Nearly a decade after the beginnings of the Financial Crisis, many of the UK's largest banks are still in the midst of dramatic restructuring efforts as they navigate increased capital requirements, drastically-less-profitable investment bank operations and questions over the sustainability of the universal banking model. For investors seeking exposure to the banking industry, are HSBC Holdings (LSE: HSBA) and Barclays (LSE: BARC) reforming enough to make wise long-term investments?
The major theme of HSBC's restructuring has been slashing costs. Before the credit crisis, HSBC spread rapidly across the globe, building up an immensely costly workforce several hundred thousand strong. CEO Stuart Gulliver has focused on dramatically trimming costs, which has resulted in 87,000 pink slips over the past three years and an additional 50,000 set to be handed out before 2017. Major asset disposals, including multibillion dollar sales of Brazilian and Turkish operations, and the closing of 12% of retail locations worldwide will also help trim operating costs by more than $4.5bn annually.
Alongside a headcount reduction, Gulliver is aiming to trim $290bn worth of risk-weighted assets and redeploy roughly half to high-margin operations in Asia, the bank's traditional breadbasket. While the sheen may have come off China's rapid economic growth, the long-term outlook for the country and the region as a whole remains very good. Refocusing on Asia, even if the board has decided against relocating headquarters there, makes a great deal of sense as 66% of profits came from the region last quarter. If management can trim low-margin operations elsewhere and continue building on a strong foundation in Asia, I believe HSBC has significant growth potential.
In it for the long haul
Meanwhile, Barclays has also sold off non-core assets and refocused on its own domestic market in the UK. The bank's strong retail lending operations and credit card business have proved highly profitable, boasting return on equity of 14.4% and 22.5% respectively. These two divisions have more than pulled their weight recently, something the still-too-large investment bank hasn't been able to do. New CEO Jes Staley will be able to articulate his vision for Barclay's future when he makes his first proper introduction to analysts when presenting full-year results in two weeks' time. His actions thus far, including cuts to non-performing trading desks in peripheral Asian markets, suggest he'll continue on the path his predecessor laid out by making deep cuts to low-return areas of the investment bank and redeploying assets to retail and credit card operations. Given the high returns and relatively low risk associated with these two divisions, I believe long-term shareholders would be well served by this plan.
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As far as which bank is the better opportunity, I believe it comes down to whether investors are more comfortable owning a UK-focused or China-focused bank. The above table shows that each is trading at relatively favourable valuations, with HSBC pricier due to better performance metrics and growth potential. For investors with a long investing horizon and higher risk appetite, I believe HSBC's great divided, location in a high-growth market and concrete plan for increased profitability make it a share that could reward shareholders for years to come.
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Ian Pierce 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.