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If this happens, I think the HSBC share price could plunge to 280p!

HSBC (LSE: HSBA) claims to be the world’s local bank, but this statement is somewhat misleading.

Indeed, while the bank does have branches all over the world for its clients and customers, from a profit perspective, HSBC is a Hong Kong bank

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I say this because HSBC generates the bulk of profits in Hong Kong. The group generated 93.6% of its pre-tax earnings in Asia during the third quarter, even though it has $426bn of risk-adjusted assets allocated to Europe and the US.

These numbers suggest that the group might be better off selling its European and US businesses and just focusing on Asia, although I don’t think this is going to happen any time soon. Such a sale would eliminate one of HSBC’s key selling points, the fact that it has branches all over the world.

Still, I think these numbers illustrate clearly where HSBC is making all of its money. 

Political problems

The problem is, Hong Kong is in the middle of a political and economic crisis. Protests against the government and China’s influence over the territory have been going on for months, and they’ve become increasingly violent. 

Hong Kong’s economy is suffering significantly from this unrest. Hong Kong fell into a recession for the first time in a decade in the third quarter, and the economic contraction is expected to continue throughout the rest of the year and possibly into 2020.

Tourists are staying away, and Hong Kong’s retail sales fell in August at the fastest pace since records began in 1982. 

The economic turbulence is having a significant impact on the bottom lines of businesses operating in the territory, such as HSBC.

Alongside its third-quarter results, the group increased the amount of money it sets aside to cover loan defaults by 74% to $883m, including a $90m “charge to reflect the economic outlook in Hong Kong.

And things could get worse before they get better. With the protests showing no sign of slowing down, further economic stress on the horizon and the increasing prospect of intervention by the Chinese government, HSBC’s bottom line is under threat. 

50% decline

If China does decide to act and break the “one country, two systems” policy that has been in place since the British handed over the territory in the late 1990s, I think the HSBC share price could plunge.

It’s difficult to tell how much of an impact this would have on the stock, but considering the fact that the group generates barely any profits outside the region, if Chinese intervention leads to an economic collapse, HSBC would be forced to write off billions in loans, which could wipe out profits across Asia. 

As around 50% of group assets are located within Hong Kong’s financial system, if these assets become trapped in the worst-case scenario outlined above, I do not think it is unreasonable to suggest that shares in HSBC could plunge by as much as 50% from current levels. That would leave the stock trading at 280p based on my calculations. 

With this being the case, if you’re on the hunt for FTSE 100 income stocks, it might be better to avoid HSBC and settle on a business with less exposure to Hong Kong. 

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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.