12/15/2009 3:02 pm EST


Jim Jubak

Founder and Editor,

This bank got its clock cleaned in the U.S. mortgage crisis. HSBC (HBC) spent $15 billion in 2003 to buy Household International in order to enter the U.S. mortgage market. The timing of that deal was just right so that write downs were about the same as what HSBC had paid to acquire the company.  The math of that deal turned into paying $15 billion to buy $15 billion in losses.

But there are advantages to things going so terribly wrong. It you survive—and the bank did rebuild its capital by raising $17.7 billion through a stock offering in April—you have good reason to examine your strategy from top to bottom. In the case of HSBC that resulted in the bank’s decision to return to its Asian roots. HSBC CEO Michael Geoghegan has announced that he will be moving his office to Hong Kong from London. That looks likely to be the key that unlocks a stock offering in China for HSBC, making the bank one of the first non-Chinese companies to list and raise money on a Chinese exchange.

At the end of 2008 Hong Kong and the rest of Asia accounted for 26% of the bank’s assets. That percentage will climb as HSBC’s China business grows and as HSBC takes advantage of troubles at competitors to pick up Asian assets. HSBC has emerged as the front runner to buy the assets of troubled Royal Bank of Scotland (RBS) in China (13 branches), India (28 branches), and Malaysia.

With the Chinese economy set to return to 10% economic growth in 2010—how sustainable that is for the long term is another story—and with Chinese exports likely to return to growth next quarter (see my posts and ), owning a bank that owns an increasing bit of Asia’s banking business seems like a good investment.

But buying HSBC isn’t without risk.

HSBC is trying to wind down its portfolio of  U.S. mortgages and loans but if the U.S. economy and the U.S. housing sector in particular dips back into recession the losses will be greater than I now expect. (My buy is based on my belief in a modest 1.5% to 2% growth in the U.S. in 2010.)  In the short-term while the business in China is promising it is still generating losses as HSBC invests in that business so HSBC can’t expect profits there to offset unexpected losses in the U.S. I think the biggest danger is that the recovery in revenue I’m looking for won’t arrive in 2010 but will be delayed until 2011. I don’t think that will happen but that is the downside. Current expectations at S&P are for operating earnings of $4.05 in 2010 so the stock isn’t expensive if that projection is accurate.

As of December 15, 2009, I’m adding this stock to Jubak’s Picks with a target price of $67 a share by December 2010. The stock pays a dividend of 2.7% as of December 15.

Full disclosure: I own shares of HSBC in my personal account and I will be buying more three days after this is posted. The stock is also a member of my long-term Jubak Picks 50 portfolio.
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