HSBC Banks Higher Profits

Published in Company Comment on 7 May 2010

Britain’s biggest bank is looking healthy, helped by a return to profit in the US.

Two of Britain's biggest banks reported results on Friday. I reported on RBS (LSE: RBS) earlier; now it's the turn of mega-cap HSBC Holdings (LSE: HSBA), which also released first-quarter results.

With a market capitalisation of around £115 billion, and 8,000 offices in 88 countries, HSBC is a global Goliath and is regarded as a bellwether banking stock. In short, if "the world's local bank" is doing well, worldwide banking is likely to be healthy.

HSBC hits the heights

On a generally weak day for shares (and banking stocks in particular), HSBC bucked the falling market on the back of healthy results. Its financial performance was well ahead of the first quarter of 2009, largely thanks to lower loan impairments. By now, this should be a familiar story, given similar reports from Lloyds Banking Group (LSE: LLOY) and RBS.

HSBC reported improved results from Personal Financial Services and Commercial Banking, but its investment-banking arm -- Global Banking and Markets -- was also ahead. Thanks to improved seasonal trends in credit, HSBC recorded pre-tax profits in the US for the first time since the credit crunch walloped it in Q2 2007.

In a statement long on words but short on numbers, HSBC warned of constrained deposit spreads and increased competition for savings. Like RBS, HSBC reported good investment-banking revenue -- it even beat its shoot-the-lights-out performance of Q1 2009.

The global bank

HSBC showed its global reach and strength by revealing that stronger demand for credit in emerging markets (led by Asian economies) helped to offset weakness in developed markets. Loan impairments fell to their lowest quarterly level in more than two years, thanks to improving credit quality in all regions except the Middle East, and especially in US consumer finance.

Overall, revenues were ahead of Q4 2009, but behind Q1 2009, with operating expenses largely flat. As a result, underlying pre-tax profits were ‘comfortably ahead' of both prior quarters.

HSBC's core Tier 1 capital ratio advanced to 9.7%. Also, unlike other riskier rivals, conservative HSBC has more deposits than loans. Fuelled by massive savings balances from the East, HSBC has an advances/deposits ratio of just 80%.

An interim dividend of 8 US cents was announced on 4 May.

Buy Britain's best-placed bank

Thanks to its global reach and conservatively managed balance sheet, I've long regarded HSBC as a core stock for UK investors. Indeed, during the post-Lehman havoc, HSBC's share price fell much less steeply than did those of Barclays (LSE: BARC), Lloyds and RBS (not to mention Northern Rock and Bradford & Bingley).

In short, HSBC is much more than a London-listed bank: it's a massive, diversified global franchise offering low-risk exposure to go-go regions such as Asia Pacific, China, India and other fast-growing markets. Demand for credit, wealth and investment products is much stronger in these areas than in ailing Europe and the US, and HSBC is a household name in these exciting markets.

If you invest in a FTSE 100 index tracker, then around one pound in 13 (7.7%) of your money will go straight into HSBC. However, I reckon that it's worth buying more HSBC. This is a business founded in 1865 that will still exist in another 145 years. In the shift from West to East, HSBC's blue-chip solidity is worth paying for.

More from Cliff D'Arcy:

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