HSBC to Sell Brazil Business to Banco Bradesco for $5.2 Billion -- 4th Update

By Margot Patrick and Julie Steinberg 

LONDON-- HSBC Holdings PLC retreated back to its Asian roots Monday with an agreement to sell its Brazilian business for $5.2 billion, in the latest dismantling of HSBC's former ambition to be "the world's local bank."

HSBC said it has entered an all-cash deal to sell the Brazilian unit to Banco Bradesco SA, leaving it with a rump Mexican business in the region that will increasingly be focused around North American trade. The bank in a June strategy update said it would pivot its business back to Asia, where its Hongkong and Shanghai Bank has been operating for 150 years.

The announcement came as HSBC reported a 4% fall in second-quarter net profit to $4.36 billion from $4.54 billion, reflecting higher operating costs and tax charges in the period. But a rise in revenue and lower bad loans pushed pretax profit higher in the three months to June 30, to $6.57 billion from $5.56 billion.

James Chappell, an analyst at Berenberg Bank, said the results are "a reassuring starting point for the revised strategy with results slightly better than consensus."

Chief Executive Stuart Gulliver told analysts that tapping fresh growth opportunities in Asia is a priority but won't be the "exclusive focus" of where it chooses to reinvest capital being freed up by reducing activities elsewhere in the world. He said the bank expects about half of the capital backing $290 billion in risk weighted assets marked for reduction will be channeled to Asia, with the rest dispersed among Europe, the Middle East and North Africa, North America and Mexico.

In HSBC's Global Banking & Markets division, second-quarter pretax profit rose to $5.02 billion from $4.63 billion as volatility in Asian equities and currency markets spurred client trading. Amid an industry debate about whether European banks are scaling back too far in investment banking and letting U.S. rivals corner the business, Mr. Gulliver said he's happy with the unit and its recent performance but that its risk-weighted assets still need to come down.

European banks have been abandoning international businesses and parts of their investment banks in an ongoing shakeout from higher capital charges. While HSBC is pulling back from the number of countries it operates in to 72 from 87 in 2011, Mr. Gulliver said "nothing has changed about the fact that we believe passionately in being a global universal bank, which means diversified by business line and diversified by geography."

Selling Brazil will result in a $37 billion reduction in risk-weighted assets. The bank said it would keep a presence in Brazil to cater to large corporate clients.

HSBC's bank in Brazil is the seventh-largest in the country with a 2.7% market share of banking assets. It made a $191 million pretax profit in the first half, after a $247 million full-year pretax loss last year. The unit employs around 21,000 people.

Mr. Gulliver kicked off an effort four years ago to pull HSBC out of countries where it lacked scale or didn't make enough money. He stepped up the program in June with a plan to cut 50,000 jobs and shave up to $5 billion from its annual costs by 2017. The bank on Monday said it would incur one-time costs associated with the plan in the second half of this year, with the bulk to register in 2016.

HSBC's regulatory woes have often overshadowed its strategy, though, as a host of regulators and authorities globally have found weaknesses in HSBC's anti-money-laundering controls and the governance at some of its units. Fines, settlements and systems cleanups have cost the bank billions of dollars in the past few years and have weighed on returns.

On Monday, it set aside a further $1.14 billion for legal settlements and provisions.

The bank, which is also close to selling its business in Turkey, said it would continue reviewing the possibility of moving its headquarters out of London. HSBC has been considering relocating to Asia, in part, executives have said, to reduce the impact of a U.K. tax on bank balance sheets and avoid a European clampdown on bonuses. In what was seen as an effort to keep HSBC in London, the U.K. government said last month it would start phasing out its tax on banks' global assets.

The headquarters review is expected to be concluded by the end of the year.

HSBC emerged from the financial crisis of 2008 in better health than many of its rivals. But tougher banking rules and investigations into its anti-money-laundering controls highlighted the risks of an earlier strategy of rapid growth through acquisitions. It debuted the advertising slogan "the world's local bank" in 2002 before phasing it out in recent years to reflect a narrowing of its ambitions.

Anjie Zheng

contributed to this article.

Write to Margot Patrick at [e-mail] and Julie Steinberg at [e-mail]

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