Will HSBC Holdings plc Overstretch Itself Again?

When all those overstretched bad loans finally came home to roost and so many big banks found themselves, like Wile E Coyote, up in the air with nothing to support them, HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) was in much better shape than the UK’s other high street names.

hsbcAsian focus

In fact, at the time, Bloomberg said that “HSBC is one of world’s strongest banks by some measures”, and when  more rigorous capital support measures were introduced in 2007 in the UK, HSBC was easily able to cover them from its own overseas coffers.

Part of the reason HSBC was so strong was its focus on Asia rather than those Western economies that were so badly exposed to the sub-prime property catastrophe. In fact, in 2013 HSBC earned only a little over 20% of its annual profits in Europe and the Americas — by contrast, 35% of profits came from the bank’s home market of Hong Kong, with the bulk of the rest from the wider Asian region.

Beefed-up rules

Back then, banking regulations were a good bit more lax than they are today, and banks were obliged to carry surprisingly little capital to cover the risk of their loans, as I explained earlier in this series of articles. The old regime demanded a Tier 1 ratio of 4% with a Core Tier 1 ratio of only 2%, and even in 2007, just before the panic set in, HSBC was well ahead of the minimum — it reported a Tier 1 ratio of a relative large 9.3%.

A year later, at the end of 2008, HSBC had beefed up its Tier 1 ratio to 9.8%. And its Core Tier 1 ratio was up to 8.5%, which was well ahead of the new requirements for 7% or better — and the new rules don’t have to be met until 2018.

Strength to strength

Core Tier 1 had reached 9.4% by 2009, and things have steadily improved since — by year-end 2013, HSBC was able to report a Core Tier 1 ratio of a very healthy-looking 13.6%, with $149bn of Core Tier 1 capital on its books. And looking forward, we saw figure of 10.9% quoted in accordance with stricter Common Equity Tier 1 regulations.

So, HSBC is the high-street bank that avoided the liquidity crunch, and it did it quite comfortably thanks to its Asian focus.

Not all roses

But there could be a sting in the dragon’s tail, as fears are growing over China’s booming credit and property markets. And that’s led to falling share prices, with HSBC down nearly 15% over the past 12 months to 611p — but at least the events of the past few years leave HSBC in a stronger capital position.

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Alan does not own any shares in HSBC.