Today I am highlighting what you need to know before investing in HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US).
Excessive asset sales undermine growth prospects
Like all of the world’s major banking houses, HSBC has undertaken a programme of aggressive streamlining following the 2008/2009 financial crisis, repairing its balance sheet and reducing its risk profile.
The firm has sold part of its banking businesses in India in the last four months, as well as some of its corporate and retail operations in the Cayman Islands.
However, these measures have led many to speculate whether the scale of asset divestments is severely undermining the firm’s long-term growth prospects. On top of this, the rapid downscaling of the group is also leaving it increasingly-reliant upon other fragile divisions to get shareholder returns rolling higher.
As broker Investec points out, this “rationalisation of ‘non-strategic’ businesses has left the group increasingly reliant on the contribution from its Global Banking & Markets [division]”.
This unit is responsible for 40% of pre-tax profits alone, and with growth also evaporating in Commercial Banking and Retail Banking & Wealth Management arms due to the aforementioned divestments and poor loan growth, HSBC seems to be backing itself into a corner.
Following on from Global Banking & Markets’ 11% revenues slide during January-March, to $5.2bn — a result which pushed group turnover 14% lower to $15.9bn — Investec expects the division to follow this up with a further 10% decline during the second quarter, results for which are due on Monday, August 4.
Groundhog day for the legal team
On top of these worries, HSBC also faces the problem of fresh courtroom upheaval in the coming months and years.
From accusations of having mis-sold payment protection insurance (PPI) in the UK on a massive scale, through to being castigated by the US Senate for doing business with rogue states including Iran and North Korea, the bank is no stranger to falling out with regulators across the globe.
Next month’s financial update will give fresh news over whether the firm will have to give its allocated reserves for PPI compensation, which already stands in excess of £2bn, a fresh shot in the arm.
But the firm is also being investigated into the fixing of the global foreign exchange markets, while just this week the institution was accused in a US courtroom of rigging the price of trillions of dollars worth of silver along with Deutsche Bank and Bank of Nova Scotia. With the treadmill of misconduct accusations on a seemingly never-ending loop, investors should be braced for a fresh wave of hits on the balance sheet.