There is reason to be bearish on HSBC today, but another reason to be bullish on the world’s third largest company by market cap. The bank has been accused of extreme earnings overstatement, with a black hole sitting on its balance sheet. Meanwhile Google may have given investors and diabetes sufferers alike reason to cry for joy.
And before we get started here is an interesting comparison for you. HSBC’s market cap is $136 billion. Google’s is $386 billion. Who would have predicted that a few years ago?
The tale of HSBC’s challenge and Google’s new opportunity probably sums up the twin issues of 2014. HSBC’s challenges relate, at least partially, to the era of tighter monetary policy which we may be entering. Google’s new opportunity relates to what may well prove to be the single most exciting story of 2014: the beginning of the era of wearable technology.
HSBC’s glaring problems: the background
Cast your mind back to the early days of 2008. It may seem hard to believe now, but this was a time when Alan Greenspan made headlines by saying the US may experience a mild recession. To many, it just seemed unthinkable. But the writing was on the wall. In the first three months of 2008, HSBC wrote off $3.2 billion worth of assets. That was bad, but actually, to start at the beginning you need to go back further.
HSBC also announced major write downs in 2007. It was in fact the first major bank to announce write-downs relating to US sub-prime. See this article for a trip down memory lane: HSBC in new sub-prime write-down, BBC
First in first out, they say. HSBC may have made the headlines for its sub-prime related woes, but a few months later, when RBS, HBOS, and Barclays seemed on the verge of collapse, HSBC was okay. Who knows whether it would have survived if there had been no banking bail-out, but one thing is for sure, it didn’t need bailing out directly. (Barclays avoided a UK government bail-out, but it still needed rescuing.) Back then, HSBC’s strength seemed to lie with its roots in China. Hong Kong & Shanghai Banking Corp stood out among the banking dross.
Now cast your mind back further still, this time to the mid-1990s, when the US Federal Reserve began upping interest rates. A chain of events was sparked off which ultimately led to the Asian crisis of 1997. As interest rates rose, money flowed out of Asia. In 1997 the world suffered a kind of dry rehearsal of the 2008 crisis, except that is for those in the so-called Tiger economies in Asia; for them there was nothing of the dry rehearsal about it – rather it was the real thing.
It appears, although it is far from proven, that we are set to enter an era of gradually tightening monetary policy. And once again the spotlight is falling on emerging markets. Economists have even come up with the nomenclature ‘fragile five’, referring to Brazil, India, Indonesia, Turkey and South Africa. Why China is not in that list is a puzzle.
HSBC’s strength in 2008 was its exposure to Asia. Is that about to be its weakness?
Forensic Asia has published a report on HSBC, which was damning to say the least.
Let’s start the analysis by peering towards the end of the Forensic Asia report. It took a look at the Hong Kong bank, a rather important subsidiary of HSBC, and said: “Hong Kong Bank crown jewel losing lustre.” To which many might respond: “Know the feeling”. But on this occasion the crown jewel relates to the rather exalted position Hong Kong Bank has within the HSBC empire. The report said: “The disposal of its Ping An Insurance stake and the accounting reclassification of Industrial Bank have likely reduced Hong Kong Bank’s 2014 operating results by 13 per cent.”
So much for the crown jewel: what about the rest?
The Forensic Asia report stated: “HSBC has not made the necessary adjustments during the quantitative easing reprieve. Rather, it has allowed legacy problems to linger as new ones in emerging markets gather pace. The result has been extreme earnings overstatement, causing HSBC to become one of the largest practitioners of capital forbearance globally.” It suggested that the bank has overstated assets by between $63.6 and $92.3 billion and will need to raise $58 billion and $100 billion in new capital, the equivalent of five to seven years’ worth of results. It warned that the bank may cut its dividend as a result.
The report’s authors, Thomas J Monaco and Andrew Haskins, said: “It is a wonder how Group management can say to shareholders with a straight face that HSBC will achieve perennial operating ROEs of 12-15 per cent.”
They actually highlighted five specific problems at the bank:
- Numerous franchise disposals and accounting changes should cause the Group’s 2012 mainland Chinese to decline by 39 per cent.
- Emerging market franchises are not faring well.
- The Group may need to raise substantial capital and/or hive off parts of its core franchise.
- Up to US $10 billion of additional legal and regulatory penalties may be incurred.
- The bank may become reliant on low-quality and volatile trading.
And just to finish on a cheery note, they said that there is a black hole in HSBC’s balance sheet.
If this is right, then that is scary. But is this true? Maybe we need to bring Stephen Hawking in on this one. There is good news; he does not seem think there is a black hole within a few million light years of here, which means HSBC may be safe in that respect at least. Mr Hawking did once say, however that: “In the Universe it may be that primitive life is very common and intelligent life is fairly rare. Some would say it has yet to occur on Earth.”
If tightening monetary policy and fears of reaction in emerging markets is the bogeyman of 2014, then technology may be the Santa Claus– ignoring issues relating to privacy, big brother watching us, and possible unemployment that is.
The problem with writing about technology is that it is hard to say which one is the best to watch. There is so much going on. But it does seem that the internet of things and wearable technology are the most immediate.
This week Google has announced the purchase of a thermostat company. Well, not just any thermostat company actually. Next Labs – the company for which Google paid $3.2 billion – produces thermostats and smoke alarms that can link to your smart phone or PC.
So, the beginning of this week saw Google tick one box: the one marked internet of things.
The end of the week has now seen the company tick another box: that marked wearable technology.
The company has announced that it is testing a new form of contact lense that measures glucose levels in tears using a tiny wireless chip and miniaturized glucose sensor that are embedded between two layers of soft contact lens material.
Brian Otis and Babak Parviz, project co-founders, said: “We’re testing prototypes that can generate a reading once per second. We’re also investigating the potential for this to serve as an early warning for the wearer, so we’re exploring integrating tiny LED lights that could light up to indicate that glucose levels have crossed above or below certain thresholds. It’s still early days for this technology, but we’ve completed multiple clinical research studies which are helping to refine our prototype. We hope this could someday lead to a new way for people with diabetes to manage their disease.”
They explained as follows: “Many people I’ve talked to say managing their diabetes is like having a part-time job. Glucose levels change frequently with normal activity like exercising or eating or even sweating. Sudden spikes or precipitous drops are dangerous and not uncommon, requiring round-the-clock monitoring. Although some people wear glucose monitors with a glucose sensor embedded under their skin, all people with diabetes must still prick their finger and test drops of blood throughout the day. It’s disruptive, and it’s painful. And, as a result, many people with diabetes check their blood glucose less often than they should.”
This is good example of why wearable technology matters. It is easy to be cynical but it provides very real benefits. Sure, parallels with the late 1990s tech bubble are emerging, but we are not in bubble territory yet.
Intel reveals zero projections
Nothing is not usually news, but it is when Intel says it expects revenue growth to be nothing, or zero, in 2014.
You don’t need a degree in rocket science to know why. You don’t even need a CSE in lighting rockets on bonfire night to know why: Intel’s woes relate to something called the death of the PC.
Of course the PC is not really dying, but like HSBC, the PC does have glaring problems. In 2013, Intel’s PC division saw revenues fall 4 per cent.
Bull: Intel says that there are signs that PC sales have stabilised.
But Intel is not a one horse company, along with ARM, it may be set to benefit in a quite spectacular way from wearable technology and the internet of things. It has revealed a 3D camera for example, and Intel’s chief executive Brian Krzanich said: “At the CES, we demonstrated multiple devices that weren’t on our roadmap six months ago.”
Intel’s hope lies with the internet of things. Google has lots of reasons to hope, and helping diabetes sufferers is just one example. HSBC, however, has black holes to wrestle with.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employee