In October, Netherlands-based ING Groep NV ( ING - Snapshot Report ) announced the sale of its Malaysian insurance business to Asian insurance giant, AIA Group Ltd, for nearly $1.7 billion (€1.3 billion).

Apart from this, ING announced the divestiture of its insurance business, pension and financial planning divisions in Hong Kong and Macau, as well as its life insurance operations in Thailand to Pacific Century Group for a total of $2.14 billion (€1.64 billion) in cash.

Our Take

The sluggish economic backdrop and the deepening Euro zone crisis have forced HSBC to rethink its business strategy. The company, under its new CEO, has resorted to aggressive restructuring since 2011. The restructuring involves streamlining its worldwide operations by shedding non-core assets to boost profitability.

HSBC currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We expected the stake sale to encourage analysts to revise their earnings estimates upward, which in turn would help HSBC achieve a better Zacks Rank.