Is HSBC Holdings plc Or Standard Chartered PLC The Best Way To Exploit The China Crisis?

I’m so glad I didn’t buy HSBC Holdings (LSE: HSBA) and Standard Chartered (LSE: STAN) three or four years ago, when both were riding high on my watch list.

I saw these global banks as a safe and solid way to play the emerging markets boom, from the safety of these well-regulated shores. Half the FTSE 100 was piling into China and Asia at the time in a bid to offset falling revenues at home. It didn’t work out so well for them. Now it looks more case of jumping out of the developed world frying pan and into the emerging market fire.

Burn, Baby, Burn

Both banks are now suffering nasty burns. HSBC is down nearly 15% over the last year alone, Standard Chartered is down 30%. They had been struggling for some time, but the Black Monday market crash in August poured more gasoline on the flames.

HSBC generated nearly 70% of its first-half profits from Asia, giving it massive exposure to the China meltdown. As Western banks flee China in fear of its build-up of bad debts, HSBC swims against the tide as it looks to build its position as financier of choice for global businesses. This means it is on course for stormy waters. I think China will continue to slow. We can’t rule out the possibility of a crash.

Gulliver’s Troubles

Group chief executive Stuart Gulliver is banking on more accommodating monetary conditions to stabilise China. Growing urbanisation, infrastructure development and evolving capital markets should continue to drive growth, despite short-term market volatility. The region is paying off for now, with strong revenue across HSBC’s Asia business driving increased first-half profits, up a healthy 10% year-on-year to $13.6bn.

If HSBC can survive the current conflagration it should find itself the dominant global bank in Asia, just in time for the ageing population to start buying retirement products. Success isn’t assured, but given its prospects HSBC is nicely priced at 11.64 times earnings. Better still, it is forecast to yield 6.4%, decently covered 1.6 times. And with a healthy core equity tier 1 ratio of 11.6, its balance sheet looks strong enough to survive what China throws at it next.

My Friend STAN

Alas, Standard Chartered. I had high hopes for this stock but thankfully, not quite high enough to buy it. That was pure luck: I had no idea, like almost everybody else, that it had such high exposure to bad loan stock. Or that it was busting US sanctions on Iran and other rogue states. Or that the dividend would be halved as new chief executive Bill Winters fought to bolster the balance sheet.

Targeted annual cost savings of $1.8bn are a good – if predictable – way for Winters to turn investor discontent into glorious summer. Trading at 7.90 times earnings it is certainly cheaper than HSBC, but the yield is now much lower at a forecast 3.8%.

Standard Chartered’s share price has shown some signs of life lately, as investors get excited about the prospect for 1,000 job cuts. Investec warns that the excitement has been overdone. It reckons consensus revenue and earnings forecasts are too high, and Winters’ job cutting strategy is implicit recognition of this fact. Core equity Tier 1 capital is at 11.5%, so like HSBC, the balance sheet is strong enough to survive China. Thriving is a different matter.

For me, HSBC has the stronger prospects in Asia, and with less risk.

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Harvey Jones has no position in any shares mentioned. 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.