The Contrary Investment Case: 3 Reasons To Sell HSBC Holdings plc

Royston Wild looks at why HSBC Holdings plc (LON: HSBA) could be set for a fall.

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hsbc

In recent days I have looked at why I believe HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) is poised to ratchet higher (the original article can be viewed here).

But, of course, the world of investing is never black-and-white business — it take a confluence of views to make a market, and the actual stock price is the only indisputable factor therein. With this in mind I have laid out the key factors that could, in fact, push HSBC Holdings’ share price to the downside.

Latin America remains a millstone

HSBC reported this week that pre-tax profits rose 9% to $22.6bn in 2013, with a robust improvement in group revenues — they rose 3% to $63.3bn during the period — not to mention the excellent progress of its expense-slashing plan helping to boost the bottom line.

However, the company again highlighted the effect of slower economic growth, rising inflation and larger impairments on its businesses in Latin America. Indeed, ‘The World’s Local Bank‘ saw underlying profits from its third-largest market slip once again during 2013, the only region to see the bottom line dip across all of its global operations. And HSBC could be set for fresh difficulties looking ahead as financial concerns in these geographies look set to persist, at least in the medium term.

Margins continue to slide

HSBC has been unable to arrest the multi-year decline in the group net interest margin (NIM), and reported that the reading slipped further during the second half of 2013, to 2.09% from 2.17% during the first six months.

As broker Investec points out, “the run-off of high margin/low quality business in North America, strategic disposals and the impact of near-zero interest rates” has driven NIM readings consistently lower for the best part of a decade. With interest rates expected to remain low for some time, HSBC looks set to experience further weakness in this area.

Meagre dividend coverage could crimp payouts

HSBC is a popular banking pick for income investors owing to its generous dividend policy. Indeed, the firm decided to lift the 2013 full-year dividend 9%, to 49 US cents per share, in 2013, and forecasters expect payouts to hit 57.7 cents and 64.3 cents in 2014 and 2015 respectively in line with surging earnings. These projections create monster yields of 5.3% and 5.9%.

Although I believe that fears over the actual extent of economic cooling in emerging markets are overplayed, investors should be aware of the potential effect of slowing activity on the bank’s earnings potential — the company sources more than 70% of all profits from Asia alone. With dividend cover running at 1.7 times this year and next, below the safety watermark of 2 times, signs of earnings weakness could weigh on future dividends.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston does not own shares in HSBC Holdings.

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