If you get to the end of this online banking review of the operations of HSBC bank and don’t understand what the heck is going on, believe me when I say I empathize. HSBC is one of the largest bank holding companies in the industry, and deciphering their myriad operations is simply a mind numbing task.
Imagine If You Will a Large, Omnipresent Bank
While the header text to this paragraph may sound like the beginnings of a twilight zone episode… maybe it is! HSBC (named for it’s founding member bank – Hong Kong and Shanghai Bank Corporation Ltd) has operations just about anywhere money changes hands. They are considered the leading bank in China and Asia Pacific, yet their headquarters is found in London (banking center of the universe – but what else would you expect from a truly global bank?). They also are considered a top Islamic bank, with operations in the Middle East, as well as a prominent bank in South America (ops in Brazil).
Oh… and they have a US wholly-owned subsidiary with $175 billion in assets. A quick look at how those assets break down indicate a $75 billion loan portfolio, $25 billion in trading assets, $29.5 billion in securities for sale (more on that distinction later), $3 billion in securities to be held to maturity, $4 billion in Fed funds purchased for resale, and about $21 billion in cash and deposits at other banks.
OK They Are Big, But Is HSBC Stable?
When one considers they hold $115 billion in deposit accounts one wonders where how on earth they would fund those accounts should a significant number of account holders demand funds – but a reserve requirement (holding in cash and liquid assets only a small % of actual deposits) system is how our banking rules work. And given their ratio of cash and liquid deposits (regulatory capital) represent more than 10% of total assets (actually 13.68% at Q3 ’09) they are considered well-capitalized under our current framework. Stability however also depends not only on the performance of a bank against certain ratios but also how well their non-cash assets are performing.
…And the Performance Has Been… Well… Not So Great in 2009
Unfortunately for HSBC they have been caught up in some of the difficulties plaguing many of the larger banks in the US, namely getting stuck with a number of poorly performing investments. The result has been net losses as of Q3 2009 on the order of $177million. Given the size of HSBC that doesn’t sound like a lot, but the parent company (HSBC plc) reports losses of $6.3 billion through three quarters of 2009. How the subsidiary managed to dodge responsibility for so much of those losses is for the accountants to reveal. When I look at a bank parent company losing that kind of money one can not help but think the subsidiary will suffer in some way shape or form.
So They Had Some Losses, But Were They ‘At-Risk’ Enough to Receive Gov’t Money?
Well funny you should ask that, as understanding what does and does not represent government money gets a little muddy. For example, banks like HSBC rely on securities markets to buy and sell groups of loans in an orderly fashion. Beginning in 2007 credit markets began to grind to a halt and with the implosion of Lehman Brothers in Sept 2008 credit markets basically seized entirely. It was only with the intervention of the US Government TALF program that the frozen markets began to drip with a little liquidity. Does this mean that HSBC received government funds? Not in so many words. On the other hand, without those available funds HSBC would not have been able to adequately conduct normal business operations related to buying and selling mortgages.
Is that clear as mud to you? Yeah, I thought so too. I decided to look a little closer at the parent company in the hopes of being able to provide a little more clarity on the subject and I more or less found what I was looking for: debt, and lots of it.
Why I Can’t Tell You to Run Out and Open an HSBC Deposit Account
HSBC is a big, complicated bank. They appear to be stable with regard to their US operations. On the other hand they also have a large highly-leveraged parent company (9:1 debt to equity ratio – ed’s note – it’s over 10:1) which has suffered considerable losses in the last year plus. The problem with highly-leveraged banks is not the management, or the capital structure (the amount of debt versus the amount of assets). The problem lies in the vulnerability of such highly leveraged banks to factors outside their control – most notably the sudden unavailability of credit.
While politicians and pundits keep telling us that things are improving in the US, large multinational banks are subject to the whims of global financial storms – and there is no guarantee that storm winds in China or Asia Pacific economies won’t cause headaches for US customers of HSBC.
That doesn’t mean yank your money out of HSBC or put it somewhere else – or don’t apply for a loan at HSBC. In fact there is every reason to apply for loans and other credit products given their financial sophistication and ability to provide credit products at a time when credit is hard to come by.
I just can’t in good conscience tell you to open a deposit account there – despite the fact they are a sponsor bank of my site and their deposit account rates are competitive. The present economic environment and their highly leveraged parent holding company capital structure prohibits it.
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