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Why Banco Santander SA May Be A Better Pick Than HSBC Holdings plc

Banco Santander (LSE: BNC) (NYSE: SAN.US) and HSBC  (LSE: HSBA) (NYSE: HSBA.US) are two similar banks.

For example, both HSBC and Santander have an international focus, unlike domestic peers such as Lloyds. The two banks are also well capitalised and conservatively managed. Further, neither bank received a government bailout during the financial crisis.

Then there are dividends to consider, both banks are dividend champions. Even though Santander recently cut its dividend payout, the bank’s shares are still set to support a dividend yield of 3.7% during 2015, according to City analysts. HSBC’s dividend yield currently weighs in at 5.6%.

Nevertheless, while Santander and HSBC have their similarities, the two banks have completely different outlooks.

Bigger is not better

The biggest difference between Santander and HSBC is size. HSBC is the second biggest bank in the world with $2.7trn in assets. Santander is roughly half the size with assets of $1.6trn. 

Unfortunately, bigger isn’t always better and HSBC’s size means that it is becoming difficult to manage. New scandals are hurting the bank’s reputation almost every day, and HSBC is now facing calls to be broken up. 

A break up may be HSBC’s best option. Indeed, managing the bank is now becoming a costly, complicated process, a trend which is shown in HSBC’s rising cost income ratio — a closely watched measure of efficiency — and falling return on equity. 

This is one of the biggest differences between Santander and HSBC. The performance of the two banks varies significantly.

Struggling 

HSBC’s full-year 2014 results showed how badly the bank is struggling to grow in a tough operating environment. 

In particular, HSBC’s full-year 2014 cost-income ratio jumped to 67.3% during 2014, from a level in the mid-50s reported in the first half of the year. The bank’s return on equity fell to 7.3% during 2014, down from 9.2% the year before. For 2014 HSBC’s pre-tax profit fell by 17%. 

On the other hand, Santander is surging ahead. Annual pre-tax profits at the bank jumped 32% last year. Profits rose in all of its ten key markets for the first time since the start of the financial crisis. The group’s cost income ratio for the year was below 50%, and return on equity increased from 5.8% to 7% year on year. 

However, the key difference between Santander and HSBC is where they do business.

Specifically, HSBC is predominately focused on Asia, while Santander is focused on Europe and the Americas. What’s really concerning about HSBC’s exposure the Asia is the level of debt in the region.

China is one of the world’s most indebted nations and any credit event will send shock waves around the region. HSBC will be unable to escape the fallout. Santander is not exposed to the same kind of risks.

Foolish summary

Overall, HSBC and Santander have many similar qualities but Santander looks to be the better pick for investors.

However, before you make any trading decision I strongly recommend that you do your own research -- you may come to a different conclusion.

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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.