As one of the world’s largest banks, HSBC (LSE: HSBA) is a force to be reckoned with. But Barclays (LSE: BARC) could be the better investment for one key reason.
Buy what you know
Warren Buffett, among others, is notorious for telling investors to buy what they know. At the very least, you should be able to explain how a company makes its money.
However, digging down and understanding how a company like Barclays makes its money is a time-consuming, complex process. Truly understanding a company’s balance sheet and overall financial direction also takes specialist knowledge that not all investors possess.
With this in mind, it pays to invest in businesses that are relatively simple to understand. And this is where HSBC and Barclays differ.
You see, in comparison to HSBC, Barclays is a relatively simple bank. The group has four main divisions: UK personal and corporate, Barclaycard, Barclays Africa and Barclays investment bank. By looking at Barclays’ annual report, it’s easy to see how each division is performing.
Four divisions
During 2014, Barclays’ UK personal and corporate profit before tax increased by 29% thanks to an improving UK economy and lower impairment charges.
Barclaycard’s pre-tax profit increased by 13% during the year, thanks to improving consumer sentiment around the world.
Barclays’ Africa business reported a 9% decline in pre-tax profit due to currency headwinds, and Barclays’ investment bank saw income decline 12%, due to currency headwinds.
Overall, Barclays’ group profit rose by 27% during 2014.
Complex structure
HSBC’s corporate structure is much more difficult to get to grips with. Firstly, the company breaks results down into four main business divisions: retail banking and wealth management, commercial banking, global banking, and markets and global private banking.
These four divisions are then broken down on a regional basis: Asia, North America, Middle East, North Africa and Latin America. Finally, after the region breakdown, income is broken down into 12 different subdivisions, such as credit cards, insurance, imports/exports, etc.
With all these different divisions to account for, HSBC’s 2013 annual report weighed in at 600 pages — roughly 20 hours’ worth of reading material.
The bottom line
Overall, compared to HSBC, Barclays is easy to understand and, on that basis, the bank is a better pick than its larger peer.
Moreover, according to current City forecasts Barclays is set to grow faster than HSBC over the next two years. Barclays’ earnings per share are set to grow 43% this year and 19% during 2016, which means that the bank is trading at a 2016 P/E of 8.7.
The City believes that HSBC’s earnings will expand 17% this year and then 5% during 2016. The company is trading at a 2016 P/E of 10.5.
