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HSBC update Oct. 12th, 2019  

 

HSBC is one of the biggest banks in the world with a market capitalization of about 180 bn$. It makes business in 5 continents. It is present in retail banking, commercial banking and global banking with about the same share of each division in EBT. 

HSBC is a solid bank with a 6% dividend yield and a moderate valuation. I assume they will grow the business and offer attractive opportunities to those that want to invest in a blue-chip company which offers a great proxy to the economic growth in the main markets of the bank. 51c dividend 5.7% dividend yield (9$/share). HSBC is listed on the LSE and hence there is no withholding tax applied. The dividend is paid completly in your pocket. A net profit of 9.9 bn$ in H1/19 estimate 18 bn$ for the whole year or 0.9$/share (9$/share) 2018 povides a PE of 10 that is not expensive. 

This is not a recommendation or proposal to do anything. The data written in this article is not guarranteed. It is my private personal opinion. I`m not independing as I own a position of HSBC shares. 

Opportunities & Risks

It seems that HSBC is making a turnaround after many disappointing stagnating years. It looks like HSBC is getting back on track. The share price is very low participating the numbers delivered in the H1 2019. 

Due to its strong retail banking HSBC has a surplus in deposits. An increase in interest rates and the interest spread short term - long term can increase the profitability significantly. Since Q3/18 deposit margins are going to increase. 

A dividend of 51c/share based on a net profit of perhaps 90c/share (2019) , 63c/share (2018) is on my point of view close to the limits of sustainability. It is the question if there are no business opportunities to invest. 

HSBC makes business in 5 continents. But 82% of its profits are generated in Asia 1/2 of that share in Hongkong. A new qualified management team that makes the business in Europe profitable could improve the profitability of the overall company significantly. On the other hand an economic downturn in greater China could vaporize HSBC profits. 

It seems that HSBC was likely included in China’s first “unreliable entity” list of companies that have jeopardized the interests of Chinese firms. That`s perhaps the reason Hong Kong’s biggest bank wasn’t included in a list of 18 lenders that will participate in pricing for a new loan prime rate of the People’s Bank of China (5). HSBC is sitting between 2 chairs in the Huawei case where the USA is asking questions...it is sitting between 2 chairs concerning the protests in KK participated by its employees. The step down of the CEO Flint and the Greater China Head Helen Wong might be one consequence of it. As China/Hongkong is the main market and source of profits it is a critical point. It is to hope that HSBC is able to get from this black list list asap. 

Another risk is in the HK property markets. HSBC is a gorilla in the HK banking. Using their IRB approach retail mortgages have only a 0.7% probability of default and a few percent of loss given default.  

There are plenty of imbalances in the world. Debt is very high in most of the established 1st world nations. There is an imbalance in the EU between North and South. There is an ideological conflict and crack line between Germany with its green left ideology and Eastern Europe that has a more conservative ideology and many more in the world. These risks are very difficult to quantify and would hit nearly all investments more or less.  

Observations

Retail banking is the bank’s largest and most profitable business, the high profitability is due to the strong position in Hong Kong and less in the UK. HSBC’s long presence and reputation in Hong Kong gives the bank pricing power in this market.

Commercial banking esp. trade finance is HSBC’s original business, its second largest in terms of revenue but it is the biggest contributor of net income; it is highly profitable. HSBC offers several services for companies to make business abroad such as trade and receivables finance, credit and lending, cash management. The bank’s extensive network in many countries means that its business model is difficult to copy, resulting in an excellent position for its clients.

The regulatory (compliance) programs costs > 3 bn$/yr. . I assume that there are additional indirect efforts/costs for this regulatory bullshit not mentioned in this numbers. All in all regulatory is a main profit hurdle in todays banking world.

Provisions relating to legal proceedings and regulatory matters are at 2 bn$ (June 30,18)

I had an HSBC account in the Middle East. I had the impression that the employees worked according to plenty of strict, static rules and regulations and had very small room for own decisions and initiatives. I appreciated it as it is in some countries a big fear is that the account fades away over night. In Europe with its qualified well paid employees such a bureaucracy is an efficient hurdle vs. success. 

A positive fact is the gender pay gap of 61%(1). It shows that positions are given by performance and not by gender preference. It is further an indication that the management is mostly male. That is positive in terms of a hard fact based management. 

 

It ssem as HSBC is boosting its staff in Asia to allocate its efforts in markets where HSBC earns money (3) while slashing jobs in the international business. This makes sense but gives away the status as worldwide balanced bank. 

Some Numbers

Number of shares: Period end basic number of $0.50 ordinary shares outstanding   20,210,388,609. A further share buyback of up to $1B is planned. On the other hand the number of shares is not decreasing. The script dividend program inflates the number of shares on the other hand. 

Revenues: 29.4 bn$ (H1/19), 2018 54 bn $

Profit before tax: 12.4 bn$ (H1/19) Net Profit 9.9 bn$, eps 0.42$/share

Net asset value per ordinary share at period($)  8.35

H1 net interest margin 1.61% vs. 1.66% in H1 2018.

As of 03/31/2019, HSBC had a common tier 1 equity ratio of 14.3% which seems to be a solid foundation.

Some News

2019 Sept. 11 HSBC weighs selling its French money loosing retail bank business.  

To main Page

(7) 2019 Sept. 11 https://seekingalpha.com/news/3498625-hsbc-weighs-sale-french-retail-bank-wsj?dr=1#email_link

(6) 2019 Aug 19 https://strategicmacro.blogspot.com/2019/08/hsbcs-exposure-to-hong-kong-real-estate_6.html?spref=tw

(5) 2019/Aug. 19 https://www.bloombergquint.com/global-economics/hsbc-gets-cold-shoulder-in-china

(4) 2019/June o3 http://www3.hkexnews.hk/listedco/listconews/sehk/2019/0603/ltn20190603091.pdf

(3) 2019/May 29 https://invezz.com/news/by_region/uk/hsbc-share-price-group-plans-to-boost-asia-retail-wealth-staff/

(2) 2019/May/3rd https://seekingalpha.com/article/4259506-hsbc-holdings-plc-2019-q1-results-earnings-call-slides

(1) 2019/jan/09 https://www.theguardian.com/business/2019/jan/08/uks-most-unequal-bank-hsbcs-gender-pay-gap-grows-to-61

2018/oct/29 https://www.blick.ch/news/wirtschaft/banken-asien-geschaeft-treibt-hsbc-weiter-an-gewinn-steigt-id9039267.html

https://seekingalpha.com/article/4202154-hsbcs-high-dividend-yield-opportunity

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