Tickers in this Article: HBC, C, SAN
When I last wrote on HSBC (NYSE:HBC) about 18 months ago, I was positive on this global banking giant. In the intervening period the shares are up about 30% (excluding a pretty solid dividend), making that a pretty solid call. Although HSBC's second quarter/first half results were not perfect by any means, this isn't a bank that runs itself on a quarter-by-quarter basis and I see little to quibble with in the bank's excellent ratios and profits, nor its policy of redirecting copious surplus capital to both growing markets and shareholders. With the shares about 10% to 15% undervalued, there's still a case to be made for buying/holding these shares.

Messy Q2 Results
Just how complex are HSBC's financial reports? The company's interim report ran nearly 300 pages and has its own index. Suffice it to say, few (if any) analysts and investors are going to find mission-critical nuggets on information on every page.

Although strong first quarter results allowed the bank to post 4% revenue growth, the second quarter was decidedly weaker (down 22%) and missed the average estimate by about 6%. First half pre-tax profits were up 10%, but there was some confusion as to the “real” average quarterly estimate – for the quarter, HSBC's profits missed by either 5% or 13% on an adjusted basis, though the first half results and market reaction suggest a 5% miss is closer to the target.

SEE: How To Evaluate The Quality Of EPS

Pretty Consistent Results On Balance
Relative to what rival banks in HSBC's core operating regions have already reported, this bank's results were broadly consistent. Loan losses were higher in Mexico and Brazil, while provisions were higher in Europe and lower in North America. Compared to what the market has seen from companies like Santander (NYSE:SAN), Citigroup (NYSE:C), Standard Chartered, and so on, that's basically what's going on in the world.

Underlying loan growth was pretty good (up 6% for the first half), but provisioning expenses were higher than expected. What was a little less encouraging was that the bank's performance was pretty comprehensively “blah”. There were some bright points (Hong Kong was strong), but HSBC seemed to come in a little light everywhere – a result that suggests to me that the global economy just isn't picking up for the second half rebound that so many investors have counted on in their forecasts and assumptions.

What Takes The Bank A Step Further?
HSBC has done a very good job with its restructuring plans, with management delivering a mix of better performance and faster results than originally forecast. With that, the bank stands on very solid footing with its global comps in terms of credit ratios, capital, profitability and so on. At the same time, though, HSBC needs higher interest rates to really thrive and the bank's growth could be compromised if the recoveries in China and the U.S. housing market stall or disappoint.

So what happens next? I expect the bank to continue its policy of redeploying capital to faster-growing regions. In other words, markets like Hong Kong and the U.K. will basically underwrite expansion in areas like Asia and Latin America as HSBC manages the slow-growth markets for profits. At the same time, I expect HSBC to generate ample surplus capital over the next three or four years, allowing for more capital to back to shareholders as dividends.

SEE: The Evolution Of Banking

The Bottom Line
HSBC never really got itself into the same sort of mess as banks like Santander or Citi, and I think the company's rate exposure will likely preclude major earnings momentum in the short term (even though HSBC has a lot of non-interest businesses contributing to profits). On the other hand, HSBC should be in good position to return capital to shareholders, and that should help underpin the share price.

Right now I project that HSBC will generate a long-term return on equity of 13%, which translates into a fair value of almost $67 today. Looking at the bank's return on tangible assets and tangible equity, fair value on a price/tangible book basis would seem to be around 1.4x, or just under $63 per share. Accordingly, with HSBC shares trading at about 10% to 15% below fair value, I still think this is a worthwhile stock for investors to consider, particularly those looking for diversified ex-US exposure.

Disclosure – At the time of writing, the author did not own shares of any company mentioned in this article.

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