HSBC is not only too big to fail – it's too big to damage. Even as insurance misselling charges and the biggest-ever bank fine knocked its performance in 2012, the lender's bottom line was barely blemished. Future accidents are bound to happen, but it's hard to imagine a shock that HSBC couldn't absorb better than its peers.
Few banks could pay a $1.9-billion (U.S.) fine for money laundering, return $1.4-billion to U.K. customers who bought unnecessary products and still report an increase in underlying pretax profit. HSBC pulled off the trick. Chief executive officer Stuart Gulliver's cost-cutting drive, completed a year ahead of target, helped limit the pain. So did a sharp drop in bad loan charges.
While last year was a miserable one for HSBC's reputation, there's no sense of that looking at the balance sheet. The core Tier 1 capital ratio is 10.3 per cent under new Basel III rules, enabling HSBC to take that rare step for a U.K. lender – raising the dividend. As long as regulators don't shift the goalposts – admittedly a big "if" – and Mr. Gulliver steers clear of big acquisitions, shareholders can look forward to HSBC's surplus capital pouring into their pockets.
The flip side of stronger capital is potentially lower returns. Group return on equity is a value-destroying 8.4 per cent, dragged down by Europe and North America – still HSBC's two biggest regions in terms of assets. And after tens of billions of dollars of losses on U.S. subprime mortgages, the money-laundering charges reinforce the impression that HSBC is simply too big to manage.
Mr. Gulliver has beefed up compliance and promised to steer clear of businesses that carry a risk of financial crime. Even so, the bank's size and geographic spread mean it will struggle to avoid future shocks.
The shares still trade at a premium to book value. Perhaps investors think returns will improve as emerging markets account for a larger share of the total, and the safety benefits of scale and diversity outweigh the hazards. Or they are seduced by a dividend yield of 4.5 per cent, based on the promised interim payout for 2013. Either way, it's hard to disagree with their sense of security.