It is time for me to top up my portfolio again. Can I find room for HSBC Holdings (LSE: HSBA) (NYSE: HBC.US)?
Big and beautiful
HSBC is sometimes called the good bank, in contrast to those baddies Barclays, Lloyds Banking Group and Royal Bank of Scotland, but it hasn't been a very good investment. Over the last three years, its share price has grown just 13%, against 24% for the FTSE 100. Over five years, it is flat. But the last 12 months have been a lot brighter, with a whopping 43% growth. Better still, HSBC actually pays a handsome dividend, a rarity in UK banking circles these days. I'm glad I tipped HSBC back in October, but should I buy it today?
HSBC has recently leapfrogged Deutsche Bank and BNP Paribas to become Europe's biggest bank. Its total assets of EUR2.04 trillion dwarf total UK GDP of just EUR1.7 trillion, as measured by the IMF, so let's be grateful it didn't need a bailout. HSBC has grown big on booming Asia and China, where it does 90% of its business. But with China growth weakening, can it repeat the trick?
The good-ish bank
Lloyds and RBS wish they could have posted Q1 results showing a 95% surge in profits before tax to £8.43bn. Not to mention a 14% rise in revenues to $18.42bn, and a 51% drop in bad debts to $1.2bn. HSBC also fluffed up its Core Tier 1 financial cushion, but it still has its dark side. Last year, it was stung with a $1.9bn settlement in the US for laundering money from Latin American drugs cartels. In March, it set aside another £1.4bn to compensate UK customers mis-sold payment protection insurance. It also faces a potentially costly probe over Libor fixing. The phrase "good bank" is clearly a relative term.
As with every bank, good or bad, regulatory uncertainty is a worry. McKinsey recently warned that European regulations could knock EUR4 trillion, roughly 25%, off the continent's private banking earnings. Perhaps coincidentally, HSBC has been dumping chunks of its European private banking arm, including its scandal-hit Swiss operation, although it remains committed to the UK. This could hit earnings in the short term, although it could also liberate HSBC to build its private banking operation in Asia, which sounds like a wiser long-term strategy. Provided, that is, China and Asia avoid slipping into recession.
HSBC now trades at 15.2 times earnings, against around 13.7 for the FTSE 100 as a whole. That makes it notably more expensive than Barclays at 9.3 times earnings and Standard Chartered at 10.3. HSBC yields 4%, covered 1.6 times, double the 2% Barclays pays and just ahead of Standard Chartered's 3.6%.
Yield to this
My biggest concern is whether HSBC can maintain its recent surge. Forecast earnings per share (EPS) growth is an ebulliant 35% for this calendar year, but it tumbles to 8% in 2014. Brokers at Investec have just downgraded HSBC to 'hold', while maintaining its £7.40 target price, pointing out that it is just 4% off its 57-month high. But I would still buy HSBC, primarily for its 4% yield, which is forecast to hit 5.1% by the end of 2014.
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