2 August 2023 HSBC embarks on year's second share buyback

HSBC embarks on year's second share buyback​

What do you need to know this week?

Global investment bank HSBC announced that it will undertake its second $2bn share buyback of the year following the results of its most recent financial quarter, with Q2 2023 profits of $8.8bn.

The primary driver of HSBC’s better-than-expected results is owed to the bank’s margins on loans, which is up from recent periods due to increased interest rates. The current market environment means that HSBC can loan sums at higher rates than in the past, effectively increasing its lending profits. (The relationship between interest rates and the banking industry’s net interest margin rates has been an ongoing theme for TCLA articles in recent weeks).

By implementing a second share buyback, not only will HSBC increase the market value of its shares, but it will also fend off activist shareholder and HSBC’s largest single shareholder, Chinese insurance giant Ping An in its attempt to force HSBC to break up and sell off certain business divisions.

Why is this important for your interviews?

Share buybacks are one of the key ways that businesses increase shareholder wealth. It is feasible that this may come up in an interview context, especially if you express interest in corporate or capital markets law. If these areas interest you, you may find it helpful to research this area a bit more.

To get you started: a share buyback is a special transaction where a company purchases shares from existing shareholders, usually at a premium relative to the shares’ market value.

Share buybacks are an alternative way for companies to pass on their profits to shareholders. The other main way companies like HSBC pass profits to shareholders is through dividend payments, which in HSBC’s case means that each shareholder as of September 2023 will get $0.10 for every share they own.

Share buybacks benefit shareholders in one of two ways:

1. If you are a shareholder of a company that offers to purchase your shares from you, you get a premium value for the shares you sell.
2. If you do not agree to sell your shares (or the company does not offer to purchase them directly from you), because there are fewer shares in issue following the purchase, your shares are worth proportionately more. This drives up the value of your shares because there are effectively fewer shareholders, all of whom now have a larger claim over the company’s profits.

You can read more about HSBC’s share buyback programme this year by reading the term sheet and its most recent Interim Report 2023.

How is this topic relevant to law firms?

Share buybacks are complex transactions because the laws of most countries including the UK, US, and Hong Kong — all of which are jurisdictions where HSBC concentrates its operations — generally prohibit companies from acquiring their own shares.

There are clearly exceptions to this rule such as lawful share buybacks, but navigating these exceptions, especially for public companies, is a complex legal and accounting exercise. Likewise, the structure of the buyback raises other complex legal and commercial questions: should the company purchase them in an “on-market” transaction (as HSBC did), or an “off-market transaction” via a private placement or other arrangement?

Companies like HSBC therefore require the assistance of corporate and equity capital markets practice groups.