Is HSBC’s share price riding hopes for radical action?

HSBC’s [HSBA] share price hasn’t had the best start to September. On the first of the month, it fell to close at just 317p.

HSBC’s share price has been on an almost unbroken downward trend since it hit 515p on 24 March. Even this represents a 13.46% decline from the 595.1p at which it started the year. Since hitting 515p, the stock has fallen 37.25% through 7 September’s close.

It has been a challenging year across the whole banking sector, but HSBC’s share price has particularly suffered as its profile and exposure have left it vulnerable.

The lender, and its investors, will hope efforts to increase its capital reserve help to absorb the rising bad loans stemming from companies impacted by COVID-19 are successful. Positive news in this quarter could be something of a lifeline for HSBC’s share price.

Profits more than halve amid souring loans

At the start of August, HSBC announced plans to accelerate job losses as it revealed that it could face bad loans of up to $13bn as a result of the coronavirus pandemic

The bank reported a year-over-year fall of 65% in pre-tax profits to $4.3bn for the first half of 2020 — a much more severe drop than expected. The figure prompted Noel Quinn, the group’s chief executive, to include a note in its interim results that “additional actions” would be taken to stabilise business and, hopefully, improve HSBC’s share price.

The good news for HSBC is that it is one of only two UK-listed banks on Goldman Sachs’ buy list, with the investment bank’s sectoral review noting that the overall trend was down by less than expected.

“Whilst managements of stronger banks were keen to underline their conviction of a dividend return to normal next year, investors’ reluctance to incorporate this into their investment thesis is at an all-time high, in our view,” analysts for Goldman Sachs said in a client note seen by Proactive Investors.

Is HSBC an undervalued stock?

Analysts at Deutsche Bank and NatWest Group, meanwhile, rate HSBC’s share price as it stands a Sell, according to the publication.

Having dropped 45.7% since the start of the year to 7 September’s close, it is little surprise that at least some analysts feel HSBC’s share price — at its current level — is undervaluing the business.

Market research company Trefis estimates the actual value of HSBC’s share price to be around $26 per share, despite the ongoing impact of coronavirus and the threat of further tension between the US and China.

This valuation is based on the research firm’s expectations of an improvement in the bank’s revenues in the second half of 2020. It expects the company to report $52.5bn in revenues for the year based on recovering economic conditions, which will help the bank’s performance steadily improve.

Trefis also believes the easing of lockdown restrictions will boost consumer demand and notes that HSBC’s banking business in Asia has remained robust, reporting a profit of more than $7.3bn in the first half of 2020. The financial services firm’s investment banking operations have driven positive revenue growth in the first two quarters due to higher trading volumes, with trading revenues rising 35% in the first half of the year compared to the same period in 2019.

An increase in advisory and underwriting fees has also partially offset the impact of weak revenues in other segments. While trading income is expected to fall in subsequent quarters, Trefis sees the bank reporting earnings in the range of $1.02 per share for the year.

Among the analysts polled by MarketScreener the consensus rating for HSBC’s share price is Underperform Out of 24 analysts covering the stock, seven rated it a Sell, eight suggested to Hold, while just two rated it a Buy. One of the analysts covering the stock recommended an Outperform rating.

Analysts polled by the market research company gave a consensus target of 480p to HSBC’s share price, which would see a 48.5% upside if hit (as of 7 September’s close).