HSBCs(LSE: HSBA) shareholders have had a rough ride over the past 12months. Indeed, since mid-February2015, HSBCs 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 continueand 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 bankscosts,and slow sales growth during the next few years.
For astart, 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, itll 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. Whats more, negative interest rates will support zombie firms,and generally speaking, this isnt good for the economy and lending in general.
And the third major headwind that HSBC is facing is that of China. Specifically, Chinas slowing growth andmountainof debt: a toxic combination.
A fourth factor that could hold back HSBCs 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 HSBCs 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 its likely that HSBCs sales income will only deteriorate going forward, and asresult, 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, withlow interestrates 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 andsupport 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 doesnt look as if HSBC will return to its former glory any time soon.
Still, this is just a roughassessment of China and HSBC’s prospects. Before making a trading decision, you should conduct your ownresearch 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.
