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I’d buy the HSBC share price ahead of the stock market recovery

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The HSBC share price has fallen by a third since Covid-19 struck, pushing it into bargain territory. However, anybody who’s keen to buy it before the stock market recovery also has to accept that its generous dividend has gone, for now.

Today, HSBC Holdings (LSE: HSBA) reported a thumping 48% drop in first-quarter pre-tax profit to $3.2bn, after setting aside $3bn to cover bad debts due to Covid-19. The HSBC share price has taken it on the chin though, and is broadly flat today. Frankly, investors feared worse.

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Despite today’s headline numbers, I think the long-term investment case for the Asia-focused FTSE 100 bank is still promising.

The HSBC share price still tempts

The coronavirus has inevitably hit the top line, with reported revenue down 5%, amid lower customer activity. Investors have been warned to expect materially lower profitability in 2020, relative to 2019.” Management is fighting back by postponing restructuring plans, and 2020 costs will now be lower than previously indicated.

HSBC has taken an early hit from the coronavirus, given its outsize Asian exposure. Today could have been a lot worse though. The HSBC share price could recover faster than domestic-focused UK banks, if Asia avoids a second wave of infections. Lending actually increased $41bn and deposits grew by $47bn, on a constant currency basis.

Regulators have forced the banks to rebuild their capital bases since the financial crisis, and this is working in HSBC’s favour today. Stock market volatility may help its investment bank, as traders look to take advantage.

The big worry is that the crisis will drag on and bad debts increase. HSBC expects impairments of between $7bn and $11bn this year. Higher, and the HSBC share price will suffer.

HSBC could lead the stock market recovery

The Prudential Regulatory Authority forced the banks to scrap dividends and focus efforts on saving businesses and private customers. That’s a shame, as the stock was yielding around 6%. Today, HSBC said it would review its dividend policy around the time of its year-end results for 2020.

The ultimate decision could be out of its hands, as regulators may determine what’s allowed. This may extend to share buybacks as well. Once the dividend is restored though, the HSBC share price will get a lift.

The global collapse in interest rates will hit net lending margins, but I suspect rates may recover faster this time. With trillions of stimulus set to hit the global economy, we might even see inflation, which would take us into a different world.

Ultimately, how fast the HSBC share price recovers depends on that pesky virus. If the world gets back to work in swift order, it’ll look a great buy at today’s price. A second or third wave could wreak havoc though.

I would buy HSBC today, based on the optimistic case. Covid-19 pessimists will disagree.

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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.

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