The risks of holding HSBC

Many of us are eager to know whether to hold, sell or buy HSBC. Personally, I don't think you should waste time to find out the answer. The plain truth is you must not hold HSBC at least not until you see the global economic, housing and credit crisis is going to get better. Here are some of the risks and problems:

HSBC has experienced a drastic change in its management team in the past few years. Leadership has become a problem particularly when their businesses in US and Europe are facing very challenging and critical times.

The bank tries to emphasize its focus in Asia particularly China. It demonstrates that its main growth is in Asia and especially China, India, etc. I have great doubts over such future. Firstly, if expanding in China is the new strength, HSBC will face a lot of traps and pitfalls. Gigantic Chinese banks dominate the banking sector inside Mainland China and there are a lot of foreign international banks competing with HSBC too. In fact, HSBC has not been really active in the Mainland until the last couple of years but many other foreign banks were already actively establishing their businesses many years ago.

You should know very well about the risks of the subprime lending by HSBC. Playing in markets like Mainland China also involve similar risks and the more active HSBC is in such markets, the higher the risks of repeating the subprime lending in US. I won't be surprised to see that when the stock and property markets in Mainland China suffer further slowdown after the Olympic bloom, banks including HSBC will post declining performances.

Indeed, global environment for financial and banking is nothing but hostile. All banks are operating against such background and HSBC can be no exception.

What worries me most is the fact that their qualities of services and standards have become a great concern. Recent news about the loss of important materials and servers containing client and account information are very disturbing. When you use a bank, privacy and secrecy are something basic to their services. If a bank can't perform well in such areas, what else can you expect?

The bank is also losing its competitiveness. Its lending interest rate is not attractive nor is its deposit rates. You may say that it is not relying too much on interest income but if so, why is there a problem with its interest rate?

While many other local banks are keen to develop investment services for their clients, the bank is still operating in its traditional mode, i.e., providing old products like unit trusts. The biggest breakthrough is the bank's IPO participation but that channel is now almost closed mainly because the IPO market in Hong Kong is almost dead!

The bank is also holding on to the pathetic Hong Kong dollar. The local currency is one of the cheapest currencies in the whole world. It is sinking against all major currencies including RMB and USD! But HSBC has to hang one to the Hong Kong dollar; it cannot move to depeg the Hong Kong dollar from USD nor can it link HKD to RMB. Unless speculators would choose HKD as the principal currency for their carry trade, HKD has little use. The only advantage of HKD is that you can easily change it to RMB but this advantage will disappear soon when other currencies in other places like Taiwan, Macau, etc. may also be easily into RMB.

HSBC will surely be hard hit again when the housing and credit crises in US and Europe worsen. When you see more and more cases like Bear Stearns, Freddie and Fannie coming up in the next 6-12 months, you will see how HSBC suffer. Investments bundled with or tainted with poor housing loans, bonds and securities are bound to fail and the extent of exposures of HSBC is always unknown. Coupled with slowdown in US and Europe as well as the curb in exports from Asia, we will see a worldwide slowdown. Wherever HSBC goes, there will be challenges and difficult times. Such is the fate of international financials and banks.

I will let you know more in the next episode. God bless HSBC!