There is no way we in this country can understand the behaviour of the share price of HSBC Bank Malta plc without a thorough grasp of the behaviour of the great HSBC bank which straddles the globe.
HSBC is a bank far bigger than this country, so the behaviour of the share price of the Malta HSBC is bound also to act as the leader of all share prices on our stock exchange, especially those of the banks.
China's economy is growing fast, largely thanks to its wholehearted embrace of capitalism, and in particular to its conversion to its adoption of the Hong Kong economic paradigm. It was HSBC which made Hong Kong. Now Hong Kong, as predicted 30 years ago in the leading London financial clubs, has taken over China.
Over the last 20 years HSBC has been a bank which moved mountains. During all these years, its share price has reflected all these successes. The leading American magazine Business Week about ten years ago called it a 'money machine'. It proved to be so to those who cared to take its advice.
What will Business Week say now, when during these last 52 weeks, the share price of HSBC has had such a disappointing performance? We must admit that the performance of the HSBC share price has been recently way behind that of Barclays and of Deutsche Bank, which are two banks in Europe which aspire to derive most of their business from overseas financial activity.
In the case of Barclays overseas work is already 50%, while Deutsche Bank has for some time adopted English as its official language to underline its international vocation. In these last 52 weeks Barclays advanced by 24%, Deutsche Bank by 19% and HSBC by a mere 8%.
These banks are all competing for international custom, and the rise in their share price reflects their success on the international market. It is the present measure of their world clout and their relative attractiveness to investors. In Barclays' case, the appointment of Marcus Agius, the Lazard and Rothschild grandee as chairman, has met universal approval by the British press, which included a positively enthusiastic spontaneous Sunday Telegraph promotion.
Barclays now has two achievements to its merit - a stupendous advance in its share price, and a city banker of hard-bitten integrity with a charisma deriving from his magic touch in financial negotiations.
On the day of his appointment Mr Agius proclaimed his international outlook, which would go some way to emphasise more strongly Barclays' long-standing ambitions of overseas expansion. Others have hailed his integrity.
Things look great for Barclays, in which Maltese investors have always had hundreds of millions; they might forget that too strong an international expansion policy might put a strain on its share price, while raising the price of some of its likely target banks.
Mr Agius, whose family originated from Valletta, is one of the most respected bankers in the City of London, thanks to his own merits and not just because he married a Rothschild 35 years.
So when we think about the future price of HSBC shares we must also know that the competition from Barclays is bound to increase significantly. It is probable that Mr Agius can now draw on the greatest pool of capital in the world for the expansion of Barclays, as he is a master in the financial networking of banks which carry fame and wealth beyond the imagination of those who have never studied the history and the social and political composition of the banking milieu in which he has flourished, and which has accepted him as its leading spirit.
The competition between HSBC and Barclays will be fought out not in tiny, but not insignificant, Malta, but rather in the global financial field where up to now HSBC has been an obviously superior player.
The big wheel
HSBC at present has a considerably bigger capital than Barclays. It was not so in the past it is the big wheel which makes the minutely small one of HSBC Malta spin. For the last 12 months it has been experiencing very negative results as regards the attractiveness of its share price.
The local HSBC bank has registered a remarkable return on equity (ROE) close to 30%. This is a financial return which in the international field is far more likely to be obtained by an investment bank than by a commercial bank. Commercial banks in the EU were for a long time surviving on a mere 8% ROE, and this, although highly unsatisfactory, caused no banking disaster.
The profit achievement of HSBC Malta has been remarkable indeed. It has a dividend cover of 4.95 compared to the 1.6 of Lloyds TSB. Its dividend payout is 4.38 compared to Lloyds' 6.5.
Why has there been in recent weeks such a considerable drop in HSBC Malta's share price in spite of the show of strength it made as regards its ROE, and the conspicuous sums of money made by those who have believed in its growth for such a long time since its coming to Malta?
Many in Malta saw for the first time the other side of the coin thanks to the hard work of HSBC. This is by no means the case for those who bought HSBC Malta shares at the top of the market. They are now nursing a hefty loss. Will they do so forever?
This possibility is far from being a certain one for one good reason - the China commodities boom is likely to continue for a long time. China's economic expansion is linked to its support of the dollar. China's hard-earned money is being poured into dollar reserves.
The US has every reason to feed China and its insatiable demand for commodities, especially copper. As long as China booms and has an economy expanding at 10% every year, HSBC will prosper. It is a bank which has a special relationship with the Chinese economy.
So the long-term prospects of the HSBC share price are by no means dismal. There will certainly be difficulties and uncertainties along the way which will endanger the HSBC share price. It is being closely tied to an expanding Chinese demand for commodities.
The present moment is one of them. As I write I watch my Bloomberg screen which says that the august Morgan Stanley and Goldman Sachs investment banks are talking in diametrically opposed ways about the future of commodities, the first bank saying that the commodities boom is over, the second expressing bullish sentiment.
These uncertainties are doubtlessly causing the big international HSBC share price wheel to wobble. If that wobbles, the tiny HSBC Malta share price wheel will have even greater difficulties. We all know that when big wheels turn small wheels spin.
The dividends question
It is incontestable that HSBC has used its massive profits to buy banks all over the world at an advantageous price, reflecting great negotiating ability and timing. Paradoxically, as the Lex column of the Financial Times stated, it has been declaring a declining dividend. This does not go down well with investors, especially international ones. So it is not surprising that on September 10, the London Sunday Times reported:
"A new battle in the High Street current account war broke out last week with Alliance and Leicester and HSBC both raising their rates. A&L will now pay an astonishing 12% on the savings account linked to its Premier current account - a rate reminiscent of the 1980s - while HSBC raised the rate on its Plus account from 0.1% to 6%."
Leadership is to be expected from HSBC, which during these last 20 years has created a new world order, by helping China decisively to move onto the global economic stage. It must be remarked however that the less investors read about astonishing changes in what banks pay out, the more they will trust their bank, and the better will be the future of its share price. Expansion is welcome but not in funny rate increases which might reflect an uncertain direction at the top. Talk about a harmful rate war between banks.
HSBC China products
There has been an unspectacular performance of some Malta-sold HSBC capital-secured China products. A capital-secured product is obviously an expensive one to administer because of insurance costs but HSBC cannot have missed the IPO Bank of China fun when the share price of that bank went up 15% on the very first day of its launching, or the 40% advance of the China Mobile share price in these last six months.
When Maltese invest in China thinking they may make use of the well-known magic touch of HSBC, and end up with an investment registering no growth at all, when the Chinese economy is advancing at the rate of 10%, they have every reason to feel disappointed.
Such disappointment is no good for investor morale, even if the HSBC China achievement might have saved capitalism.
The bank's acquisition policy has certainly given HSBC great prestige, but investors cannot live on prestige alone.
This article is not intended as investment advice, but aims to help produce an investment culture. John Azzopardi Vella has promoted the Malta Development fund and advised S&P. He is currently re-search economist of DBR Investments Ltd which is licensed by the MFSA. E-mail: johnazzopardivella@hotmail.com.