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Do Cuts At HSBC Holdings plc Make It A Better Buy Than Standard Chartered PLC?

HSBC Holdings (LSE: HSBA) (NYSE: HSBC.US) will cut up to 25,000 jobs and focus more of its efforts on Asia.

These were the main takeaways from the bank’s latest strategy review, which was published this morning. The market response was almost non-existent, and despite initial heavy trading, the bank’s share price remained pretty much flat.

Yet the changes could be significant and could pave the way for a decision to shift the bank’s headquarters to Asia.

In turn, this could put pressure on HSBC’s Asia-focused peer, Standard Chartered (LSE: STAN), to do the same.

After seeing today’s numbers, which bank looks the better buy?

The cost of cuts

HSBC is targeting annual cost savings of $4.5-5.0bn by 2017, but generating these savings will cost the bank $4.0-4.5bn.

The group’s investment banking division will shrink so that it accounts for less than one-third of HSBC’s balance sheet, while operations in Turkey and Brazil will be sold.

Alongside this, investment in Asia will be “accelerated”, with a particular focus on China.

City analysts have given the plans a cool reception. They point out that there is little that’s really new in today’s announcement. What’s more, the high cost of the cuts means that HSBC will really need to hit its targets in order for shareholders to benefit.

HSBC is targeting a return on equity (RoE) of more than 10% by 2017 along with progressive dividend growth. RoE is a key measure of profitability for banks, but HSBC’s RoE was just 7.3% in 2014.

Today’s review shouldn’t be confused HSBC’s ongoing review into the pros and cons of moving its headquarters to Hong Kong, and escaping the UK’s tax and regulatory regime.

A decision on a potential move is expected by Christmas, along with further information on the bank’s plans for ring fencing its UK operations.

What about StanChart?

HSBC’s targets are surprisingly similar to those of Standard Chartered.

In its annual results last year, Standard Chartered confirmed a RoE target of more than 10% and announced $1.8bn of cost savings by 2017.

Should HSBC decide to move its headquarters overseas, investors might put pressure on Standard Chartered to do the same.

There is one key difference between the two banks, apart from their size.

Standard Chartered has a new chief executive, Bill Winters, who takes control on 10 June. Mr Winters may decide to make more drastic changes than his predecessor.

Some analysts believe Mr Winters will decide to raise fresh cash with a rights issue, too. The outlook is a little more uncertain here than with HSBC, in my opinion.

Which bank is the better buy?

Based on the latest consensus forecasts, there is little to choose between Standard Chartered and HSBC:

 

HSBC Holdings

Standard Chartered

Market cap

£120bn

£26bn

2015 forecast P/E

11.3

11.5

2015 prospective yield

5.5%

4.8%

Price/book value ratio

1.0

0.9

Although HSBC offers a higher yield, Standard Chartered’s smaller size may provide more scope for future growth.

Analysts are forecast earnings growth of only 5% in 2016 for HSBC, compared to 13% for Standard Chartered.

I rate both banks as a buy, but am struggling to pick an overall winner.

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Roland Head owns shares in Standard Chartered and HSBC Holdings. 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.