The HSBC (LSE: HSBA) share price has plunged in value this year. Excluding dividends, shares in the lender are off around 37% in 2020. Over the past 12 months, the stock has declined by a staggering 44%!
Following this slump, the stock appears to be an excellent bargain for value seekers. Indeed, shares in the Asia-focused bank are changing hands at a price-to-book (P/B) ratio of only 0.6. That’s compared to the financial services sector average of around 1.
These numbers imply the bank could be worth as much as 40% more than its current valuation in the best-case scenario. However, while the HSBC share price looks undervalued at first, there are several things investors need to be aware of before buying into the banking group.
HSBC share price: problems ahead?
HSBC generates the majority of its profits in Asia, specifically Hong Kong. Unfortunately, the recent unrest in the region, as well as the Chinese government’s intervention, has hurt investor sentiment towards the group.
But this isn’t the only reason why investors have been avoiding the HSBC share price in 2020. It’s been struggling for some time to rekindle growth at both its European and American operations.
The coronavirus crisis has hardly helped. At the height of the crisis, HSBC had to put its restructuring plans on hold. It may also suffer from higher loan losses and defaults by customers as a result of the ongoing crisis.
All of the above makes it difficult to predict what the future holds for the HSBC share price. The bank’s strong balance sheet and globally diversified operations have both helped it weather the crisis. However, trying to figure out if the group will return to growth in the years ahead is difficult. We’ll have to wait until there’s more information about the impact the pandemic has had on the business.
Dividend cut
The bank was also forced to suspend its dividend to investors earlier this year. This only piled more pressure on the HSBC share price. The lender had been one of the most sought-after income stocks in the FTSE 100.
While management has promised to restore the payout when the group is allowed, investors might be disappointed by the level of the distribution. Even before the crisis, HSBC was paying out more than it could afford. Dividend cover had slipped below one in 2019. This implies the company was returning more cash to investors than it was actually earning from operations.
Still, despite the headwinds facing the business, over the long run, the company’s size and position in the global finance industry may help it make a healthy recovery. Therefore, investors with a long-term time horizon may benefit from buying the HSBC share price today, even though its near-term future is uncertain.
