HSBC update Jan 11th, 2020
HSBC is one of the biggest banks in the world with a market capitalization of about 160 bn$. It makes business in 5 continents. It is present in retail banking, commercial banking and global banking with about the same share of each division in EBT.
HSBC is a solid bank with a 6% dividend yield and a moderate valuation. I assume they will grow the business and offer attractive opportunities to those that want to invest in a blue-chip company which offers a great proxy to the economic growth in the main markets of the bank. 51c dividend 6.4% dividend yield (7.9$/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 estimated to 15.5 bn$ in 2019 or 0.76$/share (7.9$/share) 2019 povides a PE of < 10 that is not expensive.
Opportunities & Risks
In the first half of 2019 it seemed that HSBC is making a turnaround after many disappointing stagnating years. The 3rd quarter numbers shows a decline in profits compared to H1. The report is difficult to read as HSBC put in plenty of "adjusted numbers" (phantasy numbers). It needs some time to find the real numbers. This is a regularly a sign that the management thinks that their results are not in line with expectations.
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 76c/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.
HSBC is sitting in Hongkong its most profitable market between the two chairs of the chinese government and the protesters while the bank tries to stay as far as possible away from politics. The protesters recently destroyed HSBC lions after HSBC closed an activist account(10). China put HSBC last year on a 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 was 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 stay as far as possible away from politics.
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. If this imbalances would offset it would hit nearly all investments more or less.
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.. "We are therefore accelerating plans to remodel them, and move capital into higher growth and return opportunities," (9) from Europe and North America. This makes sense but gives away the status as worldwide balanced bank. It is a surrender.
Number of shares: Period end basic number of $0.50 ordinary shares outstanding 20,210,388,609. A further share buyback of up to $1B is planned. On the other hand the number of shares is not decreasing. The script dividend program inflates the number of shares on the other hand. All in all the number of shares inflates slowly.
Revenues: 42.8 bn$ (9m/19), 2018 54 bn $
Profit before tax: 12.4 bn$ (H1/19), $4.8bn in Q3/19
Net Profit (9m/2019) 12.8 bn$, eps 0.61$/share -> estimate 2019 15.5 Mrd. $ -> 76c/share
Tangible net asset value per ordinary share (TNAV) $7.02
2020 jan 11, HSBC is going HSBC Holdings Plc has kicked off the sale of its French retail operations, (11). This is more or less a surrender as HSBC does not see the option to make this business sufficiently profitable again.
(1) 2019/jan/09 https://www.theguardian.com/business/2019/jan/08/uks-most-unequal-bank-hsbcs-gender-pay-gap-grows-to-61