HSBC share price: after profits surge 79%, is it still too cheap?

The HSBC share price jumped on Tuesday, after profits came in ahead of expectations. Is the stock too cheap, or are there hidden risks for shareholders?

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Thanks to Covid-19, 2020 was a horrible year for British banks. This week, the UK’s Big Five lenders all reveal their first quarterly results of 2021. First to kick off the banks’ reporting season is HSBC Holdings (LSE: HSBA). Clearly, investors liked what they saw, because the HSBC share price is up today.

HSBC profits soar 79%

The UK’s biggest bank reported first-quarter pre-tax profit of $5.78bn (£4.2bn), up almost four-fifths (79%) from $3.23bn a year earlier. Diluted earnings per share (EPS) more than doubled to $0.19 from $0.09. Higher profits and EPS should help to support the HSBC share price. However, it wasn’t all good news for shareholders, as HSBC had a few hiccups.

First, total revenue declined to $12.99bn, down 5.1% from $13.69bn in Q1/20. Given the economic ravages of Covid-19, this wasn’t that bad. Second, the bank’s cost-efficiency ratio climbed to 65.7% from 57.4%, thanks to soaring costs. Third, HSBC’s net interest margin (NIM) fell to 1.21%, from 1.54% in Q1/20. This fall — a third of a percentage point — shows the bank’s spread between lending and savings rates declining sharply. Yet the HSBC share price still rose today.

The HSBC share price rises 3.3%

One reason for HSBC’s improved outlook is the bank released some loan-loss reserves set aside in 2020. The bank put aside $3bn to cover bad loans in 2020, but has since released $400m of this, which flows straight into its bottom line. Also, HSBC was profitable in all regions, making $1bn of profit in the UK ($369m in Q1/20) and $3.76bn in Asia (its main market). As I write, the HSBC share price trades at 436.8p, up 3.3% on Monday’s close. This has pushed HSBA to within 20p of its 52-week high of 456.8p on 8 March 2021. Happily, the shares are now around five-ninths (55.2%) above their 52-week low of 281.5p on 25 September 2020.

HSBA has almost halved since early 2018

Although it has rebounded hard from its September 2020 low, the HSBC share price still looks sickly over the medium term. In early January 2018, the shares were closing on £8, before falling back. At the end of 2019, HSBA closed at 591.9p, down £2 in two years, but still over a third (35.5%) above the current price.

As a giant among lenders, HSBC should benefit greatly if the world economy booms post-Covid-19. The bank expects strong global growth of 5.6% in 2021, up from an earlier forecast of 4.8%. In addition, it has launched a huge cost-cutting exercise, including slashing 35,000 jobs. It will continue its pivot from Europe and the US to Asia, where it expects faster lending growth and higher profits.

Would I buy HSBC stock today? I’m in two minds right now. On one hand, I see an £86bn global colossus with a pedigree dating back 156 years. I also see a strong balance sheet, with a Core Equity Tier 1 (CET1) ratio of 15.9%, up from 14.6% a year ago.

But HSBC makes more than 80% of its profits in China and Hong Kong. This might make it a political football in the US-China trade war. Likewise, the bank has been fined many billions for tax evasion and for laundering money for drug cartels. Thus, based on the current HSBC share price, I’ll put the bank on my ‘hold’ watchlist for now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Cliffdarcy 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.

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