Until fairly recently, I was pretty bullish on the HSBC (LSE: HSBA) share price. The company had a restructuring plan in place that I thought would be of long-term benefit to shareholders. It was going to cut costs and move resources to its more profitable Asian businesses. Then coronavirus happened.
Three months ago, the bank announced it would be pausing its planned head count reduction. A sound political and PR move given concerns surrounding lockdown and Covid-19, but not necessarily a business one. Investors were not happy, and the HSBC share price told the story.
Write-downs and recessions
The other big hit HSBC’s share price took was due to the bank increasing its loan provisions to $3bn. Effectively it was saying a recession may come, and if it does, more people and businesses will not be paying back the money we lent them.
This uncertainty is also my main concern. The provisions themselves are just that – provisions. They are not yet actually losses. Any coming recession due to lockdown – which is perfectly possible, if not likely – will no doubt take its toll. It is the uncertainty surrounding a recession that makes me concerned. Banks and financial stocks always get hit when the economy turn sour.
Even considering this though, I am starting to think the HSBC share price is looking cheap again. As it currently stands, it is at its lowest levels since 2009. It has halved since the start of 2018 and is down about a third since January this year. Given that at its worst during the credit crunch it was about the same levels as it is today, I think it may just be a bargain.
This is, however, with one caveat. Fear. Prices are driven by expectations, and they are driven by greed and fear. Unfortunately for the sensible investor, a price can be driven far below its true value for no fundamental reason. What happens to the HSBC share price this year, I think, will be driven more by investor confidence.
Restructuring back on
As a longer-term investor, however, these kind of knee-jerk reactions fade away. Fundamentals begin to take hold, and I think fundamentally, HSBC has a lot going for it.
With the planned cost cutting efforts back on, everything that made me bullish before is coming to the fore again. Reducing its head count has long been a necessary evil for the bank.
Even more importantly, instituting a plan of closing down less profitable centres, such as the US, and focusing resources on its Asian businesses, I think is a good move. Though there is always a risk of “too many eggs in one basket”, I think the benefit of focusing capital where it can make the most money will pay off.
I think the HSBC share price may see some downside this year, or it may not. In the long run however, I am still thinking it will be a decent investment.
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Karl has shares in HSBC Holdings. The Motley Fool UK has recommended HSBC Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.