Some investors have given up on the big UK banks altogether, and the forex scandal will only drive away more. How can banks expect to deliver a decent return on equity when they are constantly being bashed by multi-billion-dollar fines?
FTSE 100 listed HSBC Holdings (LSE: HSBA) (NYSE: HBSC.US) was one of the six banks slashed with a record £2.4bn fine. It may have emerged from the financial crisis with a relative clean bill of health, but has been enmeshed up in a string of banking scandals ever since.
Despite this, I believe it can still play an honest role in your portfolio.
School For Scandal
The big problem with investing in the banks is that you don’t know when the next scandal will strike, and how many millions or billions they will have to cough up in penalties as a result.
In the short term, this leaves their share prices vulnerable. But unless you think the regulators are determined to destroy the big banks altogether (they’re sorely tempted, believe me), the long-term case is somewhat stronger.
Reaping Dividends
If you’re a gambler, you might buy HSBC in the hope of enjoying a burst of share price growth, provided regulators lay off for a while, market sentiment improves and the global recovery picks up.
All of these hang in the balance, but one thing is certain. Today, HSBC yields a mighty 4.9%,, the outstripping the average 3.5% yield on the FTSE 100.
That is also notably higher than Barclays‘ yield, currently 2.8%, while Lloyds Banking Group and Royal Bank of Scotland Group still don’t pay any dividends at all.
Size matters
HSBC has other factors in its favour. There is no taxpayer stake to offload, it has a relatively strong balance sheet, a core tier 1 ratio of 11.2%, and access to key Asian markets.
Its global banking and commercial divisions have seen healthy revenues as well.
HSBC has plenty of challenges, including the long-running PPI saga, emerging market instability, and what top dividend investor Neil Woodford calls “fine inflation”. But it has the size and resilience to survive it all.
Betting On The Banks
Trading at just under 12 times earnings, against just over 15 for the FTSE 100 as a whole, you are getting some discount for HSBC’s troubles, of which you can expect plenty more.
But you can ignore all that if you plan to hold the stock for years, and keep reinvesting that juicy dividend for growth, all the way to retirement and beyond.