HSBC (LSE:HSBA) is one of the largest banks in the world. The FTSE 100 stock has a high amount of daily share turnover, meaning a lot of HSBC shares get bought and sold each day. Over the past few years, the bank has gone through a lot. This ranges from a strategic transformation to become more efficient to dealing with the global pandemic. But if I’d invested five years ago, would I be up at the moment?
Struggling from different angles
Five years ago, HSBC shares were trading around 650p. With the current price of 422p, this represents a fall of just under 35%. So on my investment of £1,000, I’d be down £350. I should note that this doesn’t take into account the dividends I would have received in the process. From 2016 to early 2020 the dividend yield was 5% or higher. Although this still wouldn’t offset the loss from the falling share price, it would go some way to reducing it.
Why have we seen such a fall in the share price over this period? One key element was the restructuring of the business before the pandemic hit. The aim here was to trim down the size of the bank, to allow it to focus more on key growth areas (predominately Asia). This involved large costing-cutting in certain areas, which spooked the market. For example, back in February last year I wrote about how the news of 35,000 job cuts saw the price drop 6% on the day.
It’s always tough to go through a restructure. The issue investors faced was that short-term pain was going to be felt before the benefits would be seen. Unfortunately, the benefits haven’t been seen yet, due to the pandemic. This struck as the bank was in the process of transforming and provided a lot of problems.
For example, large provisions were needed to be set aside for potential bad debt and loan defaults. Given the size of the bank, these numbers were significant. As a result, last autumn the HSBC share price hit low levels not seen for several decades.
Positive gains for HSBC shares in the next five years?
I personally didn’t buy HSBC shares several years ago, so the question I now consider is whether I should buy the stock now. One metric I can review is the price-to-earnings ratio. This is currently 31.5. For comparison, Barclays has a ratio of 20.74, with Lloyds at 38.6. From that I can conclude that although all bank stocks have relatively rich valuations, HSBC isn’t the most expensive in the sector.
The other question I need to think about is whether the sector will do well next year. Personally, I think it will. The driver behind this is the likely increases in interest rates in the UK and around the world next year. This should help HSBC to boost its net interest margin.
In terms of risks, I wouldn’t say that the HSBC transformation is anywhere near complete. Issues with cost cutting could provide negative publicity for the bank.
Overall, I don’t have a high enough conviction to buy HSBC shares at the moment, so will pass on the opportunity.