HSBC is now the world's ex-local bank!

While the bank's first-half profit was up, Matein Khalid still sees a lot of concerns to ponder

The world's local bank just got mauled by July's bloodbath in Shanghai, Shenzhen and Hong Kong. While first-half 2015 profit was up 10 per cent - above Wall Street sell-side consensus - the stock market is still concerned about the slump in emerging markets exports and currencies. HSBC also sold its Brazil subsidiary to Banco Bradesco for $5.2 billion or 1.8 times book value. Even though HSBC pretax profits for the first half of 2015 was $13.6 billion, the bank is exposed to economic slowdowns in China, Hong Kong, Southeast Asia, Europe, the Middle East and Sub-Saharan Africa's oil/metal exporters.
HSBC intends to slash 50,000 jobs worldwide and "pivot" to its Asian roots, since the bank generates two thirds of its revenues from the Pacific Basin. Now that HSBC is selling Demirbank, its Turkish subsidiary, after catastrophic losses in consumer banking/credit cards, the message is clear: Britain's largest listed bank is no longer the world's local bank, if local markets do not cover their cost of allocated capital.
The bank plans to slash $290 billion in risk-weighted assets from its global balance sheet, mostly from global banking and markets, or GBM, 33 per cent of group revenues. This basically means cutbacks in capital intensive structured products and complex derivatives trading businesses worldwide. The financial markets will also scan HSBC's cost containment projects as outlined in Stuart Gulliver's June strategic review.
HSBC's capital, liquidity and efficiency ratios are stellar. The Basel Tier One capital ratio is 12 per cent. The loan/deposit ratio is 72. The cost income ratio is 60. Its valuation metrics are modest at 10.8 times forward earnings and 0.84 times price/book value. The dividend yield is five to six per cent, among the most attractive in global banking.
True, Gulliver did not unveil any silver bullets and Wall Street is sceptical that HSBC can actually achieve $5 billion in cost savings by the end of 2017, given past misses on cost targets. It is also unclear how Gulliver can boost shareholder return on equity to 10 per cent and shrink GBM assets by $130 billion at the same time.
HSBC has been in restructuring mode since 2011 but the urgency increased once pretax profits fell 17 per cent in 2014 and the bank's Swiss private banking subsidiary was ensnared in a money laundering probe. It is apparent that the stock market would applaud a HSBC exit from Mexico or even most US commercial banking. Litigation risk in the Swiss private banking scandal and the billion-dollar-plus UK bank levy will hit profits.
HSBC's intention to redeploy $200 billion assets to the Pearl River Delta, Hong Kong and Southeast Asia is problematic. The bank is exposed to the Chinese credit bubble via its ownership stake in Bank of Communications and its substantial Hong Kong/Mainland branch network. This means Asian impairments will rise in the next 12 months.
I have no warm feelings about HM Treasury's imminent privatisation of the Royal Bank of Scotland on the London Stock Exchange. If ever there was a case study of a global bank destroyed by the hubris and strategic myopia of an imperial CEO (Fred the Shred, ex-Sir Fred since Buckingham Palace revoked his knighthood), it was RBS. The Scottish bank once hailed as the hottest deal-making bank on the planet (Natwest, Citizens, Charter One, Greenwich Capital Markets, the failed epic bid for ABN Amro) was nationalised by Gordon Brown and forced to write off $148 billion in dud assets amid one of the most draconian downsizings in international finance and the virtual destruction of its investment bank. I see no credible reason to buy RBS even though the loan/deposit ratio is 100, fully-loaded Basel Tier One is 11.4 per cent and Citizens Financial will be floated on Wall Street next year. Restructuring costs and margin pressures mean RBS cannot cover its cost of capital in 2015 despite its exit from cash equities/aircraft leasing. RBS is a value trap for now.