HSBC to Buy L&T Investment, Boosts Wealth Franchise in Asia

As part of the efforts to expand its wealth management business in Asia, HSBC Holdings (NYSE:HSBC) plc’s HSBC indirect wholly-owned subsidiary HSBC Asset Management (India) Private Ltd has agreed to acquire L&T Investment Management Limited (LTIM) for $425 million. The purchase deal comes four months after HSBC inked a deal to buy AXA Insurance in Singapore for $575 million.LTIM is a wholly-owned subsidiary of L&T Finance Holdings Limited (LTFH) and the investment manager of the L&T Mutual Fund. LTIM facilitates a distribution platform, comprising leading banks, regional distributors, more than 50,000 independent financial advisers, ascertained digital platforms and a footprint covering 65 locations throughout India.

Completion of the deal is subject to regulatory approvals and customary condition precedents, following which HSBC intends to integrate the operations of LTIM and its current asset management business in India, having an asset under management balance of $1.6 billion as of September 2021.

The transaction will likely be funded using existing resources. It is expected to have a minimal impact on HSBC’s common equity tier 1 ratio, while being immediately accretive to the bank’s earnings following completion. A return on investment of greater than 10% in the medium term is expected by HSBC.

LTFH will be entitled to excess cash in LTIM until the completion of the deal apart from the purchase consideration of $425 million. In the meantime, both LTIM and HSBC will warrant continuity of services to their investors and counterparties.

Per HSBC CEO Noel Quinn, the acquisition refines its business competencies in India by enhancing its scale, expanding reach and capturing 15-20% annual asset management market growth that is expected in India over the next five years. The transaction helps HSBC inch closer to becoming a pioneering wealth manager in Asia.

He further stated, “Together with our recent announcement to acquire AXA Singapore, this demonstrates our commitment to capturing the Asia wealth opportunity. We will continue to invest significantly to achieve that goal.”

Surendra Rosha, HSBC’s co-chief executive Asia Pacific, added, “LTIM’s customer base and wide footprint in India will provide HSBC with much deeper access to a high-growth wealth management market. India’s rising income levels and higher life expectancy are driving an expanding and yet under-penetrated sector.”

“The transaction with HSBC is in line with our strategic objective of unlocking value from our subsidiaries which will help us to strengthen our balance sheet for our lending business. When seen alongside the recent capital raise it provides us with enough ammunition to increase the pace of retailisation in our lending portfolio, which is one of our long-term goals," said, Dinanath Dubhashi, the managing director and CEO at LTFH.

Augmenting HSBC’s asset management business in India will also amplify its capacity to serve the wealth needs of Indian consumers as well as those representing the growing non-resident Indian customer base globally.

In February, HSBC announced that it is on an expansion spree in Asia. It plans to inject $3.5 billion worth of capital into its wealth and personal banking business in Asia, of which approximately two-thirds will be used to bolster its distribution competencies via new hires and technology improvements. The bank also announced plans of shifting capital from the underperforming businesses in Europe and the United States to Asia.

HSBC’s Asia operations account for almost two-thirds of its adjusted profit before tax in the wealth and personal banking business.

Our Take

Per a Bloomberg article, India is one of HSBC’s largest markets and the bank made more than $1 billion in the country in 2020, making the country the lender’s third largest Asian profit center, following Hong Kong and mainland China.

HSBC’s expansion plans in Asia are expected to help offset some of the adverse impacts that the low interest rate environment is persistently putting on its top line. Nevertheless, competition for fee-generating sustainable businesses in Asia might intensify over the medium term.

So far this year, on the NYSE, shares of HSBC have gained 15.3% compared with the industry’s growth of 10.3%.

Image Source: Zacks Investment Research

Currently, HSBC carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Inorganic Growth Efforts by Other Firms

Several companies from the finance sector are making consolidation efforts to counter the low-interest-rate environment and heightened costs of investments in technology.

In early December, United Bankshares (NASDAQ:UBSI), Inc. UBSI announced the completion of its merger deal with Community Bankers (NASDAQ:ESXB) Trust Corporation.

The buyout brought together two high-performing banking companies. It also bolsters United Bankshares’ position as one of the largest and best-performing regional banking companies in the Mid-Atlantic and Southeast. The combined entity will now operate across 250 locations in opportunistic markets in the United States.

First Financial Bancorp (NASDAQ:FFBC). FFBC agreed to acquire the fourth-largest independent equipment financing platform in the United States called Summit Funding Group. The deal completion, subject to customary closing conditions, is expected in the fourth quarter of this year.

The acquisition of Summit is expected to be accretive to First Financial’s earnings per share by mid-single digits in 2023 (the first year post integration). Thereafter, on a run-rate basis, the deal is expected to be accretive to earnings by low-double digits.

U.S. Bancorp’s USB primary subsidiary U.S. Bank completed the buyout of PFM Asset Management LLC. The acquisition was carried out through U.S. Bancorp Asset Management. The deal to acquire PFM Asset Management was announced this July.

U.S. Bancorp’s several acquisitions over the past years have enabled the company to foray into untapped markets and fortify its footprint in existing geographies.

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