Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



What These Ratios Tell Us About HSBC Holdings

LONDON -- Before I decide whether to buy a bank's shares, I always like to look at its return on equity and its core tier 1 capital ratio.

These core financial ratios provide an indication of how successful a bank is at generating profits using shareholders' funds, and of how strong its finances are. As a result, both ratios can have a strong influence on dividend payments and share price growth.

Today, I'm going to take a look at the FTSE 100's largest bank, HSBC Holdings  (LSE: HSBA  ) (NYSE: HSBC  ) , to see how attractive it looks on these two measures.

Return on equity
The return a company generates on its shareholders' funds is known as return on equity, or ROE. Return on equity can be calculated by dividing a company's annual earnings by its equity (i.e., the difference between its total assets and its total liabilities) and is expressed as a percentage.

HSBC's share price has risen by 26% in the last year, and the shares have a generous trailing yield of 4.3%. Let's take a look at HSBC's return on equity since 2008:

HSBC 2008 2009 2010 2011 2012 Average
ROE 5% 5% 9.2% 10.6% 8.1% 7.6%

HSBC's high single-digit average ROE is not bad for a £126-billion company, but ROE figures are most useful for comparing similar businesses, so let's look at some of HSBC's peers.

HSBC vs the competition
HSBC's big strength is its large presence in key emerging markets, particularly in Asia. The bank's only real U.K.-listed peer for emerging markets is Standard Chartered, but HSBC has a much bigger U.K. business, so I've also included Barclays:

Company Core Tier 1
Capital Ratio
Average ROE
Barclays 11% 6%
HSBC 12.7% 7.6%
Standard Chartered 11.7% 12.8%

HSBC's ROE is lower than its smaller peer Standard Chartered, but HSBC's core tier 1 capital ratio, which compares the value of a bank's retained profits and equity with its loan book, is stronger than either of its peers.

Indeed, HSBC's cash position is so strong that city analysts are predicting dividend increases of at least 10% in 2013 and 2014, as HSBC seeks to return cash to shareholders.

Is HSBC a buy?
I would never buy a share based on analysts' forecasts alone, but as an existing HSBC shareholder, I'm happy that my bank has the highest core tier 1 capital ratio of all listed U.K. banks, and that its cash balance -- which has grown from $31 billion in 2007 to $148 billion in 2012 -- is so robust.

I also like HSBC's above-average yield and emerging market strength, and believe that HSBC remains an attractive income buy.

Finding market-beating returns
Finding shares that can beat the market over a long period is hard, but if you already hold HSBC's stock, then you might be interested in learning about five star shares that have been identified by the Fool's team of analysts as "5 Shares to Retire On."

I own three of the shares featured in this free report, and I don't mind admitting they are among the most successful investments I've ever made.

To find out the identity of these five companies, click here to download your copy of this report now, while it's still available.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2493537, ~/Articles/ArticleHandler.aspx, 9/29/2016 6:24:21 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 8 hours ago Sponsored by:
DOW 18,339.24 110.94 0.61%
S&P 500 2,171.37 11.44 0.53%
NASD 5,318.55 12.84 0.24%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/29/2016 6:09 AM
HSBA $576.30 Up +4.70 +0.82%
HSBC Holdings CAPS Rating: No stars
HSBC $37.43 Down -0.16 -0.43%
HSBC Holdings CAPS Rating: **