The coronavirus pandemic has devastated bank stocks. This is because of much higher risks of loan defaults, lower profits due to low interest rates and slashed dividends. But for this reason, bank stocks are extremely cheap. One of these is mega-giant HSBC Holdings (LSE: LON:HSBA). HSBC shares have fallen by around 60% year-to-date, and, unlike some other bank stocks, it has not staged a significant recovery. But are HSBC shares simply too cheap to ignore, or does it have further to fall?
Resolute through a crisis Founded in 1865, HSBC has survived a number of crises. For example, in the aftermath of the 2008/09 global financial crisis, the share price was able to rise 105% in just eight months. This is in part due to a sturdy balance sheet, which it maintains today. It is also one of the largest financial organisations in the world, with significant exposure throughout Asia. In this respect, some believe that the bank is ‘too big to fail’.
Why has it not recovered like other bank stocks? While other bank stocks have already seen significant recoveries from their lows, HSBC has seen little growth. This is mainly because it is dealing with the geopolitical tensions occurring between China and the US. HSBC profits are heavily dependent on its position within Hong Kong and Asia in general. In fact, Asia accounts for 90% of profits. The decision to support the new security law in Hong Kong has also led to criticism of the bank. As a result, I do worry that the ongoing tensions in Hong Kong will place a major strain on the firm and hinder its recovery.
Another reason why I think this bank stock has not recovered as strongly is due to poor leadership over the years. The current CEO is Noel Quinn, who succeeded John Flint after his sacking last year. But it took Quinn six months to produce the first strategic plan for the bank, and this was scrapped due to the pandemic. The current plan includes cutting staff and shrinking the size of the bank. While this should help increase profits, decisive and even ruthless action is essential for its future health (sad though this is for those who lose their jobs). I’m not convinced that HSBC management is strong enough to achieve this aim.
Other problems HSBC is also dealing with similar issues to all other bank stocks. For example, the Bank of England has pressurised them into cancelling both dividends and share buybacks until the end of the year. This is so that they have maximum funds available for supporting businesses and sufficient cash in preparation for loan defaults. The cut dividend was particularly badly received in Hong Kong, where dividends have not been restricted. As a result, this could be especially damaging towards HSBC and its position in Asia.
For the final analysis, I would therefore stay away from this bank stock. While I do think HSBC shares will recover, I also believe that the current geopolitical tensions will hinder this growth. Instead, I would therefore invest my money in other FTSE 100 stocks.
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Stuart Blair 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.
Motley Fool UK 2020