Is HSBC Holdings plc A Bargain?

HSBC (LSE: HSBA) (NYSE: HSBC.US) is no bargain, but there are two reasons why its shares should be on the radar. First, its assets appeal to buyers. Second, it is a strong bank that can raise funds almost overnight.

Assets & Rates

While regulators insist on focussing on the liability side of banks’ balance sheets, it is the asset side that counts most.

Even tiny swings in the $2.7tn asset base of HSBC may damage the UK bank’s core capital ratios. For instance, just a 1% move down in its asset base will wipe out $27bn of capital. 

This week, HSBC sold its UK pension business to ReAssure, a Swiss Re unit, for an undisclosed sum. The business had £4.2bn of assets under management.

There are buyers out there for HSBC’s assets, and proceeds from the likely sale of other non-core operations will render HSBC a stronger bank.

More Equity?

Time and again, HSBC has proved to be a financial institution that can raise funds in extreme market conditions. Its core capital ratios offer reassurance, but should it be forced to seek $20bn to $30bn of new equity, it would have no problems. 

Uncertainty in emerging markets and dilution risk are real issues for shareholders and both weigh on HSBC’s valuation. The bulls don’t love Asia as they did only a couple of months ago.

Still, HSBC is an investment that will pay dividends. But that doesn’t mean investors should bet on it right now — its stock trades only just a tad above tangible book value.

Elsewhere

Incidentally, HSBC’s cash on hands and equivalents stand at $165.8bn. Its equity value is £117.8, or $199bn – you see what I am getting at?

HSBC has 18.9bn shares outstanding, which means that each share is valued at $10.5 and that about 83% of the value of each share is backed by cash or cash equivalents held on the balance sheet. A similar conclusion can be drawn looking at the balance sheets of other British banks.

Of course, this is just one part of the story, but HSBC has also $2.5tr of other assets to value. And its capital ratios are in good order.

The Summer Break

The problem with banks at this economic juncture is that if interest rates don’t rise, margins will not expand, and cost-cutting measures alone are unlikely contribute to value creation. And if interest rates rise too quickly, their net interest income may be greatly impacted by loan impairment charges and other provisions.

Nobody really knows how the banking system worldwide will react once interest rates in the developed word start to surge. That’s why it may be safer to wait and see how things develop, at least until after the summer break.