Sell HSBC (HBC)

What to do about HSBC (HBC)?

It’s one of the great global franchises in banking with strength in exactly the part of the world—developing Asia—that you want in a bank stock over the next decade.

But over the last decade the bank lost its way, I’d argue.

The most obvious sign of that was the bank’s acquisition of Household International, the second largest U.S. subprime mortgage lender, for $15.5 billion in 2002 just in time to catch the U.S. mortgage crisis. By the time the bank had wound up that business losses just about equaled the original acquisition price. That deal wasn’t just a bit of bad timing though. It represented a curious decade-long quest to grow the bank in the world’s developed economies through acquisitions in France, the United States, and the United Kingdom. I’ve never heard a convincing argument from HSBC about why a bank with a leading position in the world’s fastest growing economies would decide to spend investors’ money expanding into the world’s slowest growing economies.

At the end of 2009 Europe accounted for 54% of assets and North America 20%, and emerging economies for just 17% (Hong Kong), 9% (the rest of Asia), and 5% (Latin America.)

Stuart Gulliver, the new CEO who took over in January, has announced a turnaround plan that would temper these global ambitions. But the strategy can’t by any means be called one of returning to the company’s roots in Asia.

Yes, the bank has targeted wealth management, particularly wealth management in Asia as a focus for growth. Gulliver expects to generate $5 billion in additional revenue from that sector.

And he did say, “We’ve tried to do everything, everywhere, always. We’re not going to do that anymore.”

But the bank hasn’t exactly decided to abandon its drive into developed economies. Read more

I’m suggesting that you think about lightening up on your exposure to financials. I don’t think you need to sell all your bank stocks, but the sector is showing signs of breaking down with another 10% drop in the cards. The sector showed a decent little bounce yesterday on JPMorgan Chase (JPM) CEO Jamie Dimon’s presentation at the company’s shareholder meeting, but it’s back on the downside again today.

The question is not just whether to sell, but also what to sell. Today I’m selling Citigroup (C) out of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/

Another 10% correction in this sector isn’t so big a correction that investors can’t sit still through it. But what troubles me is the good possibility that some of the biggest names in this sector aren’t going much of anywhere very quickly when the correction is over. Read more

Buy HSBC (HBC)

This bank got its clock cleaned in the U.S. mortgage crisis. HSBC (HBC) spent $15 billion in 2003 to buy Household International in order to enter the U.S. mortgage market. The timing of that deal was just right so that write downs were about the same as what HSBC had paid to acquire the company.  The math of that deal turned into paying $15 billion to buy $15 billion in losses.

But there are advantages to things going so terribly wrong. It you survive—and the bank did rebuild its capital by raising $17.7 billion through a stock offering in April—you have good reason to examine your strategy from top to bottom. In the case of HSBC that resulted in the bank’s decision to return to its Asian roots. HSBC CEO Michael Geoghegan has announced that he will be moving his office to Hong Kong from London. That looks likely to be the key that unlocks a stock offering in China for HSBC, making the bank one of the first non-Chinese companies to list and raise money on a Chinese exchange.

At the end of 2008 Hong Kong and the rest of Asia accounted for 26% of the bank’s assets. That percentage will climb as HSBC’s China business grows and as HSBC takes advantage of troubles at competitors to pick up Asian assets. HSBC has emerged as the front runner to buy the assets of troubled Royal Bank of Scotland (RBS) in China (13 branches), India (28 branches), and Malaysia.

With the Chinese economy set to return to 10% economic growth in 2010—how sustainable that is for the long term is another story—and with Chinese exports likely to return to growth next quarter (see my posts http://jubakpicks.com/2009/12/10/when-will-chinas-currency-strart-to-climb-against-the-dollar/ and http://jubakpicks.com/2009/12/14/chinas-economy-takes-another-step-toward-business-as-usual-and-thats-good-news-for-the-rest-of-the-world/ ), owning a bank that owns an increasing bit of Asia’s banking business seems like a good investment.

But buying HSBC isn’t without risk. Read more

Reverse Goldilocks bank stocks: The best buys weren’t really terrible or really good but just bad enough

Ah, to be healthy bank that dodged the last financial crisis in residential mortgages and isn’t cowering in fear of the new one in commercial mortgages and loans.

You be hovering up deposits from savers looking for safety. Licking your chops at all the tasty businesses that competitors not as skilful or lucky were selling off at bargain prices. And enjoying the steepest yield curve in 30-years where short-term deposits or borrowing costing almost 0% can be turned into loans prime (currently 3.25%) plus.

Heaven.

Actually, a bank doesn’t have to be quite as pure as the driven snow to enjoy that paradise. You can even have taken a bath in the financial crisis. Issued mortgages to dead-beats unable to pay. Bought your way into businesses you didn’t understand at what turned out to be the peak of the market.

You could have done any and all of that—and still be in a position to clean up on the woes in the financial sector—as long as you’ve recovered more quickly than your peers. So desperate as investors and regulators for anyone to take the worst turkeys off their hands before they turn into billion dollar liabilities that all past sins are forgiven if you’ve got a  balance sheet now that looks strong enough to bear the load.

Banks like these—I’d call them reformed sinners—are to me the most interesting and potentially profitable segment of the banking sector. Because they didn’t dodge all the damage of the financial crisis, they didn’t snap up big deals in the early days of the crisis. So they’re not full up. But now that they have put their sins behind them to emerge as potential “rescuers” rather than candidates for rescue, they’re in a position to pick through what is still a most attractive and still growing pile of distressed financial companies.

I’ve got two banks like this to tell you about in this post. One I’ll add as a buy to Jubak’s Picks with this post. The financial sector is correcting now and it’s a reasonable time to add a financial stock. The other I’m going to put in my Watch List because the financial sector correction might have a way to go yet and what’s a bargain now might become a still bigger bargain not too far down the road. Read more

Update HSBC (HBC)

One half of HSBC’s (HBC) business is performing beautifully. Unfortunately, it’s not the part that I most want to own.

On August 3, HSBC reported second quarter earnings that showed that its investment banking and trading had doubled its pre-tax profit for the first half of 2009. For the division in charge of that business, the Global Banking and Markets group, that added up to a $6.3 billion pre-tax profit. That was enough to push the bank as a whole into the black with earnings of 21 cents a share.

In the rest of the business restructuring remained the order of the day. Read more