HBSC: Plain Vanilla Banking Equals Profits

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

Erin Davis 26 September, 2013 | 2:43PM
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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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
HSBC Holdings PLC414.05 GBP0.00Rating

About Author

Erin Davis  is a senior banking analyst for Morningstar.