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HSBC Gets Approval for Credit Card Operations in China

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HSBC Holdings plc’s (HSBC - Free Report) efforts to scale up its retail and wealth management business in China got a major boost with the U.K.-based company receiving permission to start a credit card business in China’s $1 trillion market.

The approval from the Chinese authorities came after Peter Wong, Asia-Pacific Chief Executive Officer at HSBC, announced in a weekend interview that HSBC ended its joint venture with Bank of Communications Co. However, Wong believes that there are several other avenues of collaboration with Bank of Communications and that the two companies share healthy business terms.

HSBC intends to maintain its stake of around 19% in the Chinese lender, Wong said on Saturday in an interview on the sidelines of China’s annual congress of lawmakers in Beijing.

However, Wong did not specify when HSBC won regulators’ approval or provide details on how the business will be moved forward.

The move makes HSBC the third foreign credit-card issuing company after Citigroup Inc. (C - Free Report) and The Bank of East Asia, Limited (BKEAY - Free Report) to get approval to operate solo on the mainland. The permission to start credit card operations in the country would facilitate HSBC’s plan to expand China footprint.

At its June 2015 Investor Day conference, HSBC unveiled plans to make increased investments in the under-penetrated Asian markets, with particular focus on China. Notably, the company continues to perceive China as an “engine of growth” and hence, intends to capitalize on Hong Kong’s high-quality customer base, where the market has grown over 13% in the past two years. Also, an ageing Chinese population is undeniably driving the demand for retirement and protection products in the country.

More importantly, HSBC believes that building operations in its most-profitable Asian business will help it offset the negative impact from soaring expenses. Moreover, aided by such investments, the company estimates growth in pre-tax profits to outpace that in risk-weighted assets or RWAs, thereby enhancing its return on RWAs.

Though Chief Executive Officer Stuart Gulliver’s plan seemed to suffer due to falling commodity prices, a slowing Chinese economy and a pretax loss in the fourth quarter, an independent credit card division in China would help HSBC expand the client base for its retail bank and enhance HSBC’s access to a rapidly growing market.

According to a Bloomberg report, getting approved for its own operation in China “is a meaningful step for HSBC as it gives the bank the autonomy to run the business,” said Chen Xingyu, a Shanghai-based analyst at Phillip Securities Research. “Since the Pearl River Delta is HSBC’s focus, having its own credit-card business can help the bank expand in the region.”

“There’s still strong demand for credit cards in China’s first-tier cities, but the business is getting saturated in some areas,” said Chen at Phillip Securities. “That’s why the potential in smaller cities is even bigger.”

Though the Chinese economy is currently showing signs of weakness, we believe the country will resume its strength, given a sturdy performance history as well as efforts by its government to boost growth. This, in turn, will support HSBC’s prospects in the country.

HSBC currently carries a Zacks Rank #5 (Strong Sell). A better-ranked foreign bank is Banco Bradesco S.A. (BBD - Free Report) , which holds a Zacks Rank #2 (Buy).

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