Who’d buy banking shares? My Lloyds Banking Group shares perpetually disappoint me. And HSBC Holdings (LSE: HSBA) hasn’t done much better this year. The HSBC share price has fallen 40% so far in 2020. But at least that’s not as bad as Lloyds and its 54% crash.
The growing spat between China and the US hasn’t helped HSBC. As well as escalating trade tension, a blame war over Covid-19, and fallout from the new Hong Kong law, President Trump has been taking aim directly at HSBC too.
But thinking about the world’s economic situation right now, I see HSBC as having a significant advantage over Lloyds. Being tied to the Chinese economy over the next decade and more seems, to me at least, to be a significantly more favourable position than depending on the UK economy. Whatever happens here will surely have relatively little effect on the HSBC share price in the long term.
In the past, when banking stocks have been down, I’ve taken comfort in my fat annual dividends. Dividends are gone this year, and it does seem somewhat unfair to HSBC shareholders. The PRA directed banks to withhold their dividends and preserve capital during the Covid-19 crash, which is fine. But HSBC was caught up along with the rest, simply because it’s listed on the FTSE 100, even though it has relatively little exposure to the UK market.
When HSBC does reinstate its dividends, it won’t need anywhere near the same levels to provide good yields. Analysts are forecasting something around half the 2018 level for 2021. And with the HSBC share price so low, that would still yield 7.5%.
One problem I have is that I’ve read my Motley Fool colleague Harvey Jones’s take on HSBC and other banks. He explains his reasons why he thinks Warren Buffett would avoid the likes of HSBC these days. In particular, the workings of banks can be a bit of a black art, and I couldn’t come close to fully understanding their accounts. In fact, judging by how the banking crisis took all the experts by surprise too, I doubt anyone really can. And Buffett says you shouldn’t invest in something you don’t properly understand.
Wonderful HSBC share price?
There’s Buffett’s thing about looking for wonderful companies at fair prices too. I really couldn’t describe HSBC as wonderful right now – never mind Lloyds. But the HSBC share price? On the current valuation, that looks quite wonderful to me. I don’t think it’s the individual banks themselves that might fail the wonderful test. Not now they’ve recapitalised and can boast the strongest balance sheets they’ve had in decades. It’s surely the banking business in general.
Had the banks not made heroic recovery efforts after the previous financial crunch, some could have been wiped out by the coronavirus crash. But as it is, they seem to be getting through it with little trouble. That convinces me that the HSBC share price really is too low. And, though Warren Buffett might not go for it, I think there’s room for buying decently strong companies at wonderful prices.
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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group. 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.