At first glance Barclays (LSE: BARC) and HSBC (LSE: HSBA) don't seem all that different. They're both sticking to the universal banking model that has been pummelled by post-Financial Crisis regulation, have high exposure to overseas markets, and are undergoing drastic restructuring programmes with the aim of returning close to pre-Crisis levels of profitability.
But of course, in reality the two banks are very different animals. And with better growth prospects over the long term, higher profitability, a healthier capital position and much higher shareholder returns via dividends and buybacks, I'd easily choose HSBC over Barclays if I were investing in one of these mega businesses.
The reason HSBC distinguishes itself here is because the bank is still true to its roots and counts the Asia Pacific region as its home market. In H1, its Asian operations brought in just under half of group revenue and recorded pre-tax profits of $7.1bn that accounted for 68% of the group total.
Considering the long-term growth prospects of major Asian economies, it's easy to see why HSBC is redeploying assets at a rapid clip to the region in order to benefit through its corporate banking, retail banking and wealth management arms in the years to come.
On the other hand, Barclays is in the process of selling its high-growth-but-higher-risk African retail banking assets to focus solely on the US and UK. While these are highly profitable markets for banks, they're also highly saturated and macroeconomic growth on both sides of the Atlantic is a fraction of the growth rates experienced in Asia.
In this case HSBC also comes out ahead as the group's reported return on equity (RoE) in H1 was 8.8% and a solid improvement on the 7.4% posted a year before. Management's medium target is for RoE over 10%. This looks very achievable as the bank reduces assets in low-return markets and benefits simultaneously from both cutting costs and redeploying this capital to higher-growth Asian markets.
Meanwhile, Barclays' RoE in the same period was 4.6% as the bank grappled with the remaining £23bn of bad assets, took a loss on the sale of African assets and continued to make PPI provisions at home.
At the end of June, HSBC's tier one capital ratio (CET1) stood at 14.7%, well above regulatory requirements and high enough to afford capital returns to shareholders via share buybacks. Barclays isn't far behind with a CET1 ratio at period end of 13.1%, thanks to the disposal of African assets and underlying capital growth, but it still trails HSBC by a solid margin.
Here is where HSBC really shines as the company's ordinary dividend that yields around 5% annually is bolstered by the aforementioned share buyback programme. In H1, these purchases totalled $1bn and management is moving forward with the purchase of an additional $2bn worth of shares.
Since Barclays is still firmly in turnaround mode, the company's interim dividend payout remained level at 1p per share in H1 and analysts are expecting a full-year payout of 3.18p that would yield just 1.6% at today's stock price.
Barclays is restructuring quickly but at this point in time, HSBC's higher dividends, profitability and growth potential all appeal to me much more.
Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and HSBC Holdings. 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.