HSBC’s(LSE: HSBA) share price has pulled back recently. Back in August, it was above 550p. Today however, it’s near 480p. Is this a good opportunity to buy HSBC shares for my portfolio? Let’s take a look.
The shares look cheap
HSBC shares do look quite cheap at the moment. Currently, analysts expect the bank to generate earnings per share of 80.1 cents (HSBC reports in US dollars) for 2022. That puts the stock on a forward-looking price-to-earnings (P/E) ratio of just 7.1, which is low. To put that figure in perspective, the median P/E ratio across the FTSE 100 index is about 13 right now.
Lower profits
Cheap stocks are often cheap for a reason however. And in HSBC’s case, the company is facing a few challenges right now.
One is larger loan losses as a result of weakening economic conditions. For the third quarter of 2022, HSBC reported expected credit losses (ECL) of $1.1bn (versus $659m a year earlier), reflecting increased economic uncertainty, higher inflation, and ongoing developments in China’s commercial real estate sector. This dragged profit before tax down 42% year on year to $3.1bn.
Looking ahead, HSBC said that it expects ECL for 2023 to be at the higher end of its planning range of between 30 and 40 basis points of average loans.
Pressure from major shareholder
Another issue here is that the bank is under pressure from its largest shareholder, Ping An Asset Management. Ping An is not happy with HSBC’s performance and has urged it to cut costs aggressively and exit sub-scale non-Asian markets. It believes HSBC should spin off its Asia operations.
HSBC doesn’t want to do this, as this move would have a negative impact on its credit rating, operating costs, and tax bill. So this may not happen. However, the pressure from Ping An adds some uncertainty in terms of the investment case here.
Benefiting from higher interest rates
Now there are a few reasons to be optimistic about HSBC shares. Higher interest rates are one. For Q3, the bank’s net interest income surged 30% to $8.6bn, helped by higher rates.
Its focus on growth markets is another. One of HSBC’s goals is to shift capital towards areas such as Asia and wealth management, which generate higher returns. It believes this shift will enable it to achieve solid top-line growth in the medium to long term.
Of course, there’s also the dividend here. Currently, HSBC shares have a yield of about 5.3%.
Should I buy the shares today?
So am I a buyer of HSBC shares given all of the above? The answer right now is no.
I do think the bank stock looks cheap. However, with the global economy weakening, I am happy to leave the stock on my watchlist for now and focus on other investment opportunities.
