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The Investment Case for HSBC Holdings plc

HSBC

This is the time of year many investors review their portfolio holdings. In any case, it’s always a good idea to have a clear idea of why you hold certain stocks. Whether you already own shares in HSBC (LSE: HSBA) (NYSE: HSBC.US) or it’s a stock you’re contemplating buying, here’s my rundown of why I think it’s a good investment.

Cutting to the bone, the main arguments to invest in the bank are:

  • It’s global scale and diversification;
  • A play on Asia Pacific economic growth;
  • Strong capital base;
  • Prudent, cost-conscious management;
  • A high and safe yield.

Size matters

HSBC is one of the few truly global banks. In the consumer market, its brand recognition is up there with the likes of Coca-Cola, it’s a natural bank of choice for multinational companies, and it has a geo-political clout the envy of many small countries.

Its scope covers mature markets in Europe and North America, a leading franchise in booming Asia Pacific, and large footprints in Latin America and the Middle East that provide future growth potential.

But profits aren’t evenly spread.  In the first three quarters of last year, just 15% of profits came from Europe and another 6% from North America. The powerhouse is Asia Pacific, which made up 70% of profits. Hong Kong alone contributed half of that.

HSBC is a little coy about this. It boasts that half of profits come from its home market of UK and Hong Kong. But that’s 15% from the UK and 35% from Hong Kong, twice as much. However, economic recovery in the West should boost its future contribution to profits.

Safety first

The distribution of HSBC’s risk assets is skewed more evenly than profits are, with just 40% in Asia Pacific, 30% in Europe, 20% in North America and 10% in Latin America; combining developing market growth with developed market safety.

A healthy capital cushion adds to safety. Its ‘CRD IV’ ratio, the most tortuous that European Commissioners have yet devised, is 10.6%, a whole percentage up on a year ago. The more traditional Core Tier 1 ratio is a chunky 13%.

A generally prudent management adds to HSBC’s safety. A new cadre of managers in 2010 refocused the bank on squeezing return on capital from existing operations, slashing costs.

Yield

Powerful income and cash generation leads to a healthy — and safe — dividend payout. HSBC even kept paying a dividend through the financial crisis. At today’s valuation — a modest 1.4 times tangible book value — the prospective yield is 4.6%, which compares well with pre-crisis levels. It could be a good entry point for a reliable income-generator.

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 > Tony owns shares in HSBC.