Positive sentiment boosted all the major Asian stock market indices this week. This should be excellent news for HSBC (LSE:HSBA) as Asia accounts for more than 50% of its revenues and 55% of its employees. But is this positive sentiment enough to help lift the battered stock?
HSBC share price woe
The HSBC share price has lost nearly 30% of its value since the beginning of the year. This loss is on par with its peers in the UK banking sector. However, it’s far worse than the FTSE 100 index as a whole, which has lost around 17% of its value.
It’s easy to understand why the share prices of banks have been so badly affected. Interest rates are at record lows, all dividend payments have been suspended and with a pending global recession, bad debt levels could rise sharply.
But it’s a concern that despite the share price fall, HSBC is still not considered cheap. Its price-to-earnings ratio remains above the FTSE 100 average of 15. By comparison, Lloyds and Barclays have price-to-earnings ratios of less than 9.
Diverse global player
Why is HSBC more highly valued? One reason could be that it’s geographically diverse, operating in 64 different countries. It’s also the biggest international bank in mainland China, has a dominant market share in Hong Kong and a developing presence in India. Two thirds of its profits come from Asia and when economic growth returns to the region, HSBC will undoubtedly benefit. This is in contrast to banks such as Lloyds, that are more reliant on the strength of the UK economy.
HSBC also has a large investment bank, which in the short term will benefit from market turbulence as most of its revenues are generated through fees, rather than loan interest.
Geographic and product diversification provides the HSBC balance sheet with some defensive resilience. However, the challenges facing banks at the moment are global and it’s difficult to predict when more prosperous trading conditions will return.
Fallen dividend giant
At the beginning of the year, the HSBC share price was considered attractive for income investors. They were attracted by the high dividend yield, which was in excess of 5%, and the quarterly payments.
However, profits only just covered these dividend payments. So, it wasn’t a surprise when it announced that it had suspended its dividend policy due to the potential impact the coronavirus might have on its balance sheet.
On a positive note, retaining the dividend money and accelerating cost-cutting measures should ensure HSBC emerges from these troubled times leaner and more profitable. This can only enhance the share price if it’s done successfully.
So where does that leave my view of whether HSBC is a buy or not? There are several problems in the global banking sector that aren’t going to ease in the short term. However, the geographic diversity of HSBC is a strength that should see its share price recover more quickly than some of its peers when economic conditions do improve.
But for me, the HSBC share price still isn’t low enough for me to be confident that it can recover its losses in the next six months to a year. As a consequence, I think there are better places to be investing your money.
The authors owns shares in HSBC Holdings. 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.