I told you recently why I really think Barclays is not a good investment for beginners to this stock market lark of ours, and today I want to turn my attention to fellow high-street bank HSBC Holdings (LSE: HSBA) (NYSE: HBC.US).
Again, for novices, I’d rate HSBC as an ‘avoid’. And part of the reason is the impenetrable nature of what, on the face of it, seems like a deceptively simple business. Taking money in from savers and lending it out to borrowers is simple enough, but banking, especially international, is far more complex than that.
Incomprehensible
You see, there are all sorts of derivatives like swaps, hedges, forwards, caps, collars, squinges and floors (and I only made one of those up), which most of us really don’t understand. At the height of the recent banking madness, banks were creating things out of thin air to sell to their clients, backed by a complex sequence of sliced-and-diced sub-prime mortgage-backed instruments. What does that mean? Good question. If you bought them, it essentially meant you’d lent money to people who couldn’t even pay the interest on it.
How much of HSBC’s profit comes from what classes of speculative investment? How much comes from dealing in and selling such things? I haven’t got a clue, and unless you have the knowledge and understanding (not to mention the patience) to pore over and digest the 537 pages of HSBC’s 2012 annual report, neither will you.
Now, I know company accounts in general can be pretty daunting, and even a firm that, say, makes tangible things out of metal could publish impenetrable accounts hiding all kinds of shenanigans. But at least with things like flanges, sprockets and the like, I know enough to point at them and kick them to see if they’re really there.
But 537 pages overall, with a modest 12 pages dedicated to the actual financial statements but 133 pages of notes to follow? That’s worse than Barclays, and I really think it’s best left to experts.
Dodgy dealings
It can be hard enough to understand what a large multinational company is up to, even when it’s squeaky clean.
But in 2012, HSBC was fined $1.9bn for money laundering and doing business with Syria, Iran and Mexican drug cartels.
It also had to stump up for mis-selling financial products in the UK, a practice that experience now tells us was shockingly common in the banking industry — trusted advisers everywhere were selling their customers ill-suited products in order to maximise their own profits. As of March this year, HSBC had set aside $2.4bn to cover the mis-selling of payment protection insurance and a further $598m for mis-selling interest rate swaps to its small businesses customers.
(And as an aside, I’ve noticed that when you talk to banks these days, they start with a disclaimer than any talk about their products is of a “non-advisory” nature — I guess that’s more profitable than actually giving sound advice.)
Standing in front of the Parliamentary Banking Standards Commission in February, chief executive Stuart Gulliver admitted that the bank’s structure had been “not fit for purpose” and that its management had failed to report clear indications of money-laundering.
Game for a laugh?
If you’re experienced and know what you’re doing, fine, but if you invest in HSBC shares as a novice, then be warned — you’re buying blind…
