HSBC: Banking to a Different Set of Rules Reaps Dividends and Stability

HSBC is different from other banks. For a start, it sees nothing wrong in handing a £2m bonus to the boss in a year in which the bank took a record-breaking fine of £1.2bn in the US for money-laundering and sanctions breaches.

Chief executive Stuart Gulliver, it should be said, was well away from the bank's main board when the offences were taking place (mainly 2004-10). All the same, you might have expected the "balanced scorecard" approach to directors' bonuses at HSBC to be suspended for a year to underline corporate penitence. After all, on any sober calculation of relative sins, HSBC's dealings with Mexican drug bandits were surely several leagues more serious than other banks' Libor-rigging scandals.

The absence of uproar may be related to the other way in which HSBC is different: it is well-capitalised, pays a proper dividend to shareholders and is close to earning returns in excess of the cost of shareholders' equity.

On capital, HSBC will soon be at 10.3% on the Basel committee's more stringent definition of tier 1 capital, which is within touching distance of the demand for 10.5% by 2019.

Last year's dividend was raised 11% and a 10% increase for the first nine months of this year was pre-announced on Monday. It means dividends are now about 65% of the pre-crisis level of 2007 and the yield on the shares is now almost 4.5%. Very few banks can make similar boasts. Incidentally, for Gulliver, with a personal shareholding worth £33m after years of service in the investment banking division, the 2012 dividend is worth £1.5m.

Return on equity fell to 8.4% from 10.9%. The mad accounting rules of valuing the bank's own debt were partly to blame (improvements in credit valuations force banks to take a hit to profits) and the various fines and mis-selling charges also played a significant role. But, assuming those whacks aren't repeated, a proper economic profit lies around the next corner. All it should require is a continuation of last year's growth in underlying revenues (7%) and a tighter grip on costs, an area where Gulliver scored zero on his performance scorecard.

The big picture, then, at HSBC is straightforward: the bank is enjoying beautiful trading conditions in the Far East while the west, especially the US and Europe, is a drag. Given that the former is so much bigger than the latter, the ship moves on. Add an extra kicker for clearing out small and sub-par units, and the bank is now a model of stability again.

Just imagine how good things could have been for shareholders without the appalling 2003 acquisition of US sub-prime lender Household and the disgraceful money-laundering episode. HSBC could have been an exciting growth story, rather than an illustration of strength through diversity.

Powered by article was written by Nils Pratley, for on Monday 4th March 2013 18.22 Europe/London © Guardian News and Media Limited 2010


image: © Howard Lake

JefferiesAnd the Best Place to Work in the global financial markets 2017 is...

Register for Financial Markets News Alerts