Business Overview & Strategy
HSBC was founded in 1865 as the Hong Kong and Shanghai Banking Corporation (“HSBC”) and ranked as the sixth-largest bank in the world based on total assets (Ali, 2020). HSBC is listed primarily at London and Hong Kong exchanges, with a secondary listing in New York as American Depository Receipt [ADR]. The biggest revenue contributor is Asia (50%) especially Hong Kong and mainland China, followed by Europe (28%), North America (11%), Middle East & North Africa (6%) and Latin America (5%). HSBC operates in four operating segments, namely Retail Banking and Wealth Management (43%), Global Banking and Markets (28%), Commercial Banking (26%), and Global Private Banking (3%).
HSBC aims to leverage its large international exposure to target a faster growing and higher returning market, particularly Asia while reducing European exposure. The FY2020 balance sheet makes it clear as to why HSBC takes the step; Asia contributed 146% of net profit with 47.7% gross margin, whereas Europe contributed a net loss of -48% as operating expenses exceeding the revenue. Further, HSBC also aims to maintain its position as a global leader in cross-border trade, payment, and money management by leveraging its operations in over 64 countries and a strong brand name.
Looking as to why HSBC has been performing relatively poorly in the last two years, it was mainly driven by volatile global political situations, specifically due to Brexit and US-China Trade War in 2019, followed by the pandemic in 2020. HSBC's worsening performance, therefore, is caused by external shocks, while its fundamentals remain strong especially if we consider the 23% dividend return in the past five years and decent deposits growth (HSBC Holdings, 2021).
Looking ahead in the post-pandemic world, I expect HSBC to start showing price appreciation as the economic recovery in Asia starts picking up in the next few quarters. Massive reduction in PCL will also boost the earnings in the next few quarters, similar to what already happened to banks in North America. The steepening yield curve and the rising interest rate would also improve HSBC's profitability and HSBC is likely to benefit more than other global banks as they have more exposure to the high-growth Asian markets and moving away from the European markets. Over the long-term, the price is likely to stabilize at a historical P/B ratio of about ~1x, but investors will highly benefit from the above-average dividend yield that would die up the total returns.
Regarding the political risks, the Brexit and US-China Trade War are expected to be stabilized as countries are focusing their efforts on stimulating the economy to offset the impact of the COVID-19 pandemic (Friis & Pothalingam, 2021). Regarding US-China Trade War, it is likely to be calmer with the new Biden administration. Overall, the outlook on political stability is positive for HSBC in the post-pandemic world relative to the last two years.
Ali, Z. (2020, April 07). The world's 100 largest Banks, 2020. Retrieved April 05, 2021, from https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/the-world-s-100-largest-banks-2020-57854079
Clarke, P. (2021, February 23). HSBC plans $6bn in Asia investments as profits slump by 34%. Retrieved April 05, 2021, from https://www.fnlondon.com/articles/hsbc-plans-6bn-in-asia-investments-as-profits-slump-by-34-20210223?adobe_mc=MCMID%3D57244812709731614374459840912138525497%7CMCORGID%3DCB68E4BA55144CAA0A4C98A5%2540AdobeOrg%7CTS%3D1617507920
Friis, P. B., & Pothalingam, K. (2021, January 20). Beyond Brexit: Outlook and risks for the U.K. Economy. Retrieved April 05, 2021, from https://blog.pimco.com/en/2021/01/beyond-brexit-outlook-and-risks-for-the-uk-economy
HSBC Holdings plc. (2021). Total share return. Retrieved April 7, 2021, from https://www.hsbc.com/investors/shareholder-information/total-share-return
IHS Markit. (2020). Global Economic Forecasts Analysis and Data World Economic. Retrieved April 05, 2021, from https://ihsmarkit.com/products/global-economic-forecasts-analysis-and-data-world-economic-service.html