Porter’s Five Forces Analysis of HSBC
|HSBC Holdings PLC
|March 3, 1865
|Noel P. Quinn
|USD 49.55 billion (CY21)
|USD 18.91 billion (CY21)
|Bank of America, Toronto-Dominion Bank, Banco Satander SA, Deutsche Bank
HSBC Holdings PLC is a British multinational commercial banking and investment company and the largest bank in entire European region. HSBC resides in more than 60 countries ranging across Asia, Europe, Americas and service around 40 million consumers. HSBC ranks 149th on Forbes Global 500 (2022) and 38th on Fortune Global 2000 (2022) lists.
HSBC posted revenues of USD 49.55 million in CY21, down -2%YoY largely in line with the global banking trend. The profits clocked in at USD 18.91 billion, up +1.15x, a jaw dropping increase as the world resumed towards normalcy after the Covid-19 pandemic.The company delivered stellar performance and simultaneously created HSBC Personal Wealth Planning in China and did some acquisitions Singapore and India to strengthen Asian footprint.
Porter’s Five Forces Analysis
Porter’s Five Forces Analysis is used to determine the company’s competitive position reference to it’s Industry for better strategizing the companies’ operations for higher profits and less competition, defined by Professor Micheal E. Porter in 1979,at Harvard Business School.
HSBC Rivalry among Existing Competitors
- Aggressive Competition
There is intense competition in the Banking sector from not just local but international players. HSBC, being a global banking giant, competes with essentially all the banks in the world where it holds its presence. However, such remarks should not be generalized as banks are business that depend a lot on their international brand image, technological efficiencies and quality of service. In this respect, since HSBC competes with banking giants which in turn are not so much makes the competition somewhat weak.
- Bank of America
Bank of America is the second largest bank in America after JPMorgan Chase and has more than 10% of deposit market share across US. The bank operates more than 4500 retail outlets and 16000 ATMs nationwide in the US. The bank reported Net Interest Income of USD 5.66 billion, up 4%YoY in CY21 in line with the banking sector. Moreover, BoA Net Income clocked in at USD 4.33 billion, up 41%YoY as the global business activity took up when the world moved towards normalcy post pandemic.
- Toronto-Dominion Bank
TD is a Canadian multinational banking and financial services company and is one of the big five banks in Canada. TD is the largest bank in Canada by Total Assets and has a network of 1200 branches just in US and a total consumer base of 26 million clients globally. The bank reported revenues and income of C$ 42.69 billion and C$ 14.30 billion, respectively in CY21.
HSBC Threat of New Entrants
- High Economies of Scale
The banking sector is one of the hardest to penetrate because there are a thousand different types of lending and investment products out there. These products vary in terms of maturity, securities required, level of interest rates in general and overall banking spreads. Also, there are a lot of synergies in Financial services which includes essentially banking product similarities with Mutual Funds (Equity and Fixed Income), banking mortgage loans with Real Estate Investment Trusts (RIETs) and other different types of investment. This makes extremely difficult to set up banks locally and then nearly impossible internationally.
- Excessively Regulated
Banking sector is one of the most fiercely regulated with both local laws and regulations and international laws in case of multinational banks and asset management companies. Banks also invest in global Equities which makes additional regulations applicable on them and even some ESG standards to ensure safety of environment. Also, an additional compliance measure for all the banks is the Anti-Money Laundering (AML) laws on which HSBC has been fined numerous times.
- Intense Working Capital Requirements
Banks have to set up attractive branches in various locations to attract consumers and provide learned staff to cater to them. Additional services may require installing of ATMs, locker facilities and providing Trade Finance services and even Investment Advisory services. Due to this very service nature, banks have to employ skilled people who understands and then recommends products as per the best needs of the client to maintain long term relationships. In this respect, it requires immense costs to set up and maintain the overall branches network and retain and attract skilled staff hence making barriers to entry high.
HSBC argaining Power of Suppliers
- Supplier 1 – Lender of Last resort Central Bank(high)
The central bank like European Central Bank or American Fed initially creates minimum reserve requirements and set up quotas on lending in a single sector and single entities which all the banks have to follow. Also, central bankers hold the power over money supply (by increasing or decreasing interest rates)which overall impacts two of the most key performance indicators of any bank which are Loan Demand and Net Interest Margin. This makes the bargaining power High.
- Supplier 2 – Depositors(low)
Depositors are people who put their money in the banks to earn a rate of return for their savings. However, the financial services industry is revolutionizing by each passing day with more complex products offering for various niches who wants to invest for different maturities in different liquid assts. This gives depositors (who deposit material amount) significant options to invest. However, with banks also cannibalizing in Asset Management and Wealth Planning investors are mostly price takers which makes bargaining power low.
- Supplier 3 – Office Supplies vendors (low)
These suppliers provide office supplies like computers, papers, and other necessary items on a regular basis. The power is essentially none as they are easily replaceable and switching cost is low for banks.
HSBC Bargaining Power of Buyers
- Continuous Brand Development
The buyers are purchasers of the investment products. Due to complexity of financial products and a lot of trust involved in the business, buyers and banking clients essentially are consumers who are price sensitive and avail the services of the banks. These clients are mostly price takers due to gigantic scale of the bank (like HSBC) and have essentially no pricing power.
- Continuous Brand Development
Banks invest heavily in brand development as the service industry highly varies by the perception in the mind of clients and quality of services being offered. In this respect, global banks like HSBC adheres to strictest of corporate standards and ethics to develop strong brand images.
- Ability to pass on Cost-push inflation
The impact of cost push is automatically priced in the product. Banks essentially earn a spread which is the difference of interest rate provided to the deposit holders and profit rate earned over lending and investment portfolio. This spread is automatically adjusted for any inflationary impacts when banks resorts to monetary tightening (increasing interest rate) like one the world is witnessing now.
HSBC Threat of Substitute Products or Services
- Low Switching Cost
Banking services are mostly similar and varies in slight structural differences like interest rate offered on savings product or interest rate to be paid on lending products, the securities required and even these things are highly regulated with local and international regulations applied. In this respect, there is minimal switching cost for clients to switch over to another banks.
- Financial Services Synergies
The reason why banking companies are also venturing in to other similar lines like retirement planning, asset management to provide a wide range of financial services and create synergies across all to retain clientele. The client prefers to stay and trust one investment company who cater to all investment needs and provide online access of all of the clients records to ensure safety
- Annual Financial Statements, Results and Announcements(CY21-22), Company website [online], Available at: Results and Announcements HSBC
- Forbes, (2022), HSBC [online], Available at: Forbes
- Fortune, (2022), HSBC [online], Available at: Fortune
- The Wall Street Journal, Topic: HSBC [online], Available at: Wall Street Journal
- Statista Research Department, (2021), Profits of HSBC from 2007 to 2021 [Online], Available at: Statista
- Alastair Marsh, (2022), HSBC gets slapped for running ads saying it’s green when it’s not [Online], Available at: Fortune
- Trefis Team, (2022), Where Is HSBC Stock Headed? [Online], Available at: Forbes
- Statista Research Team, (2021), Annual reported and adjusted revenue of HSBC Holding plc worldwide from 2017 to 2021 [Online], Available at: Statista
- Alena Botros, (2022), HSBC is giving its U.K. workers £1,500 to help with inflation costs as British banks spend big on their employees [Online], Available at: Fortune
- Trefis Team, (2021), HSBC Stock To Top The Revenue Outlook In Q3? [Online], Forbes
- Tristan Bove, (2022), ‘We’re not really sold on this recession idea.’ Top HSBC Asia economist thinks global recession fears are overblown [Online], Available at: Fortune