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HSBC's Rate-Hike Bonus

Few lenders stand to benefit as much from an increase in borrowing costs.

Yay, higher rates!

The Federal Reserve's hike Wednesday in the U.S., and the promise of a few more, is worrying global stocks, but one banking blue chip has a reason to be happy.

In a year when bad news has been rife -- from Brexit to higher costs forcing branch closures in the U.K. -- HSBC Holdings Plc can at last look forward to bulking up revenue.

Not Good

HSBC has been battling lower revenue as it shrinks its global footprint and copes with low interest rates

Source: Bloomberg

Few lenders stand to benefit as much from an increase in borrowing costs. HSBC's net interest income has been hammered for years and rising rates in North America and Hong Kong, whose currency is pegged to the dollar, are more than welcome.

Ouch, Cheap Money Hurts

HSBC's net interest income as a percentage of its risk-weighted assets has been falling

Source: Bloomberg

HSBC, which derives the bulk of its operating income from Asia, has lots of money to lend, too. Its loan-to-deposit ratio at the end of the third quarter was just 69 percent from as high as 100 percent in 2005, according to research from Morgan Stanley.

Even HSBC's exposure to Hong Kong's heady but increasingly hard-pressed real estate market isn't that big a deal. Although the bank made a more concerted push into mortgages in the city this year, large downpayments of at least 30 percent mean defaults are rare.

To be sure, higher rates do spell the possibility of more bad loans, especially in China, where HSBC is staking much of its future.

London-headquartered HSBC is also in the midst of a program to redeploy some $150 billion in assets to the region and hire 4,000 people in the Pearl River Delta. That low-lying area spanning Hong Kong and a large swath of southern China is home to thousands of small manufacturing firms that could fare worse if President-elect Donald Trump follows through on his campaign pledge to raise China tariffs.

But HSBC is in robust health. With a core equity Tier 1 ratio of 13.9 percent, well above its 12 to 13 percent target range, the bank is in a much stronger capital position than it was a decade ago when its U.S. consumer lending business Household International woke the world up to the ballooning credit crunch. (Back then, HSBC's Tier 1 ratio was 7.5 percent.)

The Only Way Is Up, Baby

HSBC's shares have had a stellar 2016

Source: Bloomberg

Better capital cushioning should also keep HSBC's much-loved dividend payout intact. Team that with improved revenue, and Europe's biggest bank really will be in investors' good books.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

    To contact the editor responsible for this story:
    Katrina Nicholas at knicholas2@bloomberg.net

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