Asian banking giants, HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) and Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US), have really underperformed the wider market and their peers so far this year. Specifically, both companies have lagged the FTSE 100 by more than 15% over the past month. However, after these declines the two banks look attractive due their low valuations and impressive dividend yields. But which one deservers your cash?
Overview
Let’s start with a quick overview of both banks before we get down to the nitty gritty.
| Company | HSBC | Standard Chartered |
|---|---|---|
| Forward P/E | 11 | 10 |
| Projected 2-yr EPS growth | 20% | 22% |
| Dividend yield | 4.3% | 4% |
| Dividend cover | 1.6 | 2.7 |
| Tier one capital ratio | 13.3% | 11.4% |
| Return-on-capital-employed | 10% | 12% |
It would appear that the only significant differences between HSBC and Standard Chartered, are the dividend cover, tier one capital and return-on-capital employed ratios. Aside from these factors, both companies look similar and equally attractive on a valuation basis.
With no obvious differences between Standard and HSBC at first glance, we’re are going to have to take a closer look.
HSBC’s bull case
The bull case for HSBC is quite simple, the bank has plenty of capital and it did not need to seek government help during the financial crisis. Further, earnings are expected to growth around 20% over the next two years and the company offers an attractive dividend yield of 4.3% — one of the highest payouts in the banking sector.
What’s more, HSBC is highly cash generative, reporting a free cash flow of £13 billion for full-year 2012. Indeed, the bank’s cash flow is so impressive, some City analysts have speculated that a much larger dividend payout could be on the cards for investors in the near future. There are also rumours that the bank could be considering share repurchases. Nevertheless, if HSBC does not decide to return cash to investors, the bank has plenty of money available to buy up extra growth.
Standard Chartered’s bull case
In the other corner we have Standard Chartered, which also navigated the financial crisis with ease and, like HSBC, did not need taxpayer money to stay afloat. That said, the bank has asked investors for extra cash several times during the past few years, in the form of rights issues. Unfortunately, some City analysts have speculated that Standard Chartered could ask investors for yet more cash in the near future as the bank reinvests profits for growth rather than bolstering capital ratios.
Still, after recent declines Standard Charters is now trading at a level not seen since 2009, which means that the bank is now trading at its lowest valuation in almost decade. Further, due to the banks low valuation there are rumours that predators are circling Standard, and a takeover could be likely in the near future. And the bank would be a juicy target for any potential acquire as despite Standard’s troubles in Korea, the reason behind the banks recent slump, profits in other regions are surging. For example, Standard’s income from operations in Hong Kong, Africa and India grew at double-digits rates this year.
Summary
All in all, although HSBC has a slightly high valuation than Standard at present, the banks cash generation is second to none, the dividend payout is impressive and there is plenty of potential for future growth. So, despite Standard Chartered’s low valuation and takeover prospects, I feel that HSBC should be your Asian banking giant of choice.
