Are These Two Global Banks a Buy After Legal Charges?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Large legal fees have just come from US financial authorities for global British banks Standard Chartered PLC (LSE: STAN) and HSBC Holdings PLC (NYSE: HBC). Standard Chartered has agreed to pay the fine of $327 million to settle charges of money laundering from 2001 to 2007. HSBC took a much harder hit, of up to $1.9 billion, including $1.25 billion in forfeiture and $655 million in civil penalties. Let’s look deeper into how those charges will affect each banks’ earnings.

Standard Chartered Bank focuses its operation in 24 emerging markets, including Asia, Africa, and the Middle East, with the majority of its operating income coming from Hong Kong, Singapore, Korea, India, etc. Out of $10.15 billion in total net interest income in 2011, $5.52 billion was from wholesale banking and $4.63 billion was from consumer banking, nearly 20% lower than wholesale net interest income. Within the consumer banking segment, the majority of its income came from cards, personal loans, and unsecured lending, whereas the other areas such as wealth management, deposits and mortgaged and auto finance were in the range of $1.27 - $1.48 billion in operating income. In the wholesale banking segment, financial markets accounted for the majority of operating income, nearly $3.7 billion, or about 55% of total wholesale banking income.

In the last 2 years, the bank’s net interest margin has been quite decent, around 2.2% - 2.3%. The decent net interest margin was sustained because  the majority of deposits were interest-bearing current accounts, savings deposits ($150 billion), and time deposits ($193 billion). In addition, it is interesting to see that Standard Charted has managed to diversify their loans somehow similarly to individuals and wholesale banking in several areas, including mortgages, commerce, financial, manufacturing, and communication. In 2011, Standard Chartered booked more than $4.9 billion in profit. Thus, the $327 million fine would represent only 6.6% of its total 2011 profit. In addition, Standard Chartered has consistently delivered sustainable profit and return on equity. Trailing twelve months, the return on assets was 0.86% and the return on equity was 12.15%. 

Though the fine for Standard Chartered would not affect the bank’s profit much, HSBC took a much harder hit. HSBC was fined $1.9 billion, whereas its net profit in 2011 was nearly $18 billion. Thus, the fine represents nearly 11% of its 2011 profit, a much larger percentage than Standard Chartered’s. Like its peer Standard Chartered, the majority of profits come from Hong Kong and the other parts of Asia. In the last 2 years, HSBC’s net interest margin is a bit higher than that of Standard Chartered’s; 2.51% in 2011, and 2.68% in 2010. However, in terms of profitability, the return generated on assets and equity have been lower than its peer in the recent years. Trailing twelve months, the return on assets was 0.58% and the return on equity was only 9.3%. Those two banks have been a consistent dividend payers over time. HSBC is paying shareholders a dividend yield of 4%, whereas Standard Chartered is paying 3.3%.

It is interesting to see that HSBC even edged higher after the legal fine announcement. Since the middle of November, HSBC has climbed from $47.50 $51.84 per share currently. Standard Chartered took the hit after climbed from $22.56 to $24.10 per share in the beginning of December. It decreased to $23.83 currently.

My Foolish Take

Those legal charges came quite unexpectedly. We would expect the shares of those two banks would move lower after the news. With global footprints, especially in emerging parts of the world, those two banks look destined to be long-term winners. Investors might wait for lower movement of the share prices to initiate some positions.   


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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