Half-year results from HSBC (LSE: HSBA) were not very good. Profits at the banking giant were down by just over 16%, to £1.9bn. However, it was chairman Douglas Flint who grabbed the headlines, bemoaning that his bankers were frightened to take risks and that this was hurting the bank’s ability to make money.
This is good. Banks are not that profitable – and nor should they be. Despite big profit numbers, HSBC’s return on shareholders’ equity of 9.3% is modest – but it’s probably also no more than you should expect.
The days of juicing up returns by borrowing lots of money and taking on huge risks have gone – hopefully forever.
By the look of things, HSBC is still paying its staff too much relative to the income they generate. Returns on equity could be a lot higher if they were paid similarly to staff at a drug company such as GlaxoSmithKline.
In fact, one of HSBC’s key attractions is that it is less risky than many of its peers. It comfortably funds its loans from customer deposits and doesn’t rely on more risky wholesale borrowings.
It offers a yield of 5%, which looks safe unless profits collapse, and it trades slightly above its net asset value. You won’t get rich owning the shares, but it’s a good source of income.
Verdict: buy for income