2 reasons to buy — and sell — HSBC Holdings plc

Today I am considering why investors should, and shouldn’t, stash their cash in HSBC Holdings (LSE: HSBA).

Chinese cracker

Escalating fears over the financial health of emerging regions continues to cast a pall over HSBC’s revenues outlook.

‘The World’s Local Bank’ is particularly sensitive to economic conditions in Asia Pacific, with the business sourcing around two-thirds of profits from the region. So news that adjusted pre-tax profits here sunk by 10% during the first quarter — down to $3.46bn — comes as a major worry.

Despite these near-term travails, however, I reckon HSBC’s huge exposure to China and the surrounding areas should deliver sound returns in the longer-term as exploding wealth levels drive banking product demand.

PPI pains

On top of concerns surrounding its key developing territories, market appetite for HSBC has also been smacked by expectations of surging PPI-related bills in the years ahead.

News of an FCA-backed claims deadline of 2018 was originally greeted with fanfare by the banking sector. But the sounds of popping champagne corks have since faded, with a claims surge before the cut-off now predicted — indeed, Barclays has been forced to slash dividends for this year and beyond in anticipation of surging financial penalties.

HSBC, Barclays, Lloyds and RBS have already had to shell out £55.8bn between them between 2011 and 2015 due to previous misconduct, according to Standard and Poor’s, and a further £19.5bn of costs are anticipated for this year and next.

Costs crumbling

However, extensive cost-cutting at HSBC is helping to mitigate the effect of these hulking financial penalties. The bank saw adjusted operating expenses slip a further $76m during January-March, to $7.87bn, and reductions are expected to keep rolling as restructuring steps up several notches.

HSBC noted in April that

all of our cost-reduction programmes are now under way and we have a good grip on operating expenses, adding “we are confident of hitting our cost target by the end of 2017.”

Just this week HSBC announced it was shutting half of its 50 branches in India as it advances its digital banking operations in the country.

Dividends in danger?

Still, these measures may not be enough to prevent HSBC from reducing dividends as group revenues drag. Indeed, the City expects the bank’s progressive policy to come to a halt as soon as this year. Projected dividends of 51 US cents for 2016 and 2017, if realised, will match HSBC’s payout of last year.

Many investors will no doubt be drawn in by a jumbo 8% yield. But I reckon these estimates could well disappoint.

HSBC’s CET1 ratio clocked in at 11.9% during the first quarter, the bank failing to grow its capital pile from levels reported at the start of the year. And I reckon the rising stress on the bank’s balance sheet due to rising financial penalties should come as concern to even the most optimistic income chaser.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.