Bank On HSBC Holdings (NYSE: HBC) and the Asian Equation

by Tony D’Altorio, Investment U Research
November 4, 2009

“Go west, young man, go west!”

Written by Indiana journalist John Soule in 1851 and popularized by New York Tribune founder Horace Greeley the same year, that now-famous saying advised people to take advantage of the rapid growth in the United States as the country expanded westward across the North American continent.

If those visionaries could see the global picture today, I’m sure they would say something more along the lines of, “Go east, investors, go east!” instead. But since they can’t, global banking giant HSBC Holdings (NYSE: HBC) is saying it for them.

The company began operations in Hong Kong and Shanghai, financing trade between China and Europe under the name of Hong Kong Shanghai Banking Corporation.

Today, HSBC operates in 86 countries around the world with 55% of its assets in Europe, 23% in the Asia-Pacific region, 26% in North America and 4% in Latin America.

And while the global financial crisis has traumatized banks everywhere, HSBC has managed to emerge from it all in relatively better shape, largely due to its geographic diversification, strong balance sheet and disciplined credit.

Three Reasons Why HSBC Has An Edge On Its Competition

Unlike many of its American peers, HSBC remains a deposit-led bank, with over $1.1 trillion in deposits from over 125 million retail customers. It also has a loan-to-deposit ratio of 79.5%, meaning that it takes in more than it lends out.

As if that isn’t enough, HSBC has raised $20 billion in capital this year to bring its Tier 1 capital to an impressive 10.1%, while also cleaning up its problem loan areas. Mainly located in its U.S. unit, Household Finance, those loan loss provisions are set to decrease throughout 2010 and beyond and settle at a low of 1.1% within a couple of years.

All told, HSBC has an edge that its competition just can’t match. But HSBC shareholders are a demanding bunch…

HSBC Returns to its Roots

They want the bank to return to its Asian roots, which means transitioning out of Western markets… especially the United States.

Sounds like a bold move… but it’s a strategy that makes sense. Hong Kong and China accounted for 40% of HSBC’s pre-tax profits over the first half of the year. And within a few years, that number will rise to 50%.

HSBC appears to agree with its shareholders: It’s already begun putting a new growth strategy into action, one that includes downsizing its business in the beleaguered U.S. and other slow-growth countries in favor of emerging markets.

And as proof of its commitment to developing nations, CEO Michael Geoghegan recently announced that the firm will relocate from London to Hong Kong. In his words, “To drive the Asian growth, you’ve got to be here. This is a move from west to east and it’s centered in Hong Kong, which is the gateway to China and the dominant financial center in Asia.”

That also explains why it wants to become the first foreign company listed on the Shanghai stock exchange and why it’s entered negotiations with two troubled financials – the Royal Bank of Scotland (NYSE: RBS) and ING (NYSE: ING) – to acquire their Asian assets.

Further detailing his intentions, Geoghegan said: “We want to re-emphasize that we’re number one in Hong Kong and we’re going to grow from that position as the region grows. Our Asian business is going to be the dominant part of our business in the future.”

He has good reason to claim that, given that global trends keep shifting trade and investment from west to east. But while most financials pay lip service to Asian growth, HSBC is actually doing something about it.

As this very well managed and strong bank expands even further into emerging markets, consider adding HSBC to your portfolio and joining it for the ride.

Good investing,

Tony D’Altorio

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