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By Lisa Jucca and Sinead Cruise
HONG KONG/LONDON, April 20 (Reuters) - Battling againstsceptical Western investors, HSBC , is on amission to explain why its push into a slowing China is good forthe global bank's future growth.
HSBC which reported flat annual pre-tax profit in 2015, isbetting that the Pearl River Delta region in southern China issucceeding in rapidly upgrading its economy from low-valuemanufacturing to high-growth industries, creating bigopportunities to provide banking services.
But overall negative sentiment towards China has meant itsshares, have dropped 26 percent over the past year.
In the run up to its annual shareholder meeting in London onFriday, HSBC took analysts and investors on a three-day tour ofthe Pearl River Delta, an area with 60 million people justacross the border from Hong Kong. It's UK-based board went on asimilar tour of the region last year, according to peoplefamiliar with the situation.
HSBC, which is the largest bank in Hong Kong and currentlyhas 65 bank outlets in Guangdong province, which includes thePearl River Delta, is hoping to produce $1 billion a year inpre-tax-profit from the area. But some investors are doubtfulgiven the economic slowdown in China and a spike in Chinese badbank debt.
HSBC's growth plan envisages adding 4,000 employees to thePearl River Delta area over the next three-to-five years, and italso plans to redeploy capital from other regions into Asia,though it is unclear how much of that will target southernChina. It currently has around 1,500 bank employees and 13,000IT and support staff in the Pearl River Delta.
Citi analyst Andrew Coombs, who was on the trip, says HSBCis looking to grow its branch network in the region to 100outlets, but HSBC will not comment on that.
"The bank's Pearl River Delta strategy is perfectlysensible," said Ian Gordon, who heads bank research at Investecbank and was on the trip. "However it will likely be three-plusyears before we see any meaningful incremental contribution. Itdoes nothing to soften the impact of near-term headwinds."
Last year, HSBC made 83.5 percent of its unadjusted pre-taxprofits in Asia and 52 percent in Hong Kong alone. Its mainlandChina banking profits, excluding associates, stood at $1.05billion.
FROM OLD TO NEW
The Pearl River Delta, which has played a crucial role inChina's opening up to the world since the late 1970s, accountsfor one quarter of the nation's trade and has been known as the'workshop of the world' for its production and export of massiveamounts of garments, electronics and other products.
The region, particularly around the city of Shenzhen, is nowturning into a hub for innovation and technology, as well asdeveloping a services sector that includes law, design andaccounting. Its $1.1 trillion in annual gross domestic productis already bigger than Indonesia's.
During the road show, participants were introduced to localHSBC clients such as appliances maker Medea andtelecoms giant Huawei, according to the trip'sagenda.
Other HSBC customers in the region include DJI, aShenzhen-based manufacturer that supplies three quarters of theglobal market for commercial drones thanks to its Phantom model.
"The Pearl River Delta is a natural area for (HSBC) to beoperating in," said Joost de Graaf at Amsterdam-based KempenCapital Management, which owns shares in HSBC. "But the issuethat the majority of investors will have is that (China) is nota transparent market, and the lack of bankruptcy law or formalprocedure to repossess assets when clients default, makes ithard for people to truly judge the health of the financialsystem."
Citi, which rates HSBC as its top pick among UK banks, saysHSBC currently only makes $100 million in the Pearl River Delta.HSBC is the biggest foreign player in China, where collectivemarket share by foreign banks remain below 2 percent.
DIVIDEND
To retain investors and attract funds that focus ondividend-paying stocks, HSBC distributed about $10 billion ofits 2015 profit in dividends, offering a chunky 8 percent yield,one of the highest in the global banking world. Gulliver toldHong Kong shareholders at the bank's informal annual meeting onMonday that the bank is also studying the possibility of a buyback of its shares, which are now trading below book value.
"My major concern, as I am sure it is to other investors,would be whether they are able to maintain their dividend policyand balance sheet ratios during the Asian Pivot," said TonyJordan at EFG Asset Management (UK), which owns HSBC shares.
A securities joint venture due to be launched in China,which HSBC will majority own, will give it the chance to offerservices ranging from investment banking and domestic securitiestrading, where it faces stiff competition from local lenders.
For some Asian-based investors with a long-term view, HSBC'sfocus on China is precisely the reason to invest in the bank.
"We re-entered HSBC with our Asian funds four years ago onthe basis of its return to its Asian roots," said Hugh Young,managing director at Aberdeen Asset Management Asia.
"The China strategy is important. But for many of theinvestors, who don't look at it that closely, it may be tooesoteric." (Additional reporting by Rachel Armstrong in London; Editing byMartin Howell)
