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 (LSE: HSBA.L  ) (NYSE: 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 a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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