In 2021, HSBC (LSE: HSBA) has underperformed in comparison to many other bank stocks. In fact, while Barclays has risen an impressive 24% this year and Lloyds has managed an even more impressive 33%, the HSBC share price has only risen 5%. But the bank’s recent positive trading update gives me optimism that HSBC has recovered well. Let’s look at this in more depth.
Trading update
Despite revenues being 4% lower than the year before, profits after tax in the first half of 2021 soared around 150% to over $10.8bn. This was far higher than analysts had expected and reflects the more favourable environment for banks at the moment. Indeed, HSBC was profitable in all of its regions, and performance in the UK was particularly strong. Such large profits were supported by a cancellation of $300m of provisions made for bad debts.
With restrictions on bank dividend payments removed by the Bank of England in July, HSBC also announced an interim dividend of 7 cents per share. I feel that there is scope for this to rise in the future, in line with the bank’s policy to pay out 40%-55% of earnings per share in 2021.
These results were impressive, and the HSBC share price has risen just over 1% this morning. But what other factors need to be taken into account?
Other factors
The pandemic has quickened change at HSBC, and the bank has worked hard to build its business in Asia. This has included $6bn of new investment in Hong Kong, China and Singapore. David Liao and Surendra Rosha have also been appointed as co-heads of the bank in Asia, and four executives from London have been relocated to Hong Kong. Accordingly, it is hoped that HSBC will be able to achieve strong growth through this strategy. This will hopefully have a positive impact on the HSBC share price.
At the same time, it has also been retreating from both Europe and the US, and it has sold its French and US retail branches recently. I am impressed with these strategic moves. Indeed, HSBC had long struggled to establish a foothold in either of these countries, and by selling them, it will help the company’s “pivot to Asia”.
There are risks with the Asia strategy, however. Firstly, there are a number of geo-political challenges within the region. These include ongoing US-China tensions and the difficulties raised by the controversial Hong Kong security law. Recent reports have also shown that Chinese growth is starting to slow down. These are challenges that are sure to cause difficulties for HSBC and may have a negative effect on profits.
Why is the HSBC share price too cheap?
Clearly, the bank is still facing challenges, and these are likely to persist for many years. Despite this, the recent trading update demonstrated a current performance I see as excellent. The bank also has a price-to-earnings ratio of under 10, demonstrating good value. As such, despite my earlier doubts about the company, I now believe that the HSBC share price is too cheap. This may tempt me into buying some shares for my own portfolio.
