HSBC shareholders pay for diversification
HSBC is paying the price of diversification. Although the banking group's interim results announced yesterday were better than most analysts had forecast, HSBC's exposure to the subprime mortgage business in the United States continues to weigh heavily on its performance.
Yesterday shareholders were simply grateful that the news was not worse. HSBC's stock rose as much as 3.2 per cent in early trading in London, after the group announced first-half net profits of US$10.89 billion, up 25 per cent compared with the first half of last year. That sounds impressive but the results were flattered by a low effective tax rate and by one-off gains worth more than US$1 billion; HSBC's share of the proceeds from the A-share offerings for the mainland's Bank of Communications, Ping An Insurance and Industrial Bank, in each of which it owns stakes.
Below the headline number, the bank's charges for bad loans were up a hefty 63 per cent from the first half of last year to US$6.3 billion. The increase was largely the result of a spate of defaults in HSBC's US mortgage portfolio, the cause of the group's first-ever profit warning in February this year.
Since then bank chief executive Michael Geoghegan has worked hard to contain the problem, putting in new managers, writing off US$680 million worth of loans and reducing the size of the subprime portfolio by US$8.1 billion to US$41.4 billion.
With further reductions planned for the coming months, HSBC's bosses are hoping they are over the worst of the crunch. Even though analysts warn of a new rush of defaults in the second half when higher interest payments kick in on adjustable rate mortgages, Mr Geoghegan insisted yesterday that the bank's existing US$2.1 billion of extra provisions against losses in the sector are adequate.
Even if he is right, HSBC's four-year-old attempt to diversify into the highly developed US lending market has been expensive for the bank's shareholders. The contrast with Standard Chartered, which retained its focus on developing markets in Asia and the Middle East, is especially stark. In the past four years, Standard Chartered's stock price has doubled. HSBC is up a pallid 15 per cent (see chart). Today Standard Chartered trades at a 33 times multiple to expected future earnings. HSBC is at just 12 times.
HSBC's bosses have clearly learned their lesson. Group chairman Stephen Green is in the middle of a strategic re-alignment which will refocus the bank's energies on fast-growing markets such as Russia and Asia, and concentrate on using its extensive distribution network to sell insurance and investment products structured by HSBC's in-house investment bank.
The potential is enormous. The group's pre-tax profits from Asia were up 33 per cent in the first half, and HSBC's mainland business is well on the way to generating US$1 billion in pre-tax profits this year. Meanwhile, the group's insurance business is only 'at the foothills', according to Mr Geoghegan who hopes to grow its share of profits five-fold over the coming years.
If the group can weather the US subprime storm without further big losses - and an 84 per cent increase in credit card loan loss charges is troubling - HSBC's shares could soon begin to look like a bargain.