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Should I buy HSBC shares?

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HSBC (LSE: HSBA) shares rose about 10% in the past year. The returns are in line with the FTSE 100 index, but lower than those of Barclays Bank, which I reviewed a few days back.

Here, I would like to look into the pros and cons of investing in HSBC shares.

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HSBC’s fundamentals

HSBC is in the process of transitioning to its core markets, namely Hong Kong and China. The bank will continue to retain its headquarters in London. However, many executives will move to Asia, where the bank is investing over $6bn in the next five years. The move doesn’t surprise me since the Asian region is growing at a faster rate than the UK. Also, the bank was not profitable in many of the international locations in which it was operating. This could also be seen in the fact that HSBC shares are down about 5% during the past five-year period.

HSBC bank’s first-quarter 2021 results were good. Profits increased 82% to $4.6bn. The results are not easily comparable to the previous period due to the starting of the Covid-19 last year. However, all regions were profitable, which is positive. The improved economic outlook also helped the bank release $0.4bn of expected credit losses compared to a charge of $3.0bn in the first quarter of 2020.

Revenue was down 5% to $13bn. This was mainly due to interest rate reductions in 2020. However, the bank’s capital position is good. Its CET1 (common equity tier 1) capital ratio of 15.9% was unchanged from 31 December 2020 and better than the 14.6% at the end of 31 March 2020.

Risks to consider in investing in HSBC shares

The bank’s strategy to shift to Asia is not without any risks. It had also tried this strategy on earlier occasions, but it did not have much success. The bank will also have to forego some of its existing European retail business. The political differences between China and Western countries might also negatively impact HSBC shares. 

The net interest margins are lower due to low interest rates. The net interest margin was 1.21% compared to 1.22% at the end of the December quarter and 1.54% during the same period last year. Due to the growing economic uncertainty, governments across the globe favour lower interest rates to stimulate growth. 

HSBC recently agreed to sell its French retail banking operations to US private equity group Cerberus for a token payment of €1. The bank is expected to book a pre-tax loss of about $3.0bn associated with this transaction. The French retail operations were a drag on the bank’s profits. So, this might improve profitability in the long term. However, there are costs and additional cash that might have to be provided by HSBC to maintain the agreed net asset values of $2bn at the time of the transfer.

Final view

I am not a buyer of the stock today. I like the bank’s focus on the Asian region, however, there are many uncertainties, as discussed in the risks above and the global economy. So, I will continue to keep a watch on the stock.

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Royston Roche has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and 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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