We see much to admire about 
HSBC (HSBA). Its massive footprint allows it to offer services to global customers that few financial institutions can match. We think HSBC's past focus on reach led it to make disastrous acquisitions and to build nonstrategic operations, and we're pleased that its reorganization, begun in 2011, is aimed at refocusing on the sources of its narrow moat - its ability to provide global financial services to corporate customers and its footprint in fast-growing markets. We think the streamlined strategy will free up capital to fuel growth in emerging markets, while helping management to cut fat out of its operations.
HSBC traces its roots to 1865, when it was formed to facilitate trade between China and Europe. It has since become a dominant force in global banking. It is the world's largest deposit taker, with more than $1.3 trillion in customer deposits, and serves more than 100 million retail and 3 million corporate customers. Much of this growth was driven by acquisitions. HSBC became a major competitor in continental Europe in 2000, when it acquired France's Credit Commercial, and in the U.S. mortgage market in 2002, when it acquired Household. HSBC is now focused on growing in emerging markets, which we think will deliver highly profitable growth for years to come.
HSBC's stumble with Household, which suffered deep losses in the U.S. mortgage crisis and was shuttered in 2009, demonstrates the inherent difficulty in managing disparate operations. When HSBC acquired Household in 2002, it trumpeted the latter firm's risk-modeling systems. As it turned out, HSBC placed too much faith in its newly acquired expertise and failed to adequately supervise its U.S. managers. It has since admitted that the acquisition was a mistake - and a very costly one at that.
While we remain concerned about whether HSBC is too big to manage effectively, we're comforted by the bank's focus on plain-vanilla corporate and retail banking. We're also optimistic that HSBC's solid foothold in fast-growing markets in Asia and Latin America will allow the firm to post growing profits while many of its European peers stagnate.
We think HSBC has a narrow edge over its competitors. It is one of the world's five largest banks, operating large business and retail banks in the United Kingdom as well as the largest bank in Hong Kong. It aims to be "The World's Largest Local Bank" and is focusing on expanding in fast-growing emerging markets and on serving customers in mature markets that value HSBC's global reach. The value of HSBC's broad reach was clearly demonstrated by its performance in the ongoing credit market turmoil, during which HSBC has suffered considerably less damage than most of its competitors. Excepting the global financial crisis and other unusual items, HSBC consistently earns returns above its estimated 12% cost of equity despite employing significantly lower leverage than most global banks.
HSBC, the world's largest banking group, owes its stable moat to its global business banking network, which offers customers access to services and geographies that no other one bank can match. We think it would be very difficult for a competitor to build up a competing network in order to displace HSBC, especially in Asia, and we think HSBC may even gain share as competitors retrench. At the same time, we think that HSBC, as the reigning champion, will be under constant pressure from smaller, more nimble competitors.
HSBC is exposed to nearly every economy in the world, and the global slowdown has negatively affected its results. Now that bad-debt charges in personal finance, especially in North America, are subsiding, our gaze is turning toward Asia, where competition is intensifying and compensation costs are rising. We're also worried about the ongoing recession in Europe and the possibility that low growth there could cause European income to stagnate. HSBC's far-flung network can make the bank difficult to manage; the acquisition of Household is an example of how slip-ups can cause huge losses.
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