We don’t often see a bank leading the FTSE 100‘s biggest winners these days. But that happened Tuesday, with HSBC Holdings (LSE: HSBA) as much as 7% ahead at one point. And since a Covid-19 low on 25 September, the HSBC share price has climbed almost 20%. So, are my convictions that the Footsie banking sector is oversold finally proving correct?
Well, before I go all “told you so“, the bigger picture must be examined. Even if HSBC investors have had a good month, they’re still down 44% year-to-date. And over five years, they’re sitting on a 34% loss. Tuesday’s rise in the HSBC share price is backed by something fundamental, though, in the shape of a third-quarter earnings update.
HSBC has reported a pre-tax profit of $3.1bn in the third quarter. That’s down $1.8bn from the same quarter in 2019. But just seeing a bank recording a healthy profit in 2020 seems like very good news to me. And on an adjusted basis, the bank put its pre-tax profit at an even better $4.3bn, down $1.1bn. For the nine months, adjusted pre-tax profit comes in at $9.9bn. HSBC describes that as resilient, and I wholly agree.
Healthy balance sheet
Of course, it’s probably liquidity that counts more than anything for the HSBC share price right now. And on that front, I’d say HSBC is looking comfortable. The update showed adjusted deposits if $1.6tn, 12% ahead of the same point a year previously. And a CET1 ratio of 15.6% is a strong measure at any time, never mind in a period when banks are supposed to be under severe pressure.
There’s going to be a fall in full-year earnings, for sure, but analysts predict a strong rebound in 2021. Based on that, the current HSBC share price indicates a price-to-earnings multiple of 10 while forecasts put the dividend yield at 7%. I think that’s way too cheap. But what might trigger an upwards rerating?
Asian governments have achieved remarkably greater success at tackling Covid-19 than their Western counterparts. As a result, Asian economies are already recovering well from the worldwide slump.
HSBC share price recovery ahead?
The upcoming US presidential election is surely weighing heavily on the HSBC share price, though. Should Donald Trump win reelection, it seems likely he’ll reinforce his tough economic stance on China. And that would probably not be good for any global banks, let alone HSBC with its Chinese focus.
But if Joe Biden wins, we’ll most likely see a softening of trade disputes with China. And, at least from an economic point of view, free trade is good. I think it would almost certainly boost HSBC’s prospects.
Whatever happens politically, the banks do still face risks. And I expect bearish pressure will continue to hold back the HSBC share price along with the rest of the sector for some time. But I’m fully convinced that all of those risks are more than factored into today’s low banking share prices. So yes, I’d buy banks now. And yes, I’d buy HSBC.
Alan Oscroft 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.