Shares in HSBC (LSE: HSBA) have dramatically underperformed the wider FTSE 100 this year, as concerns about the bank’s long-term strategy have depressed investor sentiment.
Year-to-date HSBC is down 16% excluding dividends, compared to the FTSE 100, which has declined by 7% excluding dividends over the same period.
And HSBC’s declines have pushed the bank’s shares down to a level not seen since the 2011 euro crisis. The shares hit a low of 470p at the end of 2011 and came close to this level again back in September when they dipped as low at 490p. Unfortunately for investors it’s unlikely that HSBC’s shares will stage a dramatic recovery anytime soon and there’s a very real possibility that they could dip further. They could even drop to a new five-year low before staging a recovery.
Broken China
HSBC’s declines can be attributed to one primary catalyst – China. Many investors are concerned about China’s slowing growth and the country’s indebtedness. As a result, some are steering clear of any company that has a significant exposure to the region.
Concerns about the state of China’s economy isn’t the only factor that’s causing investors to avoid HSBC. The bank is also struggling to produce any earnings growth and actions to cut costs have been undone by an increasing regulatory burden. Management has cut thousands of jobs, sold more than 50 non-core businesses, and exited multiple non-core markets since 2008. But since 2010, pre-tax profit has fallen by around 20%. Current City forecasts expect pre-tax profit and earnings per share to fall a further 1% and 4%, respectively, for full-year 2016.
No place like home?
The bank’s latest attempt to try to jump-start growth involves a shift back to its home market. HSBC is planning to relocate group assets away from underperforming markets such as Europe, the US and Turkey and towards Asia – specifically China – where management believes higher returns are possible.
However, it’s started to become clear over the past few months that HSBC’s management hasn’t thought this strategy through.
HSBC is planning to increase its workforce in the Pearl River Delta area of southern China, which includes both the mega city Shenzen and Hong Kong, by 30% during the next few years. According to the bank’s figures, by increasing its presence within this area, it can drive a ten-fold increase in profits from the region by 2020. Not bad. At the same time, it’s planning to cut 50,000 jobs outside China as it retreats from some non-core markets.
The problem is, HSBC is struggling to find suitable customers in China.
Spot the customer
During the third quarter, HSBC cut $38bn from its $1.2tn of risk-weighted assets but could only redeploy $5bn. As chief executive Stuart Gulliver explained, the bank had been forced to slow its redeployment of assets because of the slowdown in Asian economic growth. In other words, HSBC’s relocation to Asia is now on hold. HSBC is looking to cut $290bn of risk-weighted assets in total. Of these, management is looking to redeploy $150bn of assets into Asian markets.
As HSBC cuts its presence in non-core markets but struggles to redistribute assets in China, the bank will struggle to grow, and profits could contract further.
Which is why, if growth remains elusive, the bank’s shares could hit a new five-year low.
