The Motley Fool

HSBC Holdings plc: Was Woodford Right About ‘Fine Inflation’?

hsbc

In September, respected fund manager Neil Woodford revealed that he had sold his fund’s holding in HSBC (LSE: HSBA) (NYSE: HSBC.US), despite having only started buying 18 months earlier. The reason for his change of heart? Despite praising HSBC’s attractions in glowing terms, Mr Woodford was concerned about one particular risk which he dubbed “fine inflation”. The size of fines levied by regulators on banks appeared to be increasing, and sized on a bank’s ability to pay rather than the scale of the transgression.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Firing line

As the world’s second-largest bank, it’s easy to see how HSBC is in the firing line. Lo-and-behold, its third-quarter results disclose an eye-watering increase of $1.8bn in the amount set aside for regulatory fines since June. They comprise:

  • $0.7bn for UK customer redress – mainly PPI mis-selling where ambulance-chasing claims companies have bumped up the level of settlements;
  • $0.5bn settling with the US Federal Housing Finance Authority, one of HSBC’s more obscure regulators, over mis-selling of mortgage-backed securities;
  • $0.4bn providing for UK regulatory fines for LIBOR manipulation;
  • $0.2bn further provision arising from errors in the small print of UK personal loan statements.

These charges reduced HSBC’s underlying profit for the last quarter by nearly 30%, from $6,251 to $4,409m, completely changing the mood-music surrounding the results. It’s easy to see how Mr Woodford’s concerns arise.

The long and the short of it

But it’s instructive to contrast his observations with those of his colleague Stephen Lamacraft, reviewing the Woodford fund’s holding of Rolls-Royce (LSE: RR). Both are top-quality companies whose shares have gone backwards over the past twelve months. Rolls-Royce’s stock is down over a quarter after two profit warnings reflecting softening of its end markets – most recently, it has been indirectly affected by trade sanctions against Russia. Yet Mr Lamacraft regards this as ‘exactly the sort of market inefficiency that we aim to exploit [as long term investors]’.

How does a long-term investor distinguish between short-term headwinds and long-term value destruction? I suppose in the Woodford view of the world, HSBC’s regulatory fines fall into the latter because:

  • He expects fines will be an ongoing issue ;
  • Fines reduce the capital available to support growth (though this is a marginal factor);
  • The valuation doesn’t compensate for the potential downside risk.

These are fine judgment calls. What is clear is Mr Woodford’s respect for HSBC otherwise, which he describes as ‘ a conservatively managed, well-capitalised business with a good spread of assets’. What’s more, with the shares trading at book value and yielding 4.9% they look cheap, absent the escalation of regulatory fines that Mr Woodford fears.

So I’m happy to hold on to my HSBC shares. But I’ll be a glad as him when banker-bashing eventually falls out of fashion.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Tony Reading owns shares in HSBC and Rolls-Royce. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Where to invest £1,000 right now

Renowned stock-picker Mark Rogers and his select team of expert analysts at The Motley Fool UK have just revealed 6 "Best Buy" shares that they believe UK investors should consider buying NOW.

So if you’re looking for more top stock ideas to try and best position your portfolio in this market, then I have some good news for your today -- because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.