HSBC in Calif.: De Novos Now, Deals Later

Having secured the No. 3 spot in the New York State market, HSBC USA Inc. is now looking to make its mark on the West Coast.

Like its expansion in the Northeast, which was seeded with the 1980 acquisition of Marine Midland Bank and solidified by the 1999 acquisition of Republic New York Corp., HSBC’s California plans could include an acquisition.

Youssef A. Nasr, the president and chief executive officer of HSBC USA, has called California an “attractive market,” and last week he told investors at a Keefe, Bruyette & Woods Inc. conference that it is looking to make acquisitions on the West Coast for cash.

But at least for now, its expansion will concentrate on opening branches in a market segment it knows well: the ethnic Chinese community.

Last week, the New York-based holding company, which is wholly owned by HSBC Holdings PLC of London, opened a branch in Oakland’s Chinatown district that offers services in Cantonese and Mandarin.

The retail branch is HSBC’s fourth in the state and the first it has opened there since converting Republic Bank’s three-branch California subsidiary to the HSBC name and platform.

“We plan to open two to three branches a year in California,” John Lam, the company’s West Coast regional president, said in an interview last week. Formerly an executive vice president for retail banking at HSBC in New York, Mr. Lam moved to California two years ago to oversee the Republic transition and the company’s expansion plans.

Since then the company has added staff to the mainly private banking branches in Beverly Hills and San Francisco and to its retail branch in the Los Angeles suburb of Encino. HSBC now employs about 300 people in the state, a 20% rise from two years ago.

In the meantime, it has been scouting locations in other ethnic-Chinese communities in Southern California, such as East Los Angeles, the San Gabriel Valley, and the Rowland Heights/City of Industry area. Though the company will focus on expanding in communities that cater to ethnic Chinese, Mr. Lam said it will not be restricted to these locations.

HSBC will also look at other fast-growing markets, like Silicon Valley, he said.

In targeting the Chinese immigrant and Chinese-American communities in California, HSBC is taking a tried and true strategy to a new area.

The $696 billion-HSBC Holdings is a descendant of the Hongkong and Shanghai Banking Corporation Ltd., which was founded in 1865 in Hong Kong. HSBC now operates the largest bank in Hong Kong, with 427 offices there, along with 170 offices in 20 other Asia-Pacific countries.

The company followed its original customers as they moved outside Asia. For years it has operated retail branches that feature Chinese language signage and service in New York’s Chinatown district.

HSBC sees its Asia roots as an advantage to getting a head start in California.

“People who come from Asia are very familiar with our name,” said Mr. Lam.

But the company will be fighting for market share with some California-based community banking companies, like the San Francisco-based UCBH Holdings Inc. and the San Marino-based East West Bancorp, that cater to the same market, have already built branches in the cities HSBC is eyeing, and have been relatively successful.

UCBH, the parent of United Commercial Bank, reported a first-quarter earnings increase of over 30% from a year earlier, and its earnings per share in the quarter beat the analyst consensus by 2 cents. East West’s net income rose 10%, and its earnings per share beat estimates by 4 cents.

The Oakland branch underlines the competition HSBC will face. Within a four block radius there are branches of at least four other banks that focus on the Chinese-American population — East West, United Commercial, the Los Angeles-based Cathay Bank, and the privately owned Bank of Canton-California.

Executives at $3.06 billion-asset UCBH and $2.9 billion-asset East West say that they have been hearing about HSBC expansion plans in California for quite some time but that they have not felt any competitive pinch yet.

However, they said they will welcome the competition when it comes. “There’s a very large market here in California, and there’s room for many kinds of banks,” said UCBH’s chief financial officer, Jon Downing.

Both companies are well established and already have branches in the major Chinese communities — UCBH has 30 in California and is looking to expand in New York — and both have made inroads with middle-market and small-business customers. HSBC, in contrast, offers small-business services from its Oakland branch, but not commercial banking yet.

So, could some of these companies be a target for HSBC if it decides to buy than build?

Unlikely, says Mark Agah, an analyst at Royal Bank of Canada’s RBC Capital Markets who covers several California community banks. “HSBC is so big I think they’d look for something bigger.”