At 292p, the HSBC (LSE: HSBA) share price has fallen more than 50% this year. But the downtrend has been in place since the beginning of 2018. Since then, the stock is more than 60% lower. And it’s weak again today because of news reports that the bank moved large sums of allegedly illicit funds over almost two decades — and HSBC wasn’t the only offender according to Reuters and others. Why is it the banks can’t seem to keep out of trouble?
You’ve got to look back more than 11 years to find the share price anywhere near its current level. So, is this stock a once-in-a-decade bargain or a value trap?
A perfect storm affecting the HSBC share price
August’s half-year results report revealed the company has been battling through a perfect storm of unfavourable trading conditions. For example, the company reckons the nature, scale and pervasiveness of the coronavirus pandemic “dramatically” affected the global macroeconomic environment.
Indeed, the bank said in the report the economic disruption caused by Covid-19, together with the worsened economic outlook, resulted in a “material increase” in expected credit losses and other credit impairment charges. And there was a reduction in revenue due to lower transaction volumes and reduced client activity.
Meanwhile, levels of geopolitical risk increased and the directors expect economic impacts for the business. One example is US-China relations are under pressure, heightened by the passing of the Hong Kong national security law and the US Hong Kong Autonomy Act. And the future relationship between the UK and the EU remains uncertain. On top of that, the directors think challenges are emerging in UK-China relations.
As well as those worries, interest rates fell in most of HSBC’s key markets and the directors expect them to remain at lower levels for “the foreseeable future.” That’s not a happy situation for a bank, and HSBC said it will “adversely impact” the firm’s ongoing net interest income.
Recovery potential, but it’s risky
But there’s more. Heightened levels of uncertainty have caused a significant increase in market volatility globally. The directors reckon the situation benefited some of its global markets businesses, but it also led to large adverse mark-to-market movements in the first quarter of 2020. But those moves reversed to some extent in the second quarter.
With that lot, it’s no wonder the shares are down. And if you look at the valuation numbers, HSBC looks cheap. Indeed, the price-to-book ratio is around 0.5. And the forward-looking earnings multiple stands near nine, based on City analysts’ estimates for a resurge in earnings next year.
But will it happen? Looking ahead, the directors said in the report the outlook is highly uncertain and dependent on the path and speed of economic recovery. Indeed, banks such as HSBC tend to move according to trends in the macro-economy. If we see the green shoots of recovery, I reckon HSBC could shoot up like a rocket. But several events have the potential to sink the stock further, such as a UK/EU Free Trade Agreement failing to materialise, and the possibility of more lockdowns caused by a resurgent coronavirus pandemic.
Although HSBC has recovery potential, I think that potential comes with great risk for investors. So, I’d rather look for my bargains elsewhere and from other sectors.
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Kevin Godbold has no position in any 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.