HSBC - Rio 2016 is off their calendar

HSBC (HSBA.L): Today’s interim results are another staging post on the way to returning to their Asian roots. The days of being the World’s Local Bank are but an ad-man’s reminiscences. Mind you, the Birmingham taxidermist must still have been surprised when they asked for their Midland Bank griffin back. For the six months, adjusted pre-tax profits are up 2% at $13.0bn against $12.7bn, with eps at 48c, slightly down from 50c. The dividend for the quarter was again 10c, keeping the halfway score for the year at an unchanged 20c, more than twice covered by earnings. It looks like the control of costs is still an issue with operating expenses up 7%, whilst revenue was only up 4%, although they quote their cost efficiency measure as having improved from 58.6% to 58.2%. The balance sheet strength continues to build gently with CET1 capital at 11.6%, up from 11.1%. But all these are snapshot numbers as the group continues its rebalancing. The drive to reduce Risk Weighted Assets by 25% continues with a $50bn reduction, focused on Global Banking & Markets, although $30bn was redeployed elsewhere. In a similar vein their Brazilian business is being sold off for $5.2bn (didn’t they want a board meeting during the Olympics?), whilst Turkey has met its cranberry sauce. Total RWAs came down from $1,220bn to $1,193bn in this period.

  

The pivot back to Asia looks like the right strategy, but the timing is challenging at the macro level, as China wrestles with slowing economic growth and a soufflé of a stock market, whilst emerging market economies in general face the impending challenge of rising US dollar interest rates. At the same time the reputational damage from their various regulatory skirmishes (e.g. Switzerland and Mexico) continues to feature all too often in the press, thus hampering efforts to re-boot growth. Whether the pivot will lead to HSBC re-domiciling away from the UK remains to be seen, but George Osborne’s latest tweaks to the banking levy may be enough to postpone the packing crates. For whatever a bank’s PE is worth as a metric, consensus eps of 53.2p for this year leaves the PE at 10.9x with the shares trading at 580p. The dividend might not be growing and it has currency risk, as it is declared in dollars, but an unchanged 50c for the year would be about 32p, for a yield of 5.5%. There are lots of reasons to dismiss HSBC as a mere lumbering beast, but that yield and the long term attractions of their target markets, mean that the shares should be considered for all long term income portfolios. (Neil Cumming^, 3^rd August 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