Should I Buy HSBC?


LONDON -- It's a major high-street bank, but it didn't need a bailout from the taxpayer. It yields a generous 4.1%, while partly state-owned rivals Lloyds Banking Group and Royal Bank of Scotland pay no dividend at all (and even Barclays can only muster 2.5%). Its share price is down a mere 9% since the financial crisis, whereas Lloyds and RBS are down 90%. It has low exposure to troubled Europe but a big footprint in emerging giant China. It's HSBC (ISE: HSBA.L) (NYS: HBC) , of course, and the question today is: Should I buy it?

Fine times
The U.K.'s biggest bank isn't pure as the driven snow. It's under investigation by U.S. regulators for laundering money and has set aside at least $700 million to settle resulting fines. It has been sucked into the LIBOR-fixing scandal, has been shelling out huge sums in compensation for mis-sold payment protection insurance, or PPI, and has been accused of mis-selling interest rate swaps.

Well, it is a bank, after all.

Good bank, bad debts
But HSBC has plenty in its favor. Its half-year results, published in July, were positive. Its pre-tax profit rose 11% to $12.7 billion, beating estimates, while underlying revenue grew 4%. Its bad debts fell to $4.53 billion, down from $6.53 billion in the same period last year. HSBC grew strongly in emerging markets, and its investment-banking arm also grew. Better still, its financial strength and capital cushion also improved.

Par for the course
On the downside, it had to set aside $1.3 billion for PPI mis-selling, and worries remain over future penalties for the LIBOR scandal and interest rate swap scandals. Earnings per share declined 12%. Management was cautious about the future, particularly regarding the eurozone and anticipated "sub-par growth this year and next" in the U.S. But HSBC's global reach gives it plenty of protection against troubles on the home front, whether cash-strapped consumers or over-pushy regulators (it can always throw its weight around and threaten to quit the U.K. again).

Best of the baddies
The HSBC share price is up a handy 21% this year, as the autumn banking-stock rally pushed the shares to a 12-month high. That 4.1% dividend is covered 2.2 times. It trades on a forecast price-to-earnings ratio of 10.7 for December 2012. Speculators may prefer Lloyds or RBS, but solid, long-term investors will feel safer with HSBC -- and they'll feel richer when those dividends start rolling in. Most people see banks as a bad bunch these days, but HSBC looks like the best of them.

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Harvey owns shares in RBS. He doesn't hold any other company mentioned in this article. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.

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