It would be fair to say that shares in HSBC (LSE: HSBA) have struggled over the past five years. Since the financial crisis, the bank has battled to find to find growth and has been shedding businesses around the world in an attempt to shore up its capital position and improve returns. This reorganisation led HSBC to drop its claim that it's the "world's local bank" as management has pulled out of around 20% of the countries and territories it used to operate in before the crisis.
As the bank has retrenched over the past few years, its shares have plunged to post-crisis lows. Between the beginning of 2013 and March 2016, shares in HSBC lost 36% of their value excluding dividends. However, since reaching a post-crisis a low of 417p at the beginning of April this year, shares in HSBC have rallied by nearly 40% over the past six months and it seems as if the market has finally changed its opinion of the bank. So, is it finally safe to buy HSBC once again?
A recovery built on thin air?
Like most of the FTSE 100's constituents, shares in HSBC have benefitted from sterling's weakness this year, which is to some extent covering up business performance. For example, while the rally in HSBC's London-listed shares appears to show that the market has regained confidence in the bank, the performance of HSBC's ADRs traded in New York tell a different story. Year-to-date the New York-listed shares are down by 3% excluding dividends.
Traders in New York are right to be cautious about HSBC's prospects. For the first half, the company reported a 29% fall in pre-tax profits, citing a "turbulent period" as the cause for the decline. Management tried to appease shareholders with a share buyback of $2.5bn but this cash return was overshadowed by comments in the results release.
Specifically, HSBC warned alongside first half results that the bank was facing "considerable uncertainty" that's "likely to continue for some time." These comments don't instil confidence in HSBC's outlook.
City analysts seem to agree that the bank's troubles are unlikely to end any time soon. Current City forecasts are projecting that HSBC's earnings per share will decline by 12% this year. It's likely the bank will actually undershoot this target. For the past four years, HSBC has repeatedly undershot City earnings targets by an average of around 20%.
The bottom line
So overall, despite the fact that shares in HSBC have risen by nearly 40% over the past few months, I don't believe that it's finally safe to buy the shares. The bank is facing considerable headwinds, which will likely weigh on earnings for some time and while the London-listed shares have benefitted from a weaker sterling so far this year, underlying business performance remains patchy.
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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.