HSBC Plc (HBC) has been busy deleveraging itself over the past two years, leaving the world’s third-largest bank by market capitalization in an interesting position. As UBS analyst Alastair Ryan puts it, HSBC is “building a cash mountain.”
Though less picturesque than Rushmore, HSBC’s growing mountain of liquidity will include $48 billion (U.S.) of free cash flow over the next four years, after dividends are paid.
HSBC reports earnings on Aug. 2, but a glimpse of the bank’s position came today when its Canadian subsidiary, HSBC Bank Canada posted a $152 million profit in the second quarter, up 33%. Similarly, HSBC is sitting on $26 billion of cash and short term securities in Canada, with a Tier-one capital ratio of 13%.
The question now is what does HSBC plan to do with all its cash? “HSBC is already a uniquely underleveraged bank,” Mr. Ryan said in a research note this week. “Few deposit rich acquisition candidates exist... returning cash to shareholders could be the most attractive option.”
Shareholders would welcome that, since one of the bank's deleveraging measures over the past two years was to trim $5 billion from its dividend, compared to 2007 levels. But it may be the most palatable option. In Canada, like the world, there’s no obvious place to make a splash with that money. “I don’t think that we have a bag of money and we want to go around looking at opportunities that are anything other than organic at this stage,” said Matthew Bosrock, deputy chief executive officer, HSBC Bank Canada.