With Europe still spasming over the debt problems in Greece, Ireland and Spain, the U.S. still trying to digest billions in bad debt and foreclosed houses, China trying to slow down inflation and Japan trying to rebuild, these are not easy days to be a bank. No surprise, then, that names like Citigroup (NYSE:C) and Bank of America (NYSE:BAC) look cheap compared to historical price-book metrics. But the situation is a little different at HSBC (NYSE:HBC). This is not a perfect bank, but it looks like it's further down the road to recovery than its valuation would suggest.

TUTORIAL: Risk and Diversification

More Progress in the First Half

Admittedly, HSBC's numbers are not the easiest fodder for casual analysis, as plenty of "items" have to be backed out. Going by the reported results, pre-tax profits were up 3% on an annual comparison, with net interest income up 2%. An alternative look at the numbers shows core revenue down about 2%, with weakness in the U.S. and Europe offset by excellent results in Hong Kong and emerging markets.

HSBC did see a roughly 10% increase in operating costs, but the company seems to be making progress on cost containment initiatives. At the same time, the company's bad debt position looks to be in good shape outside the U.S., and the company has begun lending again in most of its operating regions.

Backing Out of the U.S.?

Alongside generally solid earnings, HSBC announced that it would be selling 195 banking branches in upstate New York and Connecticut to First Niagara Financial (Nasdaq:FNFG) for $1 billion. For that $1 billion, First Niagara is getting $15 billion in deposits and $2.8 billion in loans. This will increase First Niagara's branch network by more than 60% and will give it a very strong market share in upstate New York. This is a lot to digest in the wake of the New Alliance merger, but it is a pretty attractive price for First Niagara, and there won't be many opportunities like this again.

For HSBC, this deal cuts its New York branch network by about 50% and its total U.S. branch count by about 40%. Simply put, North America just seems to be more trouble than it's worth to HSBC, and the company seems to be de-prioritizing U.S. retail operations. The acquisition of Household was a major blunder for the company, and HSBC would apparently rather compete with the likes of Barclays (NYSE:BCS) and Standard Chartered than Citigroup or M&T Bank (NYSE:MTB).

A Good Bank Everywhere Else

HSBC has a rather remarkable global footprint. Ventures in locales like Russia, Poland and the U.S. may not have worked out quite as well as management hoped, but the bank is a strong player in the U.K., Hong Kong and a host of emerging markets like Vietnam, Mexico, Brazil, Argentina, Indonesia, India and China.

This model is not necessarily unique. Banco Santander (NYSE:STD) and BBVA (Nasdaq:BBVA) have good European and Latin American exposure, and banks like DBS Group have extensive Asian operations. But HSBC is relatively rare in its multi-continental footprint, and other would-be rivals like Citigroup are faced with shoring up their capital bases and reassuring shareholders.

The Bottom Line

HSBC is in better shape than its valuation suggests. True, the company is vulnerable to another U.K. meltdown as well as trouble in a host of regions like Latin America and emerging Asia, but there's no such thing anymore as a risk-free bank. What's more, management is showing that it is not in the business of gaining scale just for scale's sake. If a market doesn't look attractive enough (like upstate New York, apparently), management is willing to bail out.

HSBC likely won't make money hand-over-fist for its investors, but it is an attractive franchise for investors looking for broad exposure to global banking. Assuming that the company can produce returns on equity in the range of 13% going forward, the bank may be as much as 30% undervalued today. (For related reading, see Analyzing A Bank's Financial Statements.)

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