How Safe Is Your Money In HSBC Holdings plc?

It calls itself ‘the world’s local bank’, but is it the world’s safest bank? Roland Head takes a closer look at HSBC Holdings plc (LON:HSBA).

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HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) disappointed investors recently when its results came in short of expectations, but in my view the resulting price weakness has been an excellent buying opportunity for long-term investors, and I recently added more HSBC shares to my own portfolio.

The long-term growth story for HSBC is clear — it’s one of the biggest global trading banks, and its strong presence in China and Hong Kong places it at the centre of the world’s largest and fastest-growing economies.

However, what about the other side of the coin? Is HSBC strong enough to deal with short-term financial shocks and regional slowdowns? To find out more, I’ve taken a look at three key financial ratios, of the kind often used by credit ratings agencies.

1. Net interest margin

Net interest margin is a core measure of banking profitability, and captures the difference between the interest a bank pays on its deposits, and the interest it earns on its loans.

HSBC reported a net interest margin of 2.1% in 2013, down from 2.4% in 2012. The fall was triggered by the disposal of some high-margin businesses in North America, and by a drop in interest income in Latin America. However, I’m not too concerned by this — in my view, any short-term weakness in Latin America is easily outweighed by this region’s long-term growth potential.

2. Tier 1 capital ratio

Tier 1 capital is essentially a measure of a bank’s retained profits and its equity (book value). One of the requirements of the new Basel III banking rules, which come into force in 2015, is that banks will have to meet new, tougher, tier 1 capital standards.

HSBC reported a common equity tier 1 ratio under the expected new rules of 10.9%, substantially above the minimum required, and 15% higher than last year’s reported ratio of 9.5%.

3. Return on equity

Return on equity (RoE) is a useful way to measure the performance of financial firms, as it shows how much profit was generated compared to the book value (equity) of the firm.

HSBC reported a RoE of 9.2% in 2013, up from 8.4% in 2012. Although satisfactory, this is substantially below the 12-15% level targeted by the bank, suggesting ongoing growth may be slower than expected.

One factor in this may be HSBC’s scale — with equity of $190bn, a 15% RoE equates to profits of around $28bn!

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.

> Roland owns shares in HSBC Holdings.

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