The Motley Fool

Here’s why I’d back the HSBC share price for 2021

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

View of Canary Wharf
Image source: Getty Images.

As a value investor, I’m always on the lookout for companies that might be undervalued. As such, I’ve recently been taking a closer look at the HSBC (LSE: HSBA) share price. So would I buy?

Shares in this banking giant have come under pressure over the past 12 months. There’s no one apparent reason why this is the case. However, I believe there’s a range of reasons why investors have been selling HSBC.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story. In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

The two most important, in my opinion, are the bank’s exposure to China and record low-interest rates. 

HSBC share price challenges 

HSBC’s exposure to China used to be a competitive advantage. The Chinese economy is enormous and growing rapidly. HSBC already generates more than two-thirds of its income in Hong Kong, and management has been trying to push the business more towards Asia for the past few years.

But China’s recent actions to suppress democracy in Hong Kong have attracted criticism from policymakers worldwide. Unfortunately, HSBC has been on the wrong side of this argument.

Simultaneously, the bank’s bottom line is under pressure from low interest rates. Any bank’s basic business model is to take deposits from customers and lend this money to borrowers.

The bank’s profit is the difference between the interest rate and pays depositors and charges borrowers. But with interest rates where they are today, lenders can’t charge borrowers enough to make a substantial profit. HSBC’s net interest margin, the difference between the rate it pays depositors and charges borrowers, was just 1.2% in the third quarter of 2020. It was 1.7% in 2018

These are the main challenges the HSBC share price faces. If the net interest margin continues to decline, profits will continue to fall. What’s more, if relations between China and the West continue to deteriorate, HSBC’s reputation may take a further hit.

Opportunities 

On the other hand, I see plenty of opportunities for the group on the horizon. An economic recovery after the pandemic could lead to rising interest rates, which would be great news for the lender’s bottom line.

Also, if relations between China and the West stabilise, HSBC is in a unique position. It’s one of the few lenders with a large presence in both markets. This gives the bank an excellent competitive edge over peers and could help its growth if China’s economy continues to expand. 

I’m also attracted to the HSBC share price due to its valuation. At the time of writing, shares in the lender are trading at a price-to-book (P/B) value of 0.7. That’s compared to the long-term average of 1.2. This number suggests shares in HSBC are undervalued, although I think it also reflects the risks facing the bank as outlined above. Still, if investor confidence returns this year, the market could overlook these challenges. 

All in all, I think the HSBC share price looks cheap compared to its historical valuation. But this doesn’t mean the stock is undervalued. It’s facing many difficulties, and the lender needs to overcome these challenges. Only time will tell if the group can make the most of the competitive advantage of its international footprint. Still, I would buy the stock for 2021 considering its opportunities. 

There’s a ‘double agent’ hiding in the FTSE… we recommend you buy it!

Don’t miss our special stock presentation.

It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.

They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.

That’s why they’re referring to it as the FTSE’s ‘double agent’.

Because they believe it’s working both with the market… And against it.

To find out why we think you should add it to your portfolio today…

Click here to get access to our presentation, and learn how to get the name of this 'double agent'!

Rupert Hargreaves owns no share mentioned. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.