Warning: HSBC Holdings plc May Never Return To 600p

Photo: Barry Caruth. Cropped. Licence: https://creativecommons.org/licenses/by-sa/2.0/
Photo: Barry Caruth. Cropped. Licence: https://creativecommons.org/licenses/by-sa/2.0/

HSBC's (LSE: HSBA) shareholders have had a rough ride over the past 12 months. Indeed, since mid-February 2015, HSBC's shares have lost a quarter of their value, excluding dividends, underperforming the FTSE 100 by more than 10%.


Unfortunately, it looks as if this trend is set to continue and HSBC may never return to its former glory.

Multiple headwinds

HSBC is facing many different headwinds all of which will work together to pressure the bank's costs, and slow sales growth during the next few years.

For a start, the most pressing issue facing HSBC is that of an increasing regulatory burden. Regulators are still determined to make banks safer and reduce illegal or unfair activity in the sector. As a result, banks like HSBC are having to keep updating their rules while recording almost everything that goes on at the bank. At a time when HSBC is trying to cut costs and improve margins, the extra staff required to fulfil regulators' demands is an unwanted, but necessary, expense.

The second major headwind HSBC is facing is more concerning. Until the fourth quarter of last year, most analysts believed that interest rates had nowhere to go but up.

However, during the past few months interest rates have started to fall into negative territory for the first time ever -- a disastrous development for banks. With interest rates below zero, it'll cost banks more to hold cash on their balance sheets (a requirement of regulators) and banks will be forced to issue loans with low-interest rates to customers, squeezing income. What's more, negative interest rates will support zombie firms, and generally speaking, this isn't good for the economy and lending in general.

And the third major headwind that HSBC is facing is that of China. Specifically, China's slowing growth and mountain of debt: a toxic combination.

A fourth factor that could hold back HSBC's growth going forward is the increasing competition in the banking sector and the pressure on margins that this is having.

Difficult to work around

A bank of HSBC's size will struggle to work its way around the increasingly hostile operating environment with which financial institutions around the world are now faced.

With this being the case it's likely that HSBC's sales income will only deteriorate going forward, and as result, investors are unlikely to want to pay a premium for the shares. City analysts are already forecasting a 4% fall in earnings per share this year.

Also, with low interest rates squeezing the amount HSBC can earn on its reserves, the bank may be forced to cut its dividend payout in order to make up the difference.

The bottom line

So overall, even though HSBC shares are trading at a relatively attractive forward PE of 10 and support a market-beating dividend yield of 7.4% at current levels (the payout is currently covered one-and-a-half times by earnings per share) it might be wise to avoid the shares for the time being. Based on current market trends, it doesn't look as if HSBC will return to its former glory any time soon.

Still, this is just a rough assessment of China and HSBC's prospects. Before making a trading decision, you should conduct your own research to see if the company's suitable for your portfolio and financial goals.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.