Diminishing Return On Capital Emerges As Investor Red Flag
When any company's return on invested capital converges toward its cost of capital, it should ring alarm bells.
That is the worrying prospect facing HSBC's shareholders. Even though it has emerged relatively unscathed from the credit crunch, the U.K. and Hong Kong-based bank's returns have come under pressure.
HSBC's ROIC, a gauge of how profitably a company is investing its money, fell to 12% in the first half from 18.4% in the same period last year. The bank estimates its own cost of capital at 10%.
Admittedly, HSBC's performance looks stellar when compared with rivals such as Citigroup, which has spent recent quarters drowning in red ink. But HSBC is still under pressure to find ways to deploy capital more effectively and to shed low-earning assets.
One issue is that the emerging markets, where HSBC invested in recent years, haven't provided sufficient earnings to offset problems in the U.S. and slower-growing European markets.
HSBC has allocated plenty of capital to Asian markets, including China and India. The long-term economic outlook is good. But as the sharp declines on Asian stock markets have shown this year, there could be hiccups along the way.
Meanwhile, HSBC's return on assets has fallen recently in Hong Kong. In the rest of Asia Pacific, its first-half return fell to 1.4% from 1.7% a year earlier.
These disappointing returns have proved a drag on HSBC's overall performance. And the self-styled "world's local bank" remains weak in some regions where growth is fast.
In north Asia, it is trying to remedy that with the time-consuming exercise of taking a majority stake in Korea Exchange Bank. HSBC operates in Turkey but isn't that strong in eastern and central Europe.
Bulking up in new, fast-growing markets looks sensible. But HSBC also needs to keep cutting its exposure to some struggling businesses in the U.S. HSBC North America's risk-weighted assets rose 11% to $374 billion in the first half, under the new Basel II banking rules, with most of the rise at HSBC Finance. That is the old subprime-dominated Household International, HSBC's U.S. unit into which it has pumped $2.2 billion in equity this year and which continues to need intensive treatment.
The area where HSBC should make more of what it already has is its global banking-and-markets unit. On the one hand, there is the temptation to do a big deal, with HSBC's name sometimes linked to potential bids for an investment bank.
On the other, HSBC's strong balance sheet seems to be giving the global banking and markets business some traction in its own right. It accounted for more than 26% of group net profit in the first half.
HSBC can try deploying modest amounts of capital in that area to gain market share, as rivals retrench, while continuing to buy emerging-market assets. That might be more attractive to investors than trying to time the purchase of a distressed U.S. investment bank.
Dish Network Whiffs Against Triple Plays: Phone, Cable, & Internet
Dish Network has plenty of possible excuses for its startling second-quarter loss of 25,000 subscribers. There is the slowing economy, increased competition from phone companies and seasonal factors.
Whatever the truth, the satellite operator's results highlight a serious concern for investors: In a market dominated by cable and telephone companies selling packages of video, telephone and Internet services, satellite is too much of a one-trick pony.
Unlike satellite operators, both cable and phone companies have been able to offset losses in one product area with growth elsewhere. Comcast, for example, reported a drop in basic-video customers last week. But investors -- more interested in the cable operator's subscriber gains in phone and high-speed Internet -- shrugged off the news.
Dish needs to find an exit strategy. One option is a cost-cutting merger with rival DirecTV. The trouble is, even though struggling satellite-radio companies Sirius and XM recently won approval for such a deal, it doesn't follow that profitable Dish and DirecTV would gain clearance.
Dish might have more luck trying to strike a deal with AT&T. The telecom giant made clear last month that, despite its move to terminate its Dish marketing arrangement, it plans to continue reselling a satellite option to customers not served by its cable-based TV product.
As for timing, don't hold your breath. Dish may do well to wait until it has a better handle on the regulatory climate after the presidential election.
By: Arindam Nag
Wall Street Journal; August 5, 2008
