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Are HSBC Holdings Shares Cheap Right Now?

Motley Fool Staff, The Motley Fool

There is a lot to like about Hong Kong's banking behemoth HSBC Holdings plc (SEHK: 0005). It has a strong balance sheet with a common equity tier-1 ratio greater than many comparable American banks.

It also has exposure to Asia, which in the long run will likely continue to grow faster than Europe or the US. According to the bank, it generates around 80% of its profits from Asia, much of it in the Greater China region.

Central district of Hong Kong

Image Source: Getty Images.

Furthermore, HSBC is a competitive dividend stock, given its juicy yield of over 6% right now and a relatively stable history of dividend payments over the past five years. The bank also posted some respectable numbers in the second quarter. It reported net profits of US$4.4 billion and sales of US$14.9 billion, ahead of market expectations of profits of US$3.8 billion and sales of US$14 billion.

Despite the better-than-expected quarterly results, HSBC has had some near-term troubles and its stock price has fallen by over 10% since late July. Why has the stock fallen and are its shares currently a good investment?

Leadership reshuffle

Recently, some of HSBC's key executives have resigned or left. In early August, CEO John Flint stepped down after leading the bank for less than 18 months. Shortly after, HSBC's Greater China head, Helen Wong, resigned after leading HSBC's Greater China division since 2010.

Although Flint seemed like the perfect CEO for HSBC in early 2018, shares of the bank have not done well under his tenure – they've fallen nearly 14%. Given that Flint was expected to be the leader for much longer, HSBC now faces leadership uncertainty.

Geopolitical issues

In addition to leadership uncertainty, HSBC has warned about geopolitical issues that "could impact a significant number of our major markets."

In terms of those issues, China's economy is slowing and the trade tensions between the US and China are hurting both sides. China's RMB depreciation will also shrink HSBC's unhedged earnings in that country. And China isn't the only market that's been difficult for HSBC. There is social unrest in Hong Kong that has disrupted normal economic activity.

Meanwhile, the US Fed's target interest rate has declined for the first time since 2008 and the UK is leaving the EU at the end of October. Lower interest rates could mean a lower return on equity (ROE) for HSBC's US division and Brexit could negatively impact HSBC's London operations.

Banking on the future

A quick turnaround will be difficult. HSBC is a huge company with over 200,000 employees. Changing culture to make processes more efficient will take time.

No matter how well the bank does operationally, its stock price and profitability will also still depend on the macro fortunes of Greater China.

However, given HSBC's strong balance sheet and its cost-cutting, the bank has a solid chance of navigating the macro headwinds and maintaining its attractive dividend. Overall, HSBC hopes to cut its payroll by around 2% and because the cuts aim at higher-paid employees, HSBC believes the layoffs will save the bank US$650-700 million.

In the long run, HSBC is still well-positioned. China has pledged to abolish ownership limits in securities, life insurance, and futures for foreign investors next year, which should provide HSBC with more growth opportunities in an attractive market.

Valuations are also compelling. HSBC stock is now trading at a price-to-book (PB) ratio of just 0.76 according to Morningstar. That's considerably lower than the stock's five-year average of 0.91. HSBC also recently announced an up-to US$1 billion stock buyback program.

I believe the stock could be a solid investment option over the long term, from both a dividend and value perspective.

A version of this article originally appeared on our Fool Asia site. For more coverage like this head over to Fool.hk.en.

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