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The HSBC share price is down today! Here’s why I’d buy and hold it inside an ISA

Like many of the big banks, HSBC Holdings (LSE: HSBA) looks massively tempting at the moment, yet is struggling to live up to its potential.

I’d buy on today’s dip

The Asia-focused banking giant trades at just 10.8 times forward earnings, while offering investors a juicy forecast yield of 6.4%, covered 1.4 times by earnings. Yet investors who thought they were buying a high-dividend bargain stock will have been disappointed by recent progress. Today delivers yet another setback.

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The HSBC share price is down more than 4% after Monday’s Q3 earnings release showed a 24% drop in profit attributable to ordinary shareholders, to $3bn, blamed on that reliable scapegoat challenging market conditions.”

Reported profit before tax was down 18% to $4.8bn, worsened by additional customer redress provisions of $606m, and severance costs of $120m. Reported revenue fell 3% to $13.4bn, due to lower client activity in Global Markets, against all comparatives in the same quarter last year.

The outlook also looks glum. The report also said the revenue environment is more challenging than in the first half of 2019, and the outlook for revenue growth is softer than we anticipated at the half-year.”

As a result, HSBC management no longer expects to reach its return on tangible equity target of more than 11% in 2020.

On the comeback trail

HSBC is responding by looking to shift capital away from its low-return businesses but, combined with falling revenues, this could result in “significant charges,” including possible impairment of goodwill and additional restructuring costs.

However, the good news for investors is that HSBC intends to sustain the dividend, while maintaining a CET1 ratio of above 14%.

But the turnaround has been postponed once again. HSBC’s stock now trades 3% lower than five years ago, underperforming the FTSE 100 which grew around 13% over the same period. The dividends offer compensation, but it’s still disappointing.

Global challenges

Many investors have favoured HSBC for its Asia exposure. But this is working against it at the moment, due to the US-China trade dispute and political unrest in Hong Kong. While global diversification is appealing, it also leaves HSBC exposed to problems around the world. For example, today it reported a $132m hit from hyperinflation in Argentina.

Another problem is that this is a massive operation. After oil major Royal Dutch Shell, it’s the second biggest company on the FTSE 100 by market capitalsation, currently a huge £120bn. Acting CEO Nigel Quinn has a major task turning this around.

Investors must now brace themselves for further restructuring, and any simplification of its sprawling operations would be welcome, if only because bank results always make horribly complex reading. However, today’s low valuation is still tempting, and HSBC could arguably double your money from here.

The wider worry, of course, is that we may suffer a global recession some point in the next year or so, triggering a jump in debt impairments, while low interest rates are already squeezing lending margins.

So yes, HSBC continues to disappoint, but if you delay buying a stock like this until everything is rosy, you will almost certainly miss out on the crucial recovery phase.

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Harvey Jones has no position in any of the shares 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.