Thursday 20 June 2013

Portfolio Buy: HSBC Holdings (LSE:HSBA)

Is it still dangerous?
It's fair to say that the securities markets are in turmoil right now. No-one knows quite when and how the 'tapering' of QE is going to impact the market and investors are frantically trading their way to what they hope will be a safer portfolio structure. Many will be taking profits and holding cash on the sidelines, watching for bargains.

I have already taken a lot of profits and my strategy is still to look for income-producing assets - but diversifying away from the UK, whose economy I suspect will wallow in the doldrums for a few years (with possibly the  exception of commercial property).

But is it safe to go back into the banking water - or are the financial sharks still circling, ready to snap up any fresh meat?

I've invested a lot in high-yielding UK banks in the past - such as Northern Rock, Lloyds, RBS and Barclays - with fairly disastrous consequences. So, are the banks safer now? Have they cleaned up their acts to the point where we won't have any more financial disasters?

Probably not - but I'm hoping that HSBC Holdings is offering a good dividend at a reasonable risk. The forecast yield is 4.9% with a dividend cover of 1.9%, which is pretty good for such a large, international company. A recent Motley Fool assessment came up with these positive points:
  • HSBC is the second largest company on the FTSE 100, with a market cap roughly equal to the other four banks put together
  • the dividend yield is well ahead of Standard Chartered and Barclays
  • risk assets are broadly spread across Europe, Asia Pacific and the Americas
  • Asia Pacific contributed 65% of total pre-tax profits last quarter, with 25% coming from Hong Kong alone
  • a healthy 12.7% core tier one ratio also makes it one of the best capitalized banks
  • HSBC's shares trading at 1.1 times net assets
  • a policy of increasing dividends at least in line with inflation
It's not all good:
  • a disastrous acquisition of U.S. sub-prime lender Household led to big losses
  • HSBC seems to have been the 'go-to' bank for Middle Eastern terrorists and Mexican Drug cartels for several years, with more allegations of money laundering emerging around the world, resulting in huge fines

As the Telegraph reported:
"HSBC reported a fall in pre-tax profits for 2012 to $20.6bn after the bank was hit by record fines and the mis-selling claims but remained upbeat as it raised its dividend. The fall was largely due to a $5.2bn charge against changes in the value of the bank's own debt, as well a $1.9bn fine related to a US money-laundering investigation, and $1.4bn of provisions for the mis-selling of payment protection insurance and interest rate swaps."

If we remember that pretty much all high yield comes with a corresponding high risk perceived by the markets - in this case the risks might include further fines and poor performance in Hong Kong and the rest of China. There are probably more that I am not even aware of.

But I'm hoping that the risk/reward is OK: I'm diving back into the water.

[Purchase price: £6.913]

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. I had been watching Standard Chartered Bank (STAN) more closely than (HSBA) having previously sold in profit plus divis, only to watch it continue to rise after I sold! (Most probably on the back of all the QE)

    Again it was for its yield and its global businesses.

    I also wanted to find out more on what was happening to the Taxpayer banks and capital requirements for all banks which are also out in the news now.

    Several banks need to raise more capital but HSBC already has 12.7% and is above the requirements, plus Basel III is also looking good.

    STAN had been falling back towards value territory and the recent Fed news has helped a bit more. Looking at the banking sector HSBC looks to have the best metrics, highest yield, capital ratios etc

    There have also been several articles on various websites supporting HSBC.

    For me, I like the idea that the future yield could rise to be more than 7%, it appears to be “relatively” safe, a quarterly (rising) dividend and global diversity so what not to like?

    Well, for me I like my share buys to be below 200 day avg and this has only just fallen through! Skeletons in the cupboard and more fines! Although, they now have the MI5 guy on board to improve this area.

    On balance, I agree with you that it is worth pursuing. It may fall further with the general market/QE tapering which may offer better value later so my plan is to buy a few now and watch for further opportunities if they arise.

    In some ways I’m glad the market is “normalising” as there was not many shares that looked to be a bargain.

    It was a down day (buy on the dips!) so the first batch is now in the bag, sorry STAN.

    Gerry, newly proud HSBC shareholder!

  2. Hi DIY,

    Great minds think alike. I bought HSBA last week and Standard Chartered (STAN) and Aberdeen Asset Mgt. These are my first financial stock additions to my HYP. I think its time to get back in. STAN is currently on a low P/E.


  3. I've held HSBC for many years and, unless they go down the pan or rocket upwards, don't see myself selling ever. They are just a core holding. Recently bought some STAN as well and I'll now forget about them for a while.