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Are IG Group Holdings plc And Tullett Prebon Plc A Better Buy Than HSBC Holdings plc?

Are big banks like HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) still the best way for private investors to get exposure to the financial sector?

I’m not sure: the last few years have seen big banks globally struggling to generate decent returns, and labouring under multi-billion fines for misconduct. Just yesterday, Deutsche Bank was fined a record $2.5bn for rigging Libor interest rates.

HSBC hasn’t been without sin either, and the world’s local bank reported a total of $3.6bn in fines, settlements and compensation payments in 2014. This is money that could otherwise have been used to increase shareholder returns and boost profit growth.

Although HSBC’s 5.7% prospective yield is pretty safe and the bank’s valuation is undemanding, there is definitely a risk that this supertanker-sized bank will struggle to deliver much in the way of growth.

Two possible alternatives

Banks are meant to be safe and substantial investments — so if you’re looking for alternatives, they need to be reasonably well-established businesses.

Two possibilities I’ve considered are interdealer broker Tullett Prebon (LSE: TLPR) and spread betting provider IG Group Holdings (LSE: IGG), which despite its modern image has actually been in business since 1974.

Here’s how Tullett and IG compare to HSBC on key income, value and growth metrics:

 

HSBC

Tullett Prebon

IG Group

Forecast P/E

11.4

11.2

16.9

5-year average earnings per share growth

1.2%

-9.6%

6.7%

Prospective yield

5.7%

4.6%

4.0%

On the face of it, HSBC and IG are the best choices, depending on whether your focus is on growth or income.

However, IG’s earnings are expected to fall by 10% this year, as a result of a long period of low volatility in financial markets last year, which reduced earnings. IG’s profits are expected to rebound strongly in 2015/16, but this isn’t a business with good forward visibility on revenues.

Tullett has also suffered from changing market conditions and a lack of visibility, but the firm appears to be gradually adapting its business and regaining some growth momentum, after a difficult few years.

In particular, I believe Tullett’s acquisition last year of oil broker PVM could prove to be well timed — going forwards, around a fifth of the firm’s revenue should come from the energy sector, adding welcome diversity.

However, HSBC could still ultimately be the best buy: current City forecasts suggest the bank’s earnings per share will rise by 15% in 2015 and by 8% in 2016, while the dividend is expected to grow by around 6.5% annually over the next two years.

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Roland Head owns shares of HSBC Holdings and Tullett Prebon. 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.