Shares in HSBC (LSE: HSBA) slumped by as much as 11% in August, underperforming the FTSE 100 by several percentage points. The main reason has a lot to do with where it generates most of its profits. While the group bills itself as “the world’s local bank,” its international exposure is quite small.
HSBC generates the bulk of its profits in China, Hong Kong specifically. According to the bank’s results for the six months to the end of June, of a total group profit before tax of $12.4bn, $9.8bn came from HSBC Asian markets. Of this, $6.4bn was generated in Hong Kong and $1.5bn within China.
To put it another way, HSBC’s largest market by far is Hong Kong. As a result, the bank’s operations are likely to have been severely disrupted by the region’s recent political instability.
Hong Kong protests
According to initial reports, retail sales in Hong Kong fell 6.7% in June, and tourist numbers crashed 13% in the same month. These numbers have ignited speculation among analysts that the region’s economy could collapse into a recession. That would be terrible news for HSBC.
Unfortunately, it looks as if these protests are going to continue for some time. Therefore, I think it’s likely investors will continue to avoid HSBC until the situation quietens down in its most profitable market.
Still, management has been trying to diversify the bank away from China and Hong Kong for the past few years. As part of this plan, the bank recently announced it would be moving £35bn of capital into the UK mortgage market, where it’s still a relatively small player. HSBC commands just 7% of the UK mortgage market and wants to take this up to 10%, but that would still be less than half of peer Lloyds’ 22%.
It could be cheap
As of yet, it’s not clear what impact the protests in Hong Kong will have on HSBC’s earnings for 2019. City analysts are still expecting the bank to report earnings growth of around 3% for the full-year. Based on these forecasts, the stock is trading at a forward P/E of 9.9, which looks to me to be quite cheap, considering the size and global scale of the business.
The stock also supports a dividend yield of 7% and the bank has been repurchasing stock in recent years to return additional capital to investors.
That said, I do expect the shares to remain volatile for the foreseeable future. Until we know how the protests in Hong Kong have impacted the bank, it’s impossible to say with certainty whether or not it will miss City forecasts for the full-year.
If reports are to be believed about the state of the economy and Hong Kong, I think it’s reasonable to say the bank’s earnings will come in below expectations for 2019. That could lead to further selling. However, if management can rekindle growth across the rest of the business, then the stock certainly looks cheap at current levels.