HSBC (LSE:HSBA) shares fell on Friday morning after the Bank of England reviewed the lender’s operations. US stocks also finished weaker on Thursday, putting downward pressure on the FTSE on Friday morning.
So, here’s why the bank stock fell today!
What’s behind the fall?
On Friday, the Bank of England said that all of Britain’s big listed banks could fail without hurting taxpayers or customers.
The BoE’s tests were the first assessment since the financial crisis of 2008 and evaluated how easily failing lenders could be taken apart without receiving support from the state.
However, there was some bad news, but expected news, for shareholders. The BoE said that Britain’s biggest banks were no longer “too big to fail” in any future financial shocks, noting that shareholders, not taxpayers, would bear the costs.
In other words, the government won’t be coming to rescue ailing banks in the future.
Moreover, the BoE said that HSBC, along with two others banks, had fallen short of meeting requirements.
Concerns were raised about whether HSBC could be restructured in a way that would allow it to continue providing services to customers while authorities helped wind down the lender.
HSBC and the other two banks, will have until 2024, when the next assessment takes place, to address the shortcomings.
It’s also worth noting that US stocks finished lower on Thursday evening, ahead of inflation numbers, and this negatively impacted UK shares.
What does this mean for HSBC stock?
In my opinion, not a lot. The UK taxpayer pumped £137bn to prop up the country’s banks during the financial crash. I’ve doubted whether such a bailout would ever happen again.
The shortcomings noted are also not major concerns. None of the banks failed the tests, and it’s reassuring to see that these assessments are being carried out as a matter of good practice.
Are HSBC shares a good investment?
Despite being told to make improvements by the BoE, I think HSBC is a fair pick.
However, it’s more expensive than some of its peers, with a price-to-earnings (P/E) ratio of 10.3. Having said that, it’s also more diversified than banks like Lloyds and has more exposure to high growth markets in Asia. The bank has recently accelerated its “pivot to Asia“, which I see as positive.
Recent performance has been fairly strong too. Last year, HSBC recorded pre-tax profits of $18.9bn, trumping its pre-pandemic performances in 2019 and 2017. However, 2022 hasn’t been so rosy as inflation and impairments charges eat into profits.
The current mix of high inflation, higher rates and a cost of living crisis may cause the bank some trouble in the short term. Naturally this will impact other banks too.
So, would I buy HSBC stock? I already own shares in this bank, but at this moment I think there’s better value out there. While I’m positive on HSBC’s outlook, Lloyds, for example, trades with a P/E ratio of 5.9 and I think it represents better value.
So right now, if I had £1,000 to invest, I’d buy Lloyds over HSBC.