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Being the world’s local bank takes determination: HSBC’s six branches in Lebanon were open for business on Monday. It is, however, a strategy that delivers outstanding growth. HSBC’s organic revenues rose 14 per cent in the first half of 2006 compared with last year. Growth has accelerated steadily since 2002 and clearly exceeds that of Citigroup, still the only real peer in terms of geographic scope. Even excluding its investment bank, revived after a period of heavy investment, HSBC’s organic growth was 11 per cent.
Not that a stodgy rating of 12 times prospective earnings would suggest this. Market concerns revolve around two risks. The first is Household in the US. The acquisition of the sub-prime lender in 2003 can now be judged as a definitive success: UBS estimates the purchase price equates to just five times this year’s earnings. Nonetheless some UK investors still harbour apocalyptic visions of uncreditworthy Americans defaulting as soon as their economy slows down.
This is possible but its financial impact can be overstated. The current annual impairment of Household’s loan book stands at about 2.7 per cent. Were this to rise to its worst level in the past decade of 4.5 per cent, HSBC group profits would fall by 11 per cent – bad but not disastrous.
That leaves the second risk: big acquisitions. With a conservative balance sheet, and declining dividend payout ratio, HSBC certainly has the capacity. It seems far less obvious that it has the inclination. Its outstanding acquisitions – Hang Seng Bank in 1965, Midland Bank in 1992 and Household – were contrarian bets on partly distressed assets. That no such opportunities are judged to exist now says much about both HSBC’s intelligent culture and the wisdom of those peers who are prepared to brandish their cheque books at the top of the cycle.
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