You wouldn’t know which way to go with HSBC Holdings (LSE: HSBA), would you? The HSBC share price is down nearly 50% in 2020, so it’s got to be good value now, hasn’t it? But Lloyds has fallen even further, so maybe there’s worse to come?
What about dividends? There’s been a cut this year to help deal with the Covid-19 pressure. So yields of 5% to 6% and better could be history. But if dividends resume strongly in 2021, as analysts predict, we could see a yield approaching 8% on today’s HSBC share price.
Banks are at the heart of economic development. But the banking crisis showed you can’t trust them. It is international, though, and investing is increasingly global. Ah, but it’s mostly in China and the East Asia, and there’s turmoil there. And we’re in the middle of East-West trade wars.
The old saying “May you live in interesting times” comes to mind. It purports to be an Eastern curse. The idea is that the best times to live are the uneventful and uninteresting times, and it’s conflict and upheaval that make times interesting. But troublesome times really can be among the best times to invest in shares.
The HSBC share price’s future?
I have little doubt that the best UK shares will recover strongly and go on to reward their shareholders for decades to come. The other side of it is that weaker companies might be in longer-term trouble. Those that have imprudently over-stretched and over-borrowed in good times could end up collapsing altogether.
How do we tell the good from the bad? Where does the future lie for the HSBC share price? The key measure is surely liquidity. As it happens, we have a useful check in the form of the Bank of England’s annual stress test. For the last one, in 2019, the stress scenario now seems eerily appropriate.
In HSBC’s own words: “The Bank of England’s 2019 test scenario for the domestic UK economy is broadly similar to the 2018 exercise, however the global recession scenario is very slightly more severe than in 2018. The scenario models a hypothetical synchronised global downturn with growth in Hong Kong, China and other emerging market economies in which HSBC operates being particularly adversely affected.“
Liquidity at HSBC
Under that test, HSBC’s common equity tier 1 (CET1) capital ratio would drop to 8.9%, which is above the hurdle rate of 7.7%. There are other measures too, but essentially the result showed what the bank described as “HSBC’s continued capital strength under this severe downside scenario“.
Under those conditions, I’d expect the HSBC share price to crash. And we can only guess what the now-cancelled 2020 stress tests would need to simulate compared to what’s actually happened.
But at 10 October, HSBC reported a 30 June CET1 ratio of 15%, improving partly due to the cancellation of the 2019 final dividend. The bank released a whole host of figures, essentially showing there really isn’t a liquidity problem.
I turn back to HSBC being a major global player in an essential sector. I can see it going from strength to strength when we get back to less interesting times, with little liquidity risk in the meantime. Has the HSBC share price really bottomed? I think the chances are high.
