City's verdict on HSBC fine

Just weeks after Neil Woodford admitted selling his new fund's stake in HSBC on concerns about "fine inflation", the bank has been hit with... another fine. But rather than sparking another investor exodus, this looks like no more than a slap on the wrist for the world's local bank.

It will pay 'just' $550 million (£339 million) as part of a claim filed by the Federal Homes Finance Agency (FHFA) - which oversees Fannie Mae and Freddie Mac - against 17 financial institutions. All are accused of mis-selling residential mortgage-backed securities to the federal mortgage companies.

But HSBC, which stood accused of selling the pair $6.2 billion of mortgage-backed securities and was due to go to trial later this month, had expected a fine of up to $1.6 billion.

"The sense of relief is palpable," noted Investec Securities on Monday.

"HSBC still faces myriad ongoing conduct/litigation issues, which we assume will generate incremental charges in excess of $2 billion," the broker said. "It already holds a legal/regulatory provision of $1.76 billion, plus $1.57 billion for customer remediation and $526 million of other provisions.

"As with most UK banks, payment protection insurance with a cumulative charge of $3.35 billion has been (in pure financial terms) the single biggest item."

But HSBC trades on 1.2 times 2015 estimates for tangible net assets (TNAV), and return on equity is expected to remain below the company's own target of 12% out to 2016. Ongoing regulatory uncertainty, a further drawn-out period of near-zero interest rates and a potential "hard landing" in China, could make things worse argues Investec, which only rates the bank as a 'hold' with 620p target price.

However, that TNAV multiple is hardly aggressive. And since laying the blame for a 12% drop in half-year profit squarely at the door of regulators, HSBC shares have easily outperformed the other banks – RBS, Lloyds and Barclays. They may continue to do so.

A common equity tier 1 ratio improved tipped to break above 12% this year and prospective dividend yield of close to 5% also justify optimism.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.