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Why I think there’s upside in HSBC

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HSBC (LSE: HSBA) stock has underperformed in 2020. Shares of the bank are down over 40% year-to-date at the time of this writing. 

Stocks that do poorly often are often lower for a reason. For HSBC, the culprit seems to be a perfect storm of bad events such as Covid-19, a weak global economy, and lower interest rates. 

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Despite HSBC’s underperformance, I still have it on my watchlist. Here are three reasons why I think it has potential:

Mainland China opening up more

While HSBC has its headquarters in London, the bank actually makes most of its money in Asia. Specifically, HSBC does really well in Hong Kong, with the territory accounting for over 90% of pretax profits in 2019HSBC also has substantial business in mainland China. 

As a result, I think HSBC could benefit substantially if mainland China continues opening up its economy to outsiders. In terms of opening up the financial sector, that’s exactly what China is doing.

In recent years, Chinese regulators have committed to allowing foreign companies to fully take over local banks. The Chinese government has also committed to allow foreign companies to control pension fund managers and wealth management firms.

If HSBC makes the right deals or invests in the right areas in China, I think the bank could grow its profits faster and its stock could go higher.

The recovery after Covid-19 is contained

Covid-19 has done a lot of damage to the world economy and HSBC’s operations. However, many experts think the West will have an approved vaccine in the next few quarters. 

As a result, many believe the coronavirus could be contained in the US and the UK sometime late next year. Once Covid-19 is contained, I think there is potential for a rebound in HSBC shares simply because of better investor sentiment. 

Once Covid-19 looks like it will be contained, I also it’s likely that British regulators will allow major banks to pay dividends again. Indeed, according to analyst estimates at Citimany of the UK’s largest banks could be allowed to resume dividend payments as early as February of next year

If HSBC were allowed to pay dividends again, I believe the development could help shares of the stock. After all, the  bank was fairly popular with income investors before the coronavirus outbreak. 

I think HSBC has a low valuation 

Another reason I’m positive about HSBC is that the stock is trading well below its book value. According to Bloomberg, HSBC has a price-to-book ratio of just 0.45 at the time of this writing. That compares to the bank’s P/B ratio of around 0.8 in November 2019. 

If earnings normalise and management does a good job in terms of restructuring, I think there’s a lot of room for the shares to improve.

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Jay Yao 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.

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