The Hidden Nasty In HSBC Holdings plc’s Latest Results


HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) is a bank that I rate very highly, but recently I’ve begun to question its claim to be ‘the world’s local bank’.

You see, a careful look at HSBC’s latest results shows that when you invest in HSBC, you are essentially investing in Asia only, with the UK second, and the rest of the world pretty much out of sight:

HSBC pre-tax profits for the nine months ending 30/09/13 US$m
Hong Kong $6,277
Rest of Asia-Pacific $6,585
Europe $2,723
Middle East and North Africa $1,288
North America $1,042
Latin America $686
Total $18,601

Source: HSBC Interim Management Statement Q3 2013

HSBC reported pre-tax profits of $18bn for the first three quarters of last year — but two-thirds of that came from the Asia-Pacific region.

That’s not a bad thing, in my view — I’m quite happy to invest in the long-term story of Asian economic growth, but it’s clear that just as HSBC escaped the UK financial crisis relatively unscathed, it would also be hit much harder than other UK banks by a major financial downturn in Asia.

This is something you may need to consider when looking at the diversification of your portfolio — how great is your exposure to Asia? A major financial crisis in Asia could threaten HSBC’s dividend.

HSBC’s Asian focus isn’t likely to change — the bank has reported a steady stream of minor divestments over the last year, which has had the general effect of tightening its focus on Asian banking, with the UK second.

A banking bargain?

HSBC’s share price has come off the boil over the last 12 months, and is down by nearly 20% from its 52-week high of 772p.

The fall in the bank’s share price is broadly in line with the wider UK banking sector, but I don’t think that bailed-out basket cases like Royal Bank of Scotland Group and Lloyds Banking Group are a fair comparison to a high-quality operation like HSBC, which is fully in control of its own destiny and has paid an unbroken dividend shareholders throughout the worst financial crisis since the Great Depression.

Unlike its peers, HSBC’s return on equity — a key measure for banks — has remained stable between 8% and 10% since 2010, and its cost-efficiency ratio — a key measure of profitability, has fallen from 61.2% to 56.6% over the last year, highlighting the success of the bank’s cost-cutting measures.

HSBC shares now trade on a prospective P/E of 11 and a forecast yield of 5.0% — making them a strong buy in my book.

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> Roland owns shares in HSBC Holdings but does not own shares in any of the other companies mentioned in this article.