The bad news keeps on piling up for HSBC (LSE: HSBA). Firstly, the pandemic has led to a large number of bad loans, and the bank has had to set aside huge amounts of money for these. Low interest rates have also strained profits. Unlike other UK banks, Asia-focused HSBC has also been heavily involved in the geopolitical tensions between the US and China, thanks to the national security law in Hong Kong. This crisis seems no closer to resolution and will continue to offer a major challenge for the banking giant. But much of this bad news has been reflected in the HSBC share price, which is down 46% on the year. After a further 20% drop over the last month, is it now too cheap to ignore?
The HSBC share price has dropped after earnings
After the half-year results, there’s not much for shareholders to be positive about. Pre-tax profits fell by 65% to $4.3bn and the bank has said that bad loans linked to coronavirus could reach $13bn. It has already granted more than 700,000 payment holidays on loans, credit cards and mortgages. This was worse than many analysts had expected, and the HSBC share price dropped over 3% on the day of the results. Profits were particularly affected within both Europe and the US, while the CEO stated that performance within Asia was more resilient.
The larger problem
While the pandemic has evidently strained HSBC profits, the geopolitical tensions between China and the US have been an even greater headache. For many years, HSBC’s global outlook has been seen as a positive for shareholders. In fact, over two thirds of profits are generated within Asia, which has long been seen as a high-growth area.
Nevertheless, the current situation within the continent has placed a major strain on the HSBC share price. The decision to support the national security law imposed by China on Hong Kong has also angered many. Although the CEO Noel Quinn denied that the bank would have to choose between operations in the West and the business within Asia, he has stated that “current tensions … inevitably create challenging situations for an organisation with HSBC’s footprint”. As a result, I believe this uncertainty will continue to make HSBC a very risky stock.
The recent poor results have accelerated the need to cut costs at the bank. In fact, the firm is aiming to reduce costs by 3% this year. This will include cutting 35,000 jobs from its 235,000-strong workforce, mainly within Europe and the US. In the US, HSBC will also close a third of its 224 branches. This should help the bank increase profit margins.
As a result, with the HSBC share price at its cheapest since 2009, is it now too cheap to ignore? Personally, I’m not rushing to buy. Although the bank is in better shape than it was in 2009, both the current geopolitical tensions in China, and the problems within the UK economy make it too much of a risk. If I were to buy a bank stock, I’d go for Barclays. HSBC just has too many problems!
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Stuart Blair owns shares in Barclays. The Motley Fool UK has recommended Barclays and 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.