HSBC Holdings plc vs Banco Santander SA: Which Bank Should You Buy?

The recent announcement by HSBC (LSE: HSBA) (NYSE: HSBC.US) to axe around 8,000 jobs in the UK has put the bank back in the headlines. In fact, throughout much of 2015 it has received a considerable amount of press, with its decision over whether to quit the UK and move to Hong Kong stirring varied opinions among commentators and investors alike.

However, the two news items are entirely understandable. That’s because HSBC needs to do something about its cost base, which has spiralled to an all-time high (at the operating level) at a time when many of its rivals have successfully cut costs in recent years. As such, the next few years seem likely to be a period of upheaval for the bank, which should see it emerge as a more efficient, slimmer and more profitable entity.

Growth Potential

In fact, HSBC is expected to grow its bottom line by an impressive 19% in the current year, followed by further growth of 5% next year. And, looking beyond the next couple of years, there is scope for further strong growth numbers. That’s especially the case since China is expected to continue to adopt a looser monetary policy in the coming years, as it seeks to boost its growth rate and overcome the ‘soft landing’ that has been a feature of its economy in recent years. And, with its vast exposure to Asia, HSBC could be a major beneficiary of such a move.


Despite such a bright future, investors are still wary regarding HSBC’s prospects. This is, of course, understandable since HSBC is undergoing a period of intense change that, arguably, has been completed by many of its peers in recent years. In other words, because HSBC performed relatively well during the credit crunch, it was not forced into making efficiencies or changes to its business model to the same extent as a number of its sector peers, and so it could be argued that it is one step behind in this respect.

And, this transitionary period is reflected in HSBC’s current valuation, with it trading on a price to earnings (P/E) ratio of 11.4 which, when combined with its growth prospects, equates to a price to earnings growth (PEG) ratio of just 0.6.

Sector Peer

Clearly, there are a number of appealing alternatives to HSBC within the banking sector. One bank that appears to be worth buying right now is Santander (LSE: BNC) (NYSE: SAN.US). It recently conducted a placing to shore up its finances and appears to be on a sound financial footing, while also offering a high level of regional diversity that surpasses many of the UK-listed (and UK-focused) banks. As such, like HSBC, Santander should prove to be a resilient and relatively robust performer.

Furthermore, Santander offers similar growth prospects to HSBC over the next couple of years, with its bottom line set to rise by 12% in each of the next two years. However, where it is less appealing than HSBC is with regard to its rating, with Santander trading at a premium to the Asia-focused bank, with it having a P/E ratio of 12.4 and a PEG ratio of 1.

As such, and while both banks have bright futures, HSBC appears to offer better value for money. Certainly, the next couple of years are likely to see considerable change enacted at the bank, but for long term investors HSBC remains a hugely appealing buy at the present time.

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Peter Stephens owns shares of 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.