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Is It Time To Sell HSBC Holdings plc And Buy Shawbrook Group PLC And OneSavings Bank PLC?

The world of banking is experiencing a major shift at the present time. The ‘old guard’, which includes HSBC (LSE: HSBA), is being challenged by smaller, more nimble banks such as Shawbrook (LSE: SHAW) and OneSavings Bank (LSE: OSB), which have been hugely successful at winning new customers and increasing profitability in recent years.

In fact, Shawbrook’s bottom line is expected to rise by 42% in the current year and by a further 28% next year. This puts it on a price to earnings growth (PEG) ratio of just 0.4, which indicates that now could be a great time to buy a slice of it. Similarly, OneSavings Bank is pencilled in to grow its bottom line by 37% this year and by a further 10% next year, which puts its shares on a PEG ratio of just 1.1.

At the same time, HSBC is enduring a challenging period. Its cost base is a real problem for the bank and, while a number of its major peers have been able to cut costs and become more efficient, HSBC’s operating costs remain near record highs. And, with income coming under pressure due to a weakening outlook for the Asian economy, HSBC’s profitability could be squeezed in future.

Certainly, the bank is attempting to reduce its expenditure, but it seems to be behind the curve in this respect. Other banks have achieved much lower cost:income ratios than HSBC and yet they were unprofitable during the credit crunch while HSBC remained firmly in the black. As such, investors appear to be losing confidence in HSBC’s ability to post growing earnings, with its shares sinking by 23% in the last year so that they now trade on a price to earnings (P/E) ratio of just 9.2. For a bank with the diversity, profitability and reputation of HSBC, this appears to be unjustifiably low.

Looking ahead, HSBC still has very appealing exposure to fast-growing markets. It may not be as efficient as a number of its peers, but its management team now seems to be fully focused on this issue and is aiming to slash around $5bn in costs which could mean that 25,000 jobs are lost. Furthermore, it offers a yield of 6.8% and, while no dividend is ever 100% safe, the chances of a cut to HSBC’s dividend appear to be relatively slim since it has a dividend coverage ratio of 1.6 and is forecast to grow profits in each of the next two years.

Clearly, HSBC’s growth rate is not going to match those of challenger banks such as Shawbrook and OneSavings Bank. And, while they certainly are sound buys at the present time, HSBC has too much potential to be sold at the present time. For investors who can afford it, buying all three could be a logical move, with HSBC’s diversity, stable profitability and income appeal marking it out as the dominant stock of the three to buy for a Foolish portfolio.

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Peter Stephens owns shares of HSBC. The Motley Fool UK has recommended HSBC. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.