HSBC - a slow boat to China?

HSBC: As we all know, HSBC has had a torrid few years. The ‘noughties’ saw much flag planting acquisition of subsidiaries, including, in 2003, Household Corporation in the US. This in particular turned out to be disastrous as the sub-prime banking crisis unfolded in 2007/8. Indeed the whole ‘federal’ system of management from left subsidiaries too much autonomy, which like errant children they abused. For a bank with the reputation of HSBC to become embroiled in issues ranging from money-laundering for drugs gangs in Mexico to   tax evasion for clients of its Swiss operation, is shocking. At the same time banking regulation has become more rigorous and onerous, making a flag planting model look unwieldy and less desirable. That all brings us to today’s strategy review.

The group is aiming to reduce Risk Weighted Assets (“RWAs”) by $290bn (i.e. just under a quarter of the current total), including reducing Global Banking RWAs to less than a third of the group total. This will involve, amongst other measures, selling the Turkish operations and retreating to a core service for corporate clients in Brazil. They want to achieve $4bn-$4.5bn of cost savings (some 12% of current levels) by 2017, which will entail total costs of $4bn-$4.5bn. The group tilt back towards Asia (and away from more developed markets) will continue on several fronts. The end game, by 2017, is to produce returns on equity above 10% and revenue growth in excess of cost growth along with a progressive dividend policy.

The other big uncertainty is the ongoing review of where to site their HQ, with a return to Hong Kong being threatened. The review is due to complete by the end of this year, but George Osborne is already holding out an olive branch to the banking industry, indicating that perhaps banker bashing is a less necessary political posture post the election. A move from a more conciliatory UK to a Chinese run Hong Kong cannot be ruled out, but would be a brave step by HSBC.

Delivering all this will be a challenge for the group, but it does give them a way forward. At 617p, existing consensus of 54p in 2015 is a PE of 11.4x, with the shares trading just above net tangible asset value. A dividend worth around 33.2p gives a yield of 5.4%. This may not be the most exciting investment, but with the stables being cleaned and a new sense of purpose on display, that yield becomes very tempting. (Neil Cumming^, 9^th June 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower