A glance at HSBC - Did the market miss this one?
July 10, 2008 – 6:35 pmI have started looking into HSBC. The bank has significant exposure to risky assets and incurred huge losses in the personal finances division in the US last year. Despite this, there has not been much of an impact on the bank’s stock price. HSBC ADRs currently trade at about $85 in the NYSE and has lost a marginal 6.9% compared to huge losses for commercial and investment banks in the similar period (although they are taking a beating today as I post this and accumulate a position).
In a recent development, Morgan Stanley cut HSBC’s rating to “underweight” from “equal weight” and it expects further material reserve requirements and downgrades after declines in the US home prices during the first half of 2008. Bad debts at HSBC Finance Corp., the bank’s U.S. consumer banking unit, may rise to $15 billion this year from $12.5 billion, Morgan Stanley said. Further, the deterioration may spread to the UK, implying that the growth in profits from the Asian region will not be sufficient to offset earnings declines in the US and U.K. In one of those rare occurrences, I concur with the Street’s Riskiest Bank.
The current price for HSBC ADR is around $76 and the stock has not lost much value since the beginning of this crisis. We first took a look at it in May. Given that a good portion of their profits come from emerging markets such as China and India, it appears highly likely that there could be more downside left.
Financial Ratios
|
Financial investments (In US$ million) |
2005 |
2006 |
2007 |
|
|
US Treasury |
8,997 |
10,203 |
6,831 |
|
|
US Government agencies |
4,173 |
5,968 |
5,732 |
|
|
US Government sponsored entities |
15,889 |
13,799 |
14,533 |
|
|
UK Government |
7,740 |
7,502 |
749 |
|
|
Hong Kong Government |
4,408 |
1,080 |
3,942 |
|
|
Other government |
34,853 |
38,198 |
60,320 |
|
|
Asset-backed securities |
2,889 |
26,750 |
65,962 |
Growth in ABS outstrips that in any other form of investment |
|
Corporate debt and other securities |
96,055 |
93,311 |
112,723 |
|
|
Equities |
7,519 |
8,297 |
12,594 |
|
|
Total |
182,523 |
205,108 |
283,386 |
|
|
Asset backed securties as a % of financial investments |
2% |
13% |
23% |
|
|
Derivatives (In US$ million) |
2005 |
2006 |
2007 |
|
|
Foreign exchange |
33,047 |
55,508 |
||
|
Interest rate |
54,215 |
85,741 |
||
|
Equitie |
10,767 |
20,230 |
||
|
Credit derivative |
8,237 |
25,268 |
CDS and counterparty risk!!! |
|
|
Commodity and other |
1,304 |
1,107 |
||
|
Gross total fair values |
107,570 |
187,854 |
||
|
Netting |
(3,868) |
- |
||
|
Total |
|
103,702 |
187,854 |
|
|
Credit derivative as % of total derivatives |
|
8% |
13% |
|
|
Trading assets (in US$ million) |
|
2006 |
2007 |
|
|
|
|
|||
|
Trading assets: |
|
|
|
|
|
– not subject to repledge or resale by counterparties |
273,507 |
308,286 |
||
|
– which may be repledged or resold by counterparties |
54,640 |
137,682 |
Potential counteryparty risk to be investigated (nearly tripled during trying times) |
|
|
Total |
|
328,147 |
445,968 |
|
|
|
|
|||
|
Treasury and other eligible bills |
21,759 |
16,439 |
||
|
Debt securities |
155,447 |
178,834 |
||
|
Equity securities |
27,149 |
51,476 |
||
|
subtotal |
204,355 |
246,749 |
||
|
Loans and advances to banks |
52,006 |
100,440 |
Counteryparty risk to be investigated (exposure has doubled during dire times) |
|
|
Loans and advances to customers |
71,786 |
98,779 |
Credit risk to be investigated |
|
|
Total |
|
328,147 |
445,968 |
Geographic Concentrations
|
Profit before tax (In %) |
|||
|
|
2005 |
2006 |
2007 |
|
Europe |
30.3% |
31.6% |
35.5% |
|
Hong Kong |
21.5% |
23.5% |
30.3% |
|
Rest of Asia-Pacific |
12.3% |
16.0% |
24.8% |
|
North America |
28.2% |
21.1% |
0.4% |
|
Latin America |
7.7% |
7.9% |
9.0% |
We all know N. America will probably go negative this quarter, but Europe is in the crapper and contributed more than one third of the profits last year. Asia has contributed more than half of last year’s profits, and it doesn’t look good for Asia for 2008 – specifically China, India and Japan.
|
Total assets, by geography ( in US$ million) |
2006 |
2007 |
|
|||
|
Europe |
828,701 |
1,184,315 |
||||
|
Hong Kong |
272,428 |
332,691 |
||||
|
Rest of Asia-Pacific |
167,668 |
228,112 |
||||
|
North America |
511,190 |
510,092 |
||||
|
Latin America |
80,771 |
99,056 |
||||
|
Total |
|
1,860,758 |
2,354,266 |
|||
HSBC’s largest asset concentrations are located in areas where assets are being devalued the most.
|
Profit before tax - from Personal financial service |
|
|
|
|
By geographical region (in US$ million) |
2005 |
2006 |
2007 |
|
Europe |
1,932 |
1,909 |
1,581 |
|
Hong Kong |
2,628 |
2,880 |
4,212 |
|
Rest of Asia-Pacific |
377 |
477 |
760 |
|
North America |
4,181 |
3,391 |
(1,546) |
|
Latin America |
786 |
800 |
893 |
|
Total |
9,904 |
9,457 |
5,900 |
The US was the most profitable personal finance center, now they have to rely on areas that are heading into a hard landing.
The same goes for commercial, private and global banking.
|
Profit before tax - from Commercial Banking |
|
|
|
|
By geographical region (in US$ million) |
2005 |
2006 |
2007 |
|
Europe |
1,939 |
2,234 |
2,516 |
|
Hong Kong |
955 |
1,321 |