HSBC Holdings plc (HSBA)

A stock that I have owned for the last few years is banking conglomerate HSBC, which operates in 67 countries worldwide with Asia its largest market accounting for 45% of total revenue. The bank has over $2,500 billion assets under management globally and is the seventh largest in the world, generating reported revenue in 2018 at $53 million. The bank also delivers a strong yield of 6% that provides a good source of income generation for an investor’s portfolio. 

ASIA

As mentioned, the business generates 45% of total revenue from Asia, providing geographical diversification for investors versus UK-focused FTSE banks such as Barclays and Lloyds. Due to the global presence of the bank, the stock offers defensive qualities to investors.

Positive economic growth is also occurring in the Asia Pacific region with disposable income rising which should relate to people having more funds available to invest or save, resulting in an increase in demand for banking and investment services. As a result, countries such as China and Singapore should provide a good source of revenue for future growth.

One country that the bank has identified as an area for investment to deliver growth is Singapore, which Asia Pacific head of retail banking and wealth management Kevin Martin stating had “underperformed”.

Specifically, HSBC are looking to invest in its wealth management business to not only target onshore business but also offshore business from local Asian countries as a way to strengthen its position in key markets of China and Hong Kong. Former CEO John Flint stated that focusing on the bank’s wealth management business was key to generating future growth due to the region being home to the fastest rising individual wealth globally. 

JAWS

There are areas of concern for HSBC highlighted in its 2018 annual report. For example, jaws were down -1.2%, resulting in negative jaws for the year. This is concerning as it shows that growth is slower that rising costs, with jaws measuring the difference between cost growth versus income generation. Though the bank contributed this disappointing performance to economic conditions, the company needs to strive for positive jaws in 2019 and beyond in order to achieve sustainable growth. This will be an important challenge for the bank in the next few years.

One way in which HSBC plans to return the company back to positive jaws and meet its 2020 financial objectives is through cost reductions. For example, the bank is planning to cut hundreds of investment bank jobs in order to push down costs. 

TRADE WARS

The global battle between East and West is continuing to put downward pressure on the bank’s performance with the US and China locked in trade negotiations with tariffs threatened from both sides. As a result, investors are becoming increasingly nervous about global economic conditions.

Though HSBC earnings have not been directly influenced by any decisions as of yet, the share price has stuttered but this could cause investors to see a sharp rise once the situation is resolved. However, this seems unlikely to be anytime soon with key differences remaining between the two countries such as the protection of intellectual property.