It was one of those moments when you don’t know whether to laugh or cry. About 12 months ago I stepped into an HSBC branch in central London to take care of some business. I noticed out of the corner of my eye something unusual, so I stepped to the side to investigate further. What I found was a business banker who had literally fallen asleep on the job. He had propped himself up and had his head strategically placed in his hand to make it look like he was thinking really hard about something. Was he bored, or just really tired? Who the heck knows? What I can tell you, though, is that his behaviour personifies HSBC Holdings’ (LSE: HSBA) (NYSE: HSBC.US) investment status at present. It’s boring — but ‘good’ boring all the same.
Let’s look at the three Cs of banking stocks to get a feel for just how ‘good’ boring this bank really is.
Cash
It’s actually a pleasure to look at HSBC’s bottom-line numbers. Here’s just a taste: net profit margin of over 25% and return on equity of over 8%. It should be noted that year on year HSBC suffered a 5% drop in revenues to $87.39 billion. Given its profit margin, it just means the bank’s cost-cutting activities have worked. In addition, the bank’s got a competitive price earnings multiple of just 13.5 and a dividend yield north of 4%. For those nervous nellies out there, the stock also has a beta of 0.91.
This is the banker’s bank.
Compliance
HSBC is the second largest bank in the world, so there’s no way on earth it’s going to be able to keep its nose completely clean.
When it messed up, though, boy did it mess up! In late 2012, HSBC agreed to pay a record $1.92 billion fine in a money-laundering case. Management apologised profusely for getting it wrong. Interesting when it was clear a lot could have been done to prevent such a thing happening prior to the bank getting caught out.
And last week, according to the Guardian, HSBC became the latest bank to settle allegations that it made false representations in selling mortgage bonds to Fannie Mae and Freddie Mac. The bank paid $550 million to the Federal Housing Finance Agency for its sins.
Just this week, though, HSBC made the news after it closed the account of the North London Central Mosque. According to media reports, HSBC closed the account because they donated money to Palestine during the massacring.
Is HSBC trying to right the wrongs of the past, or is it taking advantage of the recent negative press about the Middle East?
It’s a little sad when you realise if you want to invest in a bank, you’ll have to accept that it’s going to break the law at some point. The question for the HSBC investors now, though, is whether the bank has any more dirty laundry…
Confidence
Investors can take comfort from HSBC’s size. Its tentacles extend from the Americas, to the Asia Pacific and Europe. In 2008, Forbes magazine named HSBC the fourth-largest bank in the world by assets, and the largest in terms of market value. And if that wasn’t enough, early in 2008, The Banker magazine named HSBC as the world’s most valuable banking brand.
So the call on this one is pretty straight-forward. What makes HSBC so special? It’s big, and, financially, it’s steady as she goes. Conservative is the key word here. HSBC prides itself on its low-risk investment philosophy. It certainly helps it to stand out from the crowd in today’s climate. That’s why its recent indiscretions stick out like a sore thumb. HSBC has to tread very carefully from here on in. Without the benefit of its unique qualities (including being a straight-shooter), it’s just another bank, only less sexy
