The HSBC share price is up 30% – is it now a buy?

Since the beginning of October, the HSBC (LSE: HSBA) share price is up 30%. That’s quite a gain for a FTSE 100 company in a short time. Especially as during that time fundamental issues over Brexit, a key concern for banks, remained.

The catalyst was obviously optimism resulting from the positive Covid-19 vaccines results. Bank shares were hit hard by the fears associated with the pandemic, so it was easier for them to bounce back. And it’s clear so far the HSBC share price has been bouncing back. 

Yet for all those recent gains, looking at the bigger picture, the shares are still well down over the last three years. By close to 50% according to my calculations. So does that mean HSBC shares are now cheap, or actually are they now too expensive?

HSBC is less exposed to Brexit than banking peers

Whether the shares are cheap or not is a hard question to answer, although it’s the big one. It’s a complicated picture. The trailing price-to-earnings ratio of 18 indicates now that HSBC looks quite expensive. By way of comparison, Lloyds and Barclays are both hovering nearer to 10.

When you look at the results there’s little reason to think HSBC ought to be more expensive. Tensions in Hong Kong could well flare up again as they have done in recent times. That has hurt the share price in the past and could well do so again.

The only reason I can come up with is the least exposed the banks to the UK. Far less so than Lloyds and Barclays. So its higher rating may just be a result of the ongoing Brexit negotiations. HSBC makes most of its money in Asia so is far less exposed to the UK economy. 

Less exposure to the UK hardly seems like a profitable investment case. Overall the bank lacks strategic direction and I don’t think has any obvious routes to growth.

The HSBC share price seems overvalued

Overall it’s difficult to not come to the conclusion that the recent rally means the shares are overvalued. The management has significant work to do to improve its relations with the Chinese government, which are said to be strained, and to slim down the bank. It was planning to cut jobs pre-pandemic but put much of that vital reorganisation on hold.

Until the bank is in better shape, it doesn’t deserve to trade at a premium to other banks, which are more efficient and profitable.  

HSBC is likely to reintroduce a more conservative dividend in February, but a lower dividend is not likely to excite many investors. Dividends, pre-Covid-19, were one of the only reasons to hold the shares. A lower payout is unlikely to be much of a boost for the share price.

The HSBC share price has momentum, but I think the shares are overvalued and this recovery will be short lived. For me the shares are not a buy.