Over the course of the past month, the HSBC (LSE: HSBA) share price has shown impressive resilience. From lows around the 280p mark at the end of September, the share price currently sits at 340p. This represents a gain during the period of over 20%. Given the slump for most of the year, this might not be much of a celebration for investors in the short term. However, I think there are several encouraging signs surrounding HSBC that could indicate further gains to come.
For a long time, HSBC was bought as a stock by income investors. The firm had been paying out a dividend for 74 years, and so the passive income generated from buying it was clear. Earlier this year, the dividend was cut. This was a move not exclusive to HSBC, as other banks and constituents of the FTSE 100 followed suit. Although the bank techncially had the means to pay the dividend, the regulators advised against it. As a result, the HSBC share price fell.
In a recent trading update, the company said it hoped to pay a conservative dividend next year to investors. This will still likely need approval from the PRA or FCA, but is a clear sign that the bank are wanting to pay out income to shareholders. The HSBC share price rallied over 5% post announcement, so it’s clear that a dividend is something investors do care about.
Better outlook from Covid-19
Another issue that hurt the HSBC share price this year was the pandemic. This was seen in two ways. First, provisions for bad debt had to be raised. Second, falling interest rates meant the bank suffered from the net interest margin it makes.
We could now be seeing a turnaround on both fronts. Q3 net profit came in $1.4bn, higher than the $882m expected. This better performance was helped by reducing the provisions for potential debt defaults. If this trend continues, it will be a removal of the millstone around the bank’s neck that provisions and impairments carry on financial statements.
Regarding interest rates, central banks haven’t cut rates further, and some have made it clear that they don’t want to take rates negative. This is a huge boost for HSBC, given that negative rates would really hurt profitability on a much larger scale than just having low (but positive) interest rates. This situation is still fluid, but the HSBC share price is clearly supported by central bank rhetoric.
HSBC share price: my verdict
The HSBC share price has been struggling for a while now. I think the three points above could be catalysts for a longer-term turnaround for the bank. I also think the risk of further downside is fairly small given the already depressed level of the share price. This may be a different conversation if the share price was at 500p or 600p, but not when the price is at levels not seen for two decades. Therefore, I’d consider buying it.
jonathansmith1 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.