HSBC Hits Investment Banking Watershed

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Byline: Peter Wilson-Smith Editor-in-chief

Make-your-mind-up time is fast approaching for the HSBC board over whether the global banking giant should get serious about developing its investment banking business.

HSBC Investment Bank is uncomfortably positioned in the dangerous middle ground: it's neither a boutique, nor a first division player. But if HSBC wants to provide value-added investment banking products to its huge corporate client base, it needs to take some bold steps.

The rumours of a deal with Merrill were flying again last week, after David Komansky, the Merrill Lynch chief, made some public comments about the benefits of combining the two organisations. This particular hare first started running after Merrill and HSBC announced their $1bn (E1.1bn) internet joint venture to attract wealthy individuals.

It is handy for Merrill to keep speculation bubbling, because it underpins its share price. Merrill's shares have fallen much less than the other big investment banks during the shake-out and they trade on a much higher multiple than other perennial takeover candidates such as Bear Stearns or Lehman Brothers.

However, I do not buy the idea of HBSC buying Merrill. The two organisations are chalk and cheese. Witness the fact that Komansky pulls in an investment bankerly $25m a year while HSBC's chairman, Sir John Bond, earns a more modest $2.3m. It would be a nightmare trying to put the two together and Bond is unlikely to relish the thought of paying a massive premium for Merrill to allow its stock-owning executives to retire to the Hamptons.

If HSBC did do a big deal, Morgan Stanley might be a better fit culturally and in terms of what it would bring. But it would be a gigantic step and nor can I see the HSBC board going for such a high-risk, transformational deal. HSBC is still a traditional organisation: many of the top executives have more than 40 years' service under their belts. While Bond has shown himself to be a shrewd and adventurous dealmaker, even the $10bn he paid for Republic Bank was a relatively modest bite for HSBC. …