Why Barclays PLC Has Been A Better Investment Than HSBC Holdings plc Since 2009

HSBC (LSE: HSBA) is the world’s fourth largest bank. Barclays (LSE: BARC) is the world’s tenth largest bank. HSBC’s international diversification and limited exposure to the US subprime mortgage market helped it avoid the worst of the financial crisis. Barclays has been forced to issue new stock to the private sector multiple times during 2008 and 2013, to bolster its balance sheet and remain afloat. 

However, despite Barclays’ troubles, the bank’s shares have actually outperformed those of HSBC since the middle of 2008. 

And the difference is staggering. Based on current prices Barclays has outperformed HSBC by 26%, excluding dividends, over the past seven years.

That said, over the past decade Barclays’ performance has lagged that of HSBC. Including dividends Barclays’ shares have returned -3.2% per annum during the last ten years. HSBC’s shares have produced a total return of -2.1%. 

Still, investors need to ask why HSBC’s returns been so lacklustre since the financial crisis? The bank was more prepared than most going into the crisis but has since struggled to return to growth. 

Over expansion

HSBC’s troubles can be traced to the bank’s massive acquisition spree, which started during 1999 under the leadership of chairman Sir John Bond.

Between 1998 and 2003, HSBC’s customer base jumped from 25m to 110m, following acquisitions in the US, Europe, Latin America and China. But almost all of these acquisitions have turned bad. For example, the largest acquisition during this period was the $15bn deal to buy Household International, the US consumer finance company. The financial crisis forced HSBC to write down Household International’s value to zero. 

Then, ten years after HSBC acquired Mexican bank Grupo Financiero Bital, regulators published a report showing that Mexican drug cartels had exploited HSBC’s lax controls at the Mexican branch to launder at least $881m.  

Shrinking bank

HSBC is now undoing many of the deals made under the leadership Sir John Bond. This year the bank has disposed of its Brazilian and Turkish units, and is rumoured to be seeking a buyer for its Mexican business. Part of the group’s Swiss business was sold last year, and UK ring-fencing rules will effectively force HSBC to dispose of its UK retail operations before the end of the decade.

So, it’s easy to see why Barclays has been able to outperform HSBC during the past seven years. HSBC is shrinking, and the price of its shares will remain under pressure as long as the bank is trying to find a buyer for various business units. 

Steady growth

As HSBC shrinks, Barclays’ returns are improving as the bank focuses on its core markets and sells of non-core businesses. 

For example, during 2014, Barclays’ UK personal and corporate profit before tax increased by 29% thanks to an improving UK economy and lower impairment charges. Overall, Barclays’ group profit rose by 27% during 2014. HSBC’s group pre-tax profit fell by a fifth.

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 increase 36% this year and 19% during 2016, which means that the bank is trading at a 2016 P/E of 8.9.

The City believes that HSBC’s earnings will expand 16% this year and then 3% during 2016. The company is trading at a 2016 P/E of 9.5.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and 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.