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After these allegations, what would I do with bank stocks?

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With the FTSE 100 down over 3% today, bank stocks have been some of the hardest hit. Not only have they had to deal with fears of a second lockdown, but also allegations over money laundering. Both the HSBC (LSE: HSBA) share price and the Barclays (LSE: BARC) share price have dropped nearly 7% each so far. In terms of HSBC, this means that it’s trading lower than it was in 2009 and is currently at its lowest level since 1995. Barclays has fared slightly better more recently but is still down over 50% from the start of the year. As a result, with both banks at such low prices, are they a risk worth taking or are they a deadly value trap?

This bank stock just keeps on falling

Since the start of the year, the HSBC share price has fallen 52%. This has been due to an abundance of bad news ranging from the pandemic to the souring of US-China relationships.

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I would say that the largest worry for HSBC has to be the pandemic. With the expectation being that many people and businesses will default on their loans, HSBC has had to set aside between $8bn and $13bn to cover this. In August, the bank also reported a 65% drop in pre-tax profits. This was larger than analysts had previously expected, and the share price has continued to fall since.

Unfortunately for this bank stock, the future doesn’t look much brighter either. The base rate in the UK has remained at 0.1%, and there’s talk of negative interest rates being introduced at some point in the future. This would place further strain on HSBC profits. Political tension in Hong Kong also risks undermining its position in Asia, which accounts for 90% of business.

Finally, the recent news that HSBC has supposedly allowed criminals and fraudsters to move dirty money around the world is also a major worry. Although the bank has stated that it has “embarked on a multi-year journey to overhaul its ability to combat financial crime”, accusations such as these do carry significant reputational risk. The fallout could therefore lead to further drops after its 6% fall today.

All in all, I’m avoiding HSBC shares. Although they’re undeniably cheap, the bad news looks set to continue, and I can see further declines from this point on.

Is the Barclays share price any better?

Another bank stock involved in these accusations of allowing criminal activity is Barclays. It too has pleaded innocence, stating that it “complied with all our legal and regulatory obligations”. Even so, if further evidence is found over the next few weeks, the Barclays share price could drop even further.

Fortunately, Barclays’ saving grace is its investment bank. In fact, in the first half of the year, the investment bank was able to grow revenues by over 30%, and this helped to offset some of the losses. I’m therefore more optimistic for a recovery in the Barclays share price. Of course, with a potential second lockdown on the way, and the added worry of Brexit, this stock is a risk, but I think it’s a risk worth taking.

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Stuart Blair owns shares in Barclays. The Motley Fool UK has recommended Barclays and 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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