The HSBC (LSE: HSBA) share price is recovering after last March’s sell-off. The stock is up 40% in the past six months. However, past returns are not an indication of future results. I would like to analyse the overall business to see if it’s a good buy for my portfolio.
The bull case for HSBC’s shares
HSBC bank has a global presence. A geographically diversified bank is less risky in comparison to a bank focused on one country. If there is a slowdown in one region, it might be offset by growth in another region. Also, it benefits from country-specific operational expertise, which helps to win cross-border business.
Next, the bank’s focus on the fast-growing Asian region is paying off well. The bank has derived a major portion of the operating profit for the year 2020 from this region.
The bank has a stable balance sheet and a good liquidity position. It is targeting a common equity tier 1 ratio (CET1 ratio) of above 14% in the long term. Currently, it has a CET1 ratio of 15.9% compared to 14.7% in the previous year. It was able to reduce $51.5bn in risk-weighted assets in the year 2020, which led to the improvement of the CET1 ratio.
The bear case for HSBC’s share price
The bank’s profit before tax fell by 34% year-over-year to $8.8bn in 2020. Adjusted profits before tax, which excludes any non-recurring events, fell by 45% year-over-year to $12.1bn. One of the reasons for the drop in profits was lower revenues. For a bank like HSBC, which derives around 50%-60% of its revenues from net interest income, a lower interest rate is a matter of concern. Looking into the net interest margin, it dropped to 1.32% at the end of 2020, from 1.58% in the previous year.
Also, expected credit losses and other credit impairment charges (ECL) increased due to Covid-19. For 2020, it grew from $2.8bn to $8.8bn. This led to the increase of ECL as a percentage of average gross loans and advances to customers to 0.81% from 0.25% for the previous year. This is a key metric to follow as many businesses will find it difficult to repay loans in the current environment.
HSBC has struggled to expand its international business in the last few years. The geopolitical tensions also added to its problems. The bank has already closed some of its branches in the US. It will also sell some of its European operations. For example, the bank is in talks to sell most of the French operations, as the bank has not been profitable there. The bank has also mentioned that it expects a loss on the sale in France.
Final view
HSBC is no doubt a financially stable bank. However, I am not a buyer of the stock now. The main reason is the uncertainty in the global economy and also the low interest environment. I will keep a watch on the HSBC share price. If the global economy shows solid signs of improvement, then I would reconsider my view.