Having made one of the UK banks one of my tips of the year, I’ve been a touch disappointed to see bank share prices falling rather than rising in the past month.
Perhaps, with the on-surge of the economic recovery, we have been a tad over-optimistic and ahead of ourselves about the prospects of the banks. When over-optimism meets reality, share prices fall.
But now that bank share prices have fallen, I see this as a buying opportunity, rather than a time to bale out of banks. The question is, which bank should you buy? In this article I write about a couple of heavyweight contenders…
Lloyds Banking Group
In an economic recession where housing and finance were at the centre of the crisis, it is not surprising that the shares of the UK’s leading mortgage provider, Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US), tumbled.
Yet as we finally see the recession end, and the housing market recover strongly, banking shares — and Lloyds in particular — have bounced back. Over the past year, Lloyds has been the best performing of the banks.
Yet I expect Lloyds to continue to perform well this year as well. The bank is a contrarian play on the housing boom and the banking recovery. The past few months have shown that the number of houses being bought is steadily rising, and house prices are increasing. This is a positive for house builders such as Barratt Developments, as well as banks such as Lloyds.
HSBC
If Lloyds is a contrarian play on the housing boom and banking recovery, HSBC (LSE: HSBA) (NYSE: HSBC.US) is a value play in developed markets and a growth play in emerging and frontier markets.
Unlike Lloyds, the bulk of HSBC’s business is common-or-garden retail banking and business banking, with less emphasis on housing. It, alongside Banco Santander, is one of the few truly global banks, with businesses spanning the globe from Africa and Asia to Europe, North America and South America. By assets, it is the world’s biggest bank.
The bank has been relatively untroubled by the financial crisis, and its sheer scale means that it is a very stable business that produces profits consistently year after year. This means this is perhaps the ideal income share, producing a steadily rising dividend, as well as an increasing share price.
Yet the sheer size of the company also means that you are unlikely to see the rapid growth that you might see with other, smaller companies.
Foolish bottom line
So, my conclusion is that both companies are worthwhile buys. Which bank you invest in depends on whether you would like to invest in a company that is slightly riskier but which has great turn-around potential (Lloyds), or a stable but slow-growing company with a juicy dividend yield (HSBC). Personally, I have chosen Lloyds as I think it has better growth potential.
