The HSBC (LSE: HSBC) share price has seen an encouraging recovery since last year’s market crash. Up 40% in the past six months, the worst seems to be behind HSBC. At current prices, I believe this share could be a great way to capitalise on the post-pandemic economic recovery.
HSBC’s global presence
Although HSBC is a British bank, most of its business is derived from Asia. Since the 1970’s it has taken an increasingly global business approach. This largely involved exploiting the extensive economic growth that Asia has seen in the last few decades. For context, 42% of the firm’s total capital is allocated in Asia. This capital made up 84% of total profits for 2019, highlighting the financial importance of the region to the HSBC share price.
In reaction to this, the firm is filtering its assets into these more profitable regions. In 2020, chairman Mark Tucker announced that a transition of £100bn of risk-weighted assets was underway to move capital from less profitable regions. Considering the share price was falling even before the pandemic, this seems like a wise move from the bank’s management.
The current ultra-low interest rate environment doesn’t bode well for the business. It largely reduces the bank’s ability to generate interest-related revenues. While this is bad news in the short run, rising bond yields signal investors are expecting interest rates to rise in the future. Higher forecast interest rates are indicative of higher inflation. This reduces the monetary demand and erodes future earnings. This is part of the reason for the recent fall in US tech share prices. However, this will help the recovery of bank stocks, as it increases the profits made on lending. This is good news for the HSBC share price.
Risks to the share price
In the short-to-medium term, HSBC still faces profitability problems. The FTSE 100 firm recently announced it would be revising its return on tangible equity of between 10-12% for 2021. A new target has been set of greater or equal to 10%. RoTE represents the net profit as a percentage of shareholders’ funds. A reduction in this number is bad news for investors, which could drive down the share price.
A concern for banks around the world is a growing threat that cryptocurrencies and fintech pose. The world is moving towards a cashless future, with faster, more secure payments being offered by new online services. Banks like HSBC must be able to adapt to this new digital age if they want to survive.
Finally, though Asia presents a rapidly-growing market for HSBC, this comes at the cost of fierce competition. With many banks beginning to focus more on Asia, HSBC may struggle to keep the competitive advantage it currently enjoys.
All risks considered, I would like the rising HSBC share price in my portfolio. I believe the firm offers a way to profit from the rapidly increasing economic growth in Asia. Although the firm faces some short-term problems, I think these are outweighed by the long-term benefits.
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Dylan Hood has no positions in HSBC Holdings. 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.