As HSBC shares slide, should I jump in and buy?

Bank shares have had a punishing few days – and included HSBC (LSE: HSBA). HSBC shares have fallen about 14% so far in March. They are still up 10% compared to last year, but down 17% over the five-year period.

What gives me the opportunity to buy some shares in this global banking giant?

Extensive surgery

HSBC has a lot going for it. As the full name – Hong Kong and Shanghai Banking Corporation suggests – the heart of its business is in Asia. It is a major player there, especially in Hong Kong. Indeed, last year 78% of reported profits came from Asian operations.

But the business also has extensive operations elsewhere, including in the UK. That means owning HSBC shares can give you broader international exposure than investing in more domestically focused competitors such as Lloyds and NatWest.

Besides, HSBC is a financial juggernaut. Last year, profits fell slightly but still stood at $17.5bn. With a large customer base, leading brands and leading positions in several key markets, I think the financial institution has the ability to generate strong profits in the future.

Risk profile

However, HSBC also faces risks. At a time of geopolitical tension, the approach of keeping one foot in Asia and elsewhere could increase the political risks facing banks.

HSBC also has to deal with a raft of risks that are now affecting other banks in Europe and Asia. These include the possibility of increased defaults by lenders, the risk of a housing downturn in Asia and Europe, and the effects of other institutional failures.

In fact, I see now as a risky time to buy bank stocks. The reason HSBC’s shares have fallen of late, along with its peers, is that it is still unclear how wide and deep the banking crisis will unfold.

That puts me off those stocks right now – including HSBC. Although there is potential for a worthwhile investment, I also think that there are risks that cannot be determined.

The next step

That can change. If the sector bounces back and looks good, bank stocks could increase in value. With a price-to-earnings ratio below 10, I think HSBC stock looks undervalued relative to its long-term potential.

They also offer a 5% deal. The current dividend is equivalent to just 42% of last year’s earnings, meaning the company can increase even if profits are flat or slightly down.

If the banking sector stabilizes and the economic outlook becomes clearer, I can see more in HSBC Shares to consider whether the strength of the business makes it good for the portfolio. But right now, I don’t like the risks I see in the sector. So I have no plans to buy HSBC shares.