HSBC (LSE: HSBA) is one of the world’s largest banks, and it’s also one of the world’s most diversified. Even though the group generates the majority of its profits in Hong Kong, HSBC also has substantial operations across Europe, the UK and the USA. That’s as well as its South American division.
In my opinion, this international diversification gives the bank a considerable advantage over other companies. For example, in recent years, management has been taking money from its European operations and investing it into the Chinese business, where it sees more opportunity for growth over the long term.
These efforts have helped HSBC generate huge profits while European and UK peers struggle. Last year, the bank earned $14bn of net income on revenues of $71bn. That’s more profit than Barclays, Lloyds and Royal Bank of Scotland generated altogether.
HSBC is looking to enhance profits further over the next few years. Under the stewardship of interim CEO Noel Quinn, the bank is planning to slash 10,000 jobs around the world, on top of the 4,700 redundancies announced earlier in the year.
HSBC employes 268,000 staff around the world and the group generates 80% of its profits in Asia. The axe is expected to fall on staff in Europe, where negative interest rates and depressed economic activity have hit returns. City analysts reckon as many as 17% of the bank’s employees could be let go under this new plan.
While this is bad news for staff, it seems to be the right decision for the HSBC. Since the financial crisis, the banking industry has been struggling to deal with the new regulations, increasing competition, and the rise of technology. On top of this, ultra-low interest rates have weighed on profits.
The good news is HSBC has size on its size. The bank has been able to remain so profitable while peers struggle, thanks to economies of scale and, as mentioned above, its international diversification.
These are the primary reasons why I think you can retire on the HSBC share price. The bank is so large it’s a critical component in the global financial system. Even in the event of a major economic depression or recession, there will still be clients who look to the bank to provide services thanks to its size and financial stability. Indeed, compared to the rest of the global financial services industry, HSBC pulled through the last financial crisis with relative ease.
However, despite its competitive advantages and position in the global banking industry, today you can pick up shares in HSBC for just 10.7 times forward earnings. On top of this, the stock offers a dividend yield of 6.6%. The payout is covered 1.4x earnings per share and management has also been returning cash to investors with share buybacks recently as well.
As profits continue to expand, I think there’s a good chance further cash returns could be on the cards going forward.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.