HSBC Divests Ping An Stake

HSBC Holdings plc ( HBC - Analyst Report ) has divested its entire stake (15.6%) in Chinese insurance giant Ping An Insurance (Group) Company of China, Ltd to Thailand-based Charoen Pokphand Group for an estimated $9.4 billion (HK $72.7 billion). HSBC expects to earn a post-tax gain of $2.6 billion on the sale after deducting the carrying value of investment in Ping An and the reclassification of the connected foreign exchange and other reserves.

The divestiture will be carried out in two phases. The first stage involves transfer of 21% of the shares to the acquirer on December 7, 2012. The remaining 79% shares will be transferred on January 7, 2013, after the deal gets a nod from the Chinese regulatory authority – China Insurance Regulatory Commission. Charoen Pokphand will fund the proceeds partly in cash and partly through loan obtained from China Development Bank.

Last month, HSBC announced that it was contemplating divestiture of its stake in Ping An. Back in 2002, HSBC had initially purchased a 10% stake in Ping An for an amount of $600 million. In the period between 2002 and 2005, the company acquired another 5.6% stake in Ping An for a sum of $1.7 billion. It is noteworthy that HSBC’s 15.6% stake in the company reflects 40% of its Hong Kong-traded shares held by the former.

HSBC, 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. Ping An stake sale is a part of this strategy. Earlier this year, HSBC traded 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 in China (in terms of assets).

HSBC is not the only company disposing its non-fundamental operations. In October this year, 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). ING also 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.

The sluggish economic backdrop and the deepening Euro zone crisis have forced HSBC to reorganize its business strategy. We believe that these restructuring efforts will go a long way in controlling HSBC’s rising expenses and enhancing its overall profitability.

HSBC currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. Considering the fundamentals, we maintain a long-term ‘Neutral’ recommendation on the stock.