The Investment Column: Asia crisis weighs down HSBC

HSBC was the darling of the banking sector until the bubble burst in South-east Asia. The recent economic upheaval in the region has taken its toll on its shares, which have shed more than a third of their value since the real extent of the crisis came to light. In the year to December, the banking group made pre-tax profits of pounds 4.97bn, up 10 per cent and more or less in line with recent forecasts. But the figures were way below City predictions at this time last year, before the Asian crisis broke.

Yesterday, shares closed at 1175p, up 3p on the day, and off their recent lows following some signs of a revival in confidence in Asia. The key question for would-be investors, now is not whether the Asian crisis has affected the bank's profits, which it undoubtedly has, but whether the crisis itself is past its worst.

HSBC's exposure to South Korea, Indonesia and Thailand, the three countries the IMF has been forced to bail out so far, is relatively low. But the bank has a large exposure to the Hong Kong market, which accounts for around a third of group assets. And although the Hong Kong economy has taken less of a battering than some in the region, with interest rates still running high there could be some nasty surprises around the corner.

That aside, the picture is pretty healthy. Midland Bank is doing well, with profits up 28 per cent and the cost:income ratio, at 57.5 per cent, far lower than many of its high street rivals. Things also seem on the up in Latin America, where HSBC has made a variety of acquisitions over the last year.

There is no denying HSBC has some great banking businesses. Moreover, if the pound's strength continues, the bank's decision to begin accounting in US dollars will give profits a helping hand. On the downside though, the group has signalled it is unlikely to make a major acquisition in the short term, and the shares are bound to be sensitive to any further downturn in Asia over the coming months.

Forecasts from Salomon Smith Barney put HSBC on a forward p/e of around 13, a substantial discount to the sector. But given the uncertainty in Asia, the rating looks about right.