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Why I think the HSBC share price bounce back is sustainable

Karl Loomes
·3-min read
View of Canary Wharf
View of Canary Wharf

HSBC (LSE: HSBA) shares have seen a pretty poor year overall. At its low in September, the HSBC share price was almost half the value it started at in 2020. Since then though, it has begun to bounce back. Personally I think it could be on its way up for the long run. Let me tell you why…

Why did the HSBC share price drop?

This is the first question worth asking.

Naturally, Covid-19 is partly to blame. As the first lockdown hit us earlier in the year, markets were scared. Many industries seemed to be heading into disaster. As a negative for banks, this translates mainly to higher provisions for bad loans and failed debt repayments.

HSBC, as well as other major lenders, increased provisions for bad loans. This hit HSBC’s financial results hard. But they are just provisions, not actually losses. As government support schemes and financial backing helped businesses, these fears started to wane a little.

I should say these issues are still not entirely resolved, of course. We currently stand in the second lockdown of the year, and people still talk about a potential recession as a real possibility. However with positive news of a vaccine coming out, and the Chancellor’s strong attitude towards supporting the economy, I think this seems less likely.

One last point to note is that political trouble in Hong Kong has also been weighing on the HSBC share price. Earlier in the year particularly, anti-government protests were raging in the region.

As the year has moved on, these troubles have also lessened. China has got a better hold on Covid-19 than most of the rest of the world. For HSBC and its share price, as Asia bounced back, its prospects improved.

Is the bounce back a fundamental change in its prospects?

For me, this is the next important question.

Personally, I think the answer is “no, but yes”. Some of this recovery in the HSBC share price is, I believe, a removal of pressure. I believe the price was oversold most of the year. This bounce back is perhaps a recovery to more reasonable levels. However…

This removal of fears, so to speak, should perhaps let investors see HSBC’s true potential. The bank is undergoing a fundamental reorganisation that, I believe, will help secure its share price in the future.

In the main, this involves reducing its headcount and shifting capital towards its more lucrative market. This means shifting assets and people from the US and European divisions into its Asian arm.

HSBC makes most of its money in Asia. Its US business particularly, has seen only lacklustre performance. Moving resources from areas of less profit into its highest performer should bring exponential gains if done right.

The last consideration is the HSBC dividend. Though suspended this year, there has been talk recently of its possible reinstatement. The bank was previously offering one of the highest yields in the FTSE 100. If we see payouts return, the HSBC share price should get long-term support. If this happens, I think this bounce back may be sustainable for quite some time.

The post Why I think the HSBC share price bounce back is sustainable appeared first on The Motley Fool UK.

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Karl has shares in HSBC HoldingsThe 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