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Why I think the HSBC share price is undervalued

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One English pound placed on a graph to represent an economic down turn
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The HSBC (LSE: HSBA) share price used to be one of the most popular stocks in the FTSE 100. Unfortunately, over the past few years, the company has made many missteps, which has hurt investor sentiment towards the business.

However, after the stock’s recent performance, I think there’s a great opportunity here for long-term investors, such as myself. At current prices, I believe shares in the lender are deeply undervalued. 

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Therefore, I’ve been reviewing the business recently to see if it could be worth acquiring some shares in the bank to add to my portfolio. 

HSBC share price challenges

I think it’s fair to say that HSBC has been struggling for direction over the past decade.

Throughout the 2000s, the lender embarked on an ambitious expansion programme, aiming to become the world’s local bank. Then the financial crisis slammed into its dreams. In the years after, management started to streamline the business and move away from its aggressive global expansion policy.

As well as this change of direction, the group was also faced with new regulations, a string of fines, and legal actions. One example, in 2012, the bank was fined $1.9bn for failing to prevent Mexican drug cartels from laundering hundreds of millions of dollars.

Facing multiple headwinds, HSBC began slimming down. This process has accelerated over the past three years. The bank is exiting non-core markets such as France and the US and focusing its efforts on Hong Kong and China. These have always been profit centres for the group. Management is also culling 35,000 jobs. 

Going forward, the bank is going to be smaller and leaner. I think it will also be more profitable. HSBC’s global network was previously a competitive advantage. This hasn’t worked. In my opinion, it doesn’t make much sense to keep losing money just to maintain the brand’s global status.

Instead, I think the bank can be far more successful concentrating on its favourite markets while maintaining a few international outposts. 

Undervalued equity

Considering all of the above, I think the HSBC share price is undervalued. By removing loss-making businesses and focusing on its most profitable divisions, I think profits should increase in the years ahead.

On that basis, I don’t believe the stock deserves to trade at a discount to book value. Today, it’s trading as a price to book value of 0.7. That looks too cheap to me. 

Of course, the bank may face additional challenges in the future, which could cause further problems. Another coronavirus wave, for example, may incur significant losses. Further fines and penalties may also restrict the group’s ability to do business in certain markets.

Lower interest rates are also causing problems across the financial sector. If interest rates fall below 0%, HSBC’s income may drop significantly. 

Still, even after taking these risks into account, I think the HSBC share price is undervalued. As such, I’d buy shares in the bank for my portfolio as a long-term investment.

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Rupert Hargreaves owns no 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.

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