I have long been a fan of HSBC Holdings (LSE: HSBA) as an investment. Unfortunately this is now one stock that coronavirus has me more uncertain about than any other. Unlike some other industries that I feel are oversold because of fear, banking has a big issue that could cause it trouble. Bankruptcies.
There is almost no doubt that despite the government’s best efforts, many small businesses will go under. The lockdown is keeping people away from pubs and shops alike. Many firms simply will not survive. Almost all of these companies will have loans with banks – loans that they will not be able to repay.
Provisions
It is this figure that hurt HSBC’s quarterly results reported on Tuesday. The bank said it increased loan provisions to $3bn, in an effort to prepare for a run of bankruptcies caused by the lockdown. CFO Ewen Stevenson also warned of “deep, severe recession events” – not exactly confidence-inspiring.
As always, it is the unknown that is of more worry than the facts. We simply do not know how many businesses will be going bankrupt. Nor do we know what the economic environment will look like when lockdown ends. If we did, we could make choices.
Unfortunately, as HSBC investors, some of the prospects that make the stock interesting are no longer there. Once one of the best dividend yields on the FTSE 100, the bank has now suspended its payout. This is for the first time in 75 years, and came on the back of UK government pressure due to the coronavirus. Investors in Hong Kong are now threatening legal action.
HSBC restructuring
The other key problem for HSBC is that its planned restructuring is now on hold. This was set to be a combination of job cuts and re-allocation of capital. Personally I am of the opinion that both of these things would be of great benefit to investors.
HSBC has long had an overinflated headcount across its business. In addition, re-allocating assets and people away from less profitable areas and into better ones seemed likely to set HSBC on a good path for the future.
Specifically, the bank was going to concentrate its efforts in Asia, where it is most profitable. An optimistic view may say that at least the plans are only on hold. In a first-in, first-out way, Asia seems likely to recover from the coronavirus before much of the rest of the world. This may mean HSBC will get even more benefit from reinstating its plans.
However, it seems unlikely that either US or European lawmakers will be happy with the bank cutting jobs just as we head out of lockdown.
To sum up my feelings around HSBC, I am certainly holding on to the stock I have, but I am not buying more. I can see potential for the current price to be a bargain, but for now things are just far too uncertain.
I will. however, be watching this space!
