Should I Buy HSBC Holdings Plc or Standard Chartered PLC?


Investing in emerging markets like Asia, Africa, and Latin America is one of the best ways to access high levels of growth -- but buying shares directly in foreign companies can be complicated and risky, and isn't suitable for all private investors.

One way to have your cake, and eat it, is to buy shares in the banks that finance growth in emerging markets, such as HSBC Holdings (LSE: HSBA) (NYSE: HBC.US) and Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US).

Both of these FTSE 100 banks generate the majority of their income abroad and escaped the worst of the financial crisis -- but which one looks the better buy for the next five years?

HSBC vs. Standard Chartered

I'm going to start with a look at a few key statistics that can be used to provide a quick comparison of these two companies, based on their 2012 results:

HSBC Standard
Turnover £50,087m £12,711m
Operating margin 27.3% 35.8%
2012 dividend growth 9.8% 10.5%
Price to tangible book ratio 1.37 1.66

The figures above show that Standard Chartered is significantly smaller than HSBC, and was more profitable last year.

Both provided near-identical dividend increases to their shareholders, although HSBC's historic yield of 4.2% is considerably higher than Standard Chartered's 3.2%.

One of the reasons for Standard Chartered's superior profitability is that it does much less business in the UK and Europe than HSBC, reducing its exposure to the loss-making, stagnant economies of the western world.

However, it's fair to say that both banks look healthy and profitable at the moment.

What's next?

Are the trends we identified above about to change, or should we expect more of the same?

Analysts' forecasts are notoriously unreliable, but FTSE 100 companies generally get the benefit of the most comprehensive analysis, and tend to deliver fewer surprises than smaller companies.

With that in mind, let's take a look at some forward-looking numbers for HSBC and Standard Chartered. These apply to the companies' current financial years:

HSBC Standard
Forecast P/E ratio 10.5 10.7
Forecast dividend yield 4.6% 3.5%
Forecast dividend growth 11.6% 8.9%
Forecast earnings per share growth 69.8% 18.2%

These figures, which are based on the companies' guidance figures and analysts' forecasts, place an almost identical P/E valuation on both banks, despite the huge earnings per share increase forecast for HSBC.

One reason for this is probably that HSBC's UK and European operations are expected to return to profit in 2013, after losing $3.4bn in 2012. Such a big shift will provide a noticeable uplift to earnings per share but isn't a sign of a long-term trend, so doesn't deserve a premium P/E rating.

Both banks are expected to increase their dividends by around 10% in 2013, but HSBC's current 4.6% forward dividend yield looks especially attractive to me.

Which share should I buy?

HSBC and Standard Chartered are both attractive investments, and in my view, which one you choose, depends on what you are looking for.

The majority of HSBC's income comes from Asia, plus the UK and Europe. Standard Chartered offers similar Asian exposure, but less exposure to western markets, and more exposure to Africa and the Middle East.

The choice is yours -- personally, I own shares in HSBC, because I do want some exposure to western markets, and I like its higher dividend yield, but I would be happy to own shares in either bank.

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