The sweet-spot for investors is typically a company that can re-invest its profits in expanding its asset base for many years into the future. In doing so such companies compound their shareholders’ capital. HSBC’s $2.6trn balance sheet and presence in 73 countries is thus enough to put off any investor looking for a long runway of compounding growth.

Today, however, is not in “typical” investing environment. Global economic growth is weak as debt-fuelled booms in Chinese infrastructure, and US energy production, lead to large imbalances between the supply and the demand for goods in the economy. Industrial bellwether Caterpillar, for example, described today’s environment: “Based on our outlook for 2015 sales and revenues, 2015 is going to be our third consecutive year of sales decline. And to put that in some perspective, that’s happened only one other time in the history of our company and that was during the great depression in 1930, 1931 and 1932.”

This atypical, low-growth environment has resulted in numerous unprecedented moves in financial markets. The most striking of which is the negative yields offered on shorter dated government debt. Another consequence of this environment is that companies that can re-invest their profits to grow their asset base are prized and have been bid up. Zara brand owner, Inditex, is a good example. Between 2006 and 2014 Inditex grew from 3,131 stores to 6,683 stores, with a steady, but slowing, rate of growth. Over that period revenue per store and operating costs per store stayed remarkably stable. As such, post-tax reported profit margins remained in a tight 12-14% range. With profit per store stable and the number of stores growing, but at a gradually slower pace, knowing nothing more one would expect Inditex’s market value per store to be similar to history. Over the past 10 years Inditex has traded at an average enterprise value of EUR 7mln per store. Today Inditex is valued at EUR 94bn, or over EUR 14mln per store, double its historical average. When you add to that the fact that Inditex’s key brand, Zara, has not grown its operating profit for 3 years it is clear that today’s “scarce growth” environment has pushed the valuations of growth companies to very high levels. In this atypical environment growth comes at a costly premium, which brings us back to HSBC.

HSBC is not an exciting company to own. It’s annual report runs to over 600 pages. Understanding HSBC is a daunting task. Yet two things about HSBC are quickly and easily clear. First, pre-tax, pre-provision profit for 2014 (excluding fines) of $23bn is about 40% less than the $39bn reported in 2007. HSBC is evidently far from peak profits. Second, HSBC’s $1,351bn in deposits, $975bn in loans, $415bn in invested assets and $304bn trading inventory is remarkably similar to JP Morgan’s $1,363bn in deposits, $757bn in loans, $348bn in invested assets and $399bn in trading inventory. Yet with a market cap of $160bn – 30% less than JP Morgan’s $230bn – HSBC is evidently relatively undervalued.

HSBC has in fact been a terrible investment over the past 15 years. Firstly, investors started with a bad valuation: in 2003 HSBC was valued at 3.6x tangible common equity and more than 20x profits. Following that investors have endured terrible management, the lowest interest rates ever, fee income declines, new compliance costs, and numerous fines from regulators. Taking all those punches still leaves HSBC earning about $14bn of distributable profits per year (excluding associates), valuing the company at 11x earnings. Looking to the next 5 years, given you are being asked to pay 37x earnings to Inditex’s growth, big, beaten-up and low growth HSBC is likely to outperform.

With a $2.6trn balance sheet, and a presence in 73 countries, sure, HSBC is not a business that can re-invest profits and double its size. But at the same time it is a business that requires no new investment to offer investors a prospective 6% dividend yield, and just 3% interest rates to offer investors a prospective 8% dividend yield. A growth business like Inditex will take at least 17 years, and another 5,000 stores, to get profits above EUR 7.5bn, good for an 8% yield.

In 2002 HSBC was the dominant retail bank in Hong Kong and one of the big four banks in the UK. The Hong Kong market wasn’t growing: residential mortgage loans of $23bn in 2003 were unchanged from the $23bn booked in 1999. Similarly corporate Asia was in the doldrums following the 1997 Asian financial crisis. Lending to corporates in Asia was stagnant around $50bn. Despite HSBC’s presence “on the ground” in Asia it did not anticipate and position for the rise of China. Instead in the early 2000s HSBC shifted its focus to the developed markets, as management foresaw low US interest rates boosting US mortgage lending. In 2003 HSBC acquired Household one of the largest subprime home-equity originators in the US. Household was also one of the largest issuers of “store” credit cards.

Management was right about low US rates encouraging US mortgage markets. Between 2002 and 2006 HSBC grew its US mortgage book from $27bn to $124bn. Total global home-equity and credit card loans ballooned from $49bn in 2002 to $232bn in 2007. During 2004, for example, HSBC said: “Growth was particularly strong in North America where residential mortgages rose by 44 per cent to US$112.9 billion.” The problem was that management never protected shareholders from the consequences of such rampant lending. At the end of 2007 with subprime risks already “exposed” bad loan reserves in the US were only 2.4% of loans. By the end of 2009 over 20% of the home loan book and 7% of the credit card book were delinquent. From 2007 until the end of 2014 HSBC shareholders were left with a tab for $100bn of loan losses, the majority coming from the US, enough to force the bank into a $18.5bn emergency rights issue in 2009.

So the first blunder for HSBC investors was management’s horrendous capital allocation. The good news though is that HSBC’s $100bn of realised loan losses shows it has been proactive in cleaning up its balance sheet. Wells Fargo in the US, for example, has also done a good job ridding itself of “zombie” loans with $76bn of realised losses. These numbers are well ahead of European banks, BNP for example has realised loan losses of EUR 33bn.

HSBC’s travails in the US forced a major strategy rethink. In 2011 under new management HSBC announced a new focus – back to its core competency as a global commercial bank: “There are two major trends which are key to HSBC’s future: the continuing growth of international trade and capital flows; and wealth creation, particularly in faster-growing markets. In May, we defined a new strategy for the Group to capitalise on these trends and connect customers to opportunities by building on our distinctive presence in the network of markets which generate the major trade and capital flows, capturing wealth creation in target markets and focusing on retail banking only where we can achieve profitable scale… we conducted a Group-wide portfolio review to improve our capital deployment and have now announced the disposal or closure of 16 non-strategic businesses.”

Between 2009 and 2013 the commercial loan book across Europe and Asia grew by more than $100bn from 33% of group loans to 45%. At the same time the US mortgage business shrank from $200bn to just $50bn, and the $30bn US card business was sold to Capital One. Overall HSBC’s loan book has been static at around $980bn since 2007 but below the surface US low-quality mortgage lending and global unsecured personal lending has moved from 40% of the loan book to just 16%, while loans in “advantaged” markets like Hong Kong and UK first mortgages and global commercial loans have expanded from 45% of loans to over 70%. HSBC’s loan book has never been better aligned with its market shares and its global/Asian network.

The next thing to go wrong for HSBC shareholders was the interest rate cycle. Outside of the US HSBC is deposit financed. At the end of 2008 HSBC’s total loans were just 84% of its deposits, compared to 126% at BNP or 162% at Santander. HSBC’s loan to deposit ratio in Asia at the end of 2010 was just 55%. HSBC’s strong deposit franchise meant it was not competing with other European banks for wholesale funding. But this funding advantage meant nothing when a lower policy rates and unlimited Central Bank lending in the US and Europe allowed all banks to re-price their wholesale funding. BNP, for example, which used EUR 800bn of wholesale funding for its balance sheet saw its net interest income rise from EUR 9bn in 2006 to EUR 24bn in 2011, while HSBC with its deposit financed balance sheet saw net interest income plateau at around $40bn.

Recently HSBC’s net interest income has fallen further, to $35bn, this extra $5bn in “lost” revenue stemming from a $7bn contraction in revenue at the retail business: $3bn from “run-off” US mortgage and card lending, and $4bn from around $100bn of excess retail deposits that are invested in “no yielding” government bonds. For six years HSBC has been swimming against the tide of lower interest rates, which have been a huge tailwind for weak deposit banks in Spain, Italy and France. But today with interest rates at zero the situation is reversed. HSBC’s $100bn of excess retail deposits are earning nothing and from this point with every 100bp rise in rates HSBC’s retail business should earn roughly an extra $1bn. A Fed Funds Rate at 3% suggests even with no loan growth HSBC’s balance sheet has $3bn in additional earnings power.

The third thing to go wrong for HSBC shareholders was a hemorrhaging of its fee income. Retail bank fees, which topped at over $10bn in 2007, were less than $7bn in 2014. The big fee generators for retail banks are cards and asset management. HSBC went after card fees through its acquisition of Household in 2002. In 2007 HSBC did $6.5bn in card fees well above Wells Fargo’s $2bn and close to JP Morgan’s sector leading $6.9bn. But much of that was low quality lending: delinquencies of 8% in 2009 compare to 3% reported by JP Morgan. Thus the wind down and ultimate sale of the US card business resulted in a permanent loss of $4bn in fees. Taken together with the reduction in net interest income: between 2009 and 2014 HSBC “lost” $11bn of revenue, of which $7bn is a permanent loss of earnings power.

The next headwind for HSBC investors was compliance cost inflation and new capital requirements. From 2003 through 2010 HSBC reported costs as a percent of income in the low 50% range, or equivalent to around $120,000 per employee, approximately similar to peer Wells Fargo. As part of its pivot back to Asia and away from the US HSBC made great strides in lowering its cost base. The 69,000 employees it had in the US in 2004 are down to 20,000 in 2014. The European business has been trimmed from 82,000 in 2008 to 69,000 while the inflationary Latin American business is down from 59,000 employees in 2008 to 41,000 today. Overall HSBC has exited retail operations in 15 countries. Employee and premises expenses which topped $25bn in 2008 are well in check at $24.5bn in 2014. But sadly for HSBC investors cost cutting has not flowed through to the bottom line.

Away from employee costs other expenses have been spiralling higher. As the Chairman described: “Cost progression continued globally in large part to implement regulatory change and enhance risk controls… It is clear now that societal, regulatory and public policy expectations of our industry are changing its long-term cost structure.”  In 2012 for example the UK introduced a “bank levy” which now costs HSBC over $1bn a year. Despite 70,000 job cuts since 2007 the cost of operating HSBC’s network, excluding fines, is roughly unchanged. With branch rationalisation seemingly ineffective in lowering costs all of HSBC’s revenue decline has been felt on the bottom line. The good news however is that $2bn of new compliance charges and the $1bn UK bank levy are now embedded in the cost structure, forcing HSBC management to be even more disciplined on capital allocation. Management now aims for a 2018 cost base around the $38bn reported in 2014.

So revenue has suffered from HSBC’s retreat for the US and it has suffered from low interest rates. Today the US retail business is just 6% of the loan book and interest rates are at zero. Revenues have reset. At the same time as revenue has declined HSBC has taken on an extra $3bn in regulatory and compliance costs. Instead of “waiting for the rebound” HSBC has exited 15 markets and reduced its workforce by more than 20%. Costs have reset. HSBC is now in a position where even with no loan growth, zero interest rates, and a much higher level of operating costs it can earn $14bn (excluding associates). But, for the time being this isn’t all available to be paid out to shareholders. On top of $3bn in annual regulatory costs, HSBC – guided by the regulator – is targeting 12-13% loss absorbing capital to risk-adjusted assets. This is roughly $200bn – slightly more than double the amount of capital held in 2008 – and means HSBC needs an extra $30bn of capital to meet the regulator’s demands. This of course is a hurdle to dividend growth, but even with no loan growth and zero interest rates HSBC should reach this target in 3 years.

With revenues at a trough, costs at a peak, and still the potential for a 6% dividend yield in 3 years (even without rising interest rates) you’d expect HSBC to start re-rating now. Instead since September 2014 HSBC has de-rated – its market cap down over 20%. This most recent speed bump faced by HSBC shareholders is about reputation. $2.4bn of “one-off” fine charges reported in 2011 were followed by another $2.9bn of “one-off” fine charges reported in 2013, only to be followed in 2014 by a further $3.4bn of fines, including new fines for FX manipulation. In March 2015 HSBC was dealt another blow owing to a suspected tax-avoidance scheme at HSBC’s Swiss Private Bank. The recurrence of these bad conduct events has been eating into HSBC’s profits, slowing its equity capital accumulation. As fines persist the time it takes for HSBC to reach its capital target gets delayed and delayed, which mean dividend hikes could be 5 years or more into the future. Investors have lost patience.

HSBC is an investment where over the past 15 years almost everything that can go wrong has. Having entered 2003 at 3.6x tangible common equity and 20x earnings HSBC is now valued at 1x tangible common equity and 11.4x earnings, investors have seemingly given up. Yet during that time $100bn bad loans have been purged; the weakest parts of its loan book have shrunk from 40% to 16% and the strongest parts of its loan book have increased from 45% to over 70%. Interest rates have fallen from 5% to 0%. The workforce has been reduced by 20% so to absorb $3bn in new regulatory charges. Numerous instances of bad conduct have been exposed and stopped. In a few years when its capital requirements are met HSBC can comfortably pay out $10bn in cash dividends, good for a 6.3% yield.  If interest rates reach just 3% HSBC offers investors a prospective 8% dividend yield. Add on 3% loan growth and in the next 5 years HSBC can easily earn $24bn and pay $16bn in cash dividends, good for a 10% yield. It will take Inditex about 25 years and another 6,600 stores to earn the EUR 9bn necessary to pay a 10% yield. In today’s atypical environment what’s the better bet?