December 6, 2023

Investment Banking

Let Your Investment Banking Do The Walking

HSBC Starts to Dig Into What It Bought From Silicon Valley Bank

(Bloomberg) — When acquiring a bank over a weekend, certain details might slip. In the case of HSBC Holdings Plc snapping up Silicon Valley Bank’s UK arm that includes the specifics of what was bought.

Having finalized a deal to take on the stricken lender early on Monday for just £1, HSBC began the detailed work of looking through SVB UK’s books later that day, according to a person familiar with the matter.

The rush was such that HSBC’s management didn’t speak to SVB UK’s senior executives before the deal was signed, the person said, asking not to be identified discussing a private process. Adding to the challenge was the sparse details in the data room set up by Rothschild, reflecting the rapid pace at which the plans were put in place.

There’s little sign of buyer’s remorse so far. The decision to do the deal was based on several factors: a wish to do the right thing for the British economy, an opportunity to associate the traditional bank with more fast-growing sectors and a way to boost its UK-based ring-fenced bank, several people said.

HSBC Chief Executive Officer Noel Quinn and UK boss Ian Stuart said in an email to SVB UK staff that the bank was ready to pump more cash and liquidity into SVB “as needed.” The message — also posted on LinkedIn — said the London-listed firm has already injected nearly £2 billion ($2.4 billion) of liquidity into the smaller lender, confirming an earlier Bloomberg News report. 

Read More: HSBC’s £2 Billion Boost for SVB’s UK Unit Caps Frantic Weekend

An inability to carry out comprehensive due diligence isn’t unusual in such pressurized situations. HSBC executives led by Stuart did as much as possible in the time available given the need to have an announcement ready for when markets opened on Monday, the people said. 

The emergence of HSBC as a serious buyer on Sunday was a huge boost for British officials — underlined by a friendly call between Prime Minister Rishi Sunak and HSBC Chair Mark Tucker. HSBC was judged to provide both a halo effect of giving confidence to customers and markets, and to have the upfront funds to pump into SVB in extra liquidity if needed. 


Still, for a famously conservative bank, HSBC is taking a series of calculated risks. It is taking on about £5.5 billion ($6.7 billion) of loans and deposits of £6.7 billion, according to its statement Monday. SVB’s business has about £1.4 billion of equity. 

That’s small in the context of the $493 billion in UK customer accounts that Europe’s largest lender had at the end of 2022, according to its annual report. It could write off about 10% of those loans, at a cost of about £500 million, without causing itself too much stress, one person said.

Another challenge is the type of customers. SVB banks many firms in tech and life sciences. They include some firms in crypto and other areas at the riskier end of the spectrum, people involved in the situation said. This challenge was a concern for several of the banks considering an offer to buy SVB at the weekend, they added.

HSBC may offload some of those customers if it is not comfortable with their level of riskiness, one person said. That possibility was one factor in why another bidder did not go forward, a person with knowledge of that situation said.

After the deal was announced, UK tech investors reacted with cautious optimism about the larger bank stepping in. SVB had a reputation as a reliable partner for startups, willing to support the industry’s appetite for rapid growth and frequent injections of venture capital. “It feels that HSBC values that,” said Stan Laurent, a London-based partner with investment fund Highland Europe.

Still, others wondered if HSBC would be the right fit for tech companies. Founders and investors that spoke to Bloomberg questioned how much experience HSBC has with venture debt and how the lender would manage SVB’s accelerator and diversity programs. Some spoke of diversifying where they were putting their deposits.

“It will be very telling how many companies keep their deposits,” said Ophelia Brown, a managing partner with Blossom Capital. 

Good Result

Overall, people involved in the frantic weekend talks were pleased with the result. According to one adviser, they went into the weekend expecting SVB UK to enter insolvency on Monday morning, so to have a deal for the whole business with no taxpayer money at risk was an unexpectedly positive result.

It could also signal changes for the wider banking sector. HSBC was given a waiver by the government over rules which do not allow complex corporate customers to be housed inside ring-fenced high street lending operations. Andrew Griffith, the City Minister, later told Parliament the concession was “permanent”. 

That shift could have implications for banks more widely. Banking bosses are pushing for ring-fencing rules to be watered down and the government promised a review as part of its December Edinburgh Reforms. The concessions for HSBC could increase the case for lighter rules, some executives said, even if the changes are partly due to a banking crisis.

–With assistance from Aisha S Gani, Mark Bergen, Kitty Donaldson and Harry Wilson.

(Adds email to SVB UK staff in fifth paragraph)

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