The Wall Street Journal - 28.10.2019

THE WALL STREET JOURNAL. Monday, October 28, 2019 |B9

have to reconsider how they

view the conglomerate, said Hi-

royuki Nishikawa, an analyst at

S&P. “We didn’t expect such

support [for Vision Fund com-

panies], especially not from

SoftBank itself.”

SoftBank had told investors

and credit-rating companies

that it planned to make big in-

vestments principally from the

Vision Fund, not its own bal-

ance sheet. It said that except

for the capital that the group

had contributed, it wouldn’t be

on the hook for any losses in

the fund.

The WeWork bailout throws

that fundamental premise into

question and makes it harder to

calculate SoftBank’s liabilities

and obligations, said a person

who watches the credit markets

closely. SoftBank and the Vision

Fund are linked, with the fund

consolidated into the group.

SoftBank supplied a third of the

fund’s total investments, and

Mr. Son helps lead the fund.

SoftBank accounted for about

BUSINESS & FINANCE

Sprint, which ultimately paid
off when the U.S. phone carrier
agreed to merge with T-Mobile
US Inc. Marcelo Claure, the
SoftBank executive who has
been designated as WeWork’s
executive chairman, is Sprint’s
former CEO.
WeWork isn’t the only com-
pany weighing on SoftBank. In-
vestors are souring on other
big, fast-growing young com-
panies as well. “SoftBank is
stuffed with all that,” said Mit-
sushige Akino, senior executive
officer of Tokyo-based Ichi-
yoshi Asset Management,
which sold its SoftBank shares
last year when it decided that
the technology boom would
likely peter out.

Continued from page B1

Instead of creating concern

among investors, the Vision

Fund was supposed to bring an

added layer of professionalism

to the often quirky and gut-

driven investment style of Mr.

Son, whose biggest success

was the early investment in

Alibaba Group Holding Ltd.,

the Chinese e-commerce com-

pany. The Vision Fund hired

more than a hundred staffers

to vet prospects and manage

investments and touted a valu-

ation process that called for a

review by auditors hired by the

fund’s outside investors.

S&P Global Ratings said last

week that despite the big We-

Work outlay, SoftBank still had

a lot of assets, including signifi-

cant holdings in Alibaba and

SoftBank’s Japanese mobile-

phone unit, adding that the aid

wouldn’t further depress Soft-

Bank’s already junk-level BB+

credit rating. SoftBank has

more than $160 billion in debt.

If SoftBank bails out other

portfolio companies or in-

creases its support for We-

Work, ratings companies might

$6 billion of the earlier $9 bil-

lion investment in WeWork,

with the fund accounting for

the rest, according to the per-

son familiar with the conglom-

erate’s strategy.

While Mr. Son has said the

Vision Fund would take minor-

ity stakes in companies and

not seek to control them, Soft-

Bank is expected to own as

much as 80% of WeWork’s

shares, with Mr. Claure, the

conglomerate’s chief operating

officer, heading the board.

SoftBank has said it won’t

have the majority of voting

rights or control over the com-

pany and that WeWork won’t

be a full subsidiary.

The move lets SoftBank

keep WeWork’s mountain of li-

abilities off its books, said Da-

vid Gibson, chief investment

adviser at Astris Advisory.

SoftBank “wants to avoid con-

solidation of WeWork given its

debt position could potentially

damage SoftBank’s credit posi-

tion,” he said.

—Yoko Kubota

contributed to this article.

Masayoshi Son’s biggest success was the early investment in Alibaba. RODRIGO REYES MARIN/ZUMA PRESS

SoftBank

Draws

Concerns

SoftBankGroup'sshareprice

Note: ¥1,000=$9.20

Source: FactSet

¥6,000

3,000

4,000

5,000

Jan. Oct.

For years, Hong Kong has
been one of the world’s most
profitable banking markets.
That status is now under
threat.
The city is a money-spinner
forHSBC HoldingsPLC,Stan-
dard CharteredPLC,Bank of
China (Hong Kong)Ltd. and
others, such asBank of East
Asia Ltd. and HSBC’s local
subsidiary,Hang Seng Bank
Ltd. It is lucrative in part be-
cause Hong Kong is a major fi-
nancial center, and handles a
lot of business for mainland
Chinese clients.
Banks’ profit per employee
last year was higher in Hong
Kong than in any other market
tracked by Citigroup ana-

lysts—roughly double the U.S.

figure.

But now Hong Kong’s

economy is shrinking, hit by

the U.S.-China trade war,

slowing Chinese growth and

months of antigovernment

protests. Earlier this month,

the city’s chief executive,

Carrie Lam, said Hong Kong

was in a “technical reces-

sion,” typically defined as at

least two straight quarters of

economic contraction.

A weaker economy is likely

to mean more loans going

sour and less credit demand

from households and busi-

nesses.

Meanwhile, lending is be-

coming less profitable, as the

city’s currency peg with the

U.S. dollar forces it to match

interest-rate cuts by the Fed-

eral Reserve.

Lower interest rates typi-

cally reduce the margins banks

earn, by narrowing the gap be-

tween the rates at which they

lend and borrow. To make

things worse, there is new

competition from upstart on-

line banks.

“It’s the start of the end

of an era of super profitabil-

ity in Hong Kong,” said Ronit

Ghose, the Dubai-based

global head of bank research

at Citigroup.

Quarterly results this

week—from HSBC on Monday

and Standard Chartered on

Wednesday—will give inves-

tors an early indication. The

two are both listed on the

London Stock Exchange as

well as in Hong Kong.

For the third quarter, con-

sensus forecasts compiled by

HSBC point to an 11% drop in

net profit from a year ear-

lier, to US$3.47 billion. Ex-

pected credit losses and

other credit-impairment

charges are forecast to be up

by nearly one-third, to $673

million.

One focus for HSBC watch-

ers will be cost-cutting plans,

said Gary Greenwood, a U.K.-

based analyst at Shore Capital

Group, since the bank has

pledged to increase revenue

faster than costs this year.

Now comes the virtual

competition. The Hong Kong

government this year

granted eight licenses for on-

line banks, which won’t need

physical branches.

Felix Lam, a portfolio man-

ager at BNP Paribas Asset

Management, said traditional

banks’ defense of market

share could lower fee income

and raise the cost of attracting

new deposits.

Hang Seng, HSBC and Stan-

dard Chartered will feel the

most pressure from stiffer

competition in the retail mar-

ket, Morgan Stanley analysts

wrote in a note to clients,

since about half their Hong

Kong earnings come from re-

tail.

Shares of Hong Kong-fo-

cused banks have underper-

formed the broader Hong

Kong market this year. HSBC

trades at 0.91 times the fore-

cast book value of its assets,

according to FactSet, below a

10-year average of 1.05 times.

Trading below book value can

signal investor concerns about

capital strength or future

profitability.

Despite the low valuation,

analysts and investors don’t

see the stock as a bargain. Re-

finitiv tallies analysts’ recom-

mendations on a five-point

scale: 1 is a strong buy, 3 a

hold and 5 a sell. HSBC is cur-

rently at 3.3, the most nega-

tive since 2002.

BYFRANCESYOON
ANDJOANNECHIU

Hong Kong’s Banks Confront Lean Times

Political turmoil, trade

war and slow growth

mark ‘end of era of

super profitability’

Indexandshare-priceperformance

Source: FactSet

20

–30

–20

–10

0

10

%

Jan. Oct.

HSBC

BankofChina

(Hong Kong)

HangSengindex

BankofEastAsia

YOU CAN

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