1 Bank Stock Investors Should Avoid at All Costs

Warning sign investing

Tim Phillips

September 8, 2022

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For Singapore investors, the big three bank stocks in Singapore are reliable. They provide a number of advantages to those looking for investment returns.

They pay dividends. They’re stable. They benefit from rising interest rates. So, naturally, investors are looking at other big Asian banks in the region.

Recently, one popular choice that’s been mentioned is Hong Kong banking behemoth HSBC Holdings plc (SEHK: 5). It’s big, pays dividends and has a sizeable presence in both Asia and Europe.

Surely, then, it would stand to benefit from rising interest rates just like the local Singapore banks. There might be some truth in that.

But HSBC also has many deeply-entrenched issues that make it one banking stock investors need to avoid. Here’s why.

Geopolitical issues

Recently, HSBC has made the headlines. That’s because its largest shareholder – Ping An Insurance Group Co of China Ltd (SEHK: 2318) – has called for the banking giant to be broken into two.

This would see its Hong Kong and Asian operations – its major profit centre – break away from the European and global business.

Ping An sees a breakup of HSBC releasing US$8 billion of capital and creating between US$25-35 billion in additional market value.

Besides the business reasons for proposing this split (Asia contributed nearly 70% of HSBC’s H1 2022 profit), the bank has been buffeted by geopolitical headwinds.

As a bank with colonial roots in Hong Kong, it has been a target of criticism from both UK Members of Parliament (MPs) and the Chinese Communist Party (CCP) in recent years as geopolitical tensions rise.

Caught in this political tug-of-war means that HSBC will be severely hamstrung in its current form to make headway in the much-touted growth engine of the “Greater Bay Area” in Southern China.

Problems with its size and poor returns

In addition to that, HSBC has (for years) struggled with its enormous absolute size and inability to control costs accordingly.

This can be seen it the sprawling nature of HSBC. Still operating in 64 countries globally, the bank at one point in the past decade was present in 88 different countries.

Unsurprisingly, the cost structure has ballooned. Whereas most banks run a cost-income ratio of between 30-50%, HSBC saw its cost-income ratio hit 64% in its latest H1 2022 earnings.

It’s rarely been in the 50-60% range and the bank’s management – despite saying it’s aiming to control costs – hasn’t really backed up that rhetoric with concrete results.

The fact that HSBC is guiding for a Return on Tangible Equity (RoTE) of 12% from FY2023 onwards, which would be its highest in a decade, is a sign of how dire the business is.

For banks in Singapore, for example, something like a DBS Group Holdings Ltd (SGX: D05) saw a RoE of 13.4% in its second quarter of 2022.

For most of the past decade, HSBC’s RoTE has been in the mid- to high-single digit percentage range. That’s a poor utilisation of capital by a bank the size of HSBC.

Ever since hitting an all-time high of around HK$150 in the mid-2000s, HSBC’s Hong Kong-listed shares now sit at HK$48.

Dividends for HSBC have been sorely lacking

Prior to HSBC’s dividend suspension amid the height of the Covid-19 pandemic, the bank hadn’t raised its dividend since 2015.

Meanwhile, its dividend – which used to be paid out four times a year – was cut to twice a year amid the pandemic.

Being subject to UK regulators irked a lot of dividend shareholders in Hong Kong, many of whom are elderly and rely on the shares for tax-free dividend income.

The dividend cut, and unpredictability, added to the woes of the supposed “world’s local bank”.

While its one-time rival Citigroup Inc (NYSE: C) has been paring back exposure to countries at a faster pace, HSBC has been slow to move.

In an age of deglobalisation, though, HSBC looks like it will get the “worst of both worlds”. For that reason, and much more, HSBC is one stock that all investors should avoid.

Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips owns shares of DBS Group Holdings Ltd.

About the Author: Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth. He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer. In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.