There’s no hiding place for companies with large exposure to China’s stumbling economy. At 595p per share, banking giant HSBC Holdings‘ (LSE:HSBA) shares sank 8% today (21 February) as troubles in Asia’s largest economy battered profits.
During 2023, pre-tax profits at the FTSE 100 bank came in at $30.3bn, it announced on Wednesday. While this was up 78% year on year — and represented an all-time high — it missed forecasts by around $3.5bn due to alarming fourth-quarter impairment charges.
As a long-term investor, should I be concerned about this? Or is now the time for me to load up on cheap HSBC shares?
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Fragile China
First let’s run a comb through the bank’s full-year numbers. Revenues leapt 30% year on year, to $66.1bn, thanks to what HSBC described as “the higher interest rate environment“.
Income and profits rocketed thanks to a 24 basis point improvement in the net interest margin (NIM), to 1.42%. This key earnings metric measures the difference between the interest that banks offer to savers and what they charge borrowers.
However, HSBC was rocked by fresh trouble at its Chinese operation at the end of 2023. Fourth-quarter profits actually slumped to $200m from $4.6bn a year earlier, as the bank swallowed a $3bn charge related to its stake in China’s Bank of Communications.
On the rebound?
Banks in the country are suffering due to a plethora of economic challenges. The real estate sector is enveloped by a huge debt crisis, while manufacturing activity has slumped and deflationary pressures are growing.
HSBC’s decision to book a $3.4bn charge in 2023 for expected credit losses underlines the scale of the trouble. A whopping $1bn of this is attributed just to the country’s commercial property sector, too.
But while some may view this as cause for alarm, others may consider it a sign of prudent planning. In fact, HSBC chief executive Noel Quinn reckons China’s real estate sector has now touched the bottom and is now experiencing a “progressive and gradual recovery“.
Indeed, HSBC remains confident in its outlook, as illustrated by its decision to launch a new $2bn share buyback programme today. The bank also lifted the 2023 dividend to 61 US cents per share from 32 cents in 2022.
Here’s where I stand
There’s a good chance HSBC’s income and profits will remain under pressure a little longer. The recovery could prove a rocky one, and chief executive Quinn warned today that it will take a few years for China to overcome its “current challenges“.
But I’d still be tempted to buy the bank’s shares today. This is because I buy stocks based on their investment case for the long term. And HSBC could be a big winner as population and wealth levels leap across Asia, which in turn is driving demand for banking products.
Besides, I think the possibility of further stress in 2024 is baked into the cheapness of HSBC’s share price. Today it trades on a forward price-to-earnings (P/E) ratio of six times.
At current prices the FTSE firm also carries a mighty 10.7% dividend yield. I’ll be looking to open a position in the bank myself when I next have cash to invest.
