HomeMost PopularHSBC: Hold Rating Based on Significant Risk Exposure

HSBC: Hold Rating Based on Significant Risk Exposure

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It’s clear that the recent decline in bank stocks during the most recent banking crisis will affect the appeal of investing in banks for the younger generation. This is a recurring pattern, as previous financial crises have also left a lasting impact. With a history of failed banks, the banking industry is not known for being particularly exciting.

When analyzing banks, I prioritize safety and the reliability of income. HSBC Holdings (NYSE:HSBC) has solid metrics and ranks well in terms of safety, but I have rated it as a Hold because I am uncertain about the reliability of its future income. The company plans to divest its operations in other countries and focus more on China, which poses a major risk. While China is a profitable market, HSBC is facing increasing pressure from its largest Chinese shareholder.

HSBC – An International Banking Giant

HSBC is a London-based global banking and financial services institution. With a history dating back to 1865, it operates as one of the largest and most influential banks in the world. The bank provides a wide range of financial services and serves millions of customers, businesses, corporations, governments, and international organizations. HSBC’s extensive global presence and commitment to diverse markets make it a preferred choice for multinational companies, expatriates, and international investors.

The Positives

HSBC has seen its assets increase by nearly 15% in the past five years, surpassing the $3 trillion mark. Its position among the top 10 largest banks by assets is impressive. Key factors that make HSBC attractive include its low allowance for credit losses, a healthy net loans-to-total deposits ratio of 63%, an assets-to-equity ratio of approximately 16x, and a high dividend yield of 5.7%. Additionally, it trades at a discounted price-to-earnings multiple of 6x and below its book value.

Bank P/E P/B Dividend Yield
JPMorgan Chase (JPM) 9.4x 1.5x 2.7%
Bank of America (BAC) 8.1x 0.9x 3%
Citigroup (C) 6.5x 0.4x 5%
Wells Fargo (WFC) 10.4x 0.9x 3%
Royal Bank of Canada (RY) 11.3x 1.5x 4.4%
Toronto-Dominion Bank (TD) 10.1x 1.3x 4.7%

Despite the positive indicators, I believe the bank is trading at a fair valuation based on recent results alone.

The Concerns

HSBC’s increasing focus on expanding its business in China is concerning. China’s geopolitical tensions, particularly its belligerence towards Taiwan, present significant risks. The possibility of a conflict could have widespread consequences, similar to what happened with Russia’s war on Ukraine. In my view, HSBC’s decision to prioritize China expansion is short-sighted and goes against the principles of safety and reliable future income.

My Rating

While HSBC’s financials, dividends, and valuations seem favorable, I disagree with its strategy. Banks have a history of facing long-term consequences due to short-sighted actions. Until HSBC reconsiders its China expansion strategy and focuses on operations outside of China, I would rate it as a Hold. However, I acknowledge that a strategy switch of this nature would take time and could result in subpar returns in the short term.

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