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HSBC is Performing as Expected
About a year and a half ago I warned that HSBC would be facing
increasing and unanticipated (I was a contrarian on the China bubble)
losses/slowdowns in Asia, as well as increasing losses on bad debt in the US. I
believe I was one of the very few who threw this caution out there. I
have included a free opinion along with the macro analysis to back it up
here (free registration required): Part one of three of my opinion of HSBC
and the macro factors affecting it. Subscribers can download the
forensic reports: 
HSBC_Holdings_Report_04August2008
- retail 2008-09-16 06:38:38 87.28 Kb
and HSBC_Holdings_Report_04August2008
- pro 2008-11-06 10:11:09 138.89 Kb.
As a refresher, the 2nd quarter 2008 review is available
here: HSBC 1H 08 results update.
There is a discernable trend.
From Bloomberg:
March 1 (Bloomberg) -- HSBC Holdings Plc, Europe’s biggest
bank, posted full-year net income that missed analyst estimates after
impairments for bad loans rose and profit in Asia fell.
Earnings increased to $5.83
billion from $5.73 billion a year earlier, the London-based lender said
today in a statement. That was less than the $7.76 billion median
estimate of 12 analysts surveyed by
Bloomberg. The bank dropped in London trading.Loan impairment
charges and other credit risk provisions rose to $26.5 billion in 2009
compared with $24.9 billion the previous year, the company said. Pretax
profit in Hong Kong declined to $5.03 billion from $5.46 billion, and
fell 11 percent in the rest of Asia-Pacific to $4.2 billion....
The bank plans to trade its shares in Shanghai and
moved Chief Executive Officer Michael Geoghegan to
Hong Kong from London last month to sharpen its focus on Asia. HSBC
halted consumer finance loans in the U.S. after racking up provisions
of at least $70 billion in the past four years following its
acquisition of U.S. subprime lender Household International Inc.“There
were a lot of people who were pushing the stock up as a top stock for
this year,” said Simon Maughan, London-based analyst
at MF Global Securities Ltd., who has a “neutral” recommendation on the
bank. “The environment isn’t there to develop these earnings.”...
HSBC fell 2.9 percent to
698.45 pence as of 9:09 a.m. in London, the biggest decline in the FTSE 350 Index of five
U.K. banks which fell 1.9 percent.... Pretax profit at the
investment banking unit more than tripled to $10.5 billion from $3
billion. It was the only one of HSBC’s divisions to report a gain in
profit.The bank’s North American unit posted a loss of $7.74
billion from a loss of $15.53 billion, the bank said.
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Bank loans still showing no signs of coming back. Of course you just can't see bubbles when they're forming. Personally, I think it's rather easy to spot them.
http://i45.tinypic.com/1dzwnr.jpg
HSBC also bought Household Finance in late 2004 ... just about the worst time to take a poison pill
I purchased it (quoted in France) at 4€/share when they raised capital, and sold it back at 8€/share :) That's a 100% profit. Buying financials during 1Q2009 required guts, but it did pay well.
HSBC is still currently overvalued, but it's also one of the best bank in the world.
providing loans to people only with assets isn't the way to finance growth. We need to finance people with good ideas and a sense of responsibility who will repay the money and the opportunity cost alongside that and banks by definitions can't do that. So if somebody wants to really make money by lending it, they need to lend to people that need them but also have the ideas and work ethic to make money with it and hence are credit worthy. that's where non-banking financial institutions can step in and fill the gap and make money to boot. People with assets aren't neccesarily credit worthy. Loans have to be utilised to create real wealth directly or indirectly
To add to that, the volatility of asset values is much higher than the volatility of the worth of capable talent. If you were a lender or investor, where would you rather put YOUR money for the long term?
I think its a matter of what's more readily quantifiable. I can add up assets to determine net worth if I'm a lender. But I can't quantify in numbers the ability for some one with a "good idea" to sell his product to the masses. If I was a lender or investor, I'd go with the known quantity and leave the financing of ideas to the venture capitalists.
It's not about ideas, it's about people. Investing in people will always be more profitable than investing in hard assets. If everyone had your mentality, small business lending would be near non-existent and unemployment would be rampant.
Hey, isn't that about the way it is now?
If slavery would be legal, then perhaps full recourse loans to individuals would be safer than limited-recourse loans backed by hard assets. But slavery is not legal and therefore asset-backed loans are clearly safer. Of course, this arrangement of personal bankruptcy, no debtors prisons, and no slavery is a good way to run a society even though it increases the risk of loans to people.
Then there's the confusion about higher returns. To the first order, higher yield from riskier loans is not increased lender returns, it's just to offset the credit losses. Some readers (not the post's author, of course) commenting on this site seem not to get it.
If we are talking about active investments with upside participation, I agree that smart investors can probably make more money with less leverage when financing people and ideas than when financing hard assets. That's because evaluating the investment in ideas or people is so much more difficult. Conversely, dumb investors stand to lose more when making these difficult investment decisions.
The Chinese aren't as smart as everyone thinks.
http://www.youtube.com/watch?v=dpE3MX6m-r8
Yo ... US not so smart neither
http://www.youtube.com/watch?v=qAepgZ5iM5k&feature=related
Should have spent some money on shampoo instead of that zapper.