I used the phrase “another week, another banking scandal” so often last year that I’m embarrassed to use it again, but what choice do I have?
This week it’s the turn of HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US), once seen as the clean bank, now down and dirty as the rest of the sector, following revelations about its Swiss banking arm.
Leaked secret bank account details show HSBC helping wealthy customers dodge tax and hide millions of dollars worth of assets.
Worse, it has also been accused of providing bank accounts to international criminals and corrupt businessmen, between 2005 and 2007. Frankly, it’s a scandal.
Swiss Cheese
HSBC is facing criminal investigations in the US, France, Belgium and Argentina, and maybe even the sleepy British authorities may spring into action. Like many people I feel so jaundiced by the behaviour of the banking sector in the run-up to the financial crisis, it’s impossible to register even the semblance of surprise.
Clearly, many investors feel the same, with the share price dipping just 1.5% on Monday. Scandals are now accepted as an incidental hazard of investing in the banking sector.
Fine Time
Not everyone feels this way. Last year, ace dividend investor Neil Woodford cleared out altogether, citing fears of “fine inflation” over the repeated financial penalties banks were picking up, which have blossomed into billions of dollars.
HSBC has been here before, handing over $1.9 billion after US investigators found it guilty of laundering billions of dollars for Mexican and Colombian drugs cartels, and Saudi Arabians and Bangladeshis with terrorist ties.
When one bank gets caught out, you automatically wonder what the rest are hiding. HSBC’s Swiss operation got hacked, who knows which bank will be exposed next?
Down They Go
If you are an ethical investor, there is a clear case for ruling out Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland Group on those grounds alone.
But I reckon most investors are now immune to banking scandals, and the potential for future financial penalties is in the price.
Markets even shrugged off last week’s Standard & Poor’s downgrading of a number of UK and European banks, which saw HSBC lowered one notch to A, Barclays and Lloyds down two notches to BBB, and RBS down two to BBB-.
Investing in the big banks is an act of long-term faith for those investors who have decided to stick around.
Investors have endured spiralling capital adequacy demands, endless regulatory reviews, stress tests, lost dividends, crashing investment bank profits, the nascent threat from the UK challenger banks and a ceaseless string of scandals.
The latest scoop isn’t going to change their minds. If you were going to abandon the banks, you would have done it already. Like I have.