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Britain's best bank gets better

Tuesday - 5/8/2012, 10:47am  ET

The banking sector has come in for some criticism since the credit crunch struck, but in my view not all U.K. banks are equally deserving of the bashing they have received.

The biggest bank in the FTSE 100 , HSBC Holdings , avoided the stigma of being bailed out and has recovered from the crisis relatively fast. It's currently in the middle of a worldwide revamp of its operations that's intended to cut costs and increase its focus on Asia.

Today's first-quarter interim results give us a good opportunity to review HSBC's progress so far.

Profits up?                                                     
HSBC has its roots in Asia, and it has always retained its emerging-market focus. In 2011, 78% of its profits came from Asia Pacific, Latin America, the Middle East, and North Africa, with the remainder coming from Europe. This trend continued in the first quarter, with profits before tax rising by 21% in Hong Kong, 24% in the rest of the Asia-Pacific region, and 11% in Latin America.

Overall, underlying profit before tax rose by 25% from the first quarter of 2011 to $6.8 billion. However, total reported profit before tax for the quarter fell by $600 million to $4.3 billion, thanks to the rising value of HSBC's own debt over the last year. This is a contentious and counterintuitive accounting practice that caused Royal Bank of Scotland to report a loss rather than a profit in its recent quarterly results and also led Barclays to fall foul of the taxman.

HSBC's core tier-one capital ratio also improved, rising from 10.1% to 10.4% over the quarter.

A wider moat
One example of HSBC's careful positioning for future growth comes from India, where the bank is currently completing the acquisition of the majority of RBS's Indian operations. The deal was announced two years ago but has taken until now to get regulatory approval.

By far the most attractive aspect of the deal is the 20-plus extra branches it will give HSBC in India. It is hard for foreign banks to get approval to open branches in India, but HSBC already has 50, and the RBS branches will make it the second-largest foreign bank in India, just behind Standard Chartered.

The value of this deal is twofold: It will give HSBC improved access to India's burgeoning middle classes and SME business market -- an essential avenue to retail banking growth -- and it raises the barrier to entry for any foreign competitors.

HSBC has also recently agreed to acquire Lloyds Banking Group's operations in the United Arab Emirates. HSBC's profits in the Middle East rose by 67% in 2011, and the area is a key growth market, especially for retail banking and wealth management clients.

Buy now, hold forever
While I can't guarantee that HSBC will be a 100-year share, it is certainly a company that is positioning itself skilfully for long-term growth.

HSBC's current market value of 100 billion pounds means that it is trading a fraction below its net asset value of 107 billion pounds on a price-to-earnings ratio of about 9.5. In addition, it offers an attractive dividend yield of nearly 5%. Added together, it all seems cheap, and I for one am happy to own shares in this bank.

He avoided techs in the dot-com bubble and banks in the credit boom. But just where is dividend expert Neil Woodford investing today? All is revealed in this free Motley Fool report -- "8 Shares Held By Britain's Super Investor."

Further investment opportunities:

This article was originally published as Britain's Best Bank Gets Betteron Fool.com

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