I’m working my way through the latest annual reports of your favourite FTSE 100 companies, looking for insights into their businesses. Today, it’s the turn of HSBC Holdings (LSE: HSBA) (NYSE: HBC.US).
Executive pay
Bankers’ pay continues to be a hot potato, so I made a beeline for the remuneration section of HSBC’s annual report. I learned that chief executive Stuart Gulliver’s base salary for the year was £1.25m and his total remuneration amounted to £7.43m.
I can tell you that Gulliver has the highest base salary of the UK’s big five bank bosses, and that his total remuneration for the year was over one-and-a-half times that of his nearest rival, Peter Sands of Standard Chartered. HSBC is the Footsie’s biggest bank, for sure, but is Gulliver worth so much more than Sands and the bosses of Lloyds, Barclays and Royal Bank of Scotland?
Employee costs
Sticking with pay, I was interested to learn about employee costs with reference to HSBC’s claim that: “Progress in managing costs to reflect a lower economic growth environment in developed markets was encouraging”.
The tables below show that whatever progress is being made didn’t extend to employee costs in the major developed market of Europe.
| Europe | 2010 | 2011 | 2012 |
|---|---|---|---|
| Net operating income* ($bn) | 22.75 | 24.25 | 17.61 |
| Employee costs ($bn) | 7.88 | 7.62 | 8.07 |
| Employee costs as % of net operating income | 35 | 31 | 46 |
* Before loan impairment charges and other credit risk provisions
| Rest of world | 2010 | 2011 | 2012 |
|---|---|---|---|
| Net operating income* ($bn) | 48.62 | 51.45 | 54.08 |
| Employee costs ($bn) | 11.96 | 13.55 | 12.42 |
| Employee costs as % of net operating income | 25 | 26 | 23 |
* Before loan impairment charges and other credit risk provisions
As you can see, employee costs relative to net operating income have been significantly more onerous in Europe than in the rest of the world over the last three years.
Furthermore, European employee costs as a percentage of income deteriorated markedly during 2012. While Europe contributed 25% to HSBC’s total income, the region was responsible for 40% of total employee costs.
Geographical diversification
The Europe/Rest of World division I used to look at employee costs doesn’t give full credit to HSBC’s geographical breadth.
| Europe | Hong Kong | Rest of Asia Pacific |
Middle East & North Africa |
North America | Latin America | |
|---|---|---|---|---|---|---|
| Net operating income* ($bn) | 17.61 | 12.42 | 13.58 | 2.43 | 14.69 | 10.95 |
| % of total net operating income | 25 | 17 | 19 | 3 | 20 | 15 |
* Before loan impairment charges and other credit risk provisions
I can tell you that HSBC is the only one of the Footsie’s big five banks that is a truly global business. This level of geographical diversification means HSBC is uniquely positioned to weather any regional-specific storm or spell of low economic growth.
What of the investment case? In my view, the clincher in favour of HSBC is a value earnings rating and high income at the current share price of 695p. HSBC is trading on 11.4 times this year’s forecast earnings versus the FTSE 100 average of 16.7, and offers a dividend yield of 4.7% compared with a 3.2% market average.