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How Much Lower Can HSBC Holdings plc Go?

HSBC Holdings’ (LSE: HSBA) (NYSE: HSBC. US) shareholders have every right to be disappointed in the bank’s performance so far this year. Indeed, even after reporting a stellar set of 2013 results, the bank’s share price has declined 8% year to date.

Moreover, HSBC’s management has warned that 2014 is likely to be a tough year for the group, as a tough economic climate persists and financial markets remain choppy.

The question is, how much lower can HSBC’s share price go and will it retest the 2011 lows of 470p per share?

A Chinese problem

Unfortunately, the issue at the forefront of the minds of HSBC’s investors, is China. In particular, investors are worried about China’s ever-increasing mountain of debt and a rising number of defaults.

hsbcWhat’s more, Chinese lawmakers have come out during the last few weeks and stated that they will no longer provide financial support for firms that get into trouble with creditors.

Nevertheless, HSBC’s management have played down the threat of a Chinese credit crunch, saying that some defaults are likely, although the bank’s exposure to bad debt is minimal. Further, HSBC’s management believes that defaults are likely to encourage future fiscal prudence, which is long-term positive for the region.

Rising taxes and regulation

However, outside of Asia HSBC is facing other threats, including the possibility of even greater tax liabilities here within the UK. Specifically, regulators and politicians are considering an increase of the country’s banking levy, to which HSBC is already one of the largest contributors.

Indeed, HSBC paid £551m towards the levy last year, around $0.05 per share, cash which could have been used to bolster the bank’s capital cushion. Unfortunately, under the new proposed levy rules, HSBC could be forced to contribute an additional 20% per annum in levy taxes.

Meanwhile, over in the US, HBCS’s banking business was recently put through its paces by the Federal Reserves’ annual stress test. Although the bank past the test overall, analysts found the bank lacking in the way they planned for unexpected losses and future capital needs.

Unexpected losses and future capital needs are exactly what HSBC could be facing, if the situation within China suddenly deteriorates. Some analysts have suggested that HSBC could be left with a $100bn hole in its balance sheet if China’s financial system collapses.  

That said…

All things considered, it is unlikely that China’s government will let the country’s financial system collapse. With this being the case, concerns over HSBC’s future are somewhat overblown.

Moreover, at present levels the bank appears cheap in comparison to European peers and offers a 4.8% dividend yield, which is covered nearly twice by earnings. Additionally, HSBC is slashing costs by up to $3bn per year, which should support profit growth if revenue slides. 

Foolish summary

All in all, HSBC is facing a number of headwinds in the short-term, which could push the company’s share price much lower. However, at present levels, HSBC’s shares seem cheap and the bank’s dividend yield is well covered by earnings.

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Rupert does not own any share mentioned within this article.