For most of the last 20 years, 500p has been a safe level at which to buy HSBC Holdings (LSE: HSBA) shares and lock in a generous dividend yield. Until this year. HSBC’s share price has fallen by nearly 50% in 2020.
It’s easy to blame the pandemic for this year’s collapse, but in reality HSBC was already facing a difficulties before the coronavirus crisis made things harder. Today I want to explain why I’m worried about the outlook for investors in the FTSE 100’s biggest bank.
Count the problems
A decade of ever-lower interest rates has made generating profits from good-quality lending much harder. Regulatory changes haven’t helped — the big banks have found themselves with floods of cash ring-fenced in their UK operations. This has led to tough competition in the mortgage market, slashing margins still further.
The performance of HSBC shares has also been affected by the legal issues the bank has faced. While Lloyds and other UK-focused banks suffered with PPI compensation, HSBC’s big mistake was money laundering. The bank paid a record-busting $1.9bn fine in 2012 for its involvement in laundering drug money out of Mexico.
I had been hoping that its misdeeds were now in the past. But recent press reports have suggested that HSBC might still be exposed to some risks relating to money laundering, although it has not been accused of any wrongdoing.
There’s also another problem. HSBC’s Asia focus has always been a key attraction for UK investors, providing exposure to long-term growth in this region. But the US-China trade war has left it stuck between two prickly regimes and exposed to political pressures. Most of the group’s profits come from its Hong Kong operations, so management may be forced to put Chinese interests ahead of other markets.
What does this mean for HSBC shares?
HSBC is obviously going through a difficult period. But the good news is that there’s already a lot of bad news priced in to the shares, which trade at roughly half their book value.
Although shareholders are currently going without dividends, recent comments from the bank suggest to me that payouts will restart in 2020. However, I expect the dividend to be cut, so I wouldn’t buy the shares expecting a return to last year’s payout. Current broker forecasts suggest that the 2021 payout could be nearly 50% lower than the 2018 dividend.
On balance, I’m starting to think that the impact of the problems it faces could last longer than I originally expected. Although I think the bank has the financial strength to get through this difficult patch, I’m no longer convinced that it’s the best choice for UK investors who want a reliable income.
Will HSBC shares make it back to 500p?
I think that HSBC shares probably will make it back to 500p eventually. But I suspect this may take quite a while, during which investors could face a lot of uncertainty.
I wouldn’t blame long-term shareholders for sitting tight, but for now, I’m staying away from HSBC. I’m particularly worried about the political problems it faces. On balance, I think there are better choices elsewhere in this sector for dividend investors.