People & Money

Here’s Why HSBC Bought SVB UK For £1

On Monday the 13th of March, as part of the shockwaves from the American banking sector disaster that occurred on Friday the 10th of March, HSBC announced that it was acquiring a full-fledged bank for £1 One Pound!

In its press release, it was announced, “HSBC Holdings plc announces that its UK ring-fenced subsidiary, HSBC UK Bank plc, is acquiring Silicon Valley Bank UK Limited (SVB UK) for £1.”

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Silicon Valley Bank UK Limited is the subsidiary of the American bank Silicon Valley Bank that collapsed on Friday, the 10th of March, after crashing in the stock market by over 60%. HSBC noted in their press release that the bank had “loans of around £5.5bn and deposits of around £6.7bn.” The bank also recorded a profit before tax of £88m in the financial year ending 31st of December 2022.

The question on my mind is, £1? Despite this relatively impressive performance? In this article, I will try to provide a clear explanation of why HSBC bought SVB UK for just £1.

According to Noel Quinn, the CEO of HSBC Group, “This acquisition makes excellent strategic sense for our business in the UK. It strengthens our commercial banking franchise and enhances our ability to serve innovative and fast-growing firms, including in the technology and life-science sectors, in the UK and internationally.”

Silicon Valley Bank was the bank with the highest number of tech company customers in the US, and its UK branch wasn’t any different; it catered to over 3000 high-growth startups in the UK. With the collapse of SVB, British banking regulators feared it could have a ripple effect on its UK subsidiary, which held deposits worth almost £7 billion. The potential collapse of SVB UK raised concerns about the significant impact it could have on the UK tech ecosystem, necessitating the need for urgent action.

According to Reuters, at SVB UK’s final hours, frantic discussions were underway with six banks looking at the bank’s numbers. By Monday, the deed was done, and HSBC completed the acquisition for almost nothing. The primary reason for completing the purchase at such a low price was the palpable fear that the collapse of SVB UK would cause a catastrophic impact on the UK tech ecosystem, with startups unable to access their funds.

Due to SVB’s focus on early-stage high-growth startups, its £5.5 billion loan portfolio is considered questionable. As a result, the bank requires a stable owner who can minimize the impact of any delinquent loans. Despite being offered a bid of £1.2, the bank chose HSBC’s £1 bid because of HSBC’s capacity and resources to provide stability.

According to Reuters, Lloyds Banking Group, NatWest Bank, HSBC, and three unnamed British banks were interested in SVB UK. However, one of the banks was discouraged by the lending practices of SVB, particularly towards the riskier startup sector. While for another bank, the loan book was perceived as an opportunity, as 75% of it comprised high-quality loans to private equity and venture capital funds.

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However, as time was running out on Sunday, the officials from the Treasury gave all the bidders 30 minutes to submit their final bid. Reuters said the case involved the UK Prime Minister, the Bank of England Governor, and the UK Finance Minister.

Reuters also noted that the CEO of HSBC, Quinn, was enticed by the prospect of acquiring approximately 3,000 high-growth technology and startup sector clients in one go. However, HSBC might encounter difficulties in precisely evaluating and managing those loans because of their specialized nature. However, the HSBC spokesperson noted they plan to inject £2 billion liquidity into SVB UK.

David Olujinmi

David Olujinmi studies Engineering but his true passion is research and analysis. He writes about finance, particularly the capital market, investment banking, and asset management. More »

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