When I wrote about FTSE 100 bank Lloyds Bank (LSE: LLOY) on Monday, its price had hit a four-month low of 55.3p. At its last close, it hit a new low of 52.01p. As tempting as it might be to buy one of the most liquid FTSE 100 shares, the fact remains that nothing has changed for it fundamentally.
Linked to the UK economy
It’s not as if Lloyds Bank is without its potential as a growth stock. It might be a big gainer if the UK economy turns around significantly. For a believer in the UK economy’s growth prospects and in LLOY itself, the 18.3% fall in share price from the start of the year is a good time to buy.
Better hedged than Lloyds Bank
But I think that for all other investors, another FTSE 100 banking and financial services entity, HSBC (LSE: HSBA), would be a better stock to consider. It too has seen a share price fall since the start of the year, both due to the overall market slowdown and a poor set of recent results. But the extent of decline is less than half of that seen for LLOY. At the last close, its share price was 539.7p, down 9.3% from the level at which it started 2020.
It’s also a more global business, making it better hedged against uncertain economic conditions in the UK than Lloyds. The first signs of the UK’s economic bounce-back are evident, but how far they are sustained will depend on the final Brexit deal. If the UK sees better growth in the future, this would be a win for Lloyds. But if it doesn’t, then HSBC will be better off. That HSBC’s stock has a far better performance record over the last decade is a huge comfort factor for me. Unlike Lloyds, whose share price has never gone back to the pre-financial crisis days, HSBC’s share price regained a lot of lost ground not long after the crisis hit.
Higher dividend yield
It also has a better dividend yield of 7.2% than that of Lloyds at 6.5%. And it intends to maintain its dividend policy, despite the deep ongoing restructuring at the bank. However, HSBC has kept the dividend amount flat over the years, giving Lloyds an edge here. In 2019, the latter increased the payout by 5%. Going by the current trend of a sharper fall in its share price and increase in dividends, over time it may well offer a better passive income than HSBC.
But that’s speculation. In making an investing decision for the long term, I’d consider two things. One, the fate of the UK economy. And two, the financial prospects of each. Both banks have reported disappointing numbers recently, and with uncertainty in the overall environment, their successive updates will show which one is better placed, even though both are large and stable enough to be able to get through a negative patch, I believe. As things stand, I like HSBC compared to Lloyds as I think it’s safer and more lucrative, though the UK-focused bank’s passive income isn’t bad either.
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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.