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HSBC's China Deal in Trouble

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HSBC Holdings plc’s divestiture of its entire stake (15.6%) in Chinese insurance giant Ping An Insurance (Group) Company of China, Ltd to Thailand-based Charoen Pokphand Group has come to an unexpected halt after China Development Bank (CDB) expressed concerns regarding the funding for the deal.

In December 2012, HSBC agreed to sell the Ping An stake to Charoen Popkhand for an estimated $9.4 billion (HK $72.7 billion). The deal was to be completed in two phases. The first phase involved the successful transfer of 21% of the stake on December 7, 2012. The remaining 79% shares were to be transferred on January 7, 2013, after the deal got approval from the Chinese regulatory authority – China Insurance Regulatory Commission (CIRC).

Charoen Pokphand was funding the proceeds partly in cash and partly through loan obtained CDB. Though Charoen Popkhand successfully executed the 21% stake buyout on December 7, soon questions regarding the financing of the deal started doing the rounds.

It was speculated that individual investors, other than the Thai conglomerate, had provided the funds for the Ping An deal. This contradicted the guidelines laid down by CIRC, which prohibited bank loans and other non-proprietary capital to be used for acquiring a stake in insurance companies. Further, it stated that any person or institution on trusteeship could not hold the equity of an insurance company.

The problematic financing of the deal has prompted CDB to reconsider its decision of financing the deal, leading to an abrupt halt. The deal would have fetched HSBC a post-tax gain of $2.6 billion on the sale after deducting the carrying value of investment in Ping An as well as the reclassification of the connected foreign exchange and other reserves.

HSBC, under its new CEO, has resorted to aggressive restructuring since 2011. The reshuffle involves streamlining its worldwide operations by shedding non-core assets to boost profitability. Ping An stake sale was a part of this strategy. The possible fallout of the deal would mean a major setback to the company’s restructuring initiatives.

HSBC currently retains a Zacks Rank #5, which translates into a short-term Strong Sell rating. However, other stocks in the financial sector that are performing well and are worth considering include AllianceBernstein Holding L.P. (AB - Snapshot Report) and Heartland Financial USA Inc. (HTLF - Snapshot Report). These companies carry a Zacks Rank #1 (Strong Buy).

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