Emerging markets contribution proves it pays to get back to basics

PUBLISHED : Tuesday, 06 March, 2007, 12:00am
UPDATED : Tuesday, 06 March, 2007, 12:00am


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The worst news has already been absorbed by the market, but HSBC Holdings shareholders might be watching their beloved bank mopping up the mess for months to come.

HSBC's second-half results show that its traditionally strongest business area - emerging markets - helped bail the bank out of a loss-making venture in United States consumer lending.

'The management of the bank appears to be on top of the problem but it will take some time to set it all right,' said a fund manager for Bowen Capital Management which sold its HSBC shares when the bad news came out.

The news of its problems emerged last month, when the bank issued an earnings warning due to US$10.6 billion in bad US consumer loans. Yesterday, Douglas Flint, HSBC's finance director, promised that the bank had pulled out of the loss-making businesses that caused the problems and that the mistakes had not affected or spread to other regions or lines of lending.

The bank has also fired its top managers in the US just to be sure that it had put the fire out for good.

HSBC shares ticked higher in early trading in London following their earnings statement. However, it was obvious that Hong Kong investors were not all ready to forgive and forget.

Short selling of HSBC shares totalled HK$343.2 million, more than twice the amount on Friday when investors were still wondering what the bank's earnings would be like.

'The US situation is definitely doing some damage to the share price and this could still be the early days of the US market slowdown,' said Violet Chong, a senior portfolio manager at Pacific Capital Management. 'A housing market can take years to bottom, so we'd still be watching for more signs of it in future results.'

The bank says it will return to its roots in emerging markets, building on the name and expertise on which it was founded. A sound decision but let's see how they do it, fund managers say.

'Consensus is that their strength is in emerging markets and Asia so they're saying the right things,' said Shu Yin Lee, a director of Grand River Investments.

Last year's pre-tax profits from Asia, the Middle East, Latin America and other emerging markets were almost 50 per cent of the company's total.

The bank's US$5 billion in mainland acquisitions in the past five years looks like it is beginning to pay off, with its profits there doubling last year.

Some analysts were also encouraged by HSBC's 81 US cents per share dividend for last year, which was 11 per cent higher than in 2005. Paying out a handsome dividend is also a sure way to keep the many Hong Kong retail investors happy and ensure that they will have patience as its executives refocus the bank's growth strategy.