10 Reasons Why Q3 Results From HSBC Holdings Plc Confirm My Buy Case

HSBC Holdings (LSE: HSBA) (NYSE: HBC.US) shares have fallen by more than 10% from their May peak, leaving the UK’s biggest bank up by just 6% this year, compared to the FTSE 100‘s 13% gain.

For me, however, this is good news, as I believe HSBC remains a strong buy, and intend to increase my holding — a decision that was confirmed by last week’s third-quarter results.

Costs down…

Bad debt charges fell by 27% from £6.5bn in Q3 2012 to just £4.7bn. HSBC also reduced its cost-efficiency ratio — which measures a bank’s costs as a percentage of its revenue — from 61.2% during the first nine months of last year, to just 56.6% during the same period this year.

HSBC says that it has achieved $4.5bn of sustainable savings across its business so far this year, exceeding its full-year target. The bank’s operating expenses fell by 4% during the third quarter, compared to the same period in 2012.

…Profits up

HSBC’s reported pre-tax profits for the third quarter were $4.5bn, a 30% increase on the same period last year. Revenue was broadly unchanged on the third quarter of 2012, but the bank’s return on equity, a key measure of profitability, rose from 8.9% to 10.4% on an annualised basis, during the first nine months of this year.

HSBC also logged a $1.1bn profit on the sale of its operations in Panama during the third quarter, delivering a profitable exit from a troublesome market.

13% dividend growth

HSBC’s dividend policy is for three equal quarterly payments, followed by a variable fourth-quarter payout.

This year’s quarterly dividend has been $0.10, which represents an 11% increase on last year’s $0.09 payout. If analysts’ consensus forecasts are correct, and the bank’s fourth-quarter payout is $0.21, then shareholders like me will have enjoyed an inflation-busting 13% dividend hike in 2013.

Rock-solid balance sheet

HSBC’s core tier 1 capital ratio — the standard measure of banks’ ability to withstand financial shocks — rose to 13.3% during the third quarter, from 12.7% at the end of June. In comparison, Barclays’ core tier 1 ratio is just 11.3%, Royal Bank of Scotland clocks in at 11.6%, and Standard Chartered‘s is 11.4%.

HSBC’s cash balance also continued to rise during the last quarter, reaching an impressive $170bn — up from $148bn at the end of June, and from a mere $63.5bn at the end of 2010. 

HSBC remains a strong buy

Although HSBC has played its part in some of the banking scandals of the last few years, I believe its size, profitability and major presence in Asia continue to make it an appealing buy, as does its 4.6% prospective yield.

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> Roland owns shares in HSBC Holdings but not in any of the other companies mentioned in this article. The Motley Fool owns shares in Standard Chartered.