HSBC: The Golden Days Are Past
Kenneth Cheung
Wealth Management Director & Senior District Manager at AIA Hong Kong and Macau
Summary
HSBC's capital base, highly leveraged with only one-fifth equity and four-fifths debt, is keeping pre-tax ROC from rising above 2%.
Dividends and disposals of underperforming geographical units are logical steps, but only free up a small amount of capital (~3.6%) relative to total capital base, having limited impact on ROC.
Facing stagnating revenue and profits, and a low rate environment, HSBC needs to become a leaner, more efficient institution.
It is unclear, however, that HSBC has the organizational capital and willpower to deliver.
Symbolic of Hong Kong's economic history of development into an international finance center and ubiquitous to the city's rise to prosperity, HSBC Holdings (NYSE:HSBC) is perhaps one of the most widely-held stocks among Hong Kong retail investors. Many people still "believe" in the stock, mainly for whatever is left of its brand name. The reality, however, is that HSBC is very different from what it was in its early days, and its balance sheet reflects such changes. Its "deleveraging" efforts over the past decade weren't so much about reducing debt as a percentage of capital but about shoring up equity. Debt as a percentage of capital has dropped gradually from 86% to 81% over 2010 to 2015, but its capital base remains highly leveraged with four-fifths debt and one-fifth equity, keeping pre-tax return on capital from rising above 2%. Despite disposal of underperforming geographical units and generous dividend/buyback yields, the bank is unlikely to achieve meaningful ROC upturn in the foreseeable future, thereby capping share price appreciation. Investors can look to range trade between HKD 50 and HKD 70 per share, but stock price levels above HKD 70 (the 2015 high) are likely unsustainable without improvement in fundamentals.
N. K. (2016, September 30). HSBC: The Golden Days Are Past. Retrieved October 19, 2016, from https://seekingalpha.com/article/4009460-hsbc-golden-days-past