The HSBC share price has fallen 10% in a year. Time to buy?

The last time I covered the HSBC (LSE: HSBA) share price, I concluded that if you were looking for an income stock to add to your retirement portfolio, then it might be worth taking a look at the world’s local bank considering its global diversification, the dividend yield of 6.6% and attractive valuation. 

Since then, shares in the financial giant have only continued to decline. Excluding dividends paid to investors, over the past 12-months, the stock is now down by around 10%.

Disappointing outlook 

The most important news that the company has released since my last article was its third-quarter results, which were quite disappointing. Citing economic challenges, HSBC warned that its revenue in 2020 would come in below expectations and its profitability target, 11% return on tangible equity, is unlikely to be achievable next year.

While HSBC’s Asian division continued to outperform with profit growth of 4% for the third quarter, its European arm slumped to a statutory loss of $424m, down from a profit of $634m in the third quarter of 2018. The reason for this big jump in losses? A 139% increase in group-wide expected credit losses (i.e. loan write-offs) to $2bn. 

Management declared these results “not acceptable” and has now vowed to accelerate the bank’s restructuring. The group is warning of “significant charges” from the fourth quarter of 2019 onwards as it shifts capital from lower to higher return businesses. 

The big problem 

HSBC’s big problem is its global investment bank. The division consumes a lot of capital, but profits are pretty unpredictable. This is why so many of its UK and European peers have exited investment banking altogether.

However, HSBC’s global footprint is its most significant competitive advantage, so management is having to walk a tightrope to get the balance right. Taking the axe to the group’s investment bank might have a knock-on effect across the rest of the business if clients are denied access to HSBC’s global banking network.

Over the next two years, management is planning to reduce the group’s headcount by 10,000, and the cuts will mostly fall at HSBC’s head office in London, according to City analysts. Management will be looking to reduce costs without impacting the client experience or breaching a commitment to US authorities for more stringent checks to prevent financial crime, a deal struck in 2012 when it was revealed the bank had been helping Mexican drug cartels launder money. 

Income investment 

Only time will tell if these efforts to cut costs will help return the bank to growth. Nevertheless, in the meantime, investors can pick up a 6.7% dividend yield. A forward P/E of 10.5 isn’t, in my opinion, too demanding considering the bank’s international diversification, even though growth is expected to stagnate for the last few years. 

So, overall, if you’re looking for blue-chip income, then I think now could be the time to buy the HSBC share price. If you’re looking for capital growth, on the other hand, this might not be the company for you.