HSBC Analysis

HSBC Holdings Plc is a holding company that operates on behalf of the HSBC group. It offers financial and banking services through four worldwide businesses which include wealth management and retail banking, commercial banking, global Private banking and Global Banking and Markets. Its marketing segments are split into Hong Kong, Europe, Middle Asia and North Africa, Latin America and Rest of Asia Pacific.

The Wealth management and retail marketing business offers a variety of products and services towards meeting consumer finance, personal banking and wealth management requirements of each of its customers (Menuhin & McGee, n.d.). The commercial banking section offers payments and cash management, treasury and capital markets, insurance, commercial cards among other services. The global banking and markets business offers financial services to governments, institutional and corporate clients, and private investors. The global private marketing section gives services to net worth persons and families with complicated financial needs (“HSBC Holdings plc”, 2014).

The HSBC is listed on the Hong Kong, London, New York, Bermuda and Paris stock exchanges. It has dual primary listings in both Hong Kong and London and complies with the more onerous provision. It is owned by over 200,000 shareholders who are distributed in over 100 countries and territories. The HSBC has US$128 billion of shareholders’ funds and a market capitalization of over US$177.6 billion. The total assets are over US$2,350 billion and more than 128 million customers. It has over 10,000 branches in 84 countries and territories. It is regulated by 510 regulators worldwide with the UK FSA being the head regulation authority (Menuhin & McGee, n.d.).

Corporate governance

Corporate governance is the system that of direction and management in a company. It affects the setting and achievement of goals and objectives, how risks are scrutinized and analyzed and how the company optimizes its performance. Improving the corporate governance structure of a company encourages the company to create value through exploration, entrepreneurship, development and innovation and provides systems for control and accountability together with the risks involved (“HSBC Holdings plc”, 2014).

HSBC upholds high principles of corporate governance. It complies with the applicable code requirements of the UK Corporate Governance Code as directed by Financial Reporting Council; and the Hong Kong Corporate Governance Codes as put down in Appendix 14 to the rules that govern the listing of securities on the Stock Exchange of Hong Kong.

The  board in HBSC Securities has adopted a code of conduct that conforms with the Model Code in the Model Code for Securities Transactions and also with the that Model code in the Listing Rules of the FCA (“Investing in HSBC | HSBC Holdings plc”, n.d.). The waivers allowed by The Stock Exchange of Hong Kong Limited fundamentally consider acknowledged practices in the UK, especially in appreciation of worker offer plans. Following particular enquiry, every Director has affirmed that he or she has conformed to the implicit rules for transactions in HSBC Group securities as the year progressed, except on 10 January 2013, an autonomous non-executive Director discarded an interest as helpful manager in 500 units of euro-designated favored securities of €1,000 each one issued by HSBC Capital Funding (Euro 2) L.P. before giving notice. All Directors have since been reminded their commitments under the set of principles for transactions in HSBC Group Securities

Within the company, all corporate individuals are expected to display a high level of integrity, and accurate and timely disclosure of important information. They are also expected to establish high levels of accountability. The management is monitored effectively by the board. Shareholders are highly regarded and equitably treated. The company also employs key business values (“HSBC Holdings plc”, 2014).

The Key business values of HBSC are meant to improve the performance of the company and the respect the company commands in the face of all its shareholders. First, the company utilizes high personal levels of integrity at all ranks. Everyone is also expected to be committed to truthfulness and fairness in their dealings. The company also shows a minimum bureaucracy (“Investing in HSBC | HSBC Holdings plc”, n.d.). The company commits to make and implement decisions fast. All individuals put the interests of the team ahead of those of an individual. Authority in the company is delegated according to the accountability of the individual. This way, only accountable personnel get a chance to the highest level of decision making. It is also in the principles of the company to communicate and put down principles in instruction manuals. Approval of matters by committees is minimally used to reduce the time of reaction. They also commit to comply with the spirit and letter of all rules and regulations wherever business is conducted. The company makes everyone within its workforce to understand that reputation is essential for company growth. To get a good reputation, they often employ integrity. In the company, they understand that while it takes years to build, a good reputation is very easy to lose and therefore avoid engaging in fraudulent activities.

The company has principles which are founded on an outstanding customer service, effective and efficient operations, strong capital and liquidity and a discreet lending policy. Discipline is highly regarded.

Separation between ownership and management

Often, the goals set by managers and owners conflict. Managers pursue short term goals while owners prefer long-term goals. This is because managers are often assessed on short-term goals. Long-term goals on the other hand are more likely to be profitable for the company in the long run (“Investing in HSBC | HSBC Holdings plc”, n.d.). When a company sets long term goals, it is more likely to produce quality products and hence maintain its customer base. A good customer base is a vital ingredient for company performance. There is therefore a divide between what managers want and what shareholders want. To handle this separation, several strategies are enacted at the HSBC.

First, the company elects a board of directors which is expected to make decisions in favor of adding value to the company. The board of directors is elected by shareholder by order of shares held. It is expected to approve operating and capital plans presented by management board for the achievement of strategic objectives. There also exist a number of non-executive Directors who are expected to give an outside perspective. They are not supposed to be company employees or to participate in the daily activities of the company. Non-executive directors scrutinize the performance of the management in their delivery upon agreed goals and objectives. They monitor the risk profile of the company and the performance report (“Investing in HSBC | HSBC Holdings plc”, n.d.).

To maximize the efforts of every Director, the directors are independent. This way, no director dominates the decision making process. The Directors are also equal before the company and are re-elected annually by the shareholders. Every one of them is also expected to serve a maximum of nine years with few exceptions upon request by either the request of the board or the shareholders.

HSBC’s performance using the First Quarter 2014 financial statement

The bank recorded a pretax profit of US$6.8 billion in the first quarter of 2014 which is US$1.6billion or 20% lesser than in the first quarter of 2013. The profits of the first quarter of 2013 were however inflated by a US$1.1billion boost from the reclassification of Industrial bank section of the company into financial investments. Profit before tax on an underlying basis was reported to be US1.0billion or 13% lower than it was in the first quarter of 2013.

A revenue of US15.9billion was reported in the first quarter of 2014 which was US$2.5billion lesser than the first quarter of 2013. This reflected lower gains or a net loss from reclassifications and disposals.

Compared to the fourth quarter of 2013, the bank reported a pretax profit which was higher by US$2.8 or 71% compared to US$1.0 billion in the third quarter of 2013. This was despite the disposal of the Panama operations which occurred in the last quarter of 2013. The company made a pretax profit higher by 89% on an underlying basis reflecting higher revenues and lower operating costs. The bank also reported a 5% revenue rise and a 7% revenue rise on an underlying basis (“Investing in HSBC | HSBC Holdings plc”, n.d.).

Barclays Bank, another International UK based banking institution also had negative results. According to the first quarter report, the collapse of the investment bank that had arisen from risky investments had caused the slump in profits. A drop in the fixed income had caused a decrease in the pretax profits. The institution showed a 5% drop from £1.82 billion to £1.69 billion. However, it should be noted that amid the negative impact of poor business activities at Barclays, it showed a much smaller drop in profits compared to HSBC (“Investing in HSBC | HSBC Holdings plc”, n.d.).

Another International Banking institution is the Co-operative Bank. The bank reportedly saw the year 2013 as its hardest yet. Amongst its woes, the bank lost a customer base of at least 300,000 customers. The Co-operative group which initially controlled 75 % of the company lost its interest in the company to 30%. The bank in the same year saw a loss before tax of 13% and had a change in governance.

The above reports show a major shake-up in the UK banking industry. Most of the UK banking institutions have shown major financial problems in the past few years (Fabbro & Hack, 2011). The HSBC’s drop in profits is a far better scenario compared to Co-operative bank. It is however something that still needs to be looked at. It has affected the bank’s image a lot creating shareholder erosion and a consequent drop ion share prices.

HSBC risk profile

HSBC is a good investment for those looking for long-term investments. Regardless of its low profits, the institution is showing good performance at the stock market as well as financially. The bank however has a few down turns that make it a poor destination as far as investment is concerned. First, the bank was involved in triggering the global recession of 2009. In the last one year the Judiciary has been cracking down on institutions that participated in unhealthy lending systems that were majorly to blame for the recession. The Judiciary has in the process nabbed Citigroup and JP Morgan have been charged $7 billion and $13billion respectively. By association, HSBC risks paying up to $10 billion in fines.

It is also feared the Chinese debt crisis might burst. China is a good destination for banks that have intentions in investing in loans. The Chinese market has however exceeded the reasonable expectations in the recent past. This is causing a risk in those banks that are operating in the region (Kapoor, Hillman, & Spratt, 2007). One such bank is HBSC. Regardless of the fact that HBSC acknowledges the fact that China’s debt has risen beyond the margin, it continues to offer loans to the Chinese population. This could cause both unnecessary risks and fears and investors. The risk of investing in such markets could both contribute to a drop in share prices.

Internally, the bank allows a risk factor of up to the FSA minimum capital. This implies that the bank only risks the amount of money it is able to cover without destabilizing its operations. The risk factors are however still high to the effect of lowering company value and subsequently lowering shareholder value. The main sources of risk are market risk and credit risk (“Investing in HSBC | HSBC Holdings plc”, n.d.).

Other factors however highly reduce the risk attributed to investing in HSBC. First, compared to Standard Chartered Plc, since the beginning of 2012, the bank has been performing better than Standard Chartered by more than 40%. Standard Chartered has always been a preferred share option by major investors due to its high returns. However, since it accepted to having broken sanctions against Iran, it has undergone massive shareholder erosion. In return, the investors have been running to HSBC. This is the other viable destination after standard Chartered especially for investors interested in banks that are in the Asian market.

The history of HSBC shows that its dividends have been growing over the years. While the company has struggled over the years to manage its operations, it has ensured a gradual increase in the dividend value. HSBC has also ensured a gradual growth in the past amid the volatile economic situation. The bank mainly benefits from its role in the Asian market. The bank obtains over 70% of its profits in the Asian market. For this reason, person’s investing in the financial sector and considering HSBC should be observant of the economy of Asia. In the meantime though, Asia has a promising growth as most businesses are heading east. For that reason, HSBC still remains a viable destination for investment.

Capital structure of HSBC

Basel Committee (2006) requires individual UK banks to have a total capital of 8%. This comprises of tier 1 and tier 2. It is also required that at least 4% of this ratio be core tier 1.  With this in mind, HBSC strives to ensure that it is ahead of the requirements set out by regulation authorities. By the end of 2012, the bank had set out a core tier 1 ratio of 12.3%, a tier 1 capital of 13.4% and a total regulatory capital of 16.1%. With such arrangements, the bank is sure that it will be able to meet the requirements set out by the regulators. The end of 2013, saw the government with a core tier 1 capital of 12.9%, tier 1 capital of 14.3 % and total regulatory capital of 17.2%. The company has been able to plan towards the regulatory requirements and by so doing the company is very likely to meet future regulations without having to make major changes in their funds (“Investing in HSBC | HSBC Holdings plc”, n.d.).

Engagements in partners are value accounted in the budgetary bookkeeping consolidation, although their exposures are relatively combined for administrative purposes. Subsidiaries and partners occupied with insurance and non-monetary exercises are avoided from the administrative consolidation and removed from administrative capital. The administrative consolidation does exclude Special Purpose Entities (SPEs) where huge risks have been transferred to third parties (Kapoor, Hillman, & Spratt, 2007). Exposures to these SPEs are risk weighted as securitisation positions for administrative purposes. Elements in interest of which the premise of union for financial bookkeeping purposes varies from that used for administrative purposes is usually well documented in the final end of year report (“HSBC Holdings plc”, 2014).

In case of eventualities, there are many possible sources of funds that the bank can utilize. The bank however ensures that the source of funds selected is the most efficient to ensure it does not get into problems in its attempts to repay.

First, the bank could invest in securities and equities. This method uses the most secure way for huge institutions to obtain funds. The bank is then able to maintain a steady source of income for it to use. This is however a not a reliable source of funds (Fabbro & Hack, 2011).

The most reliable source of funds for banks is deposits. The bank is allowed within certain limits to use funds that are deposited by customers for investment. Usually, regulatory authorities limit the amount of funds to be used by using the capital ratio of the company. A company like HBSC is able to obtain more allowance to use the funds due to its higher capital ratio (Hui, 2008).

Alternatively, the bank may sell rights to its shareholders. Rights are later converted to shares for its shareholders while the bank ensures that it remains with a reasonable stake of the company. In 2012, the bank escaped using this method by a whisker. This was especially amid the global financial crisis which the company contributed to its contribution (“Investing in HSBC | HSBC Holdings plc”, n.d.).

Finally, the company can obtain funding through short term and long term wholesale debts. These source of funding has however been undergoing a lot of change which has resulted from regulatory authorities and banks alike due to their risk and market pressures. Banks worldwide have instead opted to increase their use of long term debts and deposits as their major sources of income (Hui, 2008).

Finally, in the most extreme of situations, banks may opt to request the government to bail them out. The 2009–2010 recession is one such cases. During the recession, the government saw the need to intervene and provided funds for banks. The government however intervenes for economic reasons. It understands that fail to bail a bank out implies that banks may have to go down with lots of funds that belong to clients. Banks may also go down and in the event cause other economic effects like higher unemployment rates and fewer start ups.

In conclusion, HBSC is one of the leading banks especially in market capitalisation. It bears an advantage of having withstood the economic crisis hence commanding a higher consumer trust. The financial institution has had a few difficulties along the way that have originated from the economic situation in the world. The bank went through the economic crisis gracefully due to the fact that over 70 % of its profits come from Asia. Since the crisis was most prevalent in the west countries, it was at a better situation to negotiate its way through the recessions (“HSBC Holdings plc”, 2014). The bank has a few problems that may lead to its downfall. These include, a risk of investing the Chinese market massively at a point when the economy risks bursting. The bank has also suffered from lack a slight hitch in its share value. The bank’s involvement in the initiation of the recent financial crisis is likely to cause problems for its shareholders as it risks being fined up to $10 billion. However, compared to other UK based banks, the bank remains one of the best performing banks.

References

Fabbro, D., & Hack, M. (2011). RBA: Bulletin March Quarter 2011-The Effects of Funding Costs and Risk on Banks’ Lending Rates. Retrieved July 26, 2014, from http://www.rba.gov.au/publications/bulletin/2011/mar/6.html

HSBC Holdings plc. (2014). Annual Report and Accounts 2013.

Hui, F. C. (2008). “One bank, two cultural identities”: a case study of Chinese and British influence on the financial practices of HSBC bank.

Investing in HSBC | HSBC Holdings plc. (n.d.). Retrieved July 26, 2014, from http://www.hsbc.com/investor-relations/investing-in-hsbc

Kapoor, S., Hillman, D., & Spratt, S. (2007). Taking the Next Step – Implementing a Currency Transaction Development Levy.

Menuhin, J., & McGee, J. (0). STRATEGIZING ROUTINES IN HSBC (UK).